The Science Based Targets initiative (SBTi), one of the key organizations focused on aligning corporate environmental sustainability action with the global goals of addressing and limiting climate change, announced the initiation of a process to develop a net zero standard for financial institutions, with the publication of Net-Zero Foundations for Financial Institutions Draft for public consultation.

Founded in 2015, SBTi was formed as a collaboration between CDP, World Resources Institute (WRI), the World Wide Fund for Nature (WWF), and the United Nations Global Compact (UNGC), with the goal to establish science-based environmental target setting as a standard corporate practice. 

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Last month, SBTi launched its Net Zero Standard, which it will use to assess and certify corporate commitments to achieve net zero emissions. With today’s announcement, SBTi said that it aims to develop the financial sector counterpart to the new corporate net zero standard. The main goal of the process is to define the basis of a standard to best enable financial institutions to best use their influence and unique role in mobilizing capital to achieve economy-wide net zero emissions by 2050.

The process to develop a climate standard for finance comes amid a surge of commitments by companies across the financial services sector to support net zero goals. At UN COP26 climate conference last week, the Glasgow Financial Alliance for Net Zero (GFANZ) revealed that the capital represented by financial sector firms aligned with global net zero goals has now reached over $130 trillion, or roughly 40% of global financial assets.

According to SBTi, however, while net zero target setting is becoming a more common ambition for financial institutions, the definitions and activities included under the commitments vary significantly, creating difficulty in assessing the goals, and in comparability and measurement of real world impact. Some of the variations include differences in the type of financing or investment activities covered by the targets, the inclusion or exclusion of portfolio companies’ scope 3 emissions in the emissions footprint calculation, and types of mitigation strategies considered.

In its draft paper, the SBTi said:

“Our review of the financial net-zero landscape to date finds that approaches differ across dimensions such as the range of financial services that are covered and how FIs are planning to achieve their target. FIs are using a combination of different strategies to decarbonize their portfolios and invest in new climate solutions such as renewable energy and carbon dioxide removal technologies. However, without a common understanding, today’s varied net-zero target setting landscape makes it difficult for stakeholders to compare goals and to evaluate whether the actions being taken by FIs are sufficient to achieve a global net-zero economy by 2050 in line with limiting global warming to 1.5ºC this century.”

In the new paper, SBTi identifies three broad (non-mutually exclusive) approaches to net zero definitions for financial institutions, including net zero claims that are based on financed emissions, the alignment of portfolios such that each individual asset achieves a state of net-zero, and a broader “portfolio contribution” approach which considers the role of financial institutions in financing decarbonization activities and climate solutions.

The public consultation draft will be open until December 17th, with a final draft expected to be published in Q1 2022. The final standard is expected to be released in early 2023.