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New science based target guidance for the financial sector, what does it mean for you and your company’s carbon strategy?

By Hannah Morris
23rd October 2020

The Science Based Targets initiative (SBTi) has launched a science-based target framework and validation service for the financial sector. In this article we highlight the guidance to help financial firms align their lending and investments with the Paris Agreement. Speak to our team today to find out what this guidance means for you and your carbon strategy.

Financial companies will now be able to verify whether climate targets for their operations and portfolios align with the Paris Agreement’s goal of keeping global warming to 1.5°C or well-below 2°C. To date, 58 financial institutions have signed up, including Amalgamated Bank, Bank J Safra Sarasin, Standard Chartered, and Eurazeo. In addition, 80 financial institutions reported to CDP in 2019 that they intend to set a science-based target within the next two years.

The launch of the framework aligns with the heightened awareness amongst financial institutions of the material risks posed by a changing climate, and the crucial role that they can play in redirecting capital to green solutions and technologies.  

 

The new target validation service was developed by the SBTi, a collaboration between CDP, United Nations Global Compact, World Resources Institute (WRI), and the WWF. To qualify for validation by the SBTi, the targets for Scope 1 and 2 portions of financial institutions’ emissions – covering operations and purchased energy – must be set via one of three recommended approaches. The most straightforward and encouraged approach is the Absolute Contraction approach, which requires an annual linear reduction of absolute emissions of a minimum of 2.5 percent for a well-below 2 degree target, and a minimum of 4.2 percent for a 1.5 degree pathway. 

Financial institutions can also opt to set physical or economic intensity targets for Scope 1 and 2 emissions, both of which when translated into absolute terms, must also result in a minimum of 2.5% annual linear reduction in terms of absolute emissions for well-below 2°C targets and 4.2% for 1.5°C targets.

Their Scope 3 targets, which covers financial institutions’ largest impact on climate change – their investments and lending portfolios – must meet specific criteria relevant to each asset class. 

There are three methods to set Scope 3 portfolio targets for financial institutions:

  • Sectoral Decarbonisation Approach (SDA);
  • SBT Portfolio Coverage Approach; and 
  • SBT Temperature Rating Approach

These methods use asset-class approaches to link financial institutions’ investment and lending portfolios with climate stabilisation pathways, among which only the SDA method requires emissions measurement on an asset class level.  Financial institutions may use one or more of these three methods to develop portfolio targets for a SBT submission as they see fit. 

Cynthia Cummis, SBTi steering committee member and director at World Resources Institute, one of the SBTi partners, said: “The finance sector now can, and must, build the bridge to a net-zero emissions economy and enable system-wide improvements based on climate science. 

“The SBTi’s framework highlights the power of financial institutions to redirect capital to companies contributing to the low-carbon transition, and away from those that contribute to climate change.”

 

Carbon Intelligence is the leading partner to organisations when approaching science-based targets, having supported 43% of UK companies with a 1.5°C approved SBT. We have extensive cross-sector experience partnering with leading organisations to develop practical strategies and solutions to reduce emissions across their value chain and achieve net zero. We are uniquely placed to support financial institutions in setting bold targets and engaging with their diverse value chain. With this new framework in place for financial firms, Carbon Intelligence can support your business to find the right pathway to evolve your carbon strategy. 

Financial companies are uniquely positioned to influence others through their investment and lending services. To drive Paris-aligned systemic decarbonisation, it is critical to leverage shared influence and responsibility for aligning incentives as well as eliminating barriers to emissions reductions. 

The release of this guidance opens an opportunity for financial institutions to differentiate themselves from peers, effectively anticipate regulatory shifts, and show leadership with investors. Setting a Science Based Target provides transparency and credibility within an increasingly discerning market and provides tangible milestones towards a decarbonised business model. With our financial services expertise and leading Science-Based Target setting knowledge, we have helped a third of the market set a Science-Based Target and are primed to help you with your journey to align to 1.5°C. 

 

To take advantage of the opportunity this guidance has brought to this sector, firms should start now by engaging senior management teams and gathering portfolio baseline data. If you want to speak to one of our experts and find out what the guidance means for you and your carbon strategy, email info@carbon.ci.