The COVID-19 pandemic has accelerated several ongoing transitions, including the interdependence between financial institutions and our changing climate. While financial institutions’ business models are vulnerable to climate disruptions, greater attention is also being given to the influence of investment and lending portfolios on climate outcomes. This transition is marked by unprecedented growth of environmental, social, and corporate governance (ESG) investments, a profusion of high-level climate commitments by financial institutions, and burgeoning financial regulatory action on climate-related financial disclosures. Financial institutions are seeking to lead zero-carbon transformation rather than just minimize risks related to climate impacts.
To decarbonize the global economy in alignment with the goals established by the Paris Agreement, all economic actors in the real economy need to reduce their greenhouse gas (GHG) emissions at a rate sufficient to be consistent with the emissions pathways established by climate science. Financial institutions (FIs) differ from other economic sectors: they provide finance and other services to the companies that are responsible for reducing GHG emissions, rather than exercise direct control over GHG emission reductions. The central enabling role of finance is recognized in the Paris Agreement’s Article 2.1(c) on “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” The Science Based Targets initiative (SBTi) defines financial institutions as companies whose business involves the dealing of financial and monetary transactions, including deposits, loans, investments, and currency exchange. If 5 percent or more of a company’s revenue or assets comes from activities such as those described above, they are considered to be financial institutions.
The SBTi framework for financial institutions aims to support FIs in their efforts to address climate change by providing resources for science-based target setting. The framework includes target setting methods, criteria, a target setting tool, and this guidance document. This guidance document includes the following:
- Business case for setting science-based targets (SBTs);
- Guidance for FIs to use the target validation criteria and recommendations, target setting methodologies and tools to prepare targets for submission to the SBTi for approval;
- Case studies from global financial institutions on their application of target setting methods;
- Recommendations about how FIs can communicate their science-based targets, as well as how they aim to contribute to reducing greenhouse gas emissions in the real economy through the implementation of their targets; and
- Recommendations on steps that FIs can take to achieve their targets, building on the understanding that setting targets is only one of various steps (high-level commitments, measuring financed emissions, scenario analysis, target setting, enabling action, reporting) that FIs need to take to ultimately reduce greenhouse gas emissions in the real economy.