SBTi Net Zero Standard to Boost Banks’ Transition
New framework will increase expectations on deforestation and fossil fuels while raising climate-related ambition of financial institutions.
The Science Based Targets initiative’s (SBTi) much-anticipated Financial Institutions Net Zero (FINZ) standard is expected to place banks under more pressure to increase their climate-related transparency and ambition.
The standard, which is open to consultation until the end of this month, will build upon recently updated near-term target-setting criteria, ensuring that interim emissions reduction targets set by investors, insurers and banks are aligned with their long-term net zero commitments. It will also go beyond validation of decarbonisation targets, introducing target-setting criteria relating to deforestation and fossil fuels.
In particular, it is hoped that the standard will ensure asset owners and other stakeholders benefit from increased transparency and granularity from banks on their decarbonisation progress, following reports of backsliding and limited action on climate.
“The SBTi is taking a big step forward,” Paul Schreiber, Senior Policy Advisor at NGO Reclaim Finance, told ESG Investor. “If the standard is ambitious enough – it could drive good practices in the financial sector and in the banking sector specifically.”
SBTi’s new deforestation criteria will require financial institutions to commit to ending their support for contributing practices. The criteria on fossil fuels asks financial institutions to report their greenhouse gas emissions and to no longer support investment in activities that create new unabated capacity. The current draft also asks financial institutions to report the ratio of financing towards renewables versus fossil fuels.
“There’s a strong need for capital to build out new renewable and low-carbon capacity, but there’s also a need for investment to decommission fossil fuel assets – for that reason, we’ve taken a broad but nuanced approach,” said Nate Aden, Head of Financial Standards at the SBTi. “We’ve crafted the FINZ standard to ensure complete transparency, so there can’t be confusion around what and where banks are actually lending.”
The SBTi intends to publish a report later this year which will synthesise feedback to the current consultation and pilot testing. It will then publish a report outlining and explaining all changes included in the finalised standard.
“It’s a well-populated landscape and we are very conscious of SBTi’s role being one of many,” said Aden. “We see the SBTi bringing a third-party validation option for financial institutions that most other initiatives don’t offer – allowing for objectivity and credibility for these targets in ways that self-declaration doesn’t.”
The SBTi defines and promotes best practice in emissions reductions and net zero targets, as well as providing technical assistance and expert resources to companies and investors which set science-based targets in line with the latest climate science.
In June last year, the SBTi launched a consultation on three elements of its reporting and target-setting requirements for investors, insurers and banks, as well as on revisions to its fossil fuel position paper.
Transition-focused guidance for both financial institutions and companies has also been developed and published by groups such as the Glasgow Financial Alliance for Net Zero (GFANZ) and Transition Plan Taskforce (TPT).
The power of three
In its proposals for the FINZ standard, the SBTi has grouped metrics that can be used by financial institutions to chart their net zero path into three categories: impact-based, outcome-based and process-based.
Impact-based metrics measure the actual effects or results of an organisation’s climate-related activities, whereas outcome metrics consider the extent to which an entity’s strategies are in line with global climate goals. Process metrics weigh controllable actions that an organisation can undertake achieve an outcome.
Bank lending is typically covered by impact-based metrics, such as absolute financed emissions or sector-specific emissions intensity. Other types of metrics used by banks at the sector level include technology share, production volume and sector financing volume.
Reporting entities may also utilise regulation-specific metrics, such as taxonomy alignment of financing, which falls under the EU’s Sustainable Finance Disclosure Regulation (SFDR).
One key area for discussion concerns the SBTi’s criteria on climate solutions – including the extent to which banks are disclosing their lending to projects defined as climate-related solutions.
“In the consultation, it’s not very clear what the exact metric for this will be, or what target will be used,” said Schreiber.
Changes to the near-term target-setting criteria framework earlier this year included an increase in ambition to 1.5°C, with SBTi-validated financial institutions now having a shortened window to reduce Scope 1 and 2 emissions – from five to 15 years to five to ten years. These new criteria will come into effect as of 30 November.
Banks in transition
The development of credible decarbonisation pathways for banks is critical to the overall net zero transition of major economies due their role in encouraging firms in other industries to reduce their emissions, SBTi’s Aden acknowledged.
A recent global survey found that fewer than a quarter of financial services and investment companies have a net zero transition plan that looks beyond 12 months.
Several large banks faced shareholder resolutions during the 2024 AGM season asking them to provide more detail on their Paris-aligned lending activities.
“They play a catalytic role in climate stabilisation, both through their direct investment in lending activities, but also through their very strong influence over their clients and counterparties,” he said.
Several major banks chose to exit the process of seeking SBTi validation for their climate targets last year, arguing that the FINZ standard could hinder their ability to support companies through their climate transitions, particularly those in emerging markets that are more dependent on fossil fuels.
A recent assessment by the World Resources Institute (WRI) noted that major banks’ climate pledges were often less ambitious than they seemed at face value – for example, 16 out of 25 assessed banks had committed to coal phase-out by 2040 or earlier but were not taking the necessary steps to achieve this.
Enough ambition?
Some voices have argued that banks are likely to adopt SBTi’s proposed metrics, partly because the FINZ standard better prioritises interoperability with existing guidance.
“SBTi has proven over the years that it is ultimately trusted by a lot of companies and investors as a label testifying their will to decarbonise,” said Reclaim Finance’s Schreiber. “In the future, SBTi could help shape expectations on transition planning by banks and provide useful contributions as banks are building and designing those plans.”
The UN Environment Programme Finance Initiative (UNEP FI) has encouraged members across its member alliances to respond to the consultation, including signatories of the Net Zero Banking Alliance (NZBA).
“Some of the net zero alliances convened by UNEP FI will provide an alliance-level response [while] NZBA provided input in the lead up to the publication of the standard,” said Jes Andrews, UNEP FI’s Head of Climate Accountability.
The pace of NZBA members’ transition efforts has also been subject to criticism, with research suggesting tens of billions of dollars has been funnelled into fossil fuel companies by signatories.
The NZBA’s latest progress report on members’ net zero transition will be released shortly. “It demonstrates progress and growth in banks’ target-setting and transition planning and reveals some of the challenges they face,” said Andrews.
“The transparency that both NZBA and SBTi promote will help asset owners better understand the trajectory of bank’s loan books and their alignment with the net zero transition,” she added.
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