SBTi creates net-zero standards for financial firms

The Science Based Targets initiative (SBTi) has release its Financial Institutions Net-Zero Standard providing guidance for asset managers, asset owners, private equity firms and banks on how to align with activities with limiting global warming and achieving net zero by 2050 at the latest. 

Initially announced in 2022, the standards support financial institutions in setting targets that build clear routes to net zero, manage stakeholder expectations, mitigate against climate-related risks and explore emerging opportunities. 

SBTi said the new standards, built in consultation with more than 30 financial institutions, also support expanded asset class coverage and the improvement of quality and transparency of portfolio emissions. 

Firms will also be required to have a fossil fuel transition policy with a clear timeline for ceasing new financial activities and insurance services to the fossil fuel industry, and there are expectations for financial institutions to assess, monitor, disclose and address deforestation exposure in their portfolios, with an engagement plan required to address significant risks.

See also: Could science-based targets solve greenwashing?

Alberto Carrillo Pineda, chief technical officer at the SBTi, said: “Financial Institutions have the ability to play a transformative role in the transition to net zero. Their influence on the global economy and ability to engage with their portfolios is unparalleled to accelerate the net-zero transition. With its broad applicability and flexibility, this robust, science-based Standard will help financial institutions drive the net-zero transformation all over the world.”

Xavier Lerin, senior research manager at ShareAction, commented on the launch: “Today marks a key point of progress in setting a clear standard all financial institutions should meet to align their financing with climate goals. Importantly, the standard sends a clear signal that financial support for fossil fuel expansion must come to an end.” 

However, Lerin expressed disappointment that following pushback from industry during the public consultation, the deadline by which financial institutions must stop financing fossil fuel expansion was extended to 2030, “well beyond the timelines outlined in credible climate scenarios to keep global warming within safe limits”.

“At a time when the dangers of climate change are accelerating – floods, fires, and deadly heatwaves are already here – the world cannot afford half-measures. We call on signatories of the initiative to adopt the highest end of the standard’s requirements to ensure their targets and fossil fuel commitments are robust enough to realistically meet net-zero goals.”

Meanwhile, Jean-Charles Prabonneau, climate research lead at Clarity AI, said the standards will help bring greater clarity to the financial sector.

“Notably, the standard confirms the exclusion of near-term targets based solely on portfolio emissions. It acknowledges the critical role of transition finance in high-emitting sectors and discourages simplistic portfolio rebalancing from high- to low-emitting sectors. It also clarifies expectations around the phase-out of fossil fuels and deforestation, encouraging financial institutions to publish dedicated policies on both fronts.

“That said, based on our initial review, there seems to be areas where the standard could have gone further. For example, allowing general-purpose financing of oil and gas expansion until 2030 risks misalignment with science-based pathways and may lead to stranded assets. Additionally, while the standard emphasizes the importance of portfolio-level decarbonization, it stops short of requiring financial institutions to neutralize their own residual emissions. This may limit the role these institutions could play in scaling up the carbon removal industry.

“The standard also brings with it a significant data challenge. Institutions will need robust datasets to measure their current exposure and set credible targets. And while the SBTi sticks to a Net Zero by 2050 trajectory aligned with a 1.5°C pathway, this temperature outcome by 2100 is becoming increasingly unlikely at a global level. It therefore remains to be seen how banks will adopt the standard, and whether they are willing to maintain the highest level of ambition.”