Validation of the first financial institution science based targets: a turning point for the sector
14th Oct 2021
Nate Aden, SBTi Finance and Chemicals Sector Manager, explains why the first SBTs for financial institutions present an exciting new opportunity for increased climate ambition.
The Science Based Targets initiative (SBTi) is pleased to announce the validation of the first financial institution science-based targets that cover investment and lending portfolios. French bank La Banque Postale, KB Financial Group, a South Korean bank, and Swedish private equity firm EQT have new science-based targets for adjusting their investment and lending portfolios in line with stabilizing climate change at well-below 2oC this century.
When the Paris Agreement was signed in 2015, the SBTi launched a call to action for private sector companies and financial institutions to set ambitious emissions reduction targets. While dozens of financial institutions committed to setting SBTs, the SBTi asked them to hold until it was able to develop target-setting methods and validation criteria, which were published in October 2020. This first set of financial institution SBTs represents a turning point for the sector’s response to the climate challenge. It will catalyze further action among financial institutions and their clients.
Financial institution SBTs are a central component of the emissions reductions and economic transformation needed for climate stabilization. Three roles for financial institutions include allocation of capital, engagement of clients, and development of new data and products to achieve mitigation impacts in the real economy. The financial sector has broadly begun to embrace these roles with net-zero and climate-oriented initiatives. But these institutional targets provide a new quantitative, transparent, and accountable mechanism for increased climate ambition.
As of October 2021, more than 970 companies have set targets that meet the SBTi criteria. These first three science-based targets are a positive harbinger of what’s to come from the financial sector. With the right ambition, and the will to achieve it, financial institution targets will become mainstream – as they have for companies.
The targets included in this first group are emblematic of the SBTi in their methodological, geographical, and institutional diversity. To transparently and robustly link financial portfolios with emissions reductions in the real economy, the SBTi is focused on a subset of asset classes and methods. Residential mortgages, commercial real estate, electricity generation project finance, and corporate debt and equity are linked with the initiative’s physical intensity and engagement-focused methods.
New methods are being developed to cover additional asset classes. In the meantime, as illustrated in the table below, the first tranche of financial institution SBTs includes targets developed using the physical intensity Sector Decarbonization Approach, the SBT Portfolio Coverage engagement method, and the Temperature Rating engagement method.
From a geographical perspective, the headquartering of the first three SBT financial institutions in Korea, France, and Sweden reflects the SBTi’s global scope. Finally, the inclusion of banks and a private equity firm in the first tranche is consistent with the SBTi’s financial sector orientation toward banks, asset owners, asset managers, and private equity firms.
To facilitate target setting across the financial sector, SBTi’s upcoming work is focused on scaling, new method development, and harmonization with SBTi net-zero and peer initiative resources. Immediate milestones include the publication of a net-zero foundations for financial institutions paper for public comment and guidance for private equity firms during next month’s COP26 meetings.
In 2022, the SBTi will:
- Develop ‘meta-criteria’ for assessing alternate target-setting methods
- Update the financial sector criteria
- Provide additional institution-specific resources (i.e., for banks, asset owners, and asset managers)
- Provide guidance on alignment of TCFD reporting with SBTs
- Develop target-setting methods for additional asset class coverage
- Oversee a standard development process for financial institution net-zero targets
While the financial sector plays a different role than companies in achieving net-zero emissions, the forthcoming standard will be built on and consistent with the SBTi corporate Net-Zero Standard. The expected outcome is a growing group of financial institutions that transparently, quantitatively, and robustly support the emissions reductions in the real economy needed for climate stabilization.