Explained: the SBTi net zero standard for financials

In the landscape of corporate climate change claims, the Science Based Targets initiative (SBTi) is the go-to judge of whether climate targets are sufficiently robust. Now, it's set its sights on defining what credible climate action for financial institutions looks like.

The recently released "Net-zero foundations for financial institutions" paper is the preamble to the SBTi's upcoming standard of the same name which will be published in early 2023. It explains the SBTi's thoughts on crucial issues for the financial sector, with its huge potential for "driv[ing] the decarbonisation of the real economy".

South Pole knows the transformational role that financial institutions can play in accelerating the climate transition. That's why we've put together our digest of what you need to know and prepare for.

The existing landscape

The SBTi is not the first to recognise the role of financial institutions in generating emissions at scale, with over 99% of a financial institutions' footprint coming from their portfolios. The Glasgow Financial Alliance for Net Zero (GFANZ) was established in 2021 to consolidate and improve disparate net zero finance initiatives. Together, its 450+ members control assets worth over USD 130 trillion.

Membership to GFANZ is granted to financial institutions (FIs) with net zero-by-2050 commitments that include interim 2030 targets. For the SBTi, however, this is not enough. The initiative has pointed to the lack of clarity and standardisation surrounding the financial sector's net zero targets. What does reaching net zero mean for an FI? What qualitative and quantitative criteria should be used? What does "credibility" actually look like?

Building on solid foundations

As a partial answer to these questions, the SBTi previously released the financial sector science-based targets guidance. That guidance required financial institutions to set portfolio targets, e.g. for residential mortgages, listed equities and bonds, using three approaches: the SBT coverage, the sectoral decarbonisation approach and temperature scoring.

The SBTi's Finance Net Zero Standard (SBT-FI NZ) will represent the culmination of the overall project, but it won't be available until 2023. Happily, in the meantime, the "Foundations" paper outlines the basis on which that standard will be built:

• Investment strategies: methodologies include reducing greenhouse gas exposure through sector-reallocation, financing low carbon-emitting constituents, or assessing Paris Agreement alignment. However, the definitions, metrics and ambition remain ambiguous: the upcoming standard will address these gaps.
• Fossil fuel financing: in addition to the phasing out of coal by 2030, the SBTi added the much-needed phasing out of oil and gas by 2040.
• Removals: the approach of the SBTi is to prioritise value chain mitigation through the design and validation of science-based targets. Once this is done, the SBTi recommends addressing the financial institution's unabated portfolio emissions through removals: credits can be bought by the portfolio companies but not by the financial institution itself which will have to focus on removals activities.

What can FIs do today?

Despite these developments, many financial institutions will continue to find it difficult to define a credible net zero action plan. Why is this? A combination of factors: data gaps, short-termism, lack of asset ownership, fiduciary duty being focused on profitability, the aversion to risk and systemic change, the lack of standardised definitions and the high diversity of financial market players.

Nonetheless, difficult doesn't mean impossible. If you are a financial institution and want to develop a more credible net zero action plan, the sustainable finance team at South Pole will be happy to help you set science-based targets, understand more about the leading standards and recommend the best practices for your net zero journey.