There is significant activity in the target-setting landscape for financial institutions, as framework developers look to improve methodologies, address industry feedback and expand coverage from the public markets to the private markets. Although setting climate-related targets can be both complex and strategically critical, expectations from regulatory bodies and framework developers are clear: structured, time-bound and science-aligned targets are essential for the net-zero transition.
In recent months, all the leading finance frameworks have received updates, including those from SBTi, NZIF and NZAOA, and new frameworks are being developed. EcoAct expert, Luke Chater explains the key changes to be aware of from each framework, the implications for asset managers, and in particular why those investing in private markets should now consider setting a net-zero target.
The framework: The Science Based Targets initiative (SBTi) is the leading global standard for corporate emissions reduction targets.
The updates: V2.0 of near-term target criteria increases the minimum target ambition, enhancing clarity of existing asset-class specific criteria, and providing more detail on how to address fossil fuel-related activities. The Net-Zero standard for long-term targets is also in public draft stage, and currently being piloted for financial institutions.
What are the implications?
The SBTi is cracking down on fossil fuel investment, giving much clearer requirements for disclosure on investment/lending activity. There is a new separate “Fossil Fuel Finance Target” option that requires firms to breakdown their fossil fuel investments into respective fossil fuel assets to help disclose, halt transition and phase-out separate fossil-fuel related activities. It’s a clear priority, and as a leading target-setting framework, it is expected that this is the direction that other frameworks may follow. The asset class coverage has not been expanded and SBTi’s target-setting methods remain mostly directed towards publicly listed asset classes. Private assets (excluding fossil-fuel related activities) are mostly optional with the target-setting methods typically unsuitable.
The framework: The Net Zero Investment Framework (NZIF) has become the most widely used guidance by investors with voluntary net-zero commitments. It provides a flexible approach to set specific targets to guide the way to reaching these net-zero goals, as well as aiming to increase investment towards ‘Climate Solutions’. The range of action points depend on ambition and disclosure.
The updates: NZIF 2.0 has been updated based on three years of target implementation experience, and is pivoting away from simply ‘reducing financed emissions’ towards a broader strategy of ‘financing reduced emissions’. Wider updates include improved guidance and analysis tools for sovereign bonds; more detailed metrics for climate solutions target tracking; and agriculture, forestry and fishing are now considered a high impact area. Additional asset classes have been covered, including:
Future themes to be covered are nature, emerging markets, index investing, and a just transition.
What are the implications?
This new guidance emphasises one of NZIF’s key positions: that financed emissions don’t tell the whole story and wider reduction initiatives are needed. They have recognised where signatories have had issues in balancing the pursuit of year-on-year financed emissions reductions while attempting to increase investment in climate solutions and have worked to re-align the frameworks goals to longer-term real economy emissions reductions. There is also improved coverage on private assets, with guidance focused on the specific nature of lower data availability and variable influence. This is an important step in ensuring full market coverage, preventing divestment from public to private assets.
The framework: The Target-setting Protocol (TSP) is an additional highly regarded framework available for asset owners and asset managers. It includes a four-part target-setting approach:
The updates: Now in its fourth edition, the TSP details requirements on the next round of five-year targets from 2025 to 2030, requiring between 40% and 60% reductions in portfolio emissions by 2030 from a 2019 base year. It has significantly expanded coverage to private assets with guidance for private debt funds, directly held private debt, real estate debt funds and residential mortgage loans.
What are the implications?
NZAOA’s update ensures that high-emitting companies develop transition plans regardless of ownership structure. Financial institutions with private asset coverage have further clarity on how they can set targets, with fewer excuses on not engaging.
Now that guidance and frameworks have expanded coverage, altered requirements and responded to multiple iterations of feedback, a net-zero target should be within reach for most asset managers. Private equity, private debt and venture capital firms too have their choice of frameworks.
At EcoAct, we understand the specific challenges and risks that setting a target poses to financial institutions, and for this reason we have developed our bespoke Target Readiness approach. Rather than setting a commitment and then working out how to meet it, we will help you to evaluate and understand all aspects of the process before committing.
We have a wealth of experience advising asset managers on their net-zero transition. Get in touch with our experts to find out more about our approach.
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