SBTi promises Net-Zero Standard for finance sector in early 2023

The Science-Based Targets initiative (SBTi) has published new guidance on how businesses in the finance sector can align their activities with net-zero by 2050, ahead of the launch of its new Net-Zero Standard for Financial Institutions.

SBTi promises Net-Zero Standard for finance sector in early 2023

Published on Tuesday (12 April), the initiative’s latest guidance paper “represents the first step in the net-zero standard development process”. The SBTi launched its Net-Zero Standard for corporates last October, but financial firms are unable to achieve verification against this standard, as it does not account for complexities like financed emissions and how they can be dealt with through engagement and/or divestment.

Finance firms have been able to set SBTi-verified targets since October 2020. As with the corporate Net-Zero Standard, alignment with the Net-Zero Standard for Financial Institutions will be predicated on net-zero targets for 2050 at the latest, underpinned with 1.5C-aligned interim targets covering all emissions scopes. Currently, 19 financial institutions have targets verified in line with 1.5C.

This requirement is detailed in the guidance paper, which also proposes a set definition of net-zero for the finance sector and outlines the extent to which financial firms must reduce operational and financed emissions before using offsetting.

On the definition of net-zero, the paper acknowledges that a lack of a standard definition means that different companies’ plans currently cover differing emission scopes and financing activities. These discrepancies have led to criticism of some of the largest sector-specific collaborations on net-zero.

As such, the SBTi’s paper states that the Standard will require “completeness – inclusion of all relative activities” in the scope of targets, with specific boundaries set to be established in the coming months.

The paper recognises that different organisations are using different tactics to mitigate financed emissions, with most using a variety of approaches. Common approaches include engaging with portfolio companies; moving money within sectors to back the most efficient firms; re-allocating money from high-carbon to low-carbon sectors; divesting; updating exclusion policies and financing climate solutions.

Concern is expressed that not all tactics are likely to have the same real-world impact on emissions. All tactics have potential benefits and pitfalls. Divestment may lead to a high-carbon firm being influenced by investors with no climate concern, for example, thus prompting it to increase emissions. Yet, engagement is often slow, with businesses failing to produce the necessary disclosures and take the necessary action, and investors extending their timescales for engagement.

The final Net-Zero Standard for Financial Institutions, the paper confirms, will be launched in early 2023, following multi-stakeholder consultations, road-testing of methodologies and a technical review.

The SBTi’s chief executive Dr Luiz Fernando do Amaral said: “Financial institutions are critical players in driving real-economy emissions reductions through investments and lending activities. There are signs the sector is embracing this responsibility. Immediate action is already possible for short term science-based targets.

However, when it comes to net-zero, there is little understanding of what it means for the finance industry. Our paper provides the clarity that has been desperately needed and will enable us to develop a Net-Zero Standard for Financial Institutions that will help net-zero pledges deliver science-based action.”

edie recently interviewed Dr Amaral for a feature exploring whether governments should legally require companies – particularly large companies in high-carbon sectors – to set SBTi-verified targets. Click here to read that feature. 

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