ComplianceFinanceDecember 10, 2021

Coming Soon: A Net Zero Standard for the Financial Sector

A Net Zero Standard for Financial Institutions (FIs) has been placed on the table for discussion.

In September, the Institutional Investors Group on Climate Change (IIGCC) published their “Net Zero Standard for Oil and Gas.”

More recently, the Science Based Target Initiative (SBTi) issued a Net-Zero standard for financial institutions.

SBTi singled out FIs because of their potential to influence companies into climate compliance.

“FIs have a unique influence over other actors in that they provide capital and services to companies that have a responsibility for reducing their own value chain GHG emissions. Because of this, they do not exercise direct control over any major sources of GHG emissions reductions but do possess great influence over companies that do,” write SBTi Standard authors.

Also, FIs have the ability to use their relationships with clients and influence as shareholders or creditors of companies, projects, and consumers to drive decarbonization across the economy and help provide the financing necessary for the net-zero transition.

“A forward-looking approach can help ensure the necessary transition finance to all companies that have signaled their intention to decarbonize, regardless of their sector or current GHG emission footprint. For companies that are unable or unwilling to transition, however, FIs can discontinue the relationship by divesting,” write the authors.

In this proposed standard, the SBTi provides principles, definitions, metrics, and target formulation considerations for financial institutions to set quantitative net-zero targets linked with emissions reductions in the real economy.

Their ultimate target: to reach net-zero emissions before 2050, and to be consistent with achieving the 1.5°C goal of the Paris Agreement, as well as contributing to the Sustainable Development Goals (SDGs).

The paper does not, however, represent a definitive set of criteria or guidance but, rather, a first step in the process of developing a Net-Zero Standard for FIs.

What FIs Can Do

The SBTi suggests three broad approaches in which FIs can help:

1) Financed emissions: This includes net-zero claims based on reducing financed emissions to zero or to a residual level that is consistent with reaching net-zero emissions at the global or sector level in eligible 1.5°C-aligned pathways. Any remaining residual emissions are neutralized by permanently removing and storing an equivalent amount of atmospheric carbon dioxide.

2) Portfolio alignment: SBTi suggests that FIs align their financing activities with companies that are actively working to reduce emissions to achieve a state of net-zero consistent with the SBTi Corporate Net-Zero Standard.

This involves evaluating a portfolio on two points: 1) Whether or not the abatement just occurs within the portfolio by reducing exposure to GHG emissions, or 2) If the abatement measures also promote decarbonization in the wider economy.

Option 1, Reducing Portfolio Emissions Exposure, involves the reduction of portfolio emissions via the shifting of the portfolio toward lower-emitting constituents. This relies on gradually reducing the exposure to GHGs via rebalancing of the portfolio.

Option 2, Increasing Portfolio Alignment, relies on assessing the relative level of alignment of portfolio constituents against net-zero goals. This strategy encourages engagement and highlights the value of companies signaling the alignment of their own activities with net-zero goals. It requires companies to develop and disclose forward-looking ambitious reduction targets and ultimately to reduce emissions in line with global or sector goals.

3) Contribution to the net-zero economy: For this, SBTi is encouraging FIs to shift financing toward technologies needed for the real economy to reach net-zero emissions. For example, at COP26, more than 30 financial institutions committed to help end deforestation and support nature-based solutions. Also, Swiss Re’s partnership with carbon dioxide removal (CDR) company, Climeworks, demonstrates FIs’ ability to achieve their own net-zero goals through direct financing of CDR technologies.

Definitions and Metrics

The Standard lays out definitions for the most ambiguous terms, including what it means by Net-Zero, allowing for a more even playing field when comparing business-to-business climate strategies.

The paper also categorized the key metrics that can be used, i.e. GHG emissions metrics, portfolio alignment metrics, and portfolio contribution metrics. In addition, SBTi evaluates these metrics based on their ability to be easily quantified and if science-based targets can be constructed to track them over time to ensure that the ambition of the Paris Agreement is reached.

Carbon Credits

SBTi calls out carbon credits as an unreliable pathway. Specifically, companies are not able to use offsetting, the practice of purchasing carbon credits as a replacement for reducing value chain emissions in line with their science-based targets. However, under the SBTi Corporate Net-Zero Standard framework, “investment in mitigation outside the corporate value chain…is recommended to support societal net-zero goals, and high-quality carbon credits may contribute towards this.”

However, FIs are not expected to purchase carbon credits on behalf of companies, nor neutralize residual emissions from companies in their portfolios. The net-zero burden is placed entirely on the companies themselves.

Green Investments

SBTi stresses that FIs have an important role to play in scaling up investments in new climate solutions such as renewable energy, sustainable mobility, and infrastructure. As well as GHG removal technology such as direct air capture (DAC) and geological storage.

SBTi recognizes that the definition, quantification, and ambition associated with the financing of climate solutions remain to be developed. 

They write: “Ambition is usually defined in terms of the rate of change of emissions reductions, and not the rate of change of deployment of financing for new solutions. Questions around whether and how climate-solution financing can be included with net-zero targets will continue to be examined as part of the standard development process.”

Setting an Example

Just this past October, La Banque Postale became one of the first financial institutions to set a validated Science-Based target. The bank committed to ensure that its banking activities achieve net-zero carbon emissions by 2040. 

According to SBTi, La Banque Postale also became the first bank to publish a fossil-fuel exit strategy. It is committing to a complete withdrawal from coal, as well as both conventional and unconventional oil and gas (upstream and midstream activities) by 2030.

The bank will refrain from financing oil and gas energy projects, no longer provide financial services (loans, account management, etc.) to the sector, and end legacy services by 2030. La Banque Postale will also discontinue support to businesses actively involved in lobbying on behalf of the fossil fuel industry.

A Note for Companies

Companies in any sector can hop on the SBTi Net-Zero Standard bandwagon. This involves setting a science-based target exclusive to that business. 

More than 2,000 businesses and financial institutions are currently working with SBTi to make net-zero a reality. Those that are, will be ready when interested “green” Financial Institutions come to call.

In order to join SBTi, a company must set a science-based target through the following five step process:

  • Commit: submit a letter establishing your intent to set a science-based target
  • Develop: work on an emissions reduction target in line with the SBTi’s criteria
  • Submit: present your target to the SBTi for official validation
  • Communicate: announce your target and inform your stakeholders
  • Disclose: report company-wide emissions and track target progress annually

Comment Period

The Financial Institute Standard is not yet set in stone. The SBTi is currently taking public comments on their recommendations until December 17, 2021. Specifically, “The SBTi intends to strengthen this paper through a transparent, inclusive multi-stakeholder process involving financial institutions, NGOs, government officials, and other interested parties.”

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