The Science Based Targets initiative (SBTi) has emerged as a key standard-setter for private sector net-zero plans. Since its founding, it has attracted criticism for a lack of ambition and robustness in its criteria.
The initiative recently released draft standards for financial institutions. They represent a significant step forward—both for the SBTi and for net-zero discourse more broadly.
IEEFA, by and large, commends the latest standards’ temperature pathways, approach to fossil fuel financing, and treatment of carbon offsets, whilst noting some recommendations for improvement.
If the SBTi can strengthen the standards and develop practical tools and guidance, this will go a long way towards improving its credibility and putting more pressure on financial institutions to clean up their act.
Financial institutions (FIs) are finding themselves at a crossroads. The economy-wide push towards decarbonization is creating significant market opportunities. At the same time, systemic financial risk only grows as climate change progresses. Even as more banks, institutional investors, and insurers begin to speak of the risks and rewards of the energy transition, talk has often outpaced action in the sector’s climate commitments.
The Science Based Targets initiative (SBTi) was founded in 2015 to provide guidance, standard-setting, and verification for private sector net-zero plans. In the years since, the SBTi has received significant criticism on matters including inadequate standard-setting ambition, loopholes in its carbon accounting methodologies, and its limited verification procedures. While its mission of advancing corporate and institutional climate strategies should be commended, IEEFA has found many of the critiques compelling.
Yet let us give credit where credit is due: With its recent draft standards for the financial sector released in June 2023, the initiative has undoubtedly stepped up its game. If the SBTi is able to maintain and improve on the proposal’s rigor throughout the consultation process, it will go a long way towards improving its own credibility—and guiding FIs towards better management of climate-related financial risk. FIs could use alignment with these standards to signal seriousness, and FIs that fall short of SBTi approval could face pressure to clean up their act; done right, these guidelines could help protect market actors in the years to come.
The SBTi’s decision to prioritize financial sector guidelines represents an important realization: Financial institutions have special importance in the energy transition. Oil and gas companies have traditionally leaned heavily on private financial flows to maintain and expand their business model. Since the Paris Agreement, for example, banks have financed and facilitated over $5.5 trillion into the fossil fuel economy, research shows. On the flip side, financial actors are a crucial component in the rapid buildout of sustainable energy solutions and technology, a requisite for a net-zero economy. So how should an FI react when these two economies collide?
The SBTi’s proposal comes in three parts. The first, the “Near-Term Financial Sector Science Based Targets Guidance V2”, represents several criteria changes and clarifications since its first release in October 2020. The second, the “Financial Institutions Net-Zero (FINZ) Standard Conceptual Framework and Initial Criteria”, sets the scene by outlining core requirements around near- and long-term targets, and fossil fuel components. Finally, the “Fossil Fuel Finance Position Paper” recognizes the need for special guidance regarding the energy value chain, given both its disproportionate role in the exacerbation of climate change and its outsized exposure to uncertainty amidst the energy transition. The stakeholder consultation period for these drafts ended yesterday, and the SBTi will be at work finalizing the standards. IEEFA further notes the SBTi’s ongoing efforts in developing a full set of near- and long-term targets, complemented with target-setting methods and guidance for implementation that are currently not included.
The recently released financial sector guidelines represent a significant improvement in net-zero alignment benchmarks. Among the most promising developments are:
Of course, this initial draft is not perfect. IEEFA submitted a response to the consultation this month. In brief, IEEFA recommends that the SBTi should:
Time will tell what final product emerges once all consultation responses are taken into account. Yet if this draft is any indication, the direction of travel appears to be positive. The FI guidelines represent a significant contribution to net-zero concepts and discourse. If the SBTi can build on this progress in methods, tools, and guidance, it could play an important role in not only protecting financial actors from the risks of climate change but also effectively driving capital flow towards 1.5°C-aligned goals.