Understanding SBTi’s New Financial Sector Guidance: What Corporate Finance Teams Need to Know

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The Science Based Targets initiative (SBTi) has recently released its updated guidance for the financial sector, setting a new benchmark for corporate responsibility and sustainability. This guidance is crucial for financial institutions aiming to align their strategies with global climate goals. For corporate finance teams, understanding and integrating these guidelines is vital for both regulatory compliance and competitive advantage. This article explores the key elements of SBTi’s new financial sector guidance and what corporate finance teams need to know to stay ahead.

What is the Science Based Targets Initiative (SBTi)?

The SBTi is a collaboration between CDP, the United Nations Global Compact, World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). It provides companies with a clear pathway to reduce greenhouse gas (GHG) emissions in line with the Paris Agreement goals — to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C. It was established through a collaboration between four key organizations:

1. CDP: Formerly known as the Carbon Disclosure Project, CDP runs a global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. CDP’s role in SBTi involves leveraging its vast database of environmental information to support target setting and progress tracking.

2. The United Nations Global Compact: This is a voluntary initiative based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals. The Global Compact’s involvement ensures that SBTi aligns with broader sustainability and corporate responsibility efforts.

3. World Resources Institute (WRI) : WRI is a global research organization that spans more than 60 countries, working to turn big ideas into action at the nexus of environment, economic opportunity, and human well-being. WRI provides scientific research and analytical expertise to the SBTi, ensuring that the targets are rooted in robust climate science.

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4. World Wide Fund for Nature (WWF) : As one of the world’s leading conservation organizations, WWF brings its environmental advocacy and conservation expertise to the initiative, promoting the protection of natural resources while advancing climate goals.

The Goals and Importance of SBTi

SBTi’s primary mission is to provide companies with a clear pathway to reduce greenhouse gas (GHG) emissions in a manner that is consistent with the level of decarbonization required to keep global temperature increase well below 2°C above pre-industrial levels and to pursue efforts to limit warming to 1.5°C, as outlined in the Paris Agreement. This global accord, adopted in 2015, aims to unite countries in combating climate change and adapting to its effects.

How SBTi Works

• Target Setting: Companies set emissions reduction targets that are considered'science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement. The SBTi provides a framework and detailed guidance to help companies set these targets.
• Validation: Once targets are set, they are submitted to the SBTi for validation. The initiative uses a rigorous and transparent assessment process to ensure targets meet their criteria and are sufficiently ambitious
• Implementation and Reporting: Companies then integrate these targets into their business strategies and operations. They are encouraged to report on their progress annually, fostering transparency and accountability.

Benefits of SBTi for Companies

• Reputation and Trust: Companies that commit to SBTi targets often see an enhancement in their reputation as leaders in climate action. This can improve stakeholder trust and investor confidence.
• Regulatory Preparedness: By aligning with SBTi, companies are better prepared for emerging regulations and policies related to climate change.
• Operational Efficiency: Reducing GHG emissions often leads to improved energy efficiency and cost savings, contributing to the overall sustainability of the business.
• Risk Mitigation: Addressing climate risks proactively helps companies mitigate potential future impacts related to regulatory changes, market shifts, and physical climate risks.

The Broader Impact

By participating in the SBTi, companies contribute to a collective global effort to mitigate climate change. This initiative drives widespread adoption of science-based targets, fostering a competitive environment where sustainability becomes a key differentiator. The cascading effect of this can lead to significant reductions in global GHG emissions, helping to stabilize the climate and protect ecosystems and communities worldwide.

The SBTi offers a robust and scientifically supported framework for companies to take meaningful action against climate change. By setting and achieving science-based targets, businesses not only contribute to global climate goals but also secure long-term resilience and success in an increasingly sustainability-focused world.

Why is the New Financial Sector Guidance Important?

The financial sector is integral to the functioning of the global economy, wielding substantial influence over corporate behavior and market dynamics through its investment decisions, lending practices, and insurance underwriting. Given its vast reach and impact, the sector’s commitment to climate goals is crucial for driving systemic change. The updated SBTi financial sector guidance is pivotal for several reasons:

1. Enhance Accountability

Ensuring Ambitious, Science-Based Targets

Financial institutions have a unique role in shaping the direction of global capital flows. By setting science-based targets, they can lead by example, showcasing their commitment to sustainability and climate goals. The updated SBTi guidance provides a robust framework to ensure that these targets are not only ambitious but also grounded in the latest climate science. This enhances accountability by:

• Clear Benchmarks: Establishing clear benchmarks for emissions reductions that align with the Paris Agreement goals.
• Transparent Reporting: Mandating regular reporting and public disclosure of progress towards these targets, thus holding institutions accountable to their commitments.
• Third-Party Validation: Providing a rigorous validation process to ensure that targets are scientifically sound and ambitious enough to drive meaningful change.

2. Drive Consistency

Standardizing Target-Setting Across the Sector

One of the key challenges in the financial sector is the lack of standardized approaches to setting and measuring climate targets. This inconsistency can hinder comparability and accountability. The SBTi guidance addresses this by:

• Unified Framework: Offering a unified framework for financial institutions to set science-based targets, regardless of their size or geographic location.
• Best Practices: Promoting best practices in emissions accounting and target-setting, ensuring that all institutions adhere to high standards.
• Comparable Metrics: Facilitating the use of comparable metrics and methodologies, enabling stakeholders to assess and compare the climate performance of different institutions effectively.

3. Accelerate Climate Action

Encouraging Alignment with Climate Goals

The financial sector’s alignment with climate goals is essential for accelerating the transition to a low-carbon economy. The SBTi guidance aims to:

• Broaden Participation: Encourage more financial institutions to commit to setting science-based targets, thereby increasing the sector’s overall contribution to climate mitigation.
• Portfolio Alignment: Guide institutions in aligning their investment, lending, and underwriting portfolios with climate goals, ensuring that capital is directed towards sustainable projects and companies.
• Risk Management: Help institutions identify and manage climate-related risks, enhancing their resilience and stability in the face of climate change.

Additional Impacts of the SBTi Guidance

1. Influence on Corporate Behavior

Financial institutions, through their investment and lending decisions, have significant leverage over corporate behavior. By adhering to SBTi guidance, these institutions can:

• Promote Sustainability: Influence the companies they invest in or lend to, encouraging them to adopt more sustainable practices and set their own science-based targets.
• Create Market Shifts: Drive market shifts towards greener industries and technologies, thereby fostering innovation and the development of sustainable solutions.

2. Support for Policymakers

The SBTi guidance's advocated standardized approach can also help policymakers by:

• Providing Data: Offering reliable data on financial sector emissions and climate targets, which can inform policy decisions and regulatory frameworks.
• Aligning Objectives: Helping align the objectives of financial institutions with national and international climate policies, creating a cohesive approach to tackling climate change.

3. Long-Term Financial Stability

By setting and achieving science-based targets, financial institutions can also enhance their long-term stability. Climate change poses significant risks to the financial sector, including:

• Physical Risks: Damage to assets and operations from extreme weather events.
• Transition Risks: Financial losses associated with the shift to a low-carbon economy, including stranded assets in fossil fuel industries.

Proactively addressing these risks through the adoption of SBTi guidance can improve risk management and ensure that institutions remain resilient and profitable in the face of climate change.

The updated SBTi financial sector guidance is a critical tool for driving systemic change in the global financial system. By enhancing accountability, driving consistency, and accelerating climate action, it enables financial institutions to lead the way in supporting the transition to a sustainable, low-carbon economy. For corporate finance teams, understanding and implementing this guidance is not only a matter of regulatory compliance but also a strategic imperative for long-term success and resilience.

Key Elements of the New Guidance

The updated Science Based Targets initiative (SBTi) guidance for the financial sector is designed to provide a comprehensive framework for financial institutions to align their activities with global climate goals. Here are the key elements of this new guidance:

1. Sector-Specific Target Setting

Recognizing Unique Impacts and Operational Nuances

The financial sector encompasses a diverse range of services, each with its own specific impacts and operational nuances. The SBTi guidance tailors its recommendations to address these differences effectively:

• Banks: For banks, the guidance focuses on setting targets for financed emissions, which include emissions resulting from corporate and consumer lending, project finance, and investments. Banks play a crucial role in directing capital towards sustainable projects and companies, and setting science-based targets ensures that their lending and investment activities contribute to global climate goals.
• Investors: Asset managers, asset owners, and private equity firms receive specific guidance on aligning their investment portfolios with climate targets. This includes integrating climate considerations into investment strategies, engaging with portfolio companies to adopt science-based targets, and reallocating capital towards low-carbon assets.
• Insurance Companies: The guidance for insurance companies focuses on both their underwriting portfolios and investment activities. Insurance companies are encouraged to consider climate risks in their underwriting processes and to align their investment portfolios with climate targets, thereby reducing their overall carbon footprint.

2. Scope 3 Emissions

Addressing Indirect Emissions from Value Chain Activities

Scope 3 emissions, which include all indirect emissions that occur in a company’s value chain, are a significant focus of the new guidance. For financial institutions, these emissions primarily arise from their investment and lending portfolios and often represent the largest part of their carbon footprint. The guidance emphasizes the need to:

• Measure Scope 3 Emissions: Accurately quantify the emissions associated with the companies and projects they finance.
• Set Reduction Targets: Establish ambitious reduction targets for these emissions, in line with science-based criteria.
• Engage Value Chain: Work with clients and investee companies to reduce their emissions, thereby addressing Scope 3 emissions collaboratively.

3. Portfolio Coverage and Engagement

Setting Targets for a Significant Portion of Portfolios

The guidance requires financial institutions to set science-based targets covering a substantial portion of their portfolios. This involves:

• Asset Class Coverage: Ensuring that the targets encompass a broad range of asset classes, such as equities, bonds, real estate, and project finance. This comprehensive approach ensures that the entire investment portfolio aligns with climate goals.
• Client and Portfolio Company Engagement: Actively engaging with clients and portfolio companies to encourage them to adopt science-based targets. This could involve providing technical support, setting expectations for climate performance, and integrating climate considerations into investment and lending criteria.

4. Data and Reporting Requirements

Ensuring Transparency and Comparability

Robust data collection and transparent reporting are crucial components of the guidance. Financial institutions are required to:

• Baseline Emissions Calculation: Accurately measure their current emissions to establish a baseline. This involves collecting high-quality data on emissions across all relevant scopes and ensuring that the baseline is comprehensive and reliable.
• Annual Reporting: Regularly disclose their progress towards achieving their science-based targets. This includes reporting on methodologies used, any changes in baseline emissions, and adjustments to the scope of targets. Transparent reporting ensures accountability and allows stakeholders to track progress effectively.

5. Climate Scenarios and Transition Pathways

Aligning with Recognized Climate Scenarios

Financial institutions must align their strategies with recognized climate scenarios and transition pathways, such as those developed by the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA). This alignment ensures that their targets are grounded in the latest scientific understanding and policy developments. Key aspects include:

• Scenario Analysis: Using climate scenarios to model the potential impacts of different pathways on their portfolios. This helps in understanding the risks and opportunities associated with the transition to a low-carbon economy.
• Strategic Alignment: ensuring that their business strategies are consistent with achieving the goals of the selected climate scenarios. This involves integrating climate considerations into decision-making processes and long-term planning.

By adhering to these key elements, financial institutions can play a pivotal role in the global effort to combat climate change. The new SBTi guidance provides a clear and structured approach to setting and achieving science-based targets, fostering greater accountability, consistency, and ambition in the financial sector’s climate actions.

Steps for Corporate Finance Teams to Implement the Guidance

1. Assess Current Emissions and Data Systems

Corporate finance teams need to start with a comprehensive assessment of their current emissions. This involves:

• Inventory of Scope 1, 2, and 3 Emissions: Including both direct and indirect emissions.
• Data Quality Review: Ensuring data accuracy and identifying gaps.

2. Set Science-Based Targets

With the baseline established, the next step is to set ambitious yet achievable targets. This process involves:

• Scenario Analysis: Using SBTi-approved tools to model various climate scenarios.
• Stakeholder Engagement: Involving key stakeholders, including board members and investors, in the target setting.

3. Integrate Targets into the business strategy.

Targets should be embedded into the core business strategy. This requires:

• Policy Alignment: Ensuring company policies and procedures support target achievement.
• Resource Allocation: Allocating sufficient resources, including budget and personnel, to sustainability initiatives.

4. Enhance Client and Portfolio Company Engagement

Engagement with clients and portfolio companies is crucial. Strategies include:

• Collaborative Initiatives: Participating in industry collaborations and alliances.
• Support Mechanisms: Providing tools and resources to help clients set and achieve their own science-based targets.

5. Monitor, Report, and Adjust

Ongoing monitoring and reporting are essential for transparency and continuous improvement. Steps include:

• Regular Progress Reviews: Conducting frequent reviews of progress against targets.
• Public Reporting: Disclosing progress in annual sustainability reports.
• Adjustments and Updates: Revising targets and strategies as necessary based on progress and new scientific developments.

Challenges and Considerations

Implementing the SBTi guidance is not without challenges. Corporate finance teams should be prepared to address:

• Data Availability and Quality: Ensuring high-quality data across all emissions scopes.
• Client and Portfolio Company Resistance: Overcoming reluctance or lack of capacity among clients to set and meet targets. Regulatory Uncertainty: Navigating evolving regulatory landscapes and ensuring compliance.

Conclusion: The Importance of SBTi’s New Financial Sector Guidance

Aligning Financial Activities with Global Climate Goals

The updated Science-Based Targets initiative (SBTi) financial sector guidance marks a crucial advancement in the alignment of financial sector activities with global climate objectives. This alignment is not just about compliance or meeting regulatory requirements; it’s about positioning financial institutions as leaders in the transition to a sustainable, low-carbon economy. By adhering to the SBTi guidance, financial institutions can ensure their activities support the broader goals of the Paris Agreement, which aims to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.

Crucial for Sustainability and Competitiveness

For corporate finance teams, the new SBTi guidance is essential for several reasons:

• Sustainability: Understanding and implementing these guidelines helps institutions reduce their carbon footprint and contribute to global sustainability efforts. This is increasingly important as stakeholders, including investors, customers, and regulators, demand more rigorous climate action.
• Competitiveness: Institutions that proactively adopt science-based targets can differentiate themselves in the marketplace. They are better positioned to attract green financing, meet investor expectations, and capitalize on emerging opportunities in the green economy.

Setting Ambitious Targets

To drive meaningful change, financial institutions must set ambitious, science-based targets. These targets should be:

• Quantifiable and Time-Bound: Clearly defined with specific, measurable goals and deadlines.
• Aligned with Climate Science: Consistent with the latest climate science and global climate goals.
• Comprehensive: covering all relevant scopes of emissions, including Scope 1, Scope 2, and Scope 3 emissions.

Integrating Targets into Business Strategies

Integrating these targets into business strategies is crucial for achieving them. This involves:

• Strategic Planning: Incorporating climate targets into the overall strategic planning process ensures they are reflected in long-term business plans and investment decisions.
• Operational Changes: Implementing operational changes to reduce emissions, such as improving energy efficiency, transitioning to renewable energy sources, and promoting sustainable practices throughout the value chain,.
• Incentives and Accountability: Establishing internal incentives and accountability mechanisms to ensure all departments and employees are aligned with the climate goals.

Engaging with Stakeholders

Engagement with stakeholders is vital for the successful implementation of science-based targets. This includes:

• Investors: communicating the institution’s climate goals and progress to investors, demonstrating how these efforts enhance long-term value and risk management.
• Clients and Partners: Working with clients and partners to encourage them to adopt similar targets and practices, thereby amplifying the impact across the value chain.
• Regulators and Policymakers: Collaborating with regulators and policymakers to support the development of favorable policies and regulations that facilitate the transition to a low-carbon economy.

Benefits of Implementation

While implementing the new SBTi guidance requires dedication and collaboration, the benefits are substantial:

• Reduced Risk: By proactively managing climate risks, financial institutions can mitigate the potential financial impacts associated with climate change, such as asset devaluation, regulatory penalties, and reputational damage.
• Enhanced Reputation: Institutions that lead in sustainability efforts are likely to enhance their reputation among stakeholders, gaining recognition as responsible and forward-thinking entities.
• Long-Term Value Creation: Sustainable practices often lead to operational efficiencies, cost savings, and new business opportunities, contributing to long-term value creation.

A Critical Role in Addressing Climate Change

As the world grapples with the urgent challenges of climate change, the financial sector’s role becomes increasingly critical. Financial institutions have the power to influence corporate behavior, drive investments towards sustainable projects, and foster innovation in green technologies. The SBTi guidance provides a robust framework for financial institutions to take meaningful action, ensuring that their activities not only align with global climate goals but also support the transition to a resilient and sustainable economy.

The SBTi’s new financial sector guidance is a pivotal tool for aligning financial activities with global climate goals. For corporate finance teams, understanding and implementing these guidelines is crucial for sustainability and competitiveness. By setting ambitious targets, integrating them into business strategies, and engaging with stakeholders, financial institutions can lead the way in driving the transition to a low-carbon economy. The significant advantages, such as reduced risk, improved reputation, and long-term value creation, outweigh the dedication and cooperation needed for implementation. As climate change continues to present profound challenges, the financial sector’s proactive engagement and leadership will be more critical than ever, with the SBTi guidance providing the necessary framework for impactful action.

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Jonathan Garcia Amine Echtati Bob Gravestijn Erik Valiquette, CCLP Venu Borra Chris Sunderman Harley Hermanson Sami Bousri Shawn Chambers