Science-based targets for financial institutions: Three reasons to act

As discussions continue at COP27, pressure is growing on financial leaders step up their efforts to decarbonise and lead the net-zero transition. EcoAct experts, Hamish Stewart, Catherine Chisem and Luke Chater explain why financial institutions should start with science-based targets in order to deliver on net-zero commitments.

Last year at COP26, world leaders championed the role of financial institutions in transitioning the energy system and the rest of the real economy towards net-zero. One year later, with COP27 kicking off this week, finance leaders are once again being asked to lead the way in enabling and tracking decarbonisation across all sectors. So far, this work has been led by the Net-zero Asset Owners Alliance and peer alliances participating in the Glasgow Financial Alliance for Net-zero (GFANZ). The growing coalition of asset managers, asset owners, banks, investment consultants and service providers control or advise on over US$130 trillion in assets and each firm has made a public commitment to the net-zero transition.

Beyond net-zero pledges, target setting & implementation are tough

The COP27 presidency and the head of the UN have both highlighted the need for action and implementation. Speaking at the start of the COP, UN Secretary General Antonio Guterres, highlighted the need to “rebuild trust and re-establish the ambition needed to avoid driving our planet over the climate cliff.” For financial institutions, this means getting serious about implementing their net-zero and related climate targets. For those just starting out on their climate and net-zero target setting journey, this process will begin with identifying emissions hotspots in portfolios and preparing to set clear decarbonisation targets. From this baseline data gathering and goal-setting process, a more complete and comprehensive net-zero strategy can be designed that will inform actions across an organisation.

Three reasons why financial institutions should start with science-based targets

For financial institutions looking to get started, or to update their existing approach to climate target setting, The Science Based Targets initiative (SBTi) and other options provide industry-leading standards. With tailored guidance for near-term net-zero targets for financial firms to be launched in early 2023, now is the time to get started.

Why should you and your team consider setting a science-based decarbonisation target?

1. Be confident in a well-designed approach. The SBT guidance was created using the latest climate research and with the consultation of an expert advisory group representing financial institutions, consultants, NGOs, and academic institutions, to ensure that targets set using the standard are in line with industry expectations.
2. Learn from a clear implementation pathway. The target setting process and the implementation framework provide clear steps and a range of tools that can help all types of financial institutions assess and track financed emissions across investing and lending. The target setting process can be followed and paired with other approaches, such as the Net-zero Asset Owner Alliance Target Setting Protocol, the Net-zero Investment Framework, PCAF, and other approaches.
3. Stay ahead of the regulatory enforcement curve and keep up with client expectations. Financial institutions setting SBTs and taking action are able to stay ahead of future policy and regulation changes, meet investor expectations and demonstrate climate emergency leadership. More specifically for FIs, it helps to gain early access to growing, low-carbon industries.

Charting a path to systematic decarbonisation of investment & credit portfolios

Once the baseline and targets have been established with reference to the SBT standard, or other target setting protocol, the route to portfolio decarbonisation will appear much clearer. Once a target is in place, it is then essential for senior management, the board and wider stakeholders, to ensure that there is a delegated team and strategy in place to meeting this target.

At EcoAct, we have already successfully validated 60 corporate science-based targets across all sectors of the economy, including a number of leading financial institutions. In the post-COP27 reality check, when firms and political leaders will be seeking to turn their commitments into reality, we are well positioned to help guide financial institutions to both set these targets and clearly communicate progress along the way to 2030 and beyond.

Are you a financial institution wondering how to benchmark your progress on climate risk reporting, including Scope 3 data collection and management? Please register to join our Post-COP27 virtual roundtable on 22 November here.