FINANCIAL SECTOR SCIENCE-BASED
TARGETS GUIDANCE
VERSION 1.1
August 2022
Version
Change/update description
Date
Finalized
Effective Dates
Pilot
The pilot version of the FI Guidance and Criteria
October
2020
October 2022
to January
2022
1.0
No changes made to criteria/guidance. Version changed
from pilot to 1.0 to recognize the end of the pilot phase
February
2022
February 2022
to July 2022
1.1
Clarification for loan coverage metric, that financed
emissions can be used to cover the 67% minimum
threshold.
Clarification to the coverage footnote (footnote B), that
SME lending does not have to be included in the
calculation of the minimum 67% coverage
July 2022
From August
2022
Table of Contents
Table of Contents ...............................................................................................................................1
Acknowledgments .............................................................................................................................3
Executive Summary ............................................................................................................................6
Glossary........................................................................................................................................... 10
1. Introduction ............................................................................................................................. 16
1.1 Purpose of this Document ................................................................................................................ 16
1.2 The SBTi’s Financial Sector Project Audience ................................................................................... 19
1.3 The SBTi’s Financial Sector Project Context ...................................................................................... 19
1.4 What Are Science-Based Targets (SBTs)? ......................................................................................... 20
1.5 How is the Financial Sector Addressing Climate? ............................................................................. 22
2. Business Case for Financial Institutions to Set Science-Based Targets ......................................... 25
3. SBTi Target Validation Criteria and Recommendations for Financial Institutions ......................... 26
3.1 GHG Emissions Inventory and Target Boundary ............................................................................... 27
3.2 Scope 1 and 2 Target Time Frame..................................................................................................... 29
3.3 Scope 1 and 2 Target Ambition ......................................................................................................... 29
3.4 Scope 2 .............................................................................................................................................. 30
3.5 Scope 3 – Portfolio Target Setting Requirements ............................................................................. 31
3.6 Reporting........................................................................................................................................... 34
3.7 Recalculation and Target Validity ..................................................................................................... 35
4. How to Set Science-Based Targets ................................................................................................. 37
4.1 Compiling a GHG Inventory............................................................................................................... 37
4.2 Measuring Financed Emissions to Facilitate Target Setting ............................................................. 40
4.3 How to Set a SBT for Scope 1 and 2 Emissions ................................................................................. 44
5. Approaches to Setting Scope 3 Portfolio Targets ........................................................................... 49
5.1 Background and Brief Literature Review .......................................................................................... 49
5.2 Overview of Available Asset Class–Specific Methods, Broader Methods, and Existing Gaps .......... 50
5.3 Defining the Boundary of Portfolio Targets ...................................................................................... 53
5.4 Description of Methods to Set Portfolio Targets .............................................................................. 58
Financial Sector Science-Based Targets Guidance
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5.5 Approaches to Setting Targets on the Rest of the Scope 3 Categories ............................................ 92
5.6 Coal Phaseout and Fossil Fuel Disclosure ......................................................................................... 93
6. How to Communicate Science-Based Targets and Tracking Progress .............................................. 96
6.1 Tracking and Reporting Target Progress ........................................................................................... 99
6.2 Target Recalculation and Validity ................................................................................................... 100
7. How to Achieve SBTs .............................................................................................................. 102
7.1 Integration of Climate Change in Governance and Decision-Making ............................................. 102
7.2 Engaging Key Stakeholders: Companies, Service Providers, and Policymakers ............................. 103
7.3 Public Disclosure of Climate Actions ............................................................................................... 107
8. SBTi Call to Action Process: Commit, Develop Target, Validate, Announce, Disclose ................. 109
Step 1: Commit to Set a Science-based Target ..................................................................................... 109
Step 2: Develop a Target ....................................................................................................................... 110
Step 3: Submit the Targets for a Validation .......................................................................................... 111
Step 4: Announce the Targets ............................................................................................................... 112
Step 5: Target Disclosure ...................................................................................................................... 112
9. Discussion and Areas for Further Research .............................................................................. 113
Appendices .................................................................................................................................... 115
A. SDA for Residential Mortgage ....................................................................................................... 115
B. SDA for Commercial Real Estate ................................................................................................... 125
C. SDA Electricity Generation Project Finance .................................................................................. 135
D. SDA for Corporate Debt and Equity .............................................................................................. 144
E. Temperature Rating Method ........................................................................................................ 151
F. SBTi Finance Temperature Rating and Portfolio Coverage Tool ................................................... 156
References ..................................................................................................................................... 169
Financial Sector Science-Based Targets Guidance
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Acknowledgments
PRIMARY AUTHORS
Chendan Yan, World Resources Institute
Nate Aden, World Resources Institute
Cynthia Cummis, World Resources Institute
Eoin White, CDP Worldwide
Jan Vandermosten, World Wildlife Fund
Donald Linderyd, World Wildlife Fund
Chris Weber, World Wildlife Fund
TECHNICAL PARTNERS
Giel Linthorst, Guidehouse
Angélica Afanador, Guidehouse
EXPERT ADVISORY GROUP
The following individuals provided expert feedback and direction on guidance development. They did so
in a personal capacity, and their views did not necessarily represent the views of their employers.
1
Anna Viefhues, AMF Pension
Stuart Palmer, Australian Ethical Investment
Jochen Krippner, Barclays
Jean-Yves Wilmotte, Carbone 4
Tim Stumhofer, ClimateWorks Foundation
Ian Monroe, Etho Capital and Stanford University
Kaitlin Crouch, ING Bank
Maximilian Horster, ISS ESG
Dr. Nicole Röttmer, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft
Marcus Lun, RBC Global Asset Management
John Gelston, Standard Chartered
Greg Liddell, Suncorp Group
Jes Andrews, United Nations Environment Programme, Finance Initiative
Neil Patel, Voya Financial
Philip Tapsall, Westpac
Eric Christensen, WSP
1
This list does not represent all Expert Advisory Group (EAG) members who have contributed to the framework development.
More members may be added to the list.
Financial Sector Science-Based Targets Guidance
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METHOD ROAD TESTERS
The following organizations provided valuable feedback on the robustness and practicality of the draft
science-based target setting methods through the method road-testing process led by Science Based
Targets initiative (SBTi) in 2019.
ABN AMRO Bank
ACTIAM
AMF Pension
ASN Bank
ASR Nederland NV
Bank Australia
Bankinter
BNP Paribas
ING
Itaú Unibanco
La Banque Postale and La Banque Postale Asset Management
Morgan Stanley
Netherlands Development Finance Company (FMO)
Nordea Life and Pension
Skandia
Sompo Holdings, Inc.
Swedbank AB
YES BANK, Ltd.
TEMPERATURE RATING AND SBT PORTFOLIO COVERAGE TOOL
The SBTi tool development process included many partners and beta testers. We would like to
particularly thank: Christian Schmidli; representatives from Allianz; Bloomberg; ISS ESG; MSCI; Ortec
Finance; OS-Climate; Trucost; Storebrand; and Urgentum for their participation. We would also like to
thank all beta testers who provided valuable feedback on the tool development process.
Project Team
Technical Partners
Daan van de Meeberg, Ortec Finance
Lisa Eichler, Ortec Finance
Joris Cramwinckel, Ortec Finance
Hewson Baltzell, Helios Exchange
Truman Semans, OS-Climate
Wilder Marsh, OS-Climate
Financial Sector Science-Based Targets Guidance
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Data and Service Provider Collaborators
Bloomberg L.P.
CDP
ISS ESG
MSCI
Trucost
Urgentem
User Group Collaborators
Allianz
Net Zero Asset Owner Alliance
Storebrand
Tool Beta Testers
Mohammad Fesanghary and Arun Verma, Bloomberg L.P.
Carbon Intelligence
CEMAsys.com AS
Dr. Nicole Röttmer, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft
EcoAct
Goldman, Sachs & Co.
Lombard Odier Investment Managers
Manulife Investment Management
Oliver Canosa
ShareAction
Tribe Impact Capital LLP
We are thankful to Caisse de dépôt et placement du Québec (CDPQ), ClimateWorks Foundation,
Partnership for Carbon Accounting Financials (PCAF), Keeling Curve Prize, Hewlett Foundation, and the
Bank of New York Mellon for their generous financial support.
Financial Sector Science-Based Targets Guidance
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Executive Summary
Context
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.
2
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;
2
On September 14, 2020, New Zealand announced it was the first country to require annual climate risk reporting by large
banks, asset managers, and insurers; see https://www.afr.com/companies/financial-services/new-zealand-makes-climate-
reporting-compulsory-20200915-p55vno.
Financial Sector Science-Based Targets Guidance
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● 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.
The business case for setting SBTs
Financial institutions have historically focused on maximizing economic return on investment as a
guiding principle and business model. However, the meaning of fiduciary duty, that is financial
institutions’ legal and ethical obligation to act in their clients’ best interests, is shifting in the face of
climate change. The new business case for financial institutions to set SBTs for their investment and
lending portfolios is based on a four-part rationale: resilience, policy, demand, and innovation. Adoption
of SBTs can help financial institutions augment their resilience and competitiveness in the face of
extreme weather events and other climate-related risks. By becoming change makers rather than
change takers, financial institutions can effectively anticipate climate policy and regulatory shifts. Clients
are increasingly demanding climate actions by their financial institutions, and SBTs help to provide
transparent credibility. Finally, SBTs help direct financial institution innovation toward potentially
higher-margin products that support emissions reductions in the real economy.
How to set SBTs
FIs’ largest impact on climate change is through their investment and lending activities; thus, it is
essential they prioritize target setting in these areas. The SBTi has adopted an asset class–specific
approach to enable robust and meaningful targets. After an extended stakeholder engagement process,
the SBTi has selected three methods that link financial institutions’ investment and lending portfolios
with climate stabilization pathways, each of which can be used for one or more asset classes:
● Sectoral Decarbonization Approach (SDA): Emissions-based physical intensity targets are set for
real estate and mortgage–related investments and loans, as well as for the power generation,
cement, pulp and paper, transport, iron and steel, and buildings sectors within corporate
instruments.
● SBTi Portfolio Coverage Approach: Engagement targets are set by financial institutions to have a
portion of their investees set their own SBTi-approved science-based targets such that the
financial institution is on a linear path to 100 percent portfolio coverage by 2040.
● The Temperature Rating Approach: Financial institutions can use this approach to determine the
current temperature rating of their portfolios and take actions to align their portfolios to
ambitious long-term temperature goals by engaging with portfolio companies to set ambitious
targets.
Financial Sector Science-Based Targets Guidance
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The SBTi recognizes that these methods are neither exhaustive nor comprehensive and welcomes
review of additional methods. In addition to setting targets for their investment and lending activities,
FIs are required to set targets for their operations (i.e., scope 1 and 2 emissions) consistent with a well-
below 2°C pathway, and are encouraged to set them for a more ambitious 1.5°C scenario. Financial
institutions may also set targets for the remaining scope 3 categories, as defined by the GHG Protocol
Scope 3 Standard.
How to communicate targets
Science-based targets give FIs an indication of how much is needed to align their activities with the Paris
climate goals. As outlined above, FIs’ primary means for affecting GHG emission reductions is through
the companies they invest in or finance. To preserve credibility and robustness, FIs must communicate
clearly about their SBTs and the actions they take to implement their SBTs. The SBTi has developed a
template that provides instructions for FIs on how best to do the following:
● Define a headline target that sets out which asset classes are included in their targets and how
much of their total portfolio is covered;
● Define targets for individual asset classes that include the method they have used as well as
specific target language; and
● Outline the actions they will take to reach their headline and asset class–specific target(s).
The SBTi recognizes that currently there is insufficient clarity about which FI actions lead to greenhouse
gas emissions in the real economy. To make further progress in this field the SBTi requires that, after
target approval, FIs disclose actions or strategies taken during the year to meet scope 3 portfolio
targets, and disclosure of progress against all approved targets on an annual basis. As FIs set targets, this
reporting will help to identify which actions are most effective to realize GHG emission reductions in the
real economy.
How to track progress and achieve targets
Actions FIs can take to fully integrate climate change in their organizations and services and potentially
influence greenhouse gas emission reductions in the real economy include the following:
● Engaging key stakeholders, such as companies, service providers, and policymakers on
complementary components of climate action;
● Public disclosure of strategies employed to reduce the impact of the FI on climate change; and
● Integration of climate change in governance and decision-making.
Financial Sector Science-Based Targets Guidance
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How to join the SBTi and submit targets for approval
The publication of this framework in October 2020 commenced a pilot target validation project for 20
financial institutions. As with companies, the first generation of SBTs provides proof of concept that
catalyses further action and target setting among peer financial institutions. Following the conclusion
of the pilot in February 2022, all interested FIs are invited to follow the five-step SBTi Call to Action
process: commit to set an SBT, develop a target, submit the targets for validation, announce the
approved targets, and disclose target progress. In 2022, the SBTi plans to publish updated target
criteria and recommendations for financial institutions based on the latest available climate science
and target-setting methods, as well as lessons learned in the early target validation phase.
Financial Sector Science-Based Targets Guidance
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Glossary
Term
Absolute emissions
Asset class
Attribution share or
attribution factor
Avoided emissions
Biogenic CO
2
e
emissions
Business loan
Carbon accounting of
financial portfolios
Climate impact
Climate-related risks
Financial Sector Science-Based Targets Guidance
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CO
2
-equivalent (CO
2
e)
Commercial real
estate loans
Consolidation
approach
Consumer loan
Corporate debt
Debt
Direct emissions
Double counting
Emission intensity
metric
Emission removal
Financial Sector Science-Based Targets Guidance
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Emission scopes
Enterprise Value
Including Cash (EVIC)
Environmentally
extended input-
output (EEIO) data
Equity
EXIOBASE
Financed emissions
Financial institutions
Financial Sector Science-Based Targets Guidance
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Greenhouse gas
(GHG) emissions
Greenhouse Gas
(GHG) Protocol
Greenhouse gas
(GHG) accounting
Green financing
Grey financing
Indirect emissions
Investment
Listed equity and
bonds
Financial Sector Science-Based Targets Guidance
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Mortgage
Motor vehicle loan
Non listed corporate
finance
Paris Agreement
Project finance
Scenario analysis
Science-based
reduction targets
(SBTs)
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
Financial Sector Science-Based Targets Guidance
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Scope 3, category 15
(investments)
emissions
Sequestered
emissions
Sector-specific
metrics
Small and medium-
sized enterprises
(SMEs)
Total balance sheet
value
World Input-Output
Database (WIOD)
Financial Sector Science-Based Targets Guidance
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1. Introduction
The former governor of the Bank of England, Mark Carney, has warned that the global financial system is
backing carbon-producing projects that will raise the temperature of the planet by over 3°C—severely
overshooting what is required to stay well-below 2°C as agreed in the 2015 Paris Agreement.
3
At the
same time, extreme weather events and other climate impacts pose growing threats to financial
institutions’ (FIs) economic models. While many FIs are working on reducing their exposure to risks from
climate impacts, the Science Based Targets initiative’s (SBTi) finance sector guidance provides a
framework for financial institutions to reduce their impact on the climate. More specifically, it is
designed to clarify, improve, and accelerate financial institutions’ alignment with the goals of the Paris
Agreement.
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 remain aligned with the emissions pathways established by climate science. Corporate
emissions do not occur in a vacuum, but rather within a broader economic and regulatory system that
creates a complex web of incentives and disincentives for economic actors to reduce emissions. In many
ways, all actors across a given value chain, namely the upstream and downstream activities associated
with each company’s operation, and those connected through policy and other incentives, share
influence over the direct emissions of each actor and, therefore, share responsibility for reducing them.
FIs have unique influence over other actors through their provision of investment and lending services.
To drive Paris-aligned systemic decarbonization, it is critical to leverage shared influence and
responsibility for aligning incentives as well as eliminating barriers to emission reductions.
1.1 Purpose of this Document
To date, more than 70 financial institutions have publicly committed to set emissions reduction targets
through the SBTi. The list of committed financial institutions as of March 2021 is included below in
alphabetical order:
1
ABN Amro Bank N.V.
25
E.SUN Financial Holding Co., Ltd.
49
Piraeus Bank SA
2
Actiam NV
26
EQT AB
50
Principal Financial Group, Inc.
3
Albaraka Türk Participation
Bank
27
Eurazeo
51
Raiffeisen Bank International
AG
4
Allianz Investment
Management SE
28
Fubon Financial Holdings
52
Schroders
5
Amalgamated Bank
29
FullCycle
53
Shinhan Financial Group
6
ASN Bank
30
Grupo Financiero Banorte SAB de
CV
54
SK Securities, Co., Ltd
3
For more information on Mark Carney’s statement, please see https://www.theguardian.com/business/2019/oct/15/bank-of-
england-boss-warns-global-finance-it-is-funding-climate-crisis?CMP=share_btn_link.
Financial Sector Science-Based Targets Guidance
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7
Australian Ethical Investment
31
Hannon Armstrong
55
Societe Generale
8
Aviva PLC
32
Hitachi Capital Corporation
56
Sompo Holdings, Inc.
9
AXA Group
33
HSBC Holdings plc
57
Standard Chartered Bank
10
Banco do Brasil S.A.
34
ING Group
58
Storebrand ASA
11
BanColombia SA
35
KLP
59
Swedbank AB
12
Bank Australia
36
La Banque Postale
60
Swiss Re
13
Bank J. Safra Sarasin AG
37
Legal & General Group PLC
61
Turkiye Garanti Bankasi A
14
BBVA
38
Lloyd Fonds AG
62
Teachers Mutual Bank
15
BNP Paribas
39
63
Tokio Marine Holdings, Inc.
16
Caixa Geral de Depósitos
40
Mahindra & Mahindra Financial
Services Limited
64
Tribe Impact Capital LLP
17
Capitas Finance Limited
41
MetLife, Inc.
65
TSB Bank
18
Chambers Federation
42
MP Pension
66
TSKB
19
Commercial International
Bank Egypt (SAE) CIB
43
MS&AD Insurance Group
Holdings, Inc.
67
Türkiye İş Bankası
20
Commerzbank AG
44
NatWest Group plc
68
Vakifbank
21
Credit Agricole
45
Novo Banco, SA
69
Westpac Banking Corporation
22
Credit Suisse Group
46
OXI-ZEN Solutions SA
70
YES Bank
23
DGB FINANCIAL GROUP
47
PensionDanmark
71
Yuanta Financial Holding Co
Ltd
24
Direct Line Insurance Group
plc
48
Phoenix Group Holdings plc
72
Zurich Insurance Group Ltd
An additional 80 institutions in the financial sector reported to CDP in 2019 that they intend to set a
science-based target within the next two years.
Recognizing the pressing need for a tailored, yet standardized approach for financial institutions, the
SBTi launched a project in 2018 to develop target setting methods, target validation criteria and
recommendations, a target setting tool, and a guidance for financial institutions to align their lending
and investment portfolios with the ambitions of the Paris Agreement (see Figure 1.1).
Financial Sector Science-Based Targets Guidance
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Figure 1.1. Four Components of the SBTi's Framework for Financial Institutions
Source: Authors 2020.
This guidance document is a part of the science-based target setting framework for financial institutions
that ties the three other components together, namely the target validation criteria and
recommendations, target setting methods, and description of an open-source tool for target setting
methods. Financial institutions are invited to use the criteria and recommendations (Chapter 3) and
methods (Chapters 4 and 5) described in this document to formulate their targets.
The criteria and recommendations will also be used by the SBTi Target Validation Team (TVT) to assess
financial institutions’ target submissions. The SBTi Finance Tool described here is freely available
through the project website
4
along with all other project resources to facilitate target setting. Finally,
the case studies and other information included in this guidance document are intended to further
inform financial institutions’ target development, submission, and implementation processes.
In addition, this document provides recommendations to financial institutions on how to set science-
based targets for scope 1, 2, and 3 emissions (Chapters 4 and 5), informed suggestions on
communicating targets and actions (Chapter 6), examples of actions FIs can take to achieve their targets
(Chapter 7), and instructions on committing to the SBTi and submitting targets for validation (Chapter 8).
The document finishes by outlining areas for discussion and further research (Chapter 9).
4
Please find the project website here: https://sciencebasedtargets.org/financial-institutions/.
Financial Sector Science-Based Targets Guidance
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1.2 The SBTi’s Financial Sector Project Audience
The SBTi defines a financial institution as a company whose business involves the arrangement and
execution of financial and monetary transactions, including deposits, loans, investments, and currency
exchange. More specifically, the SBTi deems a company a financial institution if 5 percent or more of its
revenue or assets comes from the activities described above.
In practice (and for the first phase of the project from 2018 to 2020), the primary audience includes
universal banks, asset managers (mutual funds), asset owners (pension funds, closed-end funds,
insurance companies), and mortgage real estate investment trusts (REITs). The framework is also
relevant for other financial institutions that have holdings in the following asset classes where methods
are currently available:
- Real estate
- Mortgages
- Electricity generation project finance
- Corporate and consumer loans, bonds, and equity
Asset classes beyond this list are currently out of scope. Bilateral and multilateral development financial
institutions (e.g., the World Bank) are not the primary audience of the project. Equity REITs, namely real
estate companies that own or manage income-generating properties and lease them to tenants, are not
a target audience of this project and shall pursue the regular target validation route for companies.
Additional audiences and asset classes are expected to be included in Phase II of the project.
1.3 The SBTi’s Financial Sector Project Context
Financial institutions 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,
which contains Article 2.1(c) on “making finance flows consistent with a pathway towards low
greenhouse gas emissions and climate-resilient development.”
As reflected by Article 2.1(c), financial institutions require an approach within the SBTi that is tailored to
their role and recognizes that climate target setting is one of numerous activities needed for systemic
transformation. Due to the lack of complete understanding and evidence regarding the climate impacts
of financial institutions' investment and lending portfolios, the SBTi’s finance sector project focuses on
trackable activities. Activities that connect financial flows with GHG emission reductions in the real
economy include physical and transition risk assessment, emissions measurement and disclosure, target
setting, tracking of mitigation actions, and performance and disclosure. Thus, the SBTi framework for
finance contributes to the wider portfolio transition framework through its transparent and robust
Financial Sector Science-Based Targets Guidance
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target setting platform and disclosure requirement regarding actions taken by financial institutions to
achieve targets.
1.4 What Are Science-Based Targets (SBTs)?
1.4.1 SBTs for Companies
Targets adopted by companies to reduce GHG emissions are considered “science-based” if they are in
line with what the latest climate science says is necessary to meet the goals of the Paris Agreement—to
limit global warming to well-below 2°C above preindustrial levels and pursue efforts to limit warming to
1.5°C.
Among companies globally, there is a growing momentum for science-based target setting through the
SBTi. As of September 2020, 989 companies and 58 financial institutions have publicly joined the SBTi,
among which 467 companies have had their targets officially approved (see Figure 1.2).
5
The pace at which companies join the SBTi doubled between April 2018 and October 2019 compared to
the previous 36 months. When the SBTi was launched in 2015, science-based target setting emerged as
a novel corporate sustainability practice. The onset of the global COVID pandemic in 2020 has not
slowed the pace of company commitments such that SBTi remains on track to hit its “1,000 committed
companies by end of 2020” goal. Today, SBTs have become a shared language for ambitious corporate
climate ambition.
The SBTi has made substantial progress against its goal of making science-based target setting a
standard business practice for companies seeking to play a leading role in driving down global GHG
emissions.
5
For more information on committed and approved companies, please visit https://sciencebasedtargets.org/companies-taking-
action/.
Financial Sector Science-Based Targets Guidance
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Figure 1.2. Company Activity in the SBTi since June 2015
Source: SBTi.
1.4.2 Overview of the Science Based Targets initiative
The SBTi mobilizes companies to set science-based targets and boosts their competitive advantage in
the transition to a low-carbon economy. It is a collaboration between CDP, the United Nations Global
Compact, World Resources Institute (WRI), and the World Wide Fund for Nature (WWF), and is one of
the We Mean Business coalition commitments.
6
The finance project is one of the SBTi’s ongoing sector
development projects.
The initiative:
● Showcases companies that have set SBTs through case studies, events, and media to highlight
the increased innovation, reduced regulatory uncertainty, strengthened investor confidence,
and improved profitability and competitiveness generated by setting SBTs;
● Defines and promotes best practice in setting SBTs with the support of a Technical Advisory
Group and a Scientific Advisory Group;
● Offers resources, workshops, and guidance to reduce barriers to adoption; and
● Independently assesses and approves companies’ targets through a Call to Action campaign that
calls on companies to demonstrate their leadership on climate action by publicly committing to
set SBTs. Companies then have two years to get their targets approved and published through
the SBTi.
7
6
Please refer to the SBTi’s website for further details on its governance: https://sciencebasedtargets.org/governance/.
7
For more information, see http://sciencebasedtargets.org/.
Financial Sector Science-Based Targets Guidance
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1.5 How is the Financial Sector Addressing Climate?
Financial institutions are increasingly attuned to climate, both in terms of adaptation to warming and
reducing climate impacts of investment and lending portfolios. Actions in this latter mitigation category
can be categorized into six rubrics: high-level commitments to act, measurement of financed
emissions/disclosure, scenario analysis, target setting, implementation actions, and reporting. Table 1.1
below summarizes 15 related financial sector initiatives alongside these six rubrics.
Table 1.1. Relevant Initiatives That Support Financial Institutions' Climate Actions
Notes: UNEP = United Nations Environment Program; IIGCC = Institutional Investors Group on Climate Change; CDP = Carbon
Disclosure Project.
Source: Authors.
The SBTi’s financial sector project is focused on the target setting component in the broader portfolio
transition process. The first climate mitigation step for many financial institutions is a high-level
commitment to act through an international initiative such as the UN-convened Net-Zero Asset Owners
Financial Sector Science-Based Targets Guidance
23
Alliance, Principles for Responsible Banking, the Investor Agenda, or a commitment to Task Force on
Climate-related Financial Disclosures (TCFD) reporting. To develop emissions metrics, the Partnership for
Carbon Accounting Financials (PCAF) provides asset class methods and data resources for quantification
of financed emissions. The Institutional Investors Group on Climate Change (IIGCC) Paris Aligned
Investment Initiative builds from a high-level commitment to set out a range of actions investors should
take to align their portfolios. Target setting with the SBTi is intended to provide specific, shorter-term
components of the high-level commitments and build on the financed emissions and scenario analysis.
After the targets are set and published, the SBTi seeks to harmonize with action and reporting–focused
initiatives to facilitate implementation, accountability, and compilation of evidence.
Outside of the areas described in Table 1.1 above, financial institutions are also mitigating their climate
impact by measuring emissions intensity of their portfolios, distinguishing green versus grey financing,
and divesting from fossil fuels. The emissions intensity approach calculates emissions per economic unit,
often grams CO
2
equivalent(gCO
2
e)/$ assets under management, to quantify sector differences and
track changes over time. Green versus grey metrics are exemplified by WRI’s Green Targets tool, which
illustrates the distribution of banks’ sustainable finance commitments relative to their fossil fuel
finance.
8
University endowment and other financial institutions’ commitments to divest from fossil fuels
represent another type of action. The SBTi finance sector project complements and augments these
approaches with its focus on target setting.
1.5.1 Framework Development Process
Science-based target setting resource for financial institutions has been developed through a two-year
inclusive multi-stakeholder process, including consultation with an Expert Advisory Group (EAG)
representing financial institutions, consultants, nongovernmental organizations (NGOs), and academic
institutions; financial institutions participating in method road testing; and a broad, inclusive
Stakeholder Advisory Group (SAG), which provides input at key milestones in the framework
development process.
Below are highlights and milestones from the development process:
● September 2018: First EAG meeting;
● December 2018: EAG meeting to introduce the draft methods and solicit initial feedback;
● February 2019: EAG meeting to obtain feedback on the road-testing process;
● April 2019: Launch of draft methods for road-testing process;
● April–September 2019: Gathered feedback from financial institutions and other stakeholders
on draft asset class–based methods through road-testing process and an open stakeholder
consultation;
8
For more information on WRI’s Green Targets tool for banks, see https://www.wri.org/finance/banks-sustainable-finance-
commitments/.
Financial Sector Science-Based Targets Guidance
24
● October 2019: Hosted a webinar to share a summary of feedback received from companies
participating in the road-testing process;
● November 2019: Cohosted a webinar with Global Compact Network Australia and WWF to
share progress on methodologies with financial institutions in Oceania and Asia Pacific;
● February 2020: Hosted workshops in London and Tokyo to gather feedback from stakeholders
on draft target validation criteria;
● April 2020: Hosted a webinar to initiate public call for feedback on development of a new
temperature rating draft methodology for companies and investment portfolios;
● April–May 2020: Conducted public consultation to gather input from stakeholders on draft
target validation criteria and tool development process that will serve as central components
of the SBTi’s framework for financial institutions;
● May 2020: Hosted a webinar to share a summary of stakeholder feedback on draft target
validation criteria;
● May 2020: Participated in a webinar hosted by the Institute of International Finance to share
a project overview and update;
● April–May 2020: Hosted a webinar to launch the consultation process for the temperature
rating methodology;
● July 2020: Hosted a webinar to launch the Temperature Rating and SBT Portfolio Coverage
tool beta-testing process and provided an overview of the Financial Sector Science Based
Targets Guidance and the feedback process;
● August 2020: Shared the first draft of the Financial Sector Science Based Targets Guidance for
public comments;
● August 2020: Public consultation on the first draft of the Financial Sector Science Based
Targets Guidance took place from August 6 to 27, 2020;
● July–August 2020: Beta testing of an open-source tool, which covers the Temperature Rating
and SBT Portfolio Coverage methods, target setting tool launched on July 23. Two webinars
were hosted for beta testers: Beta Tester Technical Deep Dive: Setting Up and Integrating the
Tool in Your Workflow (August 6) ; Beta Tester Workshop: How To Run the Tool and Use
Cases (August 7). The tool is based on a new open-source Temperature Rating
methodology developed by CDP and WWF. The methodology and tool are suitable for setting
targets for unlisted and listed equity and corporate debt portfolios;
● August–October 2020: Revised the first draft of the guidance based on feedback received in
the survey and other engaged stakeholders; revised the Temperature Rating and SBT Portfolio
Coverage tool and tool documentation based on feedback received in the beta-testing
process.
9
9
More documentation of the framework development process can be found on the project website:
https://sciencebasedtargets.org/financial-institutions/.
Financial Sector Science-Based Targets Guidance
25
1. Business Case for Financial Institutions to Set Science-
Based Targets
Financial institutions are uniquely positioned to influence other actors through their investment and
lending activities. To drive Paris-aligned systemic decarbonization, it is critical to leverage shared
influence and responsibility for aligning incentives as well as eliminating barriers to emissions
reductions.
Financial institutions that set science-based targets commit to align their lending and investment
portfolios with the level of ambition required to achieve the goals of the Paris Agreement. This
commitment, along with the strategy and actions that will be taken to achieve the targets not only
contribute to the transition to a net-zero economy but also bring substantial benefits to the financial
institution. Key benefits include the following:
● Build business resilience and increase competitiveness: Performing scenario analysis and
applying methods to set SBTs enable financial institutions to align with the zero-carbon
economy, to identify and capitalize on a range of opportunities, and to mitigate climate risks and
increase competitiveness by gaining insights into the transformations faced by the economic
sectors they lend to and invest in.
● Drive innovation: As SBTs include a long-term vision, financial institutions can plan future
financing options that prioritize the low-carbon transition. Engaging with their clients, financial
institutions can develop innovative financial products and services that enable customers to
reduce emissions in the real economy.
● Build credibility and reputation: As compared to targets initiated solely by financial institutions,
SBTs have higher credibility with stakeholders since they are based on the latest available
science and validated against a set of robust criteria developed through a multi-stakeholder
consultative process. Financial institutions with SBTs can serve as lower-risk options for long-
term shareholders and investors that are seeking to hedge climate-related risks. In addition,
financial institutions with SBTs demonstrate leadership in sustainability, which improves a
financial institution's reputation with all stakeholders.
● Influence and prepare for shifts in public policy: SBTs help financial institutions adapt to
changing policies and send a stronger signal to policymakers, allowing the industry to better
influence policy decisions. Financial institutions with SBTs are much better positioned to
respond to future regulatory adjustments as governments ramp up their climate action.
● Demonstrate leadership: While metrics and methods to set SBTs targets for financial
institutions are new and best practice is still evolving, this is no reason to delay action. Financial
institutions that undertake the target setting process lead the way and push the market toward
the most credible and practical solutions.
Financial Sector Science-Based Targets Guidance
26
2. SBTi Target Validation Criteria and Recommendations for
Financial Institutions
This chapter presents Version 1.0 of the SBTi target validation criteria and recommendations for
financial institutions. These sector-specific criteria supersede the general SBTi criteria for companies.
Sections 1 to 4 and 7 of the criteria (Section 3.1, 3.2, 3.3, 3.4 and 3.7) focus on GHG inventory, scope 1
and 2 targets, and target validity and recalculations. Version 4.1 of the SBTi general criteria for
companies serves as the basis for these sections, with slight deviations for financial institutions.
10
Where relevant, these criteria are subject to the SBTi’s annual update of corporate criteria.
Developed through extensive stakeholder consultation, Sections 5 and 6 (Section 3.5 and 3.6) of
the criteria are designed specifically for financial institutions’ target setting, progress-tracking, and
action reporting related to their investment and lending activities. In 2022, the SBTi plans to update
this initial set of criteria based on lessons learned in the target validation pilot phase for financial
institutions (see Chapter 8 for more information on committing and submitting targets to SBTi).
The SBTi also reserves the right to make adjustments to the criteria, as needed, to reflect the
most recent emissions scenarios, partner organization policies, greenhouse gas accounting
approaches, and evolving understanding of best practice in science-based target setting.
All the criteria presented here must be met for financial institutions' targets to be recognized by the
SBTi. In addition, financial institutions shall follow the GHG Protocol Corporate Standard, Scope 2
Guidance, and Corporate Value Chain (Scope 3) Accounting and Reporting Standard for their emissions
accounting and reporting.
11
In the context of the criteria and this guidance, the term “shall” is used to
describe requirements related to relevant criteria and accounting guidance, whereas the term “should”
is used to describe recommendations. The SBTi recommendations are important for transparency and
best practices, but are not required. Unless otherwise noted (including specific sections), all criteria
apply to scopes 1, 2, and 3.
A select group of criteria and recommendations most relevant to FIs are expanded on in further sections
throughout this document, which include additional information on successfully fulfilling these
requirements.
12
The SBTi strongly recommends that financial institutions thoroughly review the
guidance before target development.
10
Please see Version 4.1 of the SBTi general criteria for corporates here: https://sciencebasedtargets.org/wp-
content/uploads/2019/03/SBTi-criteria.pdf.
11
Limited deviations from the scope 3 standard in this framework are described in Section 4.1 Compiling a GHG Inventory.
12
For more information on criteria not expanded further in this guidance, please refer to the SBTi Target Validation Protocol
that describes the underlying principles, process, and criteria followed to assess targets and to determine conformance with the
SBTi criteria.
Financial Sector Science-Based Targets Guidance
27
The initiative also reserves the right to withdraw a target approval decision if it becomes apparent that
the FI provided incorrect information during the target validation process that results in any of the
criteria existing during the assessment not being met, or if requirements following the approval of the
target are not respected (i.e., target progress-reporting and recalculations).
3.1 GHG Emissions Inventory and Target Boundary
Criteria
FI-C1 – Scopes: Financial institutions (FIs) must set a target(s) that covers institution-wide scope 1 and
scope 2 emissions, as defined by the GHG Protocol Corporate Standard, and scope 3 investment and
lending activities as per FI-C15 and FI-C16. FIs may set targets for remaining scope 3 emissions
categories as per FI-R9.
FI-C2 – Significance Thresholds: Financial institutions may exclude up to 5 percent of scope 1 and scope
2 emissions combined in the boundary of the inventory and target.
13
FI-C3 – Greenhouse Gases: Scope 1 and 2 targets must cover all relevant GHGs as required per the GHG
Protocol Corporate Standard. If optional targets on scope 3, categories 1–14 are set, they shall also
cover all relevant GHGs. Coverage of all relevant GHGs are recommended, where possible, for FIs’ scope
3 portfolio targets. If financial institutions are unable to cover all GHGs for scope 3 portfolio targets,
they shall cover CO
2
emissions at a minimum.
FI-C4 – Bioenergy Accounting: Direct emissions from the combustion of biomass and biofuels for
Institution-wide operational use, as well as GHG removals associated with bioenergy feedstock,
14
must
be included alongside the financial Institution’s inventory and must be included in the target boundary
when setting a science-based target and when reporting progress against that target. If biogenic
emissions from biomass and biofuels are considered climate neutral, the financial institution must
provide justification of the underlying assumptions. Financial institutions must report emissions from
N
2
O and CH
4
from bioenergy use under scope 1, 2, or 3, as required by the GHG Protocol, and must
apply the same requirements on inventory inclusion and target boundary as for biogenic carbon.
FI-C5 – Subsidiaries: It is recommended that financial institutions submit targets only at the parent- or
group-level, not the subsidiary level. Parent companies must include the emissions of all subsidiaries in
their target submission, in accordance with boundary criteria above. In cases where both parent
13
Where financial institutions’ scope 1 or 2 emissions are deemed immaterial (i.e., under 5 percent of total combined scope 1
and 2 emissions), FIs may set their SBT solely on the scope (either scope 1 or scope 2) that covers more than 95 percent of the
total scope 1 and 2 emissions. Financial institutions must continue to report on both scopes and adjust their targets as needed,
in accordance with the GHG Protocol’s principle of completeness and as per FI-C21-Mandatory target recalculation.
14
Non-bioenergy–related biogenic emissions must be reported alongside the inventory and included in the target boundary.
GHG removals that are not associated with bioenergy feedstock are currently not accepted to count as progress toward SBTs or
toward net emissions in the inventory.
Financial Sector Science-Based Targets Guidance
28
companies and subsidiaries submit targets,
15
the parent company’s target must also include the
emissions of the subsidiary if it falls within the parent company’s emissions boundary, given the chosen
inventory consolidation approach.
16
Recommendations and Additional Guidance
FI-R1 – Direct Land Use Change Emissions: When relevant, financial institutions are encouraged to
account for direct land use change emissions and include them in their target boundary. Financial
institutions seeking to implement mitigation actions aimed at reducing land use change as part of their
SBTs (e.g., through preventing deforestation from their supply chains) should include land use change
emissions in their base year inventory. Since methods to calculate land use change can differ widely, and
there is currently no standardized method recognized under the GHG Protocol, companies should
disclose the method used to calculate these impacts in their GHG inventory.
17
Financial institutions with
indirect land use emissions can report these separately alongside the inventory and similarly disclose the
method used to calculate these impacts.
FI-R2 – Bioenergy Accounting: Assumptions of neutrality for bioenergy tend to overlook that there is a
significant time lag between the bio-based resource removal (wood/crop) and later regeneration. They
also overlook possible differences in productivity among forest/crop systems used as bioenergy
feedstock and the effects of long-term carbon storage in bio-based products and/or disposal. For these
reasons, until a standardized method for bioenergy GHG accounting is developed under the GHG
Protocol, the SBTi strongly recommends financial institutions take into account the time of emissions
(i.e., wood/crop removal) and sequestration (i.e., forest/crop regrowth) in their accounting
methodologies.
15
This criterion applies only to subsidiaries. Brands, licensees, and/or specific regions or business divisions (with the exception
of banks’ asset management divisions) of a financial institution will not be accepted as separate targets unless they fall outside
of a parent company’s chosen consolidation approach.
16
Under this version of the criteria, it is optional for banks to include their asset management divisions in their scope 1, 2, and 3
target boundaries. If such exclusion is made, it shall be disclosed clearly in the target language. See Section 5.3 for more
information.
17
At the moment, the GHG protocol provides only limited guidance on agriculture, forestry, and other land-use (AFOLU)
emissions accounting, and there are no sector-specific SBT-setting methodologies available for companies in land-intensive
sectors that include AFOLU emissions. The Science Based Targets initiative is undertaking a sector development project, the
SBTi Forest, Land and Agriculture project (“SBTi FLAG”), led by WWF, to address this methodology gap. The effort will focus on
the development of methods and guidance to enable the food, agriculture, and forest sectors to set science-based targets
(SBTs) that include deforestation, and possibly other land-related impacts. In parallel to this effort, WRI and World Business
Council for Sustainable Development (WBCSD) are leading the development of three new GHG Protocol Standards on how
companies should account for GHG emissions and removals in their annual inventories. The three standards will cover: Carbon
Removals and Sequestration; Land Sector Emissions and Removals; and Bioenergy. For more information on this work and how
to participate, see here. The FLAG project and the new GHG Protocol Standards are complementary workstreams that will
provide the infrastructure needed for corporate target setting, accounting, and reporting of AFOLU-related emissions.
Financial Sector Science-Based Targets Guidance
29
3.2 Scope 1 and 2 Target Time Frame
Criteria
FI-C6 – Base and Target Years: Targets must cover a minimum of 5 years and a maximum of 15 years
from the date the target is submitted to the SBTi for an official validation.
18
FI-C7 – Progress to Date: Targets that have already been achieved by the date they are submitted to the
SBTi are not acceptable. The SBTi uses the year the target is submitted to the initiative (or the most
recent completed GHG inventory) to assess forward-looking ambition. The most recent completed GHG
inventory must not be earlier than two years prior to the year of submission.
Recommendations and Additional Guidance
FI-R3 – Base Year: The SBTi recommends choosing the most recent year for which data are available as
the target base year.
FI-R4 – Target Year: Targets that cover more than 15 years from the date of submission are considered
long-term targets. Financial institutions are encouraged to develop such long-term targets up to 2050 in
addition to midterm targets required by C6. At a minimum, long-term targets must be consistent with
the level of decarbonization required to keep global temperature increase to well-below 2°C compared
to preindustrial temperatures to be validated and recognized by the SBTi.
FI-R5 – Consistency: It is recommended that financial institutions use the same base and target years for
all targets within the midterm time frame and all targets within the long-term time frame.
3.3 Scope 1 and 2 Target Ambition
Criteria
FI-C8 – Level of Ambition: At a minimum, scope 1 and scope 2 targets will be consistent with the level of
decarbonization required to keep global temperature increase to well-below 2°C compared to
preindustrial temperatures, though financial institutions are encouraged to pursue greater efforts
toward a 1.5°C trajectory. Both the target time frame ambition (base year to target year) and the
forward-looking ambition (most recent year to target year) must meet this ambition criteria.
19
18
For targets submitted for an official validation in the first half of 2020, the valid target years are 2024–2034 inclusive. For
targets submitted in the second half of 2020, the valid target years are between 2025 and 2035 inclusive.
19
For targets submitted for an official validation in 2020, the most recent inventory data submitted must be for 2018 at the
earliest.
Financial Sector Science-Based Targets Guidance
30
FI-C9 – Absolute vs. Intensity: Intensity targets for scope 1 and scope 2 emissions are only eligible when
they lead to absolute emissions reduction targets in line with climate scenarios for keeping global
warming to well-below 2°C or when they are modeled using an approved sector pathway. Absolute
reductions must be at least as ambitious as the minimum of the range of emissions scenarios consistent
with the well-below 2°C goal or aligned with the relevant sector reduction pathway within the Sectoral
Decarbonization Approach.
FI-C10 – Method Validity: Targets must be modeled using the latest version of methods and tools
approved by the initiative. Targets modeled using previous versions of the tools or methods can only be
submitted to the SBTi for an official validation within six months of the publication of the revised
method or the publication of relevant sector-specific tools.
FI-C11 – Offsets: The use of offsets is not counted as emissions reduction toward the progress of
financial institutions’ science-based targets. The SBTi requires that financial institutions set targets
based on emission reductions through direct action within their own operations or their investment and
lending portfolios. Offsets are only considered to be an option for financial institutions seeking to
support additional emission reductions beyond their science-based targets.
FI-C12 – Avoided Emissions: Avoided emissions fall under a separate accounting system from corporate
and financial institutions’ inventories and do not count toward science-based targets.
Recommendations and Additional Guidance
FI-R6 – Choosing an approach: The SBTi recommends using the most ambitious decarbonization
scenarios that lead to the earliest reductions and the least cumulative emissions.
3.4 Scope 2
Criteria
FI-C13 – Approaches: Financial Institutions shall disclose whether they are using a location- or market-
based approach per the GHG Protocol Scope 2 Guidance to calculate base year emissions and to track
performance against a science-based target. Financial Institutions shall use a single, specified scope 2
accounting approach (“location-based” or “market-based”) for setting and tracking progress toward
their SBTs.
FI-C14 – Renewable Electricity Procurement: Targets to actively source renewable electricity at a rate
that is consistent with well-below 2°C scenarios are an acceptable alternative to scope 2 emissions
reduction targets. The SBTi has identified 80 percent renewable electricity procurement by 2025 and
100 percent by 2030 as thresholds (portion of renewable energy over total energy use) for this approach
Financial Sector Science-Based Targets Guidance
31
in line with the recommendations of RE100. Financial Institutions that already source electricity at or
above these thresholds shall maintain or increase their use share of renewable electricity to qualify.
Recommendations and Additional Guidance
FI-R7 – Purchased Heat and Steam: For science-based target modeling purposes using the sectoral
decarbonization approach (SDA), it is recommended that financial institutions model purchased heat
and steam–related emissions as if they were part of their direct (i.e., scope 1) emissions.
FI-R8 – Efficiency Considerations for Target Modeling: If financial institutions are using a method that
does not already embed efficiency gains for the specific sector, market, and the decarbonization
projected for the power sector based on well-below 2°C scenario, it is recommended that these factors
be taken into account when modeling electricity-related scope 2 targets.
3.5 Scope 3 – Portfolio Target Setting Requirements
Criteria
FI-C15 – Requirement to Set Target(s) on Investment and Lending Activities: All financial institutions
shall set targets on their investment and lending activities as required by FI-C16, irrespective of the
share of quantified scope 3 portfolio emissions as compared to the total scope 1 + 2 + 3 emissions of the
financial institution. FIs may choose from the applicable methods for target setting, by asset class, as
defined in Table 5.2.
FI-C16 – Portfolio Target Boundary: Financial institutions shall set targets on all “Required Activities” in
the Required Activities and Methods Table (Table 5.2) following the minimum boundary coverage
requirement.
FI-C17.1 – Sectoral Decarbonization Approach Targets
20
: Financial institutions’ targets using the sectoral
decarbonization approach (SDA) are considered acceptable when the following conditions are met:
• Boundary: Financial institutions shall set SDA targets on their real estate and electricity
generation–related activities as specified in the Required Activities and Methods Table (Table
5.2). SDA targets may also be set on other activities listed in Table 5.2, such as residential
mortgages, corporate loans, listed and private equity and debt for sectors where methods are
available.
• Ambition: Portfolio SDA targets must meet minimum ambition indicated by sector-specific
methods for well-below 2°C pathways.
20
Please see Section 5.4.1 for more information on the Sectoral Decarbonization Approach.
Financial Sector Science-Based Targets Guidance
32
• Time frame: Portfolio SDA targets must cover a minimum of 5 years and a maximum of 15 years
from the date the financial institution’s target is submitted to the SBTi for an official validation.
Financial institutions are further encouraged to develop long-term targets up to 2050 in addition
to the required midterm targets.
• Scope of Borrower and/or Investee Targets: Targets on scope 1 and 2 emissions are required for
real estate and electricity generation related activities as defined by SDA methods (if relevant).
For other Required Activities in the Table 5-2, FIs shall set targets on emissions scopes as
required by the relevant SBTi sector-specific guidance.
21
FI-C17.2 – SBT Portfolio Coverage Targets: Financial institutions’ targets to drive the adoption of science-
based emissions reduction targets by their borrowers and/or investees are considered acceptable when
the following conditions are met:
• Boundary: Financial institutions shall set engagement targets on corporate instruments as
specified in the Required Activities and Methods Table (Table 5.2).
• Target Level of Ambition: Financial institutions shall commit to having a portion of their
borrowers and/or investees set their own approved science-based targets such that the financial
institution is on a linear path to 100 percent portfolio coverage by 2040 (using a weighting
approach in the SBT Finance Tool). For example, a financial institution starting with 10 percent
coverage in 2020 would need to increase coverage by 4.5 percent per year (90/ (2040 – 2020) =
4.5) and reach at least 32.5 percent (10 + [5 x 4.5] = 32.5) coverage by 2025.
• Target Formulation: Financial institutions shall provide information in the disclosed target
language on what percentage of the corporate equity and debt portfolio is covered by the
target, using a weighting approach in the SBTi Finance Tool consistently throughout the target
period.
• Target Time frame: Financial institutions’ portfolio coverage targets must be fulfilled within a
maximum of five years from the date the FI’s target is submitted to the SBTi for validation.
Fulfillment of portfolio coverage targets mean that borrowers’ and/or investees’ SBTs have been
approved by SBTi.
• Scope of Borrower and/or Investee Targets: Financial institutions’ borrowers and/or investees
shall follow the latest SBTi criteria for companies to set scope 1 and 2 targets, as well as scope 3
targets when their scope 3 emissions are more than 40 percent of total scope 1,2, and 3
emissions.
21
A list of the sector-specific guidance and requirements is available in Section 9 of the SBTI Target Validation
Protocol(forthcoming May 2021).
Financial Sector Science-Based Targets Guidance
33
FI-C17.3 – Portfolio Temperature Rating Targets: Financial institutions’ targets to align the Temperature
Rating of their corporate debt and equity portfolios with ambition of the Paris Agreement are
considered acceptable when the following conditions are met:
• Boundary: Financial institutions shall set portfolio Temperature Rating targets on corporate
instruments as specified in the Required Activities and Methods Table (Table 5.2).
• Target Level of Ambition: Financial institutions shall align their portfolio scope 1 + 2 temperature
score with a minimum well-below 2°C scenario and in addition align their portfolio to a
minimum 2°C scenario for the scope 1 + 2 + 3 portion by 2040. Alignment with more ambitious
scenarios such as 1.5°C is highly encouraged. Separate targets for scope 1 + 2 and for scope 1 + 2
+ 3 shall be set.
Financial institutions shall commit to reducing their portfolio temperature scores such that the
financial institution is on a linear path to the stated goal by 2040. For example, a financial
institution starting with scope 1 + 2 portfolio temperature score of 2.9°C in 2020 would need to
decrease its portfolio temperature by at least 0.0575°C per year ([2.9°C – 1.75°C]/[2040 – 2020])
= 0.0575°C, and reach at least 2.61°C portfolio temperature score by 2025. 
For example, a financial institution starting with scope 1 + 2 + 3 portfolio temperature score of
3.2°C in 2020 would need to decrease its portfolio temperature by at least 0.06°C per year
([3.2°C – 2°C]/[2040 – 2020]) = 0.06°C, and reach at least 2.9°C portfolio temperature score by
2025. 
• Target Time frame: Portfolio alignment targets must be fulfilled within a maximum of five years
from the date the targets are submitted to the SBTi for an official validation.
• Scope of Borrower and/or Investee Targets: Financial institutions’ borrowers’ and/or investee’s
targets shall include coverage of scope 1 and 2 emissions, as well as scope 3 emissions when
their scope 3 emissions are more than 40 percent of total scope 1, 2, and 3 emissions.
Recommendations and Additional Guidance
FI-R9 – Measuring Emissions and Setting Targets for Scope 3, Categories 1–14: It is recommended but
not required for financial institutions to measure and set target(s) on categories 1–14 emissions as
defined by GHGP Scope 3 standard. Optional targets on these categories must meet criteria 19–20.1 in
the latest SBTi criteria for companies to be approved by the SBTi.
FI-R10 – Phaseout of Thermal Coal Investments: Financial institutions should establish a policy within six
months from the time of target approval that they will phase out financial support to thermal coal
across all their activities in line with a full phaseout by 2030 globally. Notably, this includes immediately
ceasing all financial or other support to thermal coal companies* that are building new infrastructure or
Financial Sector Science-Based Targets Guidance
34
investing in new or additional thermal coal expansion, mining, production, utilization (i.e., combustion),
retrofitting, or acquiring of coal assets.
* Coal companies are defined as companies with greater than 5 percent of revenues from thermal coal
mining, exploration and drilling, mining services, processing, trading, transport and logistics, equipment
manufacturing, operations and maintenance (O&M) services, engineering, procurement and
construction (EPC) services, transmission and distribution of coal-fired electricity, coal to liquids (Ctlg)
and coal to gas (CtG).
FI-R11– Disclosure of Fossil Fuel Investments and Lending: Financial institutions with approved SBTs,
should annually disclose the annual investments (public equity, private equity, corporate bonds), direct
project financing and lending to fossil fuel (oil, gas, and thermal coal) projects and companies* in U.S.
dollar amount (or other currencies) (See FI-R12 for recommendations on where to disclose).
Financial institutions that fail to phase out coal investments or disclose fossil fuel investments and
lending make themselves susceptible to risk of stranded assets and reputational damage.
* This includes:
(1) Companies that have activities (i.e., identified as share of revenues) in the exploration; extraction;
refining; transportation and distribution; storage; retailing; marketing; trading; or power, heat, or
cooling production from oil and gas. FIs should disclose the threshold used to delineate oil and gas
companies; the SBTi recommends a 5 percent threshold and for the threshold to not exceed 30 percent.
(2) In line with FI-R10, companies with greater than 5 percent of revenues from thermal coal mining,
exploration and drilling, mining services, processing, trading, transport and logistics, equipment
manufacturing, operations and maintenance (O&M) services, engineering, procurement and
construction (EPC) services, transmission and distribution of coal-fired electricity, coal to liquids (Ctlg)
and coal to gas (CtG).
3.6 Reporting
Criteria
FI-C18 – Disclosure of Target(s) Portfolio Coverage: At the time of target announcement and along with
approved targets, financial institutions shall disclose the percentage of their total investment and
lending activities covered by portfolio targets on the SBTi website, in a metric representative of the
magnitude of FIs’ main business activities, which may involve any combination of commercial banking,
investment banking, and asset management. Examples include total financed emissions associated with
investment and lending activities (if quantified), total balance sheet, total investments, total lending
book, and total assets under management.
Financial Sector Science-Based Targets Guidance
35
FI-C19 – Implementation Reporting: At the time of target submission, the financial institution shall
submit a brief summary of how it intends to meet its scope 3 portfolio targets in conformity with the
template provided in the target submission form. This disclosure is intended to create transparency. The
content of the summary will not be used as a basis for validation of targets. At the time of target
announcement, the summary of how the financial institution intends to achieve its targets shall be made
public.
22
FI-C20 – Tracking and Reporting Target Progress: After target approval, the SBTi requires annual
disclosure of scope 1 and 2 GHG emissions, disclosure of progress against all approved targets in the
relevant metric,
23
and disclosure of actions/strategies taken during the year to meet scope 3 portfolio
targets. If optional targets on scope 3 categories 1–14 as described in FI-R9 are submitted and approved
by the SBTi, their progress shall be included in the disclosure of progress as well.
Recommendations and Additional Guidance
FI-R12 — Where to Disclose: There are no specific requirements regarding where the scope 1 and 2
inventory, progress against all approved targets, and actions/strategies to meet scope 3 portfolio targets
should be disclosed, as long as it is publicly available. Recommendations include annual reports,
sustainability reports, the financial institutions’ website, and/or CDP’s annual questionnaire.
3.7 Recalculation and Target Validity
Criteria
FI-C21 – Mandatory Target Recalculation: To ensure consistency with most recent climate science and
best practices, targets must be reviewed, and, if necessary, recalculated and revalidated, at a minimum,
every five years. Financial institutions with an approved target that requires recalculation must follow
the most recently applicable criteria at the time of resubmission. Targets should be recalculated and
reset, as needed, to reflect significant changes that would compromise relevance and consistency of the
existing target.
FI-C22 – Target Validity: Financial institutions with approved targets must announce their target publicly
on the SBTi website within six months of the approval date. Targets unannounced after six months will
have to go through the approval process again, unless a different publication time frame was agreed
with the SBTi.
22
Financial institutions will have opportunities to review the summary language before the SBTi publishes it on the website.
23
See Section 6.1 on guidance to disclose progress against targets.
Financial Sector Science-Based Targets Guidance
36
Recommendations and Additional Guidance
FI-R13 – Triggered Target Recalculation: Targets should be recalculated, as needed, to reflect significant
changes that would compromise relevance and consistency of the existing target. The following list
includes example changes that should trigger a target recalculation:
● Exclusions in the inventory or target boundary change significantly and/or exceed allowable
exclusion limits;
● Significant changes in institutional structure and activities (e.g., acquisitions, divestitures,
mergers, insourcing or outsourcing, shifts in product or service offerings, changes in proportion
of investments by asset classes, addition of new products covered by available methods, major
updates in the latest climate science) that would affect the financial institution's target
boundary or ambition;
● Significant changes in data used to calculate the targets such as changes in growth projections
and discovery of significant errors or several cumulative errors that are collectively significant;
and
● Other significant changes to projections/assumptions used with science-based target setting
methods.
FI-R14 – Validity of Target Projections: The SBTi recommends that financial institutions check the validity
of target-related projections annually. The financial institution should notify the SBTi of any significant
changes, report these major changes publicly, and consider a target recalculation, as relevant.
Financial Sector Science-Based Targets Guidance
37
4. How to Set Science-Based Targets
4.1 Compiling a GHG Inventory
4.1.1 Setting Organizational and Operational Boundaries for a GHG Inventory
An institution-wide GHG inventory is the foundation to setting SBTs. The SBTi requires that financial
institutions follow the GHG Protocol Corporate Standard, Scope 2 Guidance, and Corporate Value Chain
(Scope 3) Accounting and Reporting Standard to measure and report GHG emissions.
This section presents target validation criteria that are relevant to GHG emissions inventory and target
boundary, and introduces the concepts of organizational and operational boundaries from the GHGP
Corporate Standard. It also denotes where this framework deviates from or goes beyond these existing
standards for setting targets on FIs’ investment and lending activities.
Criteria
FI-C1 – Scopes: Financial institutions (FIs) must set a target(s) that covers institution-wide scope 1
and scope 2 emissions, as defined by the GHG Protocol Corporate Standard, and scope 3
investment and lending activities as per FI-C15 and FI-C16. FIs may set targets for remaining scope
3 emissions categories as per FI-R9.
FI-C2 – Significance Thresholds: Financial institutions may exclude up to 5 percent of scope 1 and
scope 2 emissions combined in the boundary of the inventory and target.
24
FI-C3 – Greenhouse Gases: Scope 1 and 2 targets must cover all relevant GHGs as required per
the GHG Protocol Corporate Standard. If optional targets on scope 3, categories 1–14 are set,
they shall also cover all relevant GHGs. Coverage of all relevant GHGs are recommended, where
possible, for FIs’ scope 3 portfolio targets. If financial institutions are unable to cover all GHGs for
scope 3 portfolio targets, they shall cover CO
2
emissions at a minimum.
4.1.2 Ensure the SBT Target Boundary Is Aligned with the GHG Inventory
Boundary
As a first step to compile a GHG inventory, a financial institution should define its organizational
boundary by selecting a single consolidation approach based on a range of institution-specific
24
Where financial institutions’ scope 1 or 2 emissions are deemed immaterial (i.e., under 5 percent of total combined scope 1
and 2 emissions), FIs may set their SBT solely on the scope (either scope 1 or scope 2) that covers more than 95 percent of the
total scope 1 and 2 emissions. Financial institutions must continue to report on both scopes and adjust their targets as needed,
in accordance with the GHG Protocol’s principle of completeness and as per FI-C21-Mandatory target recalculation.
Financial Sector Science-Based Targets Guidance
38
considerations. The chosen consolidation approach should be applied consistently across its institutional
structure. The boundaries of its SBTs must align with the organizational boundaries of the GHG
inventory.
The GHG Protocol Corporate Standard defines three different approaches for determining the
organizational boundaries of institutional GHG inventories:
1. Operational control: A financial institution accounts for 100 percent of the emissions from
operations at which it has the full authority to introduce and implement operating policies as its
direct (i.e., scope 1) emissions. It does not account for any of the emissions from operations in
which it owns an interest but does not have operational control as direct emissions.
2. Financial control: A financial institution accounts for 100 percent of the emissions from
operations at which it can direct financial and operating activities with a view to gaining
economic benefits from those activities as its direct emissions.
3. Equity share: A financial institution accounts for direct GHG emissions and emissions from
purchased electricity, heat, and steam from operations according to its share of equity in the
operation. The equity share reflects economic interest, which is the extent of rights a company
has to the risks and rewards flowing from an operation.
The GHG Protocol Corporate Standard provides further guidance on this topic.
4.1.3 Setting the Operational Boundary
After selecting an organizational boundary, a financial institution sets its operational boundary to
distinguish between direct emissions from sources it owns or controls from indirect emissions. The
GHGP Corporate Standards defines three scopes of emissions for setting organizational boundaries:
● Scope 1: Direct GHG emissions that are emitted from sources owned and controlled by a
company;
● Scope 2: GHG emissions from the generation of electricity, heat, and steam purchased by a
company; and
● Scope 3: “Indirect” emissions from a company’s value chain activities.
The GHG Protocol Corporate Value Chain (Scope 3) Standard further categorizes scope 3 emissions into
15 categories, where category 15 (investments) is designed primarily for private financial institutions
and is likely the most significant category for these institutions (see Figure 4.1). Together with the
Technical Guidance for Calculating Scope 3 emissions, the Scope 3 Standard provides initial, high-level
guidance to account for emissions from a set of asset classes.
Financial Sector Science-Based Targets Guidance
39
For category 15, the scope 3 standard only requires the emissions measurement of corporate debt
holdings with known use of proceeds.
25
This framework goes beyond this requirement and therefore
expands the minimum boundary of category 15. This means, financial institutions shall follow the
emissions measurement requirements in the relevant asset class methods and measure emissions of
debt investments without known use of proceeds, where applicable. Section 4.2 and Section 5.4.1
explain that among the current methods supported by the SBTi, only the SDA requires the measurement
of financed emissions of the relevant asset classes. Therefore, financial institutions are not required to
measure and annually report total financed emissions for the “Required Products” in Table 5.2. Nor are
financial institutions setting SDA targets required to annually report the absolute amount of financed
emissions in metric tonnes of CO
2
equivalent (tCO
2
e) or metric tonnes of CO
2
(tCO
2
) covered by these
targets (See Section 6.1 for more information on reporting target progress).
Measurement of all seven GHGs (CO
2
, CH
4
, N
2
O, HFCs, PFCs, SF
6
, and NF
3
) is required for scope 1 and 2
emissions. Considering data availability challenges, financial institutions should cover all GHGs for
category 15 if possible, with measurement of CO
2
as the minimum requirement.
Figure 4.1. Overview of GHG Protocol Scopes and Emissions across the Value Chain
Source: Greenhouse Gas Protocol, Scope 3 Standard.
25
Please find more information on page 52 of the Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
Financial Sector Science-Based Targets Guidance
40
4.1.4 Choosing an Inventory Consolidation Approach
The GHGP Scope 3 Standard specifies that financial institutions may decide under which scope
investment and lending activities are included, depending on the chosen consolidation approach. For
instance, if a financial institution chooses the equity share approach, it has the flexibility to account for
investment-related emissions from equity investments in scope 1 and scope 2.
26
To simplify the target
setting process, financial institutions should use the operational control or financial control approach
and include all investment and lending activities in scope 3, category 15.
4.2 Measuring Financed Emissions to Facilitate Target Setting
Harmonized measurement and disclosure of financed emissions are key to ensuring comparability and
transparency among financial institutions. The SBTi has identified the Global GHG Accounting and
Reporting Standard for the financial industry, developed by the Partnership for Carbon Accounting
Financials (PCAF), as a freely available approach to measure portfolio-wide or asset-level–financed
emissions. The standard has been reviewed by the GHG Protocol and is in conformance with the
requirements set forth in the Corporate Value Chain (Scope 3) Accounting and Reporting Standard, for
Category 15 investment activities.” The Standard provides detailed methodological guidance on
measurement and disclosure of GHG emissions associated with loans and investments. The standard is
applicable to multiple geographies and includes GHG accounting methods for the asset classes covered
in this SBTi guidance document (i.e., mortgages, real estate, electricity generation project finance, and
corporate equity and debt). See Figure 4.2 below for more information.
For financial institutions that are interested in understanding the overall exposure to emissions of their
portfolios, they may use PCAF methods to conduct a portfolio-wide emissions screening and prioritize
which part of a portfolio to focus on for target setting (i.e., asset classes and sectors). Following this
prioritization, financial institutions measure emissions associated with their investing and lending
activities to determine the emission baselines from which emission-based SBTs are set. While the SBTi
has determined required activities that financial institutions shall include in the target boundary, FIs may
still set targets on optional activities if these activities are deemed significant (see Section 5.3 for more
information on this topic). For instance, while residential mortgage has been determined as an optional
activity in the current project phase, financial institutions with significant mortgage holdings are still
encouraged to include this asset class in their targets.
At the monitoring stage, financial institutions setting SDA targets shall annually measure their progress
against the target, at which point, measuring portfolio emissions intensity and comparing it with the
baseline intensity is required. For more detailed explanation on how to use PCAF as a starting point for
target setting, see Section 5.4.1 on the Sectoral Decarbonization Approach.
26
Please find more information on page 51 of the Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
Financial Sector Science-Based Targets Guidance
41
PCAF’s asset class–specific methods facilitate a harmonized approach for measuring financial
institutions’ year-on-year absolute emissions of loans and investments, fostering transparency and
accountability in the financial industry. PCAF’s asset class methods are shown in Figure 4.2.
Figure 4.2. Asset Class Coverage of Partnership for Carbon Accounting Financials
27
Note: SME = Small and medium-sized enterprise.
Source: PCAF 2020.
The PCAF Global GHG Accounting and Reporting Standard for the financial industry also incorporates a
data quality scoring with specific guidance per asset class (see Figure 4.3). Data quality ranges from
estimated data with very limited support with score 5 (i.e., economic-based sectoral emissions factors)
to audited GHG emissions data on client-level with highest quality score 1. Economic-based sectoral
emissions factors can easily be applied and are often the first step used for screening purposes to
identify hotspots in a diversified lending and investment portfolio. Scoring and disclosing on the data
quality enables financial institutions to develop a strategy to improve the data quality over time,
collecting client-level data especially for the hotspot.
27
PCAF asset class coverage reflects the methods developed for the first edition of the Global GHG Accounting and Reporting
Standard. It is expected that PCAF will develop financed emissions methods for additional asset classes in the future.
Financial Sector Science-Based Targets Guidance
42
Figure 4.3. PCAF’s General Data Quality Score Card
28
Source: PCAF 2020.
Case Study: Wells Fargo - Testing PCAF Methodology
Background on Wells Fargo
Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company
with $1.97 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo
provides banking, investment and mortgage products and services, as well as consumer and
commercial finance, through 7,300 locations, more than 13,000 ATMs, digital platforms, and contact
centers. Wells Fargo has offices in 31 countries and territories to support customers who conduct
business in the global economy. With approximately 266,000 active, full-time equivalent team
members, Wells Fargo serves one in three households in the United States and is ranked number 30
on Fortune’s 2020 rankings of America’s largest corporations.
Operational Sustainability Focus
Wells Fargo first appeared on the CDP Disclosure Leadership Index in 2008 and continues to evolve its
sustainability program with enterprise-level GHG emissions reduction targets. Since 2017, the
company has purchased renewable electricity to meet 100 percent of its global operations’ needs.
28
This is a generic data quality score card. The PCAF Standard has asset-class specific data quality score cards with detailed
description of data in relation to each score.
Financial Sector Science-Based Targets Guidance
43
Part of that commitment includes utilizing renewable energy credits (RECs) as well as transitioning to
long-term agreements that fund green sources of power generation and support grid modernization.
Financial Sustainability Focus
Understanding the importance of scope 3, category 15 (investments) also referred to as “financed
emissions,” means reassessing how to quantify and qualify these particular downstream
emissions. Earlier engagement with WRI and peers demonstrated the difficulty of calculation, and
new initiatives such as the Partnership for Carbon Accounting Financials (PCAF) help to address
common challenges.
Measuring the emissions associated with products and services across various geographies, sectors,
product types, and line of business originations presents unique challenges to any financial
institution. One goal of portfolio or multisector aggregations of GHG emissions is to determine
consistent and repeatable carbon-related metrics for sustainability reporting, and disclosures.
Determining scoping boundaries, calculation approaches, and relevant touchpoints with the financial
product, customer, geography, sector, and underlying operating assets is essential. A disciplined
procedure ensures data integrity, purpose alignment, and ultimate utility for internal and external
stakeholders.
PCAF Methodology Overview
To begin the process, Wells Fargo narrowed its focus to identify the most suitable and practical way
to quantify a portfolio or multisector approach for financed emissions using one of PCAF’s
methodologies. The selected approach required data on loan exposures (“investment”), sector-level
codes, and economic activity–based emissions factors, which together yield a high-level screening
mechanism. Wells Fargo utilized a trial run of the PCAF emissions factor database, which was in an
early beta format, to download the correct emissions factors in-scope for the testing. The referenced
emissions factors used constituted a ratio of sectoral emissions to sectoral total assets, which could
also be considered carbon intensities at the sector level (See Figure B1.1).
Figure B1.1. PCAF Methodology Overview: Economic Activity–based Emissions for Business Loans
N
ote: NAICS = North American Industry Classification System.
Financial Sector Science-Based Targets Guidance
44
Source: Wells Fargo based on PCAF Global GHG Accounting and Reporting Standard (PCAF 2020).
As visualized above, PCAF assigns its lowest data quality score (“5”) to this method because it utilizes
a pure estimation approach suited to screening and identifying hotspots in a diversified loan
portfolio. This method relies on attributing emissions factors stated per dollar of lending
(e.g., tCO
2
e/million $), which can be multiplied against an outstanding loan exposure (e.g., M$) to
result in a total emissions estimate stated in tons of carbon dioxide equivalent (tCOe).
Applying PCAF Methodology
To begin the process, multisector commercial and industrial loan exposure values were extracted
from internal systems with a look-back period of two years to ensure time variance elements such as
level and trend were also considered in the carbon accounting. These exposures were then
aggregated using North American Industry Classification System (NAICS) codes at the most granular
level possible to match with PCAF sector-based emission factors.
The first run yielded emissions estimates that were further assessed after conferring with corporate
economists and cross-referencing against external research and NGO stock-takes of system-level
emissions such as national accounting.
Lessons Learned
The main learning point was that the applied approach at a top-down level provided a good starting
point for screening diversified loan portfolios. Wells Fargo appreciated the opportunity to test the
PCAF database as it illuminated the complex moving parts of conducting top-down (i.e., sector or
multisector down) analysis and encouraged further work on bottom-up (i.e., products or customers
up) and sector-specific approaches where hotspots were identified. Wells Fargo will continue to
engage with PCAF and other external initiatives on improving the top-down and bottom-up
approaches to contextualize GHG intensities relevant for science-based targets, temperature
alignment, and nonfinancial disclosures.
4.3 How to Set a SBT for Scope 1 and 2 Emissions
Scope 1 and 2 emissions are the starting point for setting SBTs. While scope 3 emissions, in particular
category 15 (investments) are more significant for financial institutions than scope 1 and 2 emissions,
scope 1 and 2 targets consistent with a well-below 2°C pathway at a minimum are required for all
financial institutions. Financial institutions are encouraged to align their scope 1 and 2 target ambition
with a more ambitious 1.5°C scenario.
This section presents the latest SBTi target validation criteria for scope 1 and 2 targets. Detailed
guidance on applying the scope 1 and 2 criteria can also be found in Chapter 8 of the SBTi Target
Validation Protocol and Chapter 5 of the SBT Target Setting Manual.
Financial Sector Science-Based Targets Guidance
45
Criteria
FI-C6 – Base and Target Years: Targets must cover a minimum of 5 years and a maximum of 15
years from the date the target is submitted to the SBTi for an official validation.
29
FI-C7 – Progress to Date: Targets that have already been achieved by the date they are submitted
to the SBTi are not acceptable. The SBTi uses the year the target is submitted to the initiative (or
the most recent completed GHG inventory) to assess forward-looking ambition. The most recent
completed GHG inventory must not be earlier than two years prior to the year of submission.
FI-C8 – Level of Ambition: At a minimum, scope 1 and scope 2 targets will be consistent with the
level of decarbonization required to keep global temperature increase to well-below 2°C
compared to preindustrial temperatures, though financial institutions are encouraged to pursue
greater efforts toward a 1.5°C trajectory. Both the target time frame ambition (base year to target
year) and the forward-looking ambition (most recent year to target year) must meet this ambition
criteria.
30
FI-C9 – Absolute vs. Intensity: Intensity targets for scope 1 and scope 2 emissions are only eligible
when they lead to absolute emissions reduction targets in line with climate scenarios for keeping
global warming to well-below 2°C or when they are modeled using an approved sector pathway.
Absolute reductions must be at least as ambitious as the minimum of the range of emissions
scenarios consistent with the well-below 2°C goal or aligned with the relevant sector reduction
pathway within the Sectoral Decarbonization Approach.
4.3.1 Methods for Setting Scope 1 and 2 SBTs for Financial Institutions
Various target setting methods are available for setting scope 1 and 2 SBTs and differ in terms of
whether they calculate targets as a percentage reduction in absolute emissions or emissions intensity
based on a physical or economic indicator. This section describes the methods that are most applicable
to financial institutions for setting scope 1 and 2 targets. An integrated science-based target setting tool
is available and provides target modeling options for the methods described below.
Financial institutions are encouraged to use the Absolute Contraction approach to set scope 1 and 2
emissions reduction targets. The Absolute Contraction approach is the most straightforward approach
for linking targets to the well-below 2°C and 1.5°C pathways. It requires a minimum of 2.5 percent
29
For targets submitted for an official validation in the first half of 2020, the valid target years are 2024–2034 inclusive. For
targets submitted in the second half of 2020, the valid target years are between 2025 and 2035 inclusive.
30
For targets submitted for an official validation in 2020, the most recent inventory data submitted must be for 2018 at the
earliest.
Financial Sector Science-Based Targets Guidance
46
annual linear reduction in terms of absolute emissions for well-below 2°C targets and a minimum of 4.2
percent absolute annual reduction for 1.5°C targets.
31
Financial institutions can also set physical or economic intensity targets for scope 1 and 2 emissions. The
main method available through SBTi for setting physical intensity targets is the Sectoral Decarbonization
Approach (SDA), which uses convergence of emissions intensity and leverages the Beyond 2°C scenario
(B2DS) from the International Energy Agency report, Energy Technology Perspectives 2017. SDA provides
multiple sector-specific pathways, and the pathway most relevant to financial institutions is
“Services/Commercial Buildings.” This pathway mainly encompasses the “space heating and cooling,
water heating, lighting, appliances (HVAC is the technical term), and miscellaneous equipment (such as
office equipment and other small plug loads in the service sectors)” of buildings (SBTi 2015, p. 63). Due to
the lack of 1.5°C scenario data from IEA, however, SBTi currently does not provide an option for financial
institutions to set 1.5°C targets using this pathway within SDA.
An alternative approach to setting physical intensity targets that requires less data input and allows for
more flexibility with Temperature Rating options is to set targets in line with the Absolute Contraction
approach but express them in physical intensity terms. Financial institutions may choose physical units
that are representative of their operational activities and have direct physical relationships to the
quantity of emissions generated. Considering the projected growth of the chosen unit, financial
institutions shall ensure that the underlying absolute emissions reduction is in line with the Absolute
Contraction approach with a 2.5 percent annual linear reduction for a well-below 2°C alignment at a
minimum, or a 4.2 percent annual linear reduction for a 1.5°C alignment. Some common physical units
for target setting for the financial services industry include per employee (e.g., full-time equivalent) or
square meter. Although square meter is the same unit as the one used in SDA, under this option, the
target ambition is assessed against the absolute contraction approach.
Lastly, financial institutions may also set economic intensity targets using economic indicators. Scope 1
and 2 economic intensity targets shall only be set if the underlying absolute emissions reduction aligns
with at a minimum well-below 2°C scenario under the Absolute Contraction approach. In general,
however, economic units may not be useful for tracking emissions for financial institutions whose
financial growth is not tied closely to quantity of emissions. For instance, revenue for banks can be
generated through the difference in rates charged for credit accounts and paid to depositors, which has
little relationship with emissions generated in their operations.
Table 4-1 summarizes available methods for setting ambitious scope 1 and 2 targets, as defined in
Version 4.1 of the SBTi criteria.
31
The paper Foundations of Science-based Target Setting provides supplementary technical information to Chapter 3 on how
science-based target setting methods have been developed in accordance with the best available climate science.
Financial Sector Science-Based Targets Guidance
47
Table 4-1. Summary of Scope 1 and 2 Target Setting Methods
Method
Method Description
Examples of
Approved Targets
Absolute
Contraction
This approach assumes that all financial
institutions reduce absolute emissions at the
same rate:
• Well-below 2°C: Min. 2.5% annual linear
reduction
• 1.5°C: Min. 4.2% annual linear reduction
Robert Bosch GmbH commits to
reduce absolute scope 1 and 2
GHG emissions 85% and
absolute scope 3 GHG emissions
15% by 2030 from a 2018 base
year.
German multinational
conglomerate Thyssenkrupp
commits to reduce absolute
scope 1 and 2 GHG emissions
30% by 2030 from a 2018 base
year.
Physical
intensity
Option 1: Physical intensity targets modeled
using the “Services/Commercial Buildings” in
SDA in line with the B2DS scenario.
The option to set 1.5°C targets using this SDA
pathway is currently not available due to the lack of
scenario data from IEA.
Property developer, owner, and
operator Swire Properties
Limited commits to reduce
scope 1 and 2 GHG emissions
35% per square meter by 2025
and 52% per square meter by
2030 from a 2018 base year.
Option 2: Physical intensity targets with
physical units that are representative of their
operational activities and have direct physical
relationships to the quantity of emissions
generated (e.g., per employee or square
meter). Translated into absolute terms, the
target must result in a minimum of 2.5%
annual linear reduction in terms of absolute
emissions for well-below 2°C targets and 4.2%
for 1.5°C targets.
French real estate and property
management company
Mercialys commits to reduce
scope 1 and 2 GHG emissions
47% per square meter by 2030
from a 2017 base year.
Economic
intensity
Economic intensity targets that lead to
a minimum of 2.5% annual linear reduction in
absolute emissions for well-below 2°C targets
and 4.2% for 1.5°C targets.
Kering commits to reduce scope
1, scope 2, and scope 3
emissions from upstream
transportation and distribution,
business air
travel, and fuel- and energy-
related emissions
50% per unit of value added by
2025 from a 2015 base year.
Multinational inspection,
verification, testing, and
Financial Sector Science-Based Targets Guidance
48
certification company SGS
commits to reduce scope 1,
scope 2, and scope 3 (business
travel) emissions per unit of
revenue 45% by 2025 and 55%
by 2030, from a 2014 base year.
Note: IEA = International Energy Agency.
Source: Authors 2020.
Financial Sector Science-Based Targets Guidance
49
5. Approaches to Setting Scope 3 Portfolio Targets
5.1 Background and Brief Literature Review
At the start of this work, the SBTi assessed various methods and tools on their applicability to support
target setting for financial institutions. Triggered by the recommendation of the Task Force on Climate-
related Financial Disclosures (TCFD), multi-data and service providers have developed methods and
tools to perform scenario analysis and assess climate-related financial risks, which are not designed to
set climate targets.
Prior to this project, existing target setting methods for financial institutions could be categorized into
four approaches:
● Sector-based approach: Global carbon budget is divided by sector and emission reductions are
allocated to the sector (sometimes within an asset class) on the portfolio based on the sector’s
budget.
● Absolute-based approach: Percent reduction in absolute emissions required by a given scenario
is applied to all portfolios equally.
● Economic-based approach: Based on the assumption that the sum of all economic actors’ gross
profits worldwide equate to global GDP, a portfolio’s share of emissions is determined by the
sum of the gross profit of portfolio companies.
● Capacity-based approach: Alignment with various climate scenarios is assessed based on
physical asset–level production capacity and technology-type data (e.g., vehicles manufactured
per year, gigawatts [GW] electricity, etc.)
The lack of comprehensive emissions data has led some stakeholders to explore the use of capacity-
based approaches that use physical asset data for climate alignment assessment purposes. An example
of a capacity-based approach is the Paris Agreement Capital Transition Assessment (PACTA) method
produced by the 2 Degrees Investing Initiative (2dii).
32
The capacity-based method provides data that
financial institutions could use to understand sector-based alignment with technology-specific metrics,
rather than a GHG emissions–based metric. Previously in 2019, the SBTi road tested the PACTA method
with a select group of financial institutions. However, further development is needed for this method to
be incorporated into the SBTi framework for finance and accepted as a method to formulate targets in
line with the criteria.
Among the approaches developed prior to this project, the sector-based approach is considered most
valuable for the financial sector because it enables financial institutions to manage the emissions they
financed in specific sectors of the economy. As such, financial institutions can assess their portfolios per
32
Additional information is available via the PACTA website.
Financial Sector Science-Based Targets Guidance
50
asset class or sector, steer asset-level financed emissions within the global carbon budget assigned to
each sector, and monitor their improvements in emission reductions more transparently.
This level of influence in the real economy is difficult to achieve with the other three approaches.
Absolute-based targets could be achieved by shifting or lowering the exposure to certain sectors within
the portfolio without having a clear impact in the real economy. An economic-based approach is
sensitive to economic fluctuations in gross profits of portfolio companies (e.g., target achievements can
be influenced if the actual gross profit of the portfolio companies deviates strongly from the global GDP
projections). Lastly, the capacity-based approach can be limited as a robust linkage between capacity
factors and utilization rates with the global carbon budgets has yet to be proven.
5.2 Overview of Available Asset Class–Specific Methods, Broader
Methods, and Existing Gaps
For the first phase of this project, the SBTi supports three methods for financial institutions: the Sectoral
Decarbonization Approach (SDA), the SBT Portfolio Coverage Approach, and the Temperature Rating
Approach. The SBTi developed criteria specific to these three methods (FI-C17.1–FI-17.3), which are
used to assess the targets set using these methods. These methods use asset class approaches to link
financial institutions’ investment and lending portfolios with climate stabilization pathways. An asset
class–oriented approach was chosen for this framework to take into consideration the varying degree of
data availability, market liquidity, and levels of ownership of different asset classes.
33
Among these three methods, SDA is the only approach that requires emissions measurement on an
asset class level. SDA is also the only sector-based approach,
34
and it’s applicable to all asset classes
covered in the current project phase wherever sector methods are available. The SBT Portfolio Coverage
and Temperature Rating methods take an engagement-oriented approach focused on portfolio
companies’ actions to measure and reduce emissions. Both methods are applicable to all sectors for the
corporate instrument asset classes.
35
SBT Portfolio Coverage is a financial sector analogue to supplier
engagement targets for “real economy” companies’ scope 3 emissions. The Temperature Rating
Approach expands the scope of the SBT Portfolio Coverage Approach and enables FIs to assess the
ambition of portfolio companies based on their public GHG reduction targets, as compared to approved
SBTs only.
33
An initial project survey distributed in February 2018 with 34 responses from financial institutions and other stakeholders
also indicated that, in the order of votes received, corporate loans, listed equity, project finance, real estate, and mortgages are
asset classes considered most important for inclusion in the framework.
34
The sector and asset class coverage of SDA is listed in Table 5.3.
35
See Table 5.2 for more information on the applicability of methods to different asset classes.
Financial Sector Science-Based Targets Guidance
51
Financial institutions may use one or more of these three methods to develop asset class–level targets
for a SBT submission (see Section 5.3 for more guidance on this topic).
36
Table 5.1 below provides an
overview of the methods by asset class, followed by a description of each method; more in-depth
method descriptions are provided in the Appendices.
Table 5.1. Portfolio Target Setting Methods for Financial Institutions
Asset
Class
Method
Description
Potential Target
Output Example
Real estate
Sector
Decarbonization
Approach (SDA)
Emissions-based physical
intensity targets are set for
nonresidential buildings’
intensity and total GHG
emissions.
Financial Institution A
commits to reduce its
real estate portfolio
GHG emissions ___%
per square meter by
2030 from a 2018 base
year.
Mortgages
SDA
Emissions-based physical
intensity targets are set for
residential buildings’ intensity
and total GHG emissions.
Financial Institution A
commits to reduce its
mortgage portfolio
GHG emissions ___%
per square meter by
2030 from a 2018 base
year.
Electricity
generation
project
finance
SDA
Emissions-based physical
intensity targets are set for
electricity generation projects’
intensity and total GHG
emissions.
Financial Institution A
commits to reduce its
electricity generation
project finance
portfolio GHG
emissions ___% per
36
If alternate methods become available, SBTi will consider them on a case-by-case basis. Financial institutions and method
developers interested in an assessment of alternative methods should contact the SBTi finance sector team before submitting
targets set using these methods for a validation. In 2019, the SBTi Technical Working Group developed the following criteria for
new methods: maintains global carbon budget, consistency with SBTi theory of change and GHG measurement and disclosure
practices, technology agnostic, and practicality of application, as well as that the method should be freely available. In general,
SBT methods for financial institutions’ portfolios are expected to follow the GHG Protocol principles of relevance,
completeness, consistency, transparency, and accuracy. For more information, see
https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf.
Financial Sector Science-Based Targets Guidance
52
kWh by 2030 from a
2018 base year.
Corporate
instruments
(equity,
bonds,
loans)
SDA
Emissions-based physical
intensity targets are set at sector
level within the portfolio for the
following sectors: power
generation, cement, pulp and
paper, transport, iron and steel,
and buildings.
Financial Institution A
commits to reduce
GHG emissions from
the steel sector within
its corporate lending
portfolio X% per ton of
cement by 2030 from a
2018 base year.
SBT Portfolio
Coverage
Financial institutions commit to
having a portion of their investees
set their own SBTi-approved
science-based targets such that
the financial institution is on a
linear path to 100% portfolio
coverage by 2040 (in consistent
emissions or monetary terms).
Investment Firm A
commits that 30% of its
equity portfolio within
the asset class/sector by
total assets will have
science-based targets by
2025.
Temperature
Rating
This approach enables financial
institutions to determine the
current temperature rating of
their portfolio and take actions to
align their portfolios to ambitious
long-term temperature goals by
engaging with portfolio companies
to set ambitious targets.
Investment Firm A
commits to align its
scope 1 + 2 portfolio
temperature score
within the asset class or
sector from 2.6°C in
2018 to 1.75°C by 2025.
Investment Firm A also
commits to align their
scope 1 + 2 + 3 portfolio
temperature score
within the asset class or
sector from 3.1°C in
2018 to 2°C by 2025.
Source: Authors 2020.
Financial Sector Science-Based Targets Guidance
53
5.3 Defining the Boundary of Portfolio Targets
To seek approval from the SBTi, financial institutions shall follow FI-C15 and FI-C16 to set target(s) on
their investment and lending activities.
37
Depending on the composition of their portfolios, an FI may be
able to meet FI-C16 using methods that do not require measurement of financed emissions. Therefore,
it’s possible that FIs do not need to quantify any financed emissions of their holdings or only need to do
so in a partial manner.
Criteria
FI-C15 – Requirement to Set Target(s) on Investment and Lending Activities: All financial
institutions shall set targets on their investment and lending activities as required by FI-C16,
irrespective of the share of quantified scope 3 portfolio emissions as compared to the total scope
1 + 2 + 3 emissions of the financial institution. FIs may choose from the applicable methods for
target setting, by asset class, as defined in Table 5.2.
FI-C16 – Portfolio Target Boundary: Financial institutions shall set targets on all “Required
Activities” in the Required Activities and Methods Table (Table 5.2) following the minimum
boundary coverage requirement.
Financial sector activities have been organized into three categories: required, optional, and out-of-
scope activities to determine the target boundary (See Table 5.2):
1) Required activities, if relevant, shall be included in the target boundary. For example, FIs shall
include 100 percent of the activity by kWh from electricity generation project finance in the target
boundary (if relevant).
For long-term corporate loans, other than electricity generation and real estate, minimum target
coverage thresholds have been established for companies and projects in the fossil fuel sector and
all other sectors:
- Fossil fuel sector: Long-term corporate loan SBTs shall cover 95 percent of long-term lending
to fossil fuel companies. In the context of this project, coal companies are defined as companies
with greater than 5 percent of revenues from thermal coal mining, exploration and drilling,
mining services, processing, trading, transport and logistics, equipment manufacturing,
operations, and maintenance (O&M) services, engineering, procurement and construction (EPC)
services, transmission and distribution of coal-fired electricity, coal to liquids (Ctlg) and coal to
37
FIs may have parts of their portfolios, such as a specific asset class or a fund, assessed by SBTi through the partial submission
option detailed in the target submission form. However, partial targets will not be officially recognized and published by the
SBTi even if they meet all relevant criteria.
Financial Sector Science-Based Targets Guidance
54
gas (CtG).
38
Oil and gas companies are defined as companies that derive more than 30 percent
of revenues from the exploration, extraction, refining, transportation and distribution, storage,
retailing, marketing, trading, or power, heat, or cooling production from oil and gas.
39
- All other sectors: Financial institutions shall cover at a minimum 67 percent of their lending
activities to companies in all other sectors.
2) Optional activities that FIs may include in the target boundary.
40
There is no minimum coverage
requirement on optional activities, and FIs may cover as much of these activities as they wish. For
example, FIs that wish to set targets on the optional category of residential mortgage loans should
use the SDA method and could determine the target boundary themselves. These activities are
deemed optional as they can be impractical to set targets for, given challenges such as unavailability
of data or short-term period of an investment/loan.
3) Out-of-scope activities that cannot be covered by available methods or do not apply to the project
audience. Products not listed in Table 5.2 are likely also out of scope.
For asset managers, FI-C15 and FI-C16 also apply to funds managed under discretionary mandates. The
SBTi recommends but does not require that banks’ asset management divisions follow Table 5.2 to set
targets on these funds. If banks decide to exclude their asset management divisions from their parent
company–level targets, they should disclose this exclusion in the target wording for transparency and
comparability.
Table 5.2 is all-compassing and may not apply to certain financial institutions. If an FI invests solely or
mainly in optional asset classes, they should contact SBTi to discuss a minimum target coverage
boundary of these asset class(es) for the portfolio targets to be considered credible. SBTi has devised
minimum target coverage requirements for mortgage REITs and private equity firms described below,
which are two exceptions to Table 5.2.
Mortgage REITs that invest in residential and commercial mortgages, residential mortgage-backed
securities and commercial mortgage-backed securities shall, at a minimum, cover 67 percent of
residential mortgages by base year activity in square meter. Private equity firms are recommended to
use the SBT portfolio coverage approach to cover all private equity investments, regardless of the
percentage share the firm has in its investees. The SBT portfolio coverage method is encouraged given
that private equity firms often have more influence over their investees compared to other financial
38
The 5 percent threshold is determined based on a 1–5 percent range for the share of revenue the European Commission
(“Commission Delegated Regulation [EU]” 2020) and financial institutions such as KLP (“KLP Goes Coal Free” 2020) use to
identify coal companies.
39
The 30 percent threshold is based on a 20-30 percent range for the share of revenue used to exclude oil and gas companies
by financial institutions such as Robeco Institutional Asset Management (Robeco Institutional Asset Management B.V. 2020)
and Natixis (NATIXIS 2018).
40
Overtime, SBTi may update “optional activities” to be required, depending on factors such as changes in availability of data or
financial institutions’ readiness to set targets on certain asset classes.
Financial Sector Science-Based Targets Guidance
55
institutions. If private equity firms have equity investments in real estate companies or funds, 100
percent of these shall be covered either within the boundary of the SBT portfolio coverage target, or a
separate target using the SDA method. For the time being, private debt and venture capital are
considered optional for private equity firms.
The SBTi aims to strike the right balance between robustness and practicality for the criteria. Factors
such as data availability, financial institutions’ level of influence, and sector’s contribution to climate
change have been taken into consideration when determining if an activity should be required and the
corresponding minimum coverage requirements. As more data become available, methods become
more mature, and financial institutions gain more experience in target setting, the SBTi may revise Table
5.2 through the annual criteria update process. Financial institutions may also set additional targets to
increase the coverage of targets on their portfolios as methods become available for additional asset
classes and sectors.
Table 5.2 below presents these three categories of activities, the minimum coverage for required
activities (only relevant to required activities), and applicable method(s) for each activity type:
• When only one method is listed, it means that it is the only applicable method for the specific
financial activity. For example, only the SDA can be applied to electricity generation project
finance.
• When multiple methods are listed, FIs may choose one or more of the methods to set targets
that collectively meet the specific minimum coverage requirement for these products. For
example, financial institutions may use both SDA (for sectors where the method is available) and
the temperature rating method to collectively cover 100 percent of their corporate bonds
portfolios.
Table 5.2. Required, Optional, and Out-of-Scope Activities and Applicable Methods
Legend
Required Activities
Optional Activities
Out of Scope
Asset class
Products and
Requirement for
Inclusion in Targets
Required
Minimum
Coverage
for Required
Activities
Applicable Methods
Consumer
loan
Residential mortgages
Optional
a
SDA
Motor vehicle loan
Not applicable
Not available
Financial Sector Science-Based Targets Guidance
56
Personal loans
Not applicable
Not available
Project
finance
Electricity generation
project finance
100% of base
year activity
(kWh)
SDA
Other project finance
(e.g., infrastructure)
Not applicable
Not available
Corporate
loan
Corporate loan:
commercial real
estate
Min. 67% of base
year activity (m
2
)
SDA
SBT Portfolio
Coverage
Temperature
Rating
Corporate loan:
electricity generation
100% of base
year activity
(kWh)
SDA
Corporate loan: other
long-term debt (more
than one year),
excluding electricity
generation project
finance and real
estate
Fossil fuel
companies: min.
95% of base year
corporate lending
(loan value)
Other companies:
min. 67% of base
year corporate
lending
b
(loan value or
financed emissions)
SDA, where
sector-specific
methods are
available
SBT Portfolio
Coverage
Temperature
Rating
Corporate lending:
SME loans
c
Optional
SDA
SBT Portfolio
Coverage
Temperature
Rating
Corporate lending:
short-term debt (less
than one year, such as
line of credit, intraday,
and overdraft
facilities)
Optional
SDA
SBT Portfolio
Coverage
Temperature
Rating
Corporate loan: other
project finance
Not applicable
Not available
Listed
equity and
bonds
d
Common stock
100%
SDA
SBT Portfolio
Coverage
Temperature
Rating
Preferred stock
100%
SDA
SBT Portfolio
Coverage
Temperature
Rating
Corporate bonds
100%
SDA
SBT Portfolio
Coverage
Temperature
Rating
Exchange traded funds
100%
SDA
SBT Portfolio
Coverage
Temperature
Rating
Financial Sector Science-Based Targets Guidance
57
Investments in real
estate investment
trusts (REITs), listed
real estate companies,
and real estate mutual
funds
100%
SDA
SBT portfolio
coverage
Temperature
Rating
Funds of funds
Optional
SDA
SBT Portfolio
Coverage
Temperature
Rating
Derivatives
Not applicable
Not available
Sovereign and
government bonds
Not applicable
Not available
Supranational, sub-
sovereign (including
municipal) bonds
Not applicable
Not available
Agency bonds
Not applicable
Not available
Securitized fixed
income (includes
asset-backed
securities/mortgage-
backed securities,
covered bonds)
Not applicable
Not available
Private
equity and
debt
f
,
includes
venture
capital
Private equity and
debt, e.g., mezzanine
capital, ordinary
shares, preferred
shares, shareholder
loans, private real
estate companies
Optional
e
SDA
SBT Portfolio
Coverage
Temperature
Rating
Advisory
services, if
relevant
Advisory services (e.g.,
Mergers and
acquisitions), debt and
equity underwriting,
brokerage-securities
and commodities,
trading securities and
commodities, credit
guarantees, insurance
contracts, transaction
services
Not applicable
Not available
Notes:
a
As an exception to this table, mortgage REITs shall cover at a minimum of 67 percent of residential
mortgages by base year activity in square meter.
Financial Sector Science-Based Targets Guidance
58
b
The 67 percent applies to companies in all other sectors, not per sector. It is optional to include SMEs
in the calculation of the 67% coverage threshold.
c
As the definition of SMEs can vary from region to region, financial institutions may use their own
definitions of SMEs to interpret this category. For companies, the SBTi provides a streamlined target
validation route for SMEs, where an SME is defined as a non-subsidiary, independent company with
fewer than 500 employees. Financial institutions interested in engaging SMEs to set SBTs and whose
threshold for SMEs is higher than 500 employees (e.g., 1,000 employees) may have to direct their SME
clients to the regular SBTi validation route. For more information on the SBTi’s target setting option for
SMEs, please see https://sciencebasedtargets.org/faqs-for-smes/.
d
Mutual funds covering required activities in listed equity and bonds are also required.
e
As an exception to this table, private equity firms shall cover their private equity investments and
other relevant asset classes, detailed above.
f
Private debt refers to debt to private companies whose shares are not traded on a stock market.
Source: Authors 2021.
Table 5.2. shows that investments and corporate loans in real estate require a minimum coverage of 67
percent of investment and lending activity (m2). In ensuring this coverage, financial institutions should
prioritize the inclusion of assets in regions where buildings’ emissions data or buildings’ energy-related
data are available, or where data quality is generally higher quality. However, this should not deter
institutions from including assets in regions where only proxy or average data are available.
41
Similarly, corporate lending for non-fossil fuel sectors requires minimum coverage of 67 percent of
lending book value. To determine the coverage, financial institutions could screen the emissions of
their lending portfolio to identify emissions hotspots, which would help in making an informed decision
on which sectors to cover for target setting. They could also prioritize loans issued to companies in
high-emitting sectors.
5.4 Description of Methods to Set Portfolio Targets
This section provides an overview of methods available to set targets on financial institutions’
investment and lending portfolios, along with case studies of financial institutions globally that have
tested these methods in the method road-testing process for SDA and SBT Portfolio Coverage in 2019,
and the SBTi Finance Tool beta-testing process in 2020. Given that these case studies were conducted
before the final release of the guidance, the target setting exercises described may not align fully with
the criteria presented in the guidance. Financial institutions shall follow the criteria and
recommendations to prepare targets for submissions to SBTi.
42
41
This recommendation is also applicable to the optional (required for mortgage REITs) residential mortgage asset class.
42
Several FIs also mentioned that they have set net-zero targets in the case studies. Please note these targets have not been
approved by SBTi. SBTi is currently developing a framework to enable companies and financial institutions to set robust and
credible net-zero targets in line with a 1.5°C future.
Financial Sector Science-Based Targets Guidance
59
Detailed method descriptions and instructions for application are included in the Appendices.
5.4.1 The Sectoral Decarbonization Approach
The Sectoral Decarbonization Approach (SDA) is a method for setting physical intensity targets that uses
convergence of emissions intensity. An intensity target is defined by a reduction in emissions relative to
a specific business metric, such as production output of the company (e.g., metric tonne CO
2
e per tonne
product produced). The SDA assumes global convergence of key sectors’ emissions intensity by 2050.
For example, the emissions intensity of steel production in China, the United States, and Brazil is
assumed to reach the same level by 2050, regardless of its current diversity.
43
Regional pathways have
not been incorporated into this method.
The SDA is the only applicable method for several asset classes, as specified in Table 5.2. For the
remaining asset classes, SDA can be used on its own or with one or both other methods to collectively
meet the minimum required boundary coverage.
The SBTi first developed the SDA for companies in 2015 using the International Energy Agency (IEA)
Energy Technology Perspectives (ETP) scenario data. The method development process is described in
the SBTi’s Sectoral Decarbonization Approach report published in 2015.
44
Currently, the SDA uses the B2DS scenario from the Energy Technology Perspectives 2017 report, which
comprises emissions and activity projections used to compute sectoral pathways aligned with limiting
warming to well-below 2°C (IEA 2017). The SBTi also provides a 1.5°C-aligned pathway for the power
sector that enables electric utilities to submit 1.5°C-aligned targets for official recognition.
45
Due to the
lack of 1.5°C scenario data from IEA, only a well-below 2°C alignment is available for other sectors.
The criteria box below presents requirements for SDA targets.
Criteria
FI-C17.1 – Sectoral Decarbonization Approach Targets
46
: Financial institutions’ targets using the
sectoral decarbonization approach (SDA) are considered acceptable when the following
conditions are met:
43
Each sectoral budget is maintained, to the extent the sum of sectoral activity does not go beyond that projected for the
scenario (for homogeneous sectors) and no new businesses are created.
44
Please find the report here: https://sciencebasedtargets.org/wp-content/uploads/2015/05/Sectoral-Decarbonization-
Approach-Report.pdf. The original method was also described in Krabbe et al. 2015.
45
Please find more project information here: https://sciencebasedtargets.org/sector-development/power-sector/.
46
Please see Section 5.4.1 for more information on the Sectoral Decarbonization Approach.
Financial Sector Science-Based Targets Guidance
60
• Boundary: Financial institutions shall set SDA targets on their real estate and electricity
generation–related activities as specified in the Required Activities and Methods Table
(Table 5.2). SDA targets may also be set on other activities listed in Table 5.2, such as
residential mortgages, corporate loans, listed and private equity and debt for sectors
where methods are available.
• Ambition: Portfolio SDA targets must meet minimum ambition indicated by sector-specific
methods for well-below 2°C pathways.
• Time frame: Portfolio SDA targets must cover a minimum of 5 years and a maximum of 15
years from the date the financial institution’s target is submitted to the SBTi for an official
validation. Financial institutions are further encouraged to develop long-term targets up
to 2050 in addition to the required midterm targets.
• Scope of Borrower and/or Investee Targets: Targets on scope 1 and 2 emissions are
required for real estate and electricity generation related activities as defined by SDA
methods (if relevant). For other Required Activities in the Table 5-2, FIs shall set targets on
emissions scopes as required by the relevant SBTi sector-specific guidance.
47
Once the IEA publishes its updated 2020 ETP scenarios, the SBTi may develop a customized SDA tool for
financial institutions’ portfolios. In the meantime, financial institutions can use the existing SBTi target
setting tool and transport tool developed for companies to set targets on the relevant asset classes or
sectors (see Table 5.3). An inventory of asset class emissions must be conducted before modeling
targets in the tool. A dedicated calculation sheet is available for real estate and mortgages related asset
classes.
Table 5.3 below summarizes the sectors covered by the SDA, the corresponding emission intensity units
required by the method, the available temperature pathways, and relevant target setting tools.
Table 5.3. Sector and Asset Class Coverage of Sectoral Decarbonization Approach and Available
Temperature Rating and Target Setting Resources
Asset Class
Sector and Emission
Intensity Units
Temperature
Rating
Available Target
Setting Tool
Mortgage
Residential buildings
(kgCO
2
e/m
2
)
Well-below 2°C
(min. requirement)
Mortgages and Real Estate
Calculation Sheet
Real estate
Residential and service
buildings (kgCO
2
e/m
2
)
Well-below 2°C
(min. requirement)
Mortgages and Real Estate
Calculation Sheet
47
A list of the sector-specific guidance and requirements is available in Chapter 3 of the SBT Target Setting Manual (Table 3-1).
Financial Sector Science-Based Targets Guidance
61
Electricity generation
project finance
Power generation
(kgCO
2
e/kWh)
Well-below 2°C
(min. requirement)
1.5°C
SBTi Target Setting tool-
SDA for Power
Corporate equity,
bonds, and loan
Aluminum (kgCO
2
e/ton)
Well-below 2°C
(min. requirement)
SBTi Target Setting tool-
SDA for Aluminum
Buildings (kgCO
2
e/m
2
)
Well-below 2°C
(min. requirement)
Mortgages and Real Estate
Calculation Sheet
Cement (kgCO
2
e/tonne)
Well-below 2°C
(min. requirement)
SBTi Target Setting tool-
SDA for Cement
Chemical
Not available
The chemical sector SDA
pathway cannot be used at
present. Chemical
companies should use the
general SBT methods in the
SBTi Target Setting tool.
SBTi is developing sector-
specific guidance for the
chemical and
petrochemical industry.
Fossil fuel
Not available
Oil and gas sector
ongoing
development by
SBTi
Not available
Iron and steel
(kgCO
2
e/ton)
Well-below 2°C
(min. requirement)
SBTi Target Setting tool-
SDA for Iron and Steel
Power generation
(kgCO
2
e/kWh)
Well-below 2°C
(min. requirement)
SBTi Target Setting tool-
SDA for Power
Financial Sector Science-Based Targets Guidance
62
1.5 °C
Pulp and Paper
(kgCO
2
e/tonne)
Well-below 2°C
(min. requirement)
SBTi Target Setting tool-
SDA for Pulp and Paper
Transport: passenger,
freight, auto
manufacturing (scope 3
– use of sold products)
(kgCO
2
e/vehicle-
kilometer,
kgCO
2
e/tonne-
kilometer,
kgCO
2
e/vehicle-
kilometer)
Well-below 2°C
(min. requirement)
SBTi Transport Tool
Source: Authors 2020.
How to Calculate Physical Emissions Intensity for SDA Targets
For financial institutions, determining portfolio emissions intensity is the starting point to apply the SDA
for target setting. Portfolio emissions intensity refers to financed emissions per unit of activity data (e.g.,
kgCO
2
e/m
2
, kgCO
2
e/kWh, kgCO
2
e/tonne cement). Three steps are taken to derive this:
1. Measure the absolute GHG emissions of each investment and/or loan in a specific asset class
(i.e., scope 1 and 2 emissions of borrowers and/or investees and scope 3 emissions where
possible);
2. Calculate the share of borrowers’ and/or investees’ emissions that should be attributed to the
financial institution (i.e., financed emissions); and
3. Divide the sum of financed emissions by the sum of attributed activity data of all investments
and/or loans in the specific asset class.
Figure 5.1 illustrates the three steps to derive the emissions intensity baseline of a financial institution
that applies the SDA.
Figure 5.1. Steps to Calculate Baseline Emissions Intensity for Setting SDA Targets
Financial Sector Science-Based Targets Guidance
63
Source: PCAF 2020.
It is important to note that the attribution factor to calculate FI’s share of emissions and share of activity
data varies across asset classes, as shown in Figure 5.2 below.
Figure 5.2. Attribution Factors for Various Asset Classes in the Partnership for Carbon Accounting
Financials Framework
Financial Sector Science-Based Targets Guidance
64
Source: PCAF 2020.
Detailed guidance on the methods to calculate financed emissions per asset class is provided in the
Global GHG Accounting and Reporting Standard for the financial industry (PCAF 2020).
Calculating the portfolio emission intensity is the first step financial institutions need to take to set
emissions-based targets. This is followed by converging the projected emission intensity to the same
level as the sector-specific decarbonization pathway in 2050.
Sectoral Decarbonization Approach for Mortgages
A mortgage is a lending agreement to purchasing a residential property in exchange for a regular
repayment at interest, which the lender is entitled to with the condition that the loan becomes void
upon the payment of the debt. Residential property refers to a building for a single family or multifamily
that is used primarily for human dwelling (i.e., apartments and houses).
Targets on a mortgage portfolio are set using the global decarbonization pathway for residential
buildings (i.e., the global floor area projections and emissions intensity pathways for residential
buildings defined in IEA ETP 2017 B2DS).
A calculation sheet is available for setting targets on mortgage portfolios.
Case Study: De Volksbank - Testing SDA for Mortgages
Background on de Volksbank
De Volksbank is the fourth-largest retail bank in the Dutch market, with 3.2 million customers and
nearly 3,000 employees. The bank provides mortgages (€47.8 billion in 2018), manages savings
(€37 billion) and offers 1.5 million customers a current account. It also offers a limited range of
insurance and investment products and loans. The bank provides its services through four brands:
ASN Bank, BLG Wonen, Regio Bank, and SNS.
De Volksbank started measuring the climate impact of its portfolio in 2015 and continued to do so
on a quarterly basis. In 2018, 85 percent of de Volksbank’s financed emissions were attributed to
mortgages. Thus, sustainable housing is the focal point of de Volksbank’s climate ambition,
creating customer value by increasing comfort and energy-efficient living. As such, applying the
science-based targets (SBTs) method for mortgages helps de Volksbank answer the key question:
To what extent and at what pace should the bank help its customers to “decarbonize” their own
homes?
SDA applied to de Volksbank’s mortgage portfolio
De Volksbank applied the SDA method for mortgages in April 2019 and presented the results to
the SBTi community in June 2019.
Financial Sector Science-Based Targets Guidance
65
The methodology combines the floor area of the buildings it financed, the growth forecast of its
mortgage portfolio until 2030, and the absolute financed emissions it regularly measures using
the GHG accounting methods developed by the Partnership for Carbon Accounting Financials
(PCAF).
Floor area: The surface area data from the housing units financed by the bank were retrieved from
the Dutch Cadastre, which collects and registers administrative and spatial data on all Dutch
properties.
Absolute financed emissions: This includes total scope 1 and 2 emissions for each housing unit in de
Volksbank’s portfolio. De Volksbank derived these emissions by converting the average electricity
and gas consumption per energy label
48
to CO
2
emissions, using national average emission factors.
49
See Figure B2.1.
Figure B2.1. Distribution of Energy Labels in de Volksbank’s Mortgage Portfolio and Emissions
Profile
Source: De Volksbank 2020.
Emissions intensity: De Volksbank combined the absolute financed emissions with the floor area to
derive the emissions intensity of its mortgage portfolio in 2018. The baseline emissions intensity
was calculated to be 30.8 kgCO
2
/m
2
, from which de Volksbank projected into the future until 2050.
Selecting the decarbonization pathway: De Volksbank compared its projected emissions intensity
with three building emissions pathways from the following scenarios (see Figure B2.2):
48
Energy labels express the energy performance of dwellings and are provided by the Dutch Enterprise Agency (De Rijksdienst
voor Ondernemend Nederland (RVO]). Where “A” label is the best and “G” label is the worst.
49
Average gas and electricity consumption derived from Wonen in Ongewone;
www.rijksoverheid.nl/documenten/rapporten/2013/04/11/cijfers-over-wonen-en-bouwen-2013
and converted to emissions using factors from www.CO2emissiefactoren.nl.
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• Dutch Climate Agreement,
50
• European Union Beyond 2°C Scenario (EU B2DS) for residential buildings, and
• World B2DS for residential buildings.
De Volksbank selected the EU B2DS residential building decarbonization pathway to model the
SBTs on its mortgage portfolio.
Figure B2.2. Emission Intensity of de Volksbank’s Mortgage Portfolio Compared with Three
Pathways
Source: De Volksbank 2020.
Outcome and potential actions to achieve targets
Using the EU B2DS, de Volksbank identified the intensity and absolute targets shown in Figure
B2.3.
Figure B2.3. Absolute and Intensity Targets Resulting from This Case Study
Source: De Volksbank 2020.
50
The Dutch Climate Agreement scenario goes until 2030, and we assume it converges to the European Union Beyond 2°C
scenario (B2DS).
Financial Sector Science-Based Targets Guidance
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The challenge de Volksbank encountered with these targets is that steering emissions on energy
labels will not be sufficient to achieve a 91 percent reduction of emission intensity by 2050. Even
if the bank achieves “A” labels for the entire portfolio, it would only be able to reduce 40 percent
of emissions.
While de Volksbank would need more granular emissions data per mortgage, the bank identified a
crucial driver that could help it steer emissions. In the Netherlands, most of the buildings’ scope 1
and 2 emissions are caused by natural gas combustion. Thus, the bank sees great value in focusing
its strategy on engaging with clients in fostering electrification of the heating systems (i.e., heat
pumps), installation of more renewable energy systems (e.g., solar panels), and increasing energy
efficiency.
Conclusions and recommendations
The results show the pace and the extent to which emissions per square meter financed by de
Volksbank’s mortgage portfolio must be reduced to align its portfolio with national, European,
and global emissions scenarios. In 2020, de Volksbank is examining whether and how it can
incorporate the results into its present target of a climate-neutral balance sheet by 2030.
In the meantime, as the bank works with peers within PCAF to increase data granularity for
mortgage portfolios, a unique collaboration between PCAF and the Dutch Central Bureau of
Statistics (Centraal Bureau voor de Statistiek or CBS), also known as Statistics Netherlands) led to
access actual electricity and gas consumption data of for seven financial institutions in the
Netherlands, including de Volksbank.
51
The bank plans to recalculate the emission intensity
baseline of its mortgage portfolio using this actual energy consumption data and rerun the target
setting analysis.
Sectoral Decarbonization Approach for Real Estate
A real estate investment is the allocation of capital for partial or full ownership of property, real estate
investment groups, real estate trading, real estate investment trust (REIT), etc. Both residential and
service buildings under real estate investment are included in this methodology. Residential buildings
refer to private dwellings such as apartments and houses, whereas service buildings include properties
related to trade, finance, retail, public administration, health, food and lodging, education, and
commercial services.
Targets on a real estate portfolio are set using the global decarbonization pathway for service buildings
and/or residential buildings accordingly (i.e., the global floor area projections and emissions intensities
pathways defined in the IEA ETP 2017 B2DS).
A calculation sheet is available for setting targets on real estate portfolios.
51
For more information about the results of the collaboration between PCAF and CBS on actual energy consumption for
mortgage portfolios, see https://carbonaccountingfinancials.com/newsitem/cbs-publishes-co2-emissions-of-dutch-banks-
mortgage-portfolios#newsitemtext.
Financial Sector Science-Based Targets Guidance
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Case Study: Bank J. Safra Sarasin, Ltd. - Testing SDA for Real Estate
Background on Bank J. Safra Sarasin, Ltd.
Bank J. Safra Sarasin, Ltd. is a leading Swiss private bank and pioneer with over 30 years of experience
in sustainable investments. The bank is part of the international J. Safra Sarasin Group and has more
than 25 locations in Europe, Asia, the Middle East, and Latin America. By the end of 2019, the J. Safra
Sarasin Group had assets under management in excess of CHf 180 billion.
Bank J. Safra Sarasin asset management climate pledge
In May 2020, Bank J. Safra Sarasin Asset Management launched a Climate Pledge aiming for a carbon-
neutral outcome by 2035 in assets under management and banking operations (Bank J. Safra Sarasin
2020).
The J. Safra Sarasin Investment Foundation (SAST) was established by Bank J. Safra Sarasin, Ltd. in 1991.
Under SAST, the sustainable investment group, “Sustainable Real Estate Switzerland” was established
in 2009 as a portfolio of directly held real estate properties in Switzerland. Bank J. Safra Sarasin, Ltd.
developed a holistic sustainability approach, which fully integrates environmental, social, and
corporate governance (ESG) criteria in every step of the investment process at SAST “Sustainable Real
Estate Switzerland.” An important component of the sustainability approach is the Environmental
Management System (EMS), established in 2017. It monitors the energy and water consumption of the
real estate properties and, based on Swiss emission factors, calculates the resulting greenhouse gas
(GHG) emissions (scope 1 and 2). The EMS serves as the foundation for implementing the Bank J. Safra
Sarasin Asset Management Climate Pledge.
SDA applied to SAST “Sustainable Real Estate Switzerland”
As of September 2020, Switzerland is in the process of overhauling its CO
2
-law and determining the
climate regulation until 2030. This also includes building-related CO
2
benchmarks related to retrofit
measures (Swiss Parliament 2020). In July 2020, Bank J. Safra Sarasin, Ltd. applied the Sectoral
Decarbonization Approach (SDA) for Real Estate included in the Science Based Target initiative’s (SBTi)
finance sector framework on the real estate portfolio of SAST “Sustainable Real Estate Switzerland.”
Bank J. Safra Sarasin, Ltd. aims to validate the ambition formulated by its own Climate Pledge and
deliver ambitious climate action for the assets under management, investors, and tenants. For the real
estate portfolio, it consequently means to validate the proposed decarbonization pathway and
compare it to the level of decarbonization required for the sector as proposed by the SDA approach.
The real estate portfolio consists of 30 built real estate properties in Switzerland with approximately
75 percent multifamily houses, 20 percent commercial, and the remaining 5 percent mixed-use
properties. Of the 30 real estate properties, 29 are reporting in the EMS as of June 2020. Five projects
were under construction, and the gross asset value was at CHf 0.72 billion with a total floor area of 0.1
million m
2
. The methodology combines the entire floor area of the portfolio, floor area growth forecast
until 2035, and resulting GHG emissions based on scope 1 and 2 emissions of the real estate properties.
Scope 1 emissions include all emissions resulting from energy production at the site of the real estate
properties, such as photovoltaic (PV) systems, heat pumps, etc. Scope 2 emissions include all purchased
Financial Sector Science-Based Targets Guidance
69
electricity and energy carriers for heating, and, where available, measured or otherwise statistically
estimated tenant electricity consumptions. The energy consumption was normalized with average
active floor area for the reporting period. Bank J. Safra Sarasin, Ltd. calculated the total annual GHG
emissions using emission factors published by the Swiss government (BFU 2016)
52
(energy
consumption type [kWh] x emission factor = GHG emissions [kgCO
2
e]). The emission intensity results
in using the floor area normalized by active area, where unoccupied floor area is excluded. To develop
a decarbonization pathway, 2018 was defined as base year and annual growth was assumed at
approximately 3 percent.
Outcome
Bank J. Safra Sarasin Asset Management aims for an alignment of the decarbonization pathway with a
1.5°C warming scenario (Figure B3.1). Therefore, the decarbonization pathways published by Carbon
Figure B3.1. GHG Emission Intensity of J. Safra Sarasin’s Asset Management Climate Pledge
Compared with Three Pathways
Source: J. Safra Sarasin 2020.
Risk Real Estate Monitor (CRREM) (CRREM 2020),
53
which includes a 1.5°C warming scenario, was used
as a reference benchmark for Swiss commercial and residential multifamily real estate. The
decarbonization pathway modeled by the SDA method used the global decarbonization scenario, and
the result was compared to the decarbonization pathway based on the J. Safra Sarasin Asset
Management Climate Pledge aiming for a carbon-neutral outcome by 2035. By utilizing the SDA, the
resulting absolute and intensity targets are shown in Table B3.1, compared against the goals of the
Climate Pledge:
52
BAFU (2016), Lifecycle Inventory Data in the Building Sector:
https://www.kbob.admin.ch/kbob/de/home/publikationen/nachhaltiges-bauen/oekobilanzdaten_baubereich.html.
53
According to the CRREM “Global Pathways” documentation, the 1.5°C scenario was developed by Friends of the Earth with a
GHG emission budget by 2050 of 890 GtCO
2
e; https://www.crrem.org/pathways/.
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Table B3.1. Absolute and Intensity Targets of J. Safra Sarasin’s Real Estate Portfolio Resulted from
the Analysis
Intensity targets [kgCO
2
e/m
2
]
Absolute Targets [tCO
2
e]
2018
2025
2030
2035
2050
2018
2025
2030
2035
2050
SDA
22.7
16.6
11.9
8.3
1.0
SDA
1989
2271
1883
1523
5
Climate
Pledge
22.7
11.4
4.7
0.0
0.0
Climate
Pledge
1989
1553
748
1
0
Intensity targets [% compared to 2018]
Absolute targets [% compared to 2018]
2018
2025
2030
2035
2050
2018
2025
2030
2035
2050
SDA
-
-27%
-48%
-63%
-96%
SDA
-
14%
-5%
-23%
-86%
Climate
Pledge
-
-50%
-79%
-100%
-
Climate
Pledge
-
-22%
-62%
-100%
-
Source: J. Safra Sarasin 2020.
Conclusion
By applying the SDA method, Bank J. Safra Sarasin, Ltd. was able to compare a sectoral decarbonization
pathway with its own Climate Pledge, leading to achieving similar reduction targets, although 15 years
ahead of the target deadline. Furthermore, it shows that the Bank J. Safra Sarasin Asset Management
Climate Pledge is aligned with a 1.5°C warming scenario based on the CRREM decarbonization
pathways, used as a reference benchmark. The challenge will be in implementing a number of
sustainability measures on an asset level, necessary to deliver the carbon-neutral outcome of the
Climate Pledge by 2035. As of June 2020, the SAST “Sustainable Real Estate Switzerland” portfolio is at
85 percent renewable energy use for warm water and heating. Therefore, a necessary measure will
include abandoning fossil fuels, for example, switching to biogas at properties with gas heating and
eventually to entirely renewable heating systems. Renewable electricity purchasing needs to be
extended to all properties, and, where applicable, on-site PV systems need to be installed. Here Swiss
law enables the creation of self-consumption associations (Zusammenschluss zum Eigenverbrauch)
with tenants, where they purchase solar electricity generated on-site from the owner (SAST 2019).
54
At
two real estate properties of the SAST “Sustainable Real Estate Switzerland” portfolio, such ZEVs were
launched and the aim is to implement them in every new construction project. Regarding energy
efficiency, the real estate portfolio benefited from a strategy of using building certifications where
possible for new construction projects. To further decrease and optimize energy consumption, further
efficiency measures such as energy retrofits will be necessary. More generally, a decarbonization
pathway can serve as a forward-looking indicator, guiding the journey toward net-zero. On this basis,
the EMS will include reporting on the Climate Pledge and be continuously updated with higher-quality
and more topical data. Bank J. Safra Sarasin, Ltd. is committed to setting science-based targets through
the Science Based Targets initiative and to deliver exemplary climate action based on the J. Safra
Sarasin Asset Management Climate Pledge.
54
SAST (2010) Sustainable Real Estate Switzerland, Sustainability Report;
https://product.jsafrasarasin.com/internet/product/en/dl-fl?dl=0E9D7D47EBCEAC30.
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Case Study: Storebrand - Testing SDA for Real Estate
Background on Storebrand
The Storebrand Group is a leading player in the Nordic market for long-term savings and insurance.
The group manages more than NOK 830 billion, making Storebrand Norway's largest private asset
manager. As a significant asset owner, insurer and asset manager, we see great economic
opportunities in the alignment of investment portfolios to a sustainable agenda. Hence, sustainability
is integral to Storebrand’s business. Storebrand’s standard for sustainable investments is based on
the expectation that companies who contribute to solving society’s problems in a sustainable way will
be more profitable in the long run.
Storebrand was the first Norwegian company to establish a sustainable investment department in
1995. Environmental, social, and corporate governance (ESG) analysis has been increasingly
integrated into the daily risk management and company selection processes of Storebrand’s fund
managers. Customers are thus enabled to invest more sustainably. Currently NOK 277 billion under
management are invested in fossil fuel-free products, and NOK 53.7 billion in Sustainable Solutions,
defined as investments contributing to sustainable development without causing substantial harm to
the environment or society. This definition includes a whitelist of Solution companies, Green Bonds,
and real estate with Green Building Certificates.
In 2019, Storebrand was one of the 12 founding members of the UN-backed Net-Zero Asset Owner
Alliance, committing to transition its investments to net-zero GHG emissions by 2050.
Setting SBT for Storebrand's real assets
Storebrand Real Estate manages properties of around 1 million square meters, which are mostly
commercial buildings located in Norway and Sweden. These direct investments in the real estate
asset class is a diversification from equities and bonds. They constitute NOK 45 billion, or about 5
percent of the Storebrand Group's total assets under management, and have more than doubled
since 2013. External investors hold about one-third of the capital, through the entities Storebrand
Eiendomsfond Norge KS and SPP Fastigheter AB, while the entities Storebrand Trygg, Vekst and
Utvikling AS are wholly owned by the Storebrand pension fund.
With near full coverage of metering data from the buildings, including energy consumption of
tenants, Storebrand has conducted carbon accounting for its real estate portfolio over the last few
years. Since its 2016 real estate pledge to meet the Paris Agreement, Storebrand realized that shifting
the emissions trend to meet its pledge was a challenging task. Quantifying science-based targets is
crucial to bringing clarity to the necessary path ahead for Storebrand.
For the target setting exercise, Storebrand chose 2019 as the baseline year, and 2030 stood out as the
natural medium-term target year. A modeling tool built by Guidehouse, a consultancy, was used to
model the real estate science-based targets according to the Sectoral Decarbonization Approach in
the SBTi framework for financial institutions. Under this framework, the SDA approach is applied on
financial institutions’ real estate portfolios to derive physical intensity targets. Storebrand has
recently committed to a 1.5°C scenario in 2050, so the targets were modeled in line with this goal.
55
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72
Under the SDA approach, scope 2 emissions in the modeling covers only electricity consumed.
Emissions from district heating/cooling are categorized as scope 1 emissions. Because the portfolio’s
initial scope 1 emissions intensity was already lower than the level of sectoral intensity required in
2050 , the convergence model was not appropriate, and thus the modeling assumes that scope 1
emissions intensity remains constant. The final target is based on the combined pathway of scope 1
and scope 2 emissions intensity, where the latter plays the major role in achieving the target.
Emissions from tenants’ energy use were included in the assessment.
Outcome/Experience
Compared to previous models explored by Storebrand Real Estate, the applied SDA method for 1.5°C
scenario gives a steeper pathway decrease toward 2030, resulting in 60 to 75 percent reductions
from 2019 to 2030. For the scope 2 emissions, including the energy use of the tenants, Storebrand
modeled the target based on both location-based emissions factors and market-based emissions
factors, as shown in Figure B4.1 and Figure B4.2. The assumed activity growth rate was 2 percent per
year.
Figure B4.1. Location-based Intensity Pathway, Trygg and Vekst Entities
Source: Storebrand 2020.
In the location-based trial shown in Figure B4.1, initial scope 1 + 2 emission intensity in 2019 was 5.80
kgCO
2
/m
2
, which decreases to 1.97 kgCO
2
/m
2
in 2030. This represents a 66 percent decrease from the
base year level.
55
Guidehouse, the consultancy that supported the case study development, adjusted the power pathway in line with the 1.5°C
based on the SBT 1.5°C guidance for utilities. As Storebrand’s scope 1 emissions intensity was already very low, one can assume
that the combined scope 1 + 2 is in line with 1.5°C.
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Figure B4.2. Market-based Intensity Pathway, Trygg and Vekst Entities
Source: Storebrand 2020.
In the market-based trial shown in Figure B4.2, initial scope 1 + 2 emission intensity in 2019 was 27.05
kgCO
2
/m
2
, which decreases to 6.89 kgCO
2
/m
2
in 2030. This represents a 75 percent decrease from the
base year level.
Conclusions and recommendations
The applied SDA model to Storebrand’s Real Estate assets resulted in 60–75 percent emissions
intensity reductions (CO
2
per m
2
) from 2019 to 2030, mainly due to the steep emissions reductions in
the scope 2 emissions in line with a 1.5°C scenario. To set a science-based target on a real estate
portfolio, an FI must first choose between location-based or market-based scope 2 emissions
accounting as the basis for modeling a target. The two methods may result in quite different
emissions and target figures as shown in the graphs above, but the results also allows for different
options to reach the target. Going beyond the operational and technological measures of the
location-based method implies flexibility to utilize market-based measures like Renewable Energy
Certificates. Before concluding, further investigation into opportunities and challenges of meeting the
two different targets is needed. Storebrand will also explore scope 3 real estate emissions targets and
measures for waste and transport-related emissions, although these are not within the scope of the
SDA for real estate method.
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Sectoral Decarbonization Approach for Electricity Generation Project Finance
Project finance is the financing of a project, such as infrastructure, and public and industrial assets using
a limited-resource structure, including debt, equity, and/or mezzanine. This method focuses on projects
in the power sector; other types of project finance are currently out of scope (see Table 5.2).
Targets on an electricity generation project finance portfolio are set using the global decarbonization
pathway for power generation (i.e., the global electricity production projections and emissions intensity
pathways defined in the IEA ETP 2017 B2DS, which sees coal generation without carbon capture and
storage [CCS] phased out globally by 2040).
To set targets on electricity generation project finance, financial institutions can use the SDA power sector
pathway in the general Science-based Target Setting Tool. The tool now also includes a 1.5°C-aligned
pathway for the power sector, and a quick start guide is available to support target development (SBTi
2020e).
Case Study: Mizuho Financial Group - Testing SDA for Electricity Generation
Project Finance
Background on Mizuho Financial Group
The Mizuho Financial Group is one of the largest financial institutions in Japan, offering a broad
range of services including banking, trust and securities, and other business related to financial
services through its group companies. The group was established in September 2000. Under the
umbrella of the holding company Mizuho Financial Group, the major group companies include
Mizuho Bank (MHBK), Mizuho Trust & Banking (MHTB), and Mizuho Securities (MHSC).
As an initiative to address climate change, Mizuho Bank (“Mizuho”) has already developed its own
carbon accounting methodology to measure CO
2
emissions and CO
2
emission reductions targeted
for large-scale power generation projects. Mizuho’s carbon accounting approach measures
emissions from business as well as the degree to which business activities contribute to reducing
CO
2
emissions. Mizuho have been disclosing the results of its carbon accounting since 2006 and
has been utilizing these results as information for future management to support the movement
toward a decarbonized society. Mizuho Financial Group participated in the SBTi road-testing
program to enhance its evaluation system and support efforts to reduce GHG emissions.
Application of the SDA for electricity generation for project finance
Mizuho applied the SDA for Mizuho’s project finance portfolio of fossil fuel–fired power generation
and renewable energy power generation. To apply the SDA for fossil fuel–fired power projects,
Mizuho used its loan outstanding data as of March 31, 2019 (the end of FY2018) and annual GHG
emission data for each project estimated at the timing of financial close. If not available, Mizuho
Financial Sector Science-Based Targets Guidance
75
used the actual Annual Energy Production (AEP) for the project under operation and the estimated
AEP for the project under construction. To calculate the annual GHG emission with AEP, Mizuho
used the emission factors from JBIC J-MRV guideline (https://www.jbic.go.jp/en/business-
areas/sectors/images/jmrv_guideline_en.pdf), which is based on the latest data edition by IEA.
Mizuho is still working to incorporate its renewable energy project portfolio into Mizuho’s
modeling based on the methodology of SDA.
Based on the data collected from each of its project finance front offices, Mizuho calculated
baseline emissions from its project finance portfolio of fossil fuels electricity generation globally.
When renewable energy project data are collected, Mizuho plans to improve the modeling, taking
these data into consideration in the future.
Project-level Approach
Advantage
Given that Mizuho has engaged in the project finance business globally and has played a lead role
in project development, Mizuho has access to GHG emission data at the stage of loan arrangement.
Throughout engagement with the borrower and the project due diligence process with external
consultants, Mizuho has been able to maintain data accuracy and seek data verification.
Challenges
It was challenging to collect data of annual GHG emission and/or AEP and total project cost of each
project. Mizuho communicated with its officers located globally to provide Mizuho with the
necessary data, which took more time than expected to collect. Additionally, it was difficult to
confirm the accuracy of this data within such a limited time frame and with a limited data
infrastructure.
To track progress, Mizuho tries to monitor the continuous emission status of projects during the
operation period. However, Mizuho frequently confronts practical difficulties due to the lack of
emission data. For example, the project borrower is not obliged to obtain emission data after a
project enters into the operation stage. Under such a situation, it is difficult for Mizuho to verify
the emission data and reconcile the estimated data with the actual data. Therefore, Mizuho
occasionally has to rely on a theoretical calculation method using information on annual energy
production and third-party average emission factors.
Conclusions and recommendations
Mizuho recognizes that regarding fossil fuel–fired power projects, it is important to improve the
accessibility to the emission data and the quality of the verification process. Taking advantage of its
market presence under the project finance arrangement, Mizuho consider it important to seek
more practical collaboration with Mizuho’s clients to obtain more accurate data, especially at the
Financial Sector Science-Based Targets Guidance
76
monitoring stage of each project. Mizuho considers that this engagement to improve data quality
would improve the ability to drive GHG emissions reductions.
Even if the quality data issues can be addressed, Mizuho considers that actions taken by financial
institutions have limited ability to directly reduce emissions from electricity generation projects.
Given this perceived limitation, Mizuho plans to strategically increase the portfolio of renewable
energy projects.
Sectoral Decarbonization Approach for Corporate Equity, Bonds, and Loans
This methodology covers listed equity, private equity, corporate bonds, and corporate loans. Targets are
set on relevant “Required Activities” in Table 5.2, for which specific sectoral decarbonization pathways
are available (e.g., electricity, iron and steel, cement, aluminum, pulp and paper, transport, and
commercial buildings).
Regarding emissions scopes of portfolio companies that shall be included in the targets, FIs shall refer to
the relevant SBTi sector-specific guidance for SDA methods. For instance, FIs’ targets on portfolio auto
Original Equipment Manufacturers (OEMs) shall include their scope 1 and 2 emissions, as well as scope 3
‘use of sold products’ emissions of sold vehicles. Specifically, ‘use of sold products’ targets shall meet
the minimum level of ambition determined by the SBTi’s transport sector guidance, covering Well-to-
Wheel emissions of sold vehicles. A list of the sector-specific requirements and guidance is available in
Chapter 3 of the Target Setting Manual (Table 3.1).
Please refer to Table 5.3 for target setting resources available for different sectors. A detailed
description of the SDA methods per asset class is provided in the Appendices.
Case Study: Applying the SDA and SBT Portfolio Coverage Method to La
Banque Postale’s Corporate Equity and Bond Portfolios
Context of the study
La Banque Postale is a subsidiary of Le Groupe La Poste, the French national postal services company.
La Banque Postale is entrusted with a banking accessibility mission, which guarantees universal and
nondiscriminatory access to free, simple, and indispensable banking services for people who are
excluded from traditional banking services and who have specific needs.
La Banque Postale is organized around three areas of expertise: (i) retail banking, (ii) life insurance,
personal risk insurance, property and health insurance; and (iii) asset management, carried out through
Financial Sector Science-Based Targets Guidance
77
the asset management subsidiaries (La Banque Postale Asset Management and Toqueville Finance),
which provide savings and investment products to individual customers and legal entities. With
aggregated assets under management (AUM) (LBPAM-Tocqueville Finance) of €235 billion at
December 31, 2019, La Banque Postale Asset Management (LBPAM) is the fifth-largest asset
management company in France. It offers open funds, dedicated funds, and mandates to its
institutional investors, insurers, mutuals, major companies, and distributors, As a full manager, LBPAM
operates in all asset classes.
As an early adopter of responsible banking, La Banque Postale has always supported asset financing
and energy projects on renewable energy development and excluded fossil fuels. In addition, the Bank
has measured the exposure of its corporate and investment banking activity to climate risk since 2013
(carbon intensity of corporate issuers). Together, La Banque Postale and La Banque Postale Asset
Management place the ecological and energy transition, the fight against global warming, and the
protection of ecosystems at the heart of their strategic concerns. La Banque Postale is engaged in the
reduction of its carbon footprint and committed to setting science-based targets through the SBTi in
2017. The climate strategy consulting company, EcoAct, applied the SBTi Finance methods on behalf of
La Banque Postale, on selected corporate equity and bond portfolios.
Application of the SDA methodology to the power generation equity and bond portfolios
Application of the methodology and challenges
La Banque Postale chose to assess the alignment of a portion of its investments in the power generation
and real estate sector with a well-below 2°C trajectory. The portfolios assessed were bond and equities
portfolios from La Banque Postale Asset Management, mainly positioned on green assets to analyze
their alignment. This analysis aims at providing La Banque Postale with a long-term target in the
investment decision-making choices; that is, deciding whether to invest in a company based on its own
trajectory, the trajectory of the portfolio, or to engage with an investee on carbon intensity goals.
The assessment on these equities and bonds portfolios focused on two sectors: power generation and
real estate, as a constraint was to have enough issuers into the sectors assessed to draw unbiased
conclusions. In this case study, La Banque Postale chose to present the results for the power generation
sector only. At the end of 2017, these investments represented 8.3 percent of the value of the equity
portfolio studied (8 companies, €47 million) and 3.9 percent of the corporate bond portfolio studied
(12 companies, €42 million). The remaining part of the portfolio focuses on sectors of the economy not
included in the SDA methodologies or the sector of the economy where La Banque Postale invests in
too few companies for the trajectory to be a meaningful investment decision-making tool.
The assessment focused on financed emissions from investments in electricity production, a sector
that is expected to progressively transition to low-carbon power generation. The data covering 2017
power generation companies’ GHG emissions and electricity output were obtained from the public
reports of the companies shown in Table B6.1:
Table B6.1. Equities and Bonds Portfolio
Equities portfolio
Bonds portfolio
Acciona SA
Iberdrola International BV
Financial Sector Science-Based Targets Guidance
78
Scatec Solar ASA
Alliander NV
Neoen SA
Engie SA
Voltalia SA
Ren Finance BV
Orsted A/S
Enel SpA
Falck Renewables SpA
Iberdrola Finanzas SA
Iberdrola SA
Terna Rete Elettrica
Nazionale SpA
Source: La Banque Postale 2020.
Global sector GHG emissions and output data were directly retrieved from the International Energy
Agency Beyond 2°C Scenario (B2DS) as shown in Table B6.2.
Table B6.2. Global Activity and Emissions Intensities in the B2DS
Parameter
IEA Data
Units
Sector activity 2017
2,56E +10
MWh
Sector activity 2030
3,10E+10
MWh
Sector activity 2050
4,43E+10
MWh
Sector intensity 2017
1,36E+00
tCO
2e
/MWh
Sector intensity 2030
7,15E-01
tCO
2e
/MWh
Sector intensity 2050
1,07E-01
tCO
2e
/MWh
Notes: MWh = Megawatts/hour; tCO
2
e = Tonnes of CO
2
equivalent.
Source: IEA 2017.
Projecting investees’ 2030 production values (in megawatts/hour [MWh]) was challenging as
companies generally do not disclose forecasts that far ahead. Therefore, 2030 production values were
forecasted as follows:
• Sectoral activity growth was extrapolated as the percentage difference between the reference
year in 2017 and the year 2030 in the IEA B2DS scenario. This percentage growth (20.8 percent)
was applied to the annual power generation of all companies included in the sectoral analysis.
• Moreover, it was assumed that the ownership values and allocation will remain constant across
the period for the portfolios.
Results of the study
After applying the SBTi’s Sectoral Decarbonization Approach (SDA) to the power generation sector on
its equity and bonds portfolio, La Banque Postale was able to draw the two following trajectories
allowing the portfolios to remain in line with a well-below 2°C scenario. See Figure B6.1.
Figure B6.1. La Banque Postale’s Power Sector Portfolio Intensity Pathway
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La Banque’s Postale’s power generation portfolio intensity compared to the sectoral intensity in a
B2DS.
Source: La Banque Postale 2020.
These intensity reduction trajectories show that La Banque Postale’s investments, in companies that
have large renewable energy installed capacities, have paid off: their intensity in 2017 is already lower
than the sectoral intensity of the IEA Beyond 2°C (B2DS) sectoral intensity.
From that base year, the SDA methodology calculates a trajectory for the portfolio: the trajectories
show that to converge the sectoral and portfolio trajectories toward 2030, La Banque Postale’s
projected portfolio needs to decrease its modeled emission intensity by half between 2017 and 2030
(from 0.20 to 0.11 for the equity portfolio and to 0.10 tCO
2
/MWh for the bond portfolio).
These trajectories are a powerful indicator and decision-making tool for La Banque Postale: if La
Banque Postale wants to stay aligned, its portfolios would need to reach the 2030 target.
Conclusions and recommendations
Applying the SDA approach to La Banque Postale’s power generation corporate equity and bond
portfolios allowed the bank to measure the current carbon intensity of its portfolios and to define what
yearly targets are to be reached until 2030 to keep global warming to well-below 2°C by 2050.
As per the SDA approach, La Banque Postale used the global B2DS pathway scenario to calculate the
sector intensity for the target year.
Furthermore, the portfolio’s carbon intensity will have to be recalculated periodically. Indeed,
investment choices will have to be checked against La Banque Postale’s trajectory to assess whether
the portfolio is still aligned with the objectives of the Paris Agreement. However, the changing
portfolio’s carbon intensities may result in fluctuations of the end target (2030).
Calculating each company’s power generation carbon intensity allows for identification of GHG
emissions hotspots within the portfolio, which is a first step to implement investment stewardship
strategies.
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The SBTi framework includes other methods to align the power generation portfolio’s carbon intensity
with the Paris Agreement, including the SBT Portfolio Coverage Approach, which can reveal additional
insights into the investees’ 2030 trajectory.
Application of the SBT Portfolio Coverage method to La Banque Postale’s corporate equity and
bond portfolios
Application of the methodology and challenges
The portfolios studied were bond and equities portfolios from La Banque Postale Asset Management,
mainly positioned on green assets for the assessment of their alignment. The portfolio coverage
method was conducted on La Banque Postale’s corporate equity and bond portfolio, on a scope
covering 100 percent of the value held, as all sectors are included in this method. The study was carried
out using public nonfinancial information and the list of companies that published science-based
commitments extracted from the SBTi website in March 2020. Companies’ scope 1 and 2 emissions
were retrieved from nonfinancial databases. Based on this data, five categories of commitments were
defined, as shown in Table B6.3.
Table B6.3. Science-based Target Commitment Categories
Status
Category
SBTi: set
1
SBTi: committed
2
Ongoing process
3
No emission reductions initiative
4
No information
5
Source: La Banque Postale 2020.
These five categories allowed us to make predictions on ambitious yet attainable portfolio coverage
targets as categories 2 and 3 are likely to set targets within the next five years, while in categories 4
and 5 it is less likely.
56
Results of the study
After applying these five categories to the equity and bond portfolios, we looked at three different
metrics to define coverage: percentage of assets under management, percentage of GHG emissions,
and percentage of enterprise values/market capitalization (Table B6.4).
57
Table B6.4. Five Categories Used to Define Coverage
Category
Equity Portfolio
Bonds Portfolio
AUM (%)
CO
2
(%)
MCap (%)
AUM (%)
CO
2
(%)
EV (%)
SBTi: Set
16
14
16
10
29
16
SBTi: Committed
18
19
18
11
17
23
Ongoing process
23
25
23
13
9
9
56
Per the criterion for SBT Portfolio Coverage targets, investees’ or borrowers’ targets shall be approved by SBTi.
57
Financial institutions shall use one of the weighting approaches in the SBTi Finance Tool consistently throughout the target
period.
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No emission reductions initiative
1
6
1
4
1
6
No information
42
36
42
62
43
46
Notes: AUM = Assets under management; MCap = Market capitalization; EV = Enterprise value.
Source: La Banque Postale 2020.
These metrics allow performance of the portfolios to be measured in terms of investees’ engagement
as of today. They then serve as a basis to set targets of a percentage of issuers within the portfolio to
be covered by a SBT target in the future (e.g., engage with issuers to have a defined percentage of the
portfolio covered by a “SBTi target set” within the next five years).
Conclusions and recommendations
La Banque Postale found the portfolio coverage analysis as the friendliest method, for internal and
public disclosure purposes, among the three methods (SDA, SBT Portfolio Coverage, and PACTA)
included in the SBTi road-testing process. On the one hand, it provides portfolio managers with
insightful conclusions regarding current climate performance of investees. On the other hand, it
enables financial institutions to set portfolio coverage targets to work toward a well-below 2°C
portfolio alignment and start communicating about them to investees and the general public. Based
on these conclusions, La Banque Postale has started working on a hybrid metric combining ownership
and emissions indicators to maximize the impact of its investment stewardship strategy and encourage
its investees to set their own science-based targets.
5.4.2 SBT Portfolio Coverage for Corporate Instruments
Financial institutions may use the SBT Portfolio Coverage method to set targets on their corporate
instrument asset classes, including corporate debt, listed equity and bonds, and private equity and debt
(see relevant “Required Activities” in Table 5.2) to drive adoption of science-based targets. This method
can be used on its own or with the other two methods to collectively meet the minimum coverage for all
“Required Activities.”
To use the SBT Portfolio Coverage method, financial institutions commit to engaging with their
borrowers and/or investees to set their own science-based targets, which shall be validated by the
SBTi,
58
such that the financial institution is on a linear path to achieve 100 percent SBT coverage by
2040. As fulfillment of portfolio coverage targets means that borrowers’ and/or investees’ SBTs have
been approved by the SBTi, the 2040 timeline has been determined to allow borrowers and/or investees
58
This differs from SBTi’s latest criteria for companies’ supplier engagement targets, where suppliers’ targets are not required
to be approved but should only be set in line with SBTi’s resources. SBTi stepped up the requirement for investee’s targets
given the rapidly increasing adoption of SBTs and SBTi’s improved capacity to deliver timely target validations. In addition,
requiring SBTi approval ensures that borrowers’ and/or investees’ scope 3 emissions are addressed as per SBTi’s general criteria
for companies, where companies must set scope 3 targets if their scope 3 emissions are more than 40 percent of the total.
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enough time to implement their target to ultimately achieve an economy-wide transition to net zero by
2050. Table 3.1 of the Science Based Target Setting Manual presents information on the applicability of
available SBT methods to various sectors and ongoing sector development work, which can help inform
financial institutions’ engagement efforts with borrowers and/or investees.
To define the coverage of the SBT Portfolio Coverage target, financial institutions shall use one of the
weighting approaches in the SBTi Finance Tool consistently throughout the target period. More
instructions on applying this method in the SBTi Finance Tool can be found in Appendix F.
The ambition of the SBT Portfolio Coverage method depends on the financial institution’s starting point.
Whereas a financial institution starting with 10 percent coverage in 2020 would need to increase
coverage by 4.5 percent per year (90/20 = 4.5), a financial institution starting with 30 percent coverage
would need to increase coverage by 3.5 percent per year. An example of a portfolio coverage target
could be that Investment Firm A commits that 32.5 percent of its equity portfolio by total assets will
have science-based targets by 2025.
SBT is a useful indicator for investors to understand their borrowers’ and/or investees’ publicly
committed trajectories to mitigate GHG emissions. However, it does not replace a robust assessment of
the companies’ business model or associated risks. For further recommendations on steps FIs can take
to integrate climate change in their organization and achieve their targets in a manner that leads to GHG
emissions reduction in the real economy, please refer to Chapter 7.
Criteria
FI-C17.2 – SBT Portfolio Coverage Targets: Financial institutions’ targets to drive the adoption of
science-based emissions reduction targets by their borrowers and/or investees are considered
acceptable when the following conditions are met:
• Boundary: Financial institutions shall set engagement targets on corporate instruments as
specified in the Required Activities and Methods Table (Table 5.2).
• Target Level of Ambition: Financial institutions shall commit to having a portion of their
borrowers or investees set their own approved science-based targets such that the financial
institution is on a linear path to 100 percent portfolio coverage by 2040 (using a weighting
approach in the SBT Finance Tool). For example, a financial institution starting with 10
percent coverage in 2020 would need to increase coverage by 4.5 percent per year (90/ (2040
– 2020) = 4.5) and reach at least 32.5 percent (10 + [5 x 4.5] = 32.5) coverage by 2025.
• Target Formulation: Financial institutions shall provide information in the disclosed target
language on what percentage of the corporate equity and debt portfolio is covered by the
target, using a weighting approach in the SBTi Finance Tool consistently throughout the target
period.
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• Target Time frame: Financial institutions’ portfolio coverage targets must be fulfilled within a
maximum of five years from the date the FI’s target is submitted to the SBTi for validation.
Fulfillment of portfolio coverage targets mean that borrowers’ and/or investees’ SBTs have
been approved by SBTi.
• Scope of Borrower and/or Investee Targets: Financial institutions’ borrowers and/or investees
shall follow the latest SBTi criteria for companies to set scope 1 and 2 targets, as well as scope
3 targets when their scope 3 emissions are more than 40 percent of total scope 1,2, and 3
emissions.
Case Study: Eurazeo - Applying the SBT Portfolio Coverage Method
Background on Eurazeo
Eurazeo is a leading global investment company, with a diversified portfolio of €18.8 billion in assets
under management, including €12.5 billion from third parties, invested in over 430 companies. With
its considerable private equity, venture capital, real estate, private debt, and fund of funds expertise,
Eurazeo accompanies companies of all sizes, supporting their development through the commitment
of its nearly 300 professionals and by offering deep sector expertise, a gateway to global markets, and
a responsible and stable foothold for transformational growth.
Targets proposed by Eurazeo
59
Below are the preliminary targets Eurazeo intends to set under the SBTi framework. Eurazeo committed
to set SBTs in June 2020, has submitted for validation its scope 1 and 2 targets, and plans to further
align its scope 3 targets with the SBTi criteria and recommendations after the framework is launched.
Management company: Eurazeo commits to reduce its scope 1 and 2 GHG emissions 71 percent per
employee and its travel-related emissions 72 percent by 2030 from a 2017 base year.
Portfolio: Eurazeo commits to screen 100 percent of emissions of these investments
*
and will engage
companies emitting 30 percent of these emissions to set reduction targets within the next five years.
*
Scope: Until 2025, over a scope of investments made with its own capital, for all asset classes (excluding
fund of funds). Beyond 2025, the coverage will progressively expand to third party money–financed
assets.
Why did you set a science-based target?
Eurazeo is strongly aware that climate change is more than ever a major challenge to people,
ecosystems, and the economy. Representing 5 to 10 percent of GDP in Europe and in the United States,
Eurazeo believes that private equity has a special role to play in the fight against climate change. Being
59
These targets have not been approved by SBTi.
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the first private equity company to commit to a SBT climate trajectory, Eurazeo hopes to pave the way
for numerous other fellow competitors, hence accelerating the transition to a low-carbon economy.
To drive effective action against climate change, Eurazeo acts at two different levels.
First, Eurazeo is committed to reducing its direct operational impact mostly related to its buildings and
employees travel. Since 2015 it has reduced the direct footprint of its Parisian offices by 73 percent and
aims to go beyond and cover all of its geographies with its SBT commitment.
Second, Eurazeo acts at its portfolio level. Nonfinancial impact—including CO
2
emissions—of the
portfolio companies is measured on a yearly basis and progress plans are implemented and thoroughly
monitored. Since 2011, Eurazeo has encouraged its portfolio companies to implement corporate social
responsibility (CSR) programs that have enabled them to reduce 1,068,000 metric tons of CO
2
equivalent in emissions through the implementation of operational energy-saving programs.
60
These
programs also helped save more than €243 million in expenditure directly through the reduction of
energy and fuel consumptions and indirectly through dedicated programs deployed by each company.
2020 marks a new chapter in the group’s combat against climate change. With the acceleration of this
crisis, it is now necessary to go beyond its best effort and strengthen its commitment within a science-
based target well-below 2°C trajectory.
*
France Invest, the French Association of Investors for Growth, brings together private equity
companies active in France and the associated professions that support them. Its members play a
major role in the growth and transformation of companies and in supporting the French economy.
What was the process of setting your targets?
Since 2008, Eurazeo has developed robust carbon measurements for its own operational activities and
for its portfolio. Scope 1, 2, and 3 emissions are measured for Eurazeo’s own activities and for its fully
consolidated investments (companies over which the group holds a controlling interest, usually as a
result of a majority stake), scope 1 and 2 emissions are measured for its minority investments. These
measurements are updated on a yearly basis and validated by statutory auditors. With the constant
portfolio evolution, it has been a long process to build the accurate methodologies and tools allowing
robust emission measurements.
Did you encounter any challenges?
It is extremely complex to decouple economic growth and ecological impact. Enabling such change at
scale necessitates out of the box thinking, boldness, and persistence from all management teams.
Implementing such an ambitious trajectory has raised a lot of questions and required a lot of
pedagogy to create confidence, alignment, and ultimately commitment.
60
Methodological details are available in chapter 3.4 of Eurazeo’s 2019 Universal Registration Document:
https://www.eurazeo.com/assets-eurazeo/uploads/2020/03/EURAZEO_EN_COMPLET_VBAT3_2020_04_09-1POST_BAT.pdf).
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5.4.3 The Portfolio Temperature Rating Approach for Corporate Instruments
Financial institutions may use the Temperature Rating Approach to address and cover corporate
instruments, including corporate debt, listed equity and bonds, and private equity and debt (see
relevant “Required Activities” in Table 5-2). Under this approach, financial institutions determine the
current temperature score of their portfolio based on the public GHG emissions reduction targets of
their investees. It enables financial institutions to set targets to align their base year portfolio
temperature score to a long-term temperature goal. This approach can be used on its own or with the
other two methods to collectively meet the minimum coverage for all “Required Activities.”
A range of methods currently exist to determine the temperature rating of investment portfolios.
The “Alignment Cookbook,” published by Institut Louis Bachelier, compares many of these methods to
measure the alignment of investment portfolio with temperature trajectories (Raynaud et al. 2020).
Currently the SBTi only recognizes the temperature rating methodology co-developed by WWF and CDP
for target submissions. This is the only method currently recognized as it has been created in
collaboration with the SBTi, is fully open source, is fully transparent in methodology and output, and has
undergone a public consultation process.
The SBTi will consider the use of alternative methods to determine temperature rating on a case by case
basis. Financial institutions should contact the SBTi finance sector team before submitting targets set
using these alternative methods for validation.
Temperature Rating Methodology
The temperature rating method developed by CDP and WWF is an extension of the SBT Portfolio
Coverage approach to enable FIs to assess the current ambition of portfolio companies based on their
public GHG reduction targets (including SBTs and any other valid public GHG targets that meet the
method criteria). This method enables the assessment of ambition of any corporate GHG emissions
reduction targets against a wider range of temperature outcomes and allows financial institutions to
understand the overall temperature rating of their portfolios and take actions to move portfolio
companies toward better temperature ratings (e.g., 2°C, well-below 2°C, 1.5°C). The method is open
source and has gone through a separate consultation process.
The latest version of the methodology can be found here.
Criteria
FI-C17.3 – Portfolio Temperature Rating Targets: Financial institutions’ targets to align the
Temperature Rating of their corporate debt and equity portfolios with ambition of the Paris
Agreement are considered acceptable when the following conditions are met:
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• Boundary: Financial institutions shall set portfolio Temperature Rating targets on corporate
instruments as specified in the Required Activities and Methods Table (Table 5.2).
• Target Level of Ambition: Financial institutions shall align their portfolio scope 1 + 2
temperature score with a minimum well-below 2°C scenario and in addition align their
portfolio to a minimum 2°C scenario for the scope 1 + 2 + 3 portion by 2040. Alignment with
more ambitious scenarios such as 1.5°C is highly encouraged. Separate targets for scope 1 + 2
and for scope 1 + 2 + 3 shall be set.
Financial institutions shall commit to reducing their portfolio temperature scores such that
the financial institution is on a linear path to the stated goal by 2040. For example, a financial
institution starting with scope 1 + 2 portfolio temperature score of 2.9°C in 2020 would need
to decrease its portfolio temperature by at least 0.0575°C per year ([2.9°C – 1.75°C]/[2040 –
2020]) = 0.0575°C, and reach at least 2.61°C portfolio temperature score by 2025.
For example, a financial institution starting with scope 1 + 2 + 3 portfolio temperature score
of 3.2°C in 2020 would need to decrease its portfolio temperature by at least 0.06°C per year
([3.2°C – 2°C]/[2040 – 2020]) = 0.06°C, and reach at least 2.9°C portfolio temperature score by
2025.
• Target Time frame: Portfolio alignment targets must be fulfilled within a maximum of five
years from the date the targets are submitted to the SBTi for an official validation.
• Scope of Borrower and/or Investee Targets: Financial institutions’ borrowers’ and/or
investee’s targets shall include coverage of scope 1 and 2 emissions, as well as scope 3
emissions when their scope 3 emissions are more than 40 percent of total scope 1, 2, and 3
emissions.
As illustrated in Figure 5.3 below, the Temperature Rating method covers a broader group of companies
than the strictly SBTi-approved SBT Portfolio Coverage method, enabling the assessment of any public
GHG emissions reduction target that meets the protocol criteria.
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Figure. 5.3. Overview of the Temperature Rating Method
Source: CDP and WWF 2020.
The method is composed of three distinct components that will allow financial institutions to first
quantify the temperature score of their portfolio:
1. Target-level protocol: The target protocol converts individual targets of various formats into
temperature scores. This is achieved by generating simple regression models for estimated
warming in 2100 from climate scenarios with short, medium, and long-term trends in metrics
like absolute emissions or emissions intensities. Regression models are generated based on
scenarios in the IPCC special report on 1.5°C scenario database (CDP and WWF 2020). In
addition to defining methods for disclosed targets, a default scoring approach is applied to all
nontarget disclosing companies.
2. Company-level protocol: Since companies may have multiple climate targets, covering different
GHG emission scopes and time frames, a protocol is used to aggregate all target data to produce
scores at a company level. This protocol defines the minimum quality criteria for determining
the acceptability of a target to be scored and the steps required to identify and aggregate
multiple targets to produce an overall company score. Following the SBTi corporate criteria, only
forward-looking ambition is considered when assessing the targets, and past performance is not
credited.
3. Portfolio-level protocol: The company scores are then aggregated to generate scores at a
portfolio level. This consists of weighting company scores on the basis of GHG emissions and
economic indicators to generate an overall weighted score for a specific portfolio. Financial
institutions shall use one of the weighting approaches in the SBTi Finance Tool consistently
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throughout the target period. More instructions on applying this method in the SBTi Finance
Tool can be found in the SBT Portfolio Coverage and temperature rating discussion included in
the Appendix F.
Aligning current temperature scores to temperature goals:
Base year temperature scores are produced at a scope 1 + 2 and a scope 1 + 2 + 3 level for each
portfolio. Financial institutions must then formulate targets to align this temperature to the desired
temperature outcome, for example, 1.5°C. Table 5.4 presents the key steps to generate temperature
scores and align targets with long-term temperature goals.
Table 5.4. Key Steps to Generate Temperature Scores under the Portfolio Temperature Rating Method
Step 1. Base Year Temperature Score
Types of portfolio scores
Two portfolio-level temperature scores shall be generated based
on company targets and/or default scores:
- Scope 1 + 2 score (°C)
- Scope 1 + 2 + 3 score (°C)
Boundary
The portfolio must reflect the holdings on a given date e.g. first or
last day of financial or calendar year.
Outputs
In addition to the two scores generated, FIs must provide the
following information when submitting targets for an official
validation:
● The percentage of portfolio GHG emissions that are
covered by GHG targets and the percentage of portfolio
GHG emissions that are assessed using default score;
and/or
● The percentage of portfolio invested value that is covered
by GHG targets and the amount of portfolio invested
value that is assessed using default scores.
Example: 30% of the portfolio’s GHG emissions/invested value are
covered with valid targets, with the remaining 70% scored using
default scores from investees with no valid targets.
Step 2. Target Setting
Minimum ambition thresholds
The scope 1 + 2 portion of the portfolio must be aligned to at least
a well-below 2°C (1.75°C) score, and the scope 1 + 2 + 3 portion
must be aligned to at least a 2°C score by 2040.
Target time frame
Targets must be within five years of the year the targets are
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submitted to the SBTi. This means that the company has
effectively five years to engage companies to set targets or to
adjust the portfolio holdings so the portfolio temperature is
aligned to a linear pathway that will reach in the temperature
goals by 2040.
Target wording
Two targets must be set for each portfolio, addressing both
operational (scope 1 + 2) and value chain (scope 1 + 2 + 3)
emissions of the investees.
Scope 1 + 2 target wording:
Investment Firm A commits to align its scope 1 + 2 portfolio
temperature score from 2.6°C in 2018 to be on a well-below 2°C
pathway by 2025.
Scope 1 + 2 + 3 target wording:
Investment Firm A commits to align its scope 1 + 2 + 3 portfolio
temperature score from 3.1°C in 2018 to be on a 2°C pathway by
2025.
Step 3. Temperature Rating
Boundary
Each reporting year, and the target year temperature score must
also be calculated on a given date in the calendar year or financial
year, consistent with the approach used to calculate the base year
temperature score.
Alignment ambition
A linear approach to 2040 is used to determine the minimum
ambition required per year. A linear annual temperature
reduction (LATR) is generated based on the base year temperature
score and the desired temperature goal in 2040.
The minimum ambition must be at least well-below 2°C (1.75°C)
by 2040 for scope 1 + 2 and 2°C for scope 1 + 2 + 3.
LATR = (Base Year TS – Long-term TS) / (Long-term Target Year –
Base Year).
Where,
LATR = Liner annual temperature reduction (°C/year)
TS = Temperature score (°C)
A company looking to be WB2C (1.75C) aligned by 2040 starting
from a portfolio S1 + 2 temperature score of 2.9C in a 2020 base
year would have to reduce its portfolio score by at least the
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90
following amount each year:
LATR = (2.9 – 1.75)/(2040 – 2020) = 0.0575C/year
Therefore, if an FI sets a maximum five year target, the maximum
temperature of the portfolio in 2025 would be: 2.9 – 5*0.0575 =
2.61C
Outputs
Each year leading to the target year, the following data points
should be disclosed by the FI:
● Percentage of portfolio GHG emissions covered by targets
and covered by default scores and/or
● Percentage of portfolio invested value covered by targets
and covered by default scores
Recalculation
The types of default scores must remain consistent across sectors.
If changes to these models are implemented over the target
period, the company will have to rebaseline the temperature of
the fund. This will be based primarily on the sector-specific models
that are modified over time.
Alignment options
The temperature score of any given portfolio can be aligned to a
lower temperature score to achieve a target through the following
hierarchy of actions:
1. Engagement: Engage existing investees to set more
ambitious targets, which would translate to lower
temperature scores
2. Adjustment: FIs can adjust the portfolio holdings, moving
the fund’s capital to investees with more ambitious targets
3. Divestment: FIs can remove investees with no/low ambition
targets and replace them with companies that have more
ambitious targets
The SBTi recommends that FIs focus on direct engagement as a
measure that can most effectively lead to emission reductions on
the ground, while recognizing that the latter two indirect
strategies shall remain as complementary available measures.
Source: Authors 2020.
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Case Study: Amundi - Application of the Temperature Rating Method
Background on Amundi
Amundi is Europe’s largest asset manager by assets under management, ranking among the
top 10 global players, offers its 100 million clients—retail, institutional, and corporate—a
complete range of savings and investment solutions in active and passive management, in
traditional or real assets. Amundi clients benefit from the expertise and advice of 4,500
employees in nearly 40 countries. Created in 2010 and listed on the stock exchange in 2015,
Amundi currently manages over €1.5 trillion of assets.
Using the temperature rating methodology developed by WWF and CDP, which is now
incorporated in the SBTi Finance Tool, Amundi determined the temperature of four of its
portfolios. This pilot was a first step in demonstrating how to apply this method to an
investment fund and to encourage corporates and financial players to take action using this
approach.
Temperature rating of Amundi’s portfolio
Amundi first selected four equity funds: one generalist fund and three thematic funds for
responsible investing for which results are displayed in Table B8.1 below. The first step was
to identify target and GHG emission data for all portfolio companies. This was done by using
data disclosed to CDP as part of its 2019 disclosure process. When including both approved
science-based targets and targets disclosed through CDP, between 35 and 65 percent of
funds contained no targets. This meant that the default scoring approach used to assign
temperatures to companies with no valid public targets did have a significant influence on
the results.
The fund with the lowest default score coverage, Amundi Global Equity Sustainable Income
Fund, also obtained a lower temperature score, as it relied less on the high default scores of
3.2°C. While the default score can heavily influence the final portfolio result, it is also an
effective way to identify which companies to engage with in order for them to set targets
and ultimately lower the portfolio score.
Table B8.1. Temperature Ratings for a Selection of Amundi Funds
Fund Name
Temperature Rating
(Scope 1 + 2)
Temperature Rating
(Scope 1 + 2 + 3)
CPR Invest – Climate Action
2.3°C
2.7°C
CPR Invest – Food for Generations
2.6°C
2.6°C
Amundi Global Ecology
2.6°C
2.6°C
Amundi Global Equity Sustainable
Income
2.2°C
2.7°C
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Source: Amundi Asset Management 2020.
Amundi observed that funds’ current temperatures range from 2.2°C to 2.7°C. From this
observation it can be seen that many companies are setting ambitious public targets, in
addition to SBTs, but that much remains to be done to achieve a trajectory in line with the
Paris Agreement. This approach enabled Amundi to rate companies with ambitious targets,
and importantly, to identify companies that do not have valid public targets that can be
scored.
As part of its environmental, social, and corporate governance (ESG) research toolbox, the
Temperature Rating Approach will bolster Amundi’s forward-looking assessment capabilities
to identify priorities and the degree of action required, notably through engagement with
companies across the investment universe to set more ambitious, science-based emissions
reduction targets. As companies make commitments, it will be possible to build portfolios
that are more in line with the Paris Agreement.
Outcomes and target setting
The temperature rating provides a useful metric to deploy engagement with issuers on climate
targets. Indeed, results show that the mobilization of all portfolio companies is imperative if
we want to go further, with corporate engagement being essential to achieve this.
Conclusions and recommendations
The results of the temperature rating exercise showed the extent of target setting within the
given portfolios and determined how far these portfolios are from the long-term
temperature goals set out in the Paris Agreement.
A key challenge for Amundi now is to build coherent strategies that foster climate action
using this temperature data. Indeed, in addition to its clear engagement purpose, the
temperature rating can provide a useful signal for issuer selection when combined to other
climate-related metrics. While the methodology will be subject to future developments and
improvements, currently deploying such metric is the first necessary step toward setting
meaningful climate targets on funds.
5.5 Approaches to Setting Targets on the Rest of the Scope 3 Categories
For financial institutions to focus their efforts on their investment and lending activities, the SBTi only
recommends but does not require that financial institutions measure emissions and set targets on scope
3, categories 1–14.
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Recommendations and Additional Guidance
FI-R9 – Measuring emissions and setting targets for scope 3, categories 1–14: It is recommended but
not required for financial institutions to measure and set target(s) on categories 1–14 emissions as
defined by GHGP Scope 3 standard. Optional targets on these categories must meet criteria 19–20.1
in the latest SBTi criteria for companies to be approved by SBTi.
For financial institutions interested in submitting targets on categories 1–14, they must ensure that
these targets meet criteria 19–20.2 in the latest SBTi general criteria for them to be approved and
announced. FIs may use the SBTi Target Setting tool to develop these targets.
In terms of applicable methods, the absolute contraction and supplier engagement approaches can be
used to set targets on most categories. The absolute contraction method has been introduced in Section
4.3 on scope 1 and 2 target setting. For categories 1–14, financial institutions may consider setting
absolute targets in line with a less ambitious 2°C scenario (1.23 percent linear annual reduction), given
that scope 3 emissions can be more difficult to reduce as compared to scope 1 and 2 emissions.
Requirement for supplier engagement target is detailed in C20.1 of the SBTi general criteria.
Relevant SDA pathways may also be applied to categories such as upstream transportation and
distribution (transport), business travel (transport), employee commuting (transport), and upstream
leased assets (building services). However, given that the application of SDA requires more input data
than absolute contraction, financial institutions should weigh the amount of effort toward setting SDA
targets against the significance of these categories.
Financial institutions may combine targets on multiple scope 3 categories. For example, a financial
institution may set one single upstream supplier engagement target on category 1—purchased goods
and services, and category 4—upstream transportation and distribution, that engages relevant suppliers
covering both categories.
5.6 Coal Phaseout and Fossil Fuel Disclosure
Fossil fuel combustion is the largest source of greenhouse gas emissions and the central driver of
climate change. Fossil fuels are also the dominant source of energy for the global economy. Financial
institutions seeking to align with the Paris Agreement should explicitly and transparently address the
role of fossil fuels in their investment and lending portfolios. In recognition of the complex and societally
embedded nature of fossil fuels, the SBTi formulated two fossil fuel-related recommendations (FI-R10
and FI-R11) for financial institutions.
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The first recommendation relates to the adoption of a thermal coal phaseout policy. The IPCC 1.5°C
emission pathways indicate that emissions from coal should reduce by four-fifths in 2030 relative to
2010 (IPCC 2018). Recent research on energy technologies shows that the share of uncompetitive coal
plants worldwide is on track to increase rapidly to 60 percent in 2022 and to 73 percent in 2025 (Rocky
Mountain Institute 2020). The same report indicates that the trend is not limited to developed
countries. In China and India, for example, 95 percent and 85 percent, respectively, of the coal fleet
may become unprofitable by 2025. FIs should thus reduce their exposure to thermal coal as quickly as
possible, to reach zero by 2030 to avoid stranded assets, detrimental climate impacts, and related
losses.
The phaseout of thermal coal investments is intended to accelerate energy transition and does
not preclude support for low-carbon transformation of existing facilities. Moreover, effective coal
phaseout requires consideration of a just transition to ensure viability and long-term stability (see Jakob
et al. 2020).
The second recommendation regards disclosure and supports consistent understanding of the full range
of financial institutions' fossil fuel investments and related activities. Fossil fuel investment disclosure
preserves credibility and creates an initial mechanism for financial institutions to help address justice
and equity components of climate action.
Recommendations and Additional Guidance
FI-R10 – Phaseout of thermal coal investments: Financial institutions should establish a policy within
six months from the time of target approval that they will phase out financial support to thermal coal
across all their activities in line with a full phaseout by 2030 globally. Notably, this includes
immediately ceasing all financial or other support to thermal coal companies* that are building new
infrastructure or investing in new or additional thermal coal expansion, mining, production, utilization
(i.e., combustion), retrofitting, or acquiring of coal assets.
* Coal companies are defined as companies with greater than 5 percent of revenues from thermal coal
mining, exploration and drilling, mining services, processing, trading, transport and logistics,
equipment manufacturing, operations and maintenance (O&M) services, engineering, procurement
and construction (EPC) services, transmission and distribution of coal-fired electricity, coal to liquids
(Ctlg) and coal to gas (CtG).
FI-R11– Disclosure of Fossil Fuel Investments and Lending: Financial institutions with approved SBTs
should annually disclose the annual investments (public equity, private equity, corporate bonds),
direct project financing and lending to fossil fuel (oil, gas, and thermal coal) projects and companies*
in U.S. dollar amount (or other currencies) (See FI-R12 for recommendations on where to disclose).
Financial institutions that fail to phase out coal investments or disclose fossil fuel investments and
lending make themselves susceptible to risk of stranded assets and reputational damage.
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* This includes:
(1) Companies that have activities (i.e., identified as share of revenues) in the exploration, extraction,
refining, transportation and distribution, storage, retailing, marketing, trading, or power, heat, or
cooling production from oil and gas. FIs should disclose the threshold used to delineate oil and gas
companies; SBTi recommends a 5 percent threshold and for the threshold to not exceed 30 percent.
(2) In line with FI-R10, companies with greater than 5 percent of revenues from thermal coal mining,
exploration and drilling, mining services, processing, trading, transport and logistics, equipment
manufacturing, operations and maintenance (O&M) services, engineering, procurement and
construction (EPC) services, transmission and distribution of coal-fired electricity, coal to liquids (Ctlg)
and coal to gas (CtG).
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6. How to Communicate Science-Based Targets and
Tracking Progress
Given the importance of transparency to stakeholders on the actions of financial institutions in reducing
GHG emissions, the SBTi provides specific requirements and guidance on how FIs communicate their
SBTs and strategies to achieve their SBTs. Financial institutions should not make claims about emission
reductions attributed to these strategies or related financial products without credible evidence to
support these claims.
The SBTi requires FIs to develop target language in the target submission form to the SBTi and the target
will be used for public communication once targets are approved.
FIs shall formulate target language for the following:
• A scope 1 and 2 target using the target language template in the financial sector target
submission form;
• A target to cover any optional scope 3, category 1–14 targets approved by the SBTi;
● A headline target for portfolios that sets out the asset classes for which they have set science-
based targets and how much of their total portfolio is covered, the purpose of which is to
simplify the communication of multiple asset-level targets; and
● Target language for asset-level targets using the specific target language templates.
At the time of target submission, FIs shall submit a brief summary of the strategy and actions the FI will
implement to reach their science-based target(s) and why they selected these actions. This summary
shall be provided by the FIs with their target submission and will be published, along with the science-
based targets, on the SBTi website upon target approval.
The detailed target language template is provided in Table 6.1 below and additional guidance on
formulating target language is included in the financial sector target submission form and shall be
followed by FIs when setting targets.
Table 6.1. Target Language Template for Financial Institutions
Scope 1 and 2 Targets
Absolute target: Financial Institution A commits to reduce absolute scope 1 and 2 GHG emissions
[XX]% by [target year] from a [base year].
Intensity target: Financial Institution A commits to reduce scope 1 and 2 GHG emissions [XX]% per
[unit] by [target year] from a [base year].
Scope 3 Portfolio Targets – Headline Target
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Financial Institution A commits to achieve SBTs in [asset classes] by [target year](if there are
multiple target years of the asset class–specific targets, use the target year that’s farthest into the
future) from a [base year]. Financial Institution A’s portfolio targets cover [XX]% of its total
investment and lending activities by [unit].
Scope 3 Portfolio Targets – Asset Class Target
Asset Class
Method
Target
Output Example
Real estate
Sector
Decarbonizati
on Approach
(SDA)
Financial Institution A commits to reduce its real estate
portfolio GHG emissions XX% per square meter by 2030
from a 2017 base year.
Mortgages
SDA
Financial Institution A commits to reduce its mortgage
portfolio GHG emissions XX% per square meter by 2030
from a 2017 base year.
Electricity
generation
project finance
SDA
Financial Institution A commits to reduce its electricity
generation project finance portfolio GHG emissions XX%
per kWh by 2030 from a 2017 base year.
Corporate
instruments
(equity, bonds,
loans)
SDA
Financial Institution A commits to reduce GHG emissions
from the steel sector within its corporate lending
portfolio XX % per tonne of cement by 2030 from a 2017
base year.
SBT Portfolio
Coverage
Investment Firm A commits that 30% of its equity portfolio
within the [asset class or sector] by [unit] will have set
science-based targets by 2024.
Temperature
rating
Investment Firm A commits to align its scope 1 + 2 portfolio
temperature score within the [asset class or sector] from
XX°C in 2018 to XX°C by 2025.
Investment Firm A commits to align its scope 1 + 2 + 3
portfolio temperature score within the [asset class or
sector] from XX°C in 2018 to XX°C by 2025.
Action Plan to Achieve Targets
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Financial Institution A will implement the following strategy and actions to achieve its targets:
● Example: Financial Institution A aims to steer its [XX dollar amount] corporate equity,
bonds, and loan book in power generation, steel, cement, and aviation through actively
supporting clients’ low-carbon transition. For example, it will offer more favorable interest
rates to investees that set and stay on track to meet ambitious climate goals. Financial
Institution A selected these actions because [add reasons].
Source: Authors 2020.
The SBTi recognizes that there is a lack of clarity about which FI actions could lead to greenhouse gas
emissions in the real economy. The SBTi’s annual disclosure requirement is intended to help identify the
most effective actions to realize GHG emissions reductions in the real economy and lead to further
progress in this area.
The SBT-FI welcomes collaboration with other climate initiatives that seek to develop methods or tools
that enable the measurement of the impact of climate actions (see also the Chapter 7. How to achieve
SBTs). We also encourage FIs to engage with relevant service providers to develop such tools and adjust
their strategies according to the findings of these analyses.
Given that current methods do not cover all asset classes or sectors on FIs’ portfolios and that the target
boundary requirement remains flexible on certain financial products, FIs are required to disclose the
coverage of their total investment and lending activities by SBTs in the target language (C18) using an
economic or emissions metric that is representative of the magnitude of their main business activities.
This disclosure requirement is intended to enhance the transparency and comparability of portfolio
targets. Given that this version of the criteria allows banks to submit targets without their asset
management divisions, banks shall also be explicit about such exclusions in the target wording.
Criteria
FI-C18 – Disclosure of Target(s) Portfolio Coverage: At the time of target announcement and along
with approved targets, financial institutions shall disclose the percentage of their total investment
and lending activities covered by portfolio targets on the SBTi website, in a metric representative of
the magnitude of FIs’ main business activities, which may involve any combination of commercial
banking, investment banking, and asset management. Examples include total financed emissions
associated with investment and lending activities (if quantified), total balance sheet, total
investments, total lending book, and total assets under management.
FI-C19 – Implementation Reporting: At the time of target submission, the financial institution shall
submit a brief summary of how it intends to meet its scope 3 portfolio targets in conformity with the
template provided in the target submission form.
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This disclosure is intended to create transparency. The content of the summary will not be used as a
basis for validation of targets. At the time of target announcement, the summary of how the financial
institution intends to achieve its targets shall be made public.
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6.1 Tracking and Reporting Target Progress
This section presents recommendations on tracking and reporting progress of portfolio targets set using
SDA, SBT Portfolio Coverage, and Temperature Rating Approaches. Financial institutions should take
these recommendations into consideration for the annual disclosure of target progress required by the
criteria.
6.1.1 Tracking Progress Against SDA Targets
Financial institutions should track and disclose progress against their SDA targets on an annual basis. The
tracking metric is emissions per activity unit relevant to the sector (e.g., kgCO
2
per kWh, kgCO
2
per tons
of steel, kgCO
2
per m
2
), combined with the percentage of portfolio outstanding value in the specific
asset class/sector. To measure annual progress, financial institutions should use the GHG accounting
methods developed by the Partnership for Carbon Accounting Financials (PCAF). These methods enable
financial institutions to calculate the absolute emissions per asset class at a specific point in time. The
absolute emissions is then converted to emissions intensity using the physical activity data that are
linked to the loans and investments (e.g., the amount of kWh, tons of steel, or m
2
that financial
institutions have financed). The result should be compared with the emissions intensity of the previous
year.
6.1.2 Tracking Progress Against Temperature Rating Targets
Each reporting year, the FI should disclose both portfolio temperature ratings (scope 1 + 2 rating and the
scope 1 + 2 + 3 rating). In addition, when submitting targets for official validation, and when reporting
and tracking progress against targets, financial Institutions must disclose the following information:
● The percentage of portfolio GHG emissions that is covered by public targets and the percentage
of portfolio GHG emissions that is assessed using default scores in the reporting year; and
● The percentage of portfolio invested value that is covered by public targets and the percentage
of portfolio invested value that is assessed using default scores in the reporting year.
For more details on the reporting requirements, please see Section 5.4.3.
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Financial institutions will have opportunities to review the summary language before the SBTi publishes it on the website.
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Financial institutions should report the percentage of relevant asset class(es) covered by approved SBT
companies on an annual basis, using the same weighting approach chosen for the base year consistently
throughout the target period. Financial institutions may further indicate whether they are on track to
meet the targeted coverage of SBT companies set out for the five-year target period. If financial
institutions choose to do so, they should provide evidence to support any statement about whether
they are on or off track and clearly state any assumption used. An example of such assumptions could
be that the same progress achieved in the first year will be achieved in the remaining four years:
Financial Institution A projects that it is currently on track to meet the five-year target.
In addition to reporting on the percentage of companies with approved SBTs, financial institutions may
also report the coverage of companies committed to the SBTi or the increase in the number of
companies measuring and reporting scope 1, 2, and 3 emissions to show incremental progress of
portfolio companies.
Criteria
FI-C20 – Tracking and Reporting Target Progress: After target approval, SBTi requires annual
disclosure of scope 1 and 2 GHG emissions, disclosure of progress against all approved targets in the
relevant metric, and disclosure of actions/strategies taken during the year to meet scope 3 portfolio
targets. If optional targets on scope 3 categories 1–14 as described in FI-R9 are submitted and
approved by SBTi, their progress shall be included in the disclosure of progress as well.
6.2 Target Recalculation and Validity
As additional methods and the latest climate science become available, financial institutions shall
continue to follow best practices and ensure that their targets remain relevant. Therefore, per FI-C21 –
Mandatory Target Recalculation FIs must review, and if necessary, recalculate and revalidate their
targets, at a minimum, every five years. Financial institutions with approved targets that require
recalculation must follow the most recent applicable criteria for the finance sector at the time of
resubmission.
The SBTi also recommends that financial institutions recalculate targets, as needed, to reflect significant
changes that would compromise relevance and consistency of the existing target. Examples of
significant changes that should trigger a recalculation are included in FI-R13 – Triggered Target
Recalculation in Section 3.7. If financial institutions set intensity targets and there are significant
changes in the projection of the related activity, this should trigger a target recalculation and
resubmission of the target to the SBTi.
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To institutionalize the practice of target adjustments, financial institutions should establish a base-year
recalculation policy that sets out a qualitative or quantitative significance threshold to trigger a
recalculation of targets. Examples of changes that could trigger a target recalculation include updates in
climate science, availability of higher quality investee data, and significant changes to the financial
institution such as a merger or acquisition.
Criteria
FI-C21 – Mandatory Target Recalculation: To ensure consistency with most recent climate science and
best practices in science-based target setting, targets must be reviewed, and if necessary,
recalculated, and revalidated, at a minimum, every five years. Financial institutions with an approved
target that requires recalculation must follow the most recently applicable criteria at the time of
resubmission. Targets should be recalculated and reset, as needed, to reflect significant changes that
would compromise relevance and consistency of the existing target.
FI-C22 – Target Validity: Financial institutions with approved targets must announce their target
publicly on the SBTi website within six months of the approval date. Targets unannounced after six
months will have to go through the approval process again, unless a different publication time frame
was agreed upon with the SBTi.
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7. How to Achieve SBTs
There are numerous actions that FIs can use to achieve their portfolio SBTs. Chapter 7 builds on the
SBTi’s criteria and recommendations for target setting and reporting, and further recommends steps
that FIs can take to fully integrate climate change in their organization and services and achieve their
targets in a manner that leads to greenhouse gas emissions reduction in the real economy.
7.1 Integration of Climate Change in Governance and Decision-Making
FIs should integrate climate change across their institution. This can include the following:
● Adoption of climate-related investment principles. These should recognize that portfolio
alignment with the Paris Agreement will contribute to investing in the best interests of FIs’
beneficiaries or clients.
● Establishment of a climate governance structure. FIs should make portfolio alignment with the
Paris Agreement a board priority—including explicit attribution of this responsibility within the
board. They should also put governance structures in place that ensure proper support and
implementation of the policy—including incentive schemes, commitment of resources, capacity
building, and involvement of beneficiaries or clients.
● Integration of climate change in the investment and/or lending policy. FIs should adopt an
investment and/or lending policy that reflects and aligns with their climate-related investment
principles. This can include—depending on the type of FIs—investment/lending targets,
strategic asset allocation, engagement objectives, selection/screening criteria and incentives for
service providers based on climate performance, and performance measurement and reporting.
● Adjustment of strategic asset allocation to harness climate-related opportunities. FIs should
consider climate risks and opportunities in strategic asset allocation (SAA), including increasing
their exposure where feasible to alternative asset classes that are more likely to have a direct
positive climate impact on the real economy—such as infrastructure (e.g., grids and renewable
energy), real estate (highly energy-efficient and resilient buildings), and private equity
(renewable and energy efficiency companies).
● Adoption of additional sector-specific policies. FIs should extend their investment policy to
sectors and technologies that pose particular climate-related risks or offer particular
opportunities. These are most notably:
○ Sectors where greenhouse gas-intensive companies have a significant potential to offer
alternative solutions and thus reduce their emissions—such as power utilities, industrial
sectors (steel, cement, chemicals), and automotive; and
○ Sectors that are deemed to shrink and ultimately disappear with the energy transition
(e.g., coal, oil, and gas), but where some companies still have the potential to make a
timely shift to other business models.
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The sector policies should define criteria that allow the FI to identify to what extent the
companies in its portfolio are able and willing to align their business model with the Paris
Agreement, set out a strategy as to how the FI will urge companies to adopt 1.5°C transition
plans through active ownership, and identify at which point exposure reduction/divestment is
desirable in light of the inability or unwillingness of a company to transition in a timely manner.
● Development of methods or tools that enable the measurement of the impact of climate
actions. There currently is insufficient clarity about which FI actions lead to greenhouse gas
emissions in the real economy. FIs should engage with relevant service providers to develop
tools that allow the FI to build a better understanding of the impact of their actions on
greenhouse gas emissions, and adjust their strategies according to the findings of these
analyses.
7.2 Engaging Key Stakeholders: Companies, Service Providers, and
Policymakers
Generating impact in the real economy requires all relevant stakeholders to move at the same time.
Hence FIs should leverage the influence they have over companies, policymakers, and financial service
providers. This will ensure that the rules of the game in which FIs operate are supportive of their own
climate actions.
FIs should work collectively with their peer FIs to learn, seek advice, share best practice, and, most
importantly, increase the impact of engagement activities with portfolio companies and policymakers.
They should engage in FI coalitions and participate in and drive coalitions that promote the alignment of
portfolios with the Paris Agreement (see Table 1.1 for more details).
7.2.1 Company Engagement
FIs should develop an engagement strategy to achieve alignment of their portfolio companies’ business
models with the Paris Agreement—through the adoption and publication of time-bound 1.5°C transition
plans composed of the following elements:
● A commitment to align business models with the Paris Agreement and, more concretely, a time-
bound climate science–based target built on forward-looking climate scenario analysis. If FIs set
SBT Portfolio Coverage targets (i.e., targets to engage borrowers/investees to set approved
SBTs), all companies in the boundary of these targets shall have approved SBTs by 2040 in line
with the SBT Portfolio Coverage target criterion.
● Capital management plans to end capital expenditure for new high-carbon projects, increase
capital expenditure for low-carbon projects, and a clear time line for the closure of existing high-
carbon assets. This could include cash returns through buybacks or dividends.
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● The disclosure of the target and transition plan and alignment with Task Force on Climate-
related Financial Disclosures (TCFD) recommendations. Such information should be published in
mainstream financial reports (integrated reporting).
● A commitment to review and ratchet up targets and transition plans in light of the evolving
climate science, in particular the development of more detailed 1.5°C scenarios driven by the
Paris Agreement.
● A public commitment to support policies that aim to reduce emissions in line with the Paris
Agreement, be transparent about lobbying activities and related expenditures, and exit third-
party organizations (e.g., business and trade associations) that promote policies that pose a risk
to the Paris Agreement.
Given the urgency to tackle climate change, FIs should have an escalation process in place for when
engagement does not lead to significant results within set time frames (6, 12, 24, 36 months), where a
range of options are available to FIs: open letters, filing/supporting shareholder resolutions, and voting
at annual general meetings (AGMs), end support to companies’ efforts to raise capital (notably through
corporate bonds), and ultimately divestment. Figure 7.1 below gives a potential time line for such an
escalation process.
Figure 7.1. Escalation Process in Case of Unsuccessful Engagement
Note: AGM = Annual general meeting.
Source: WWF 2019.
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7.2.2 Policy Engagement
Regulations and government policies are key drivers of systemic change. The most climate-aware FIs
should engage with policymakers to accelerate the adoption and implementation of climate-friendly
policies.
Strengthening long-term investor involvement in the “rules of the game” that govern the financial
system is a strategic area of interest: given the high urgency of the climate challenge, FIs should engage
with policymakers in favor of the proper implementation of the Paris Agreement—as the best pathway
to mitigate their climate-related risks, maximize their positive contribution to climate goals, protect the
long-term value of their assets, and invest in the best interest of members and beneficiaries.
FIs should engage with policymakers to ask for the following items:
● Climate and energy policies and regulations that drive a timely implementation of the Paris
Agreement and its embedded climate targets;
● Adequate climate and wider ESG corporate disclosure policies and regulations to ensure that
relevant climate and ESG data become available to investors—in particular by integrating the
TCFD recommendations into national legislation, with an emphasis on forward-looking climate
scenario analysis; and
● Financial policies and regulations that drive better understanding of climate-related risks and
opportunities for financial institutions, through the assessment of climate and wider ESG risks
for investors and their mitigation, with the ultimate goal of portfolio alignment with the Paris
Agreement.
7.2.3 Service Provider Engagement
FIs that understand climate-related financial risks and opportunities will find it necessary to address the
need to align their investments with the Paris Agreement, together with their service providers.
However there are many reasons why the investment supply chain may not act in accordance with asset
owners’ interests on climate issues, including commercial conflicts of interests, time horizons, cultural
norms. Asset owners therefore need to closely monitor all their service providers, including their
investment consultants, index providers, proxy voting advisors, sell side analysts and credit rating
agencies, remuneration consultants, and auditors.
In many cases, FIs rely on investment consultants to develop their investment strategies, climate
strategies, select service providers (e.g., investment managers), etc. Therefore, investment consultants
operate at a critical interface in the investment ecosystem, and FIs can push them to drive innovation
within the financial community. The following actions are recommended for FIs:
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● Ensure that investment consultants address climate-related risks and opportunities and adapt
their core services accordingly and demonstrate a robust track record that shows capacity to
assess and address climate-related issues;
● Require investment consultants to advise so as to help them develop climate-related strategies
(principles, policies, targets, processes, and portfolio implementation) that will align
investments with the Paris Agreement over time;
● Ask investment consultants to allocate dedicated time for interaction and discussion on long-
term risks and opportunities—particularly related to climate change—and to adjust
remuneration accordingly;
● Ask investment consultants to assess the climate-related performance of other service providers
(notably investment managers) and suggest engagement approaches for accelerating their
climate-related efforts; and
● Publicly signal their climate-related requirements for investment consultants to urge them to act
to avert a potential devaluation of their reputational capital.
Index providers (e.g., MSCI, FTSE, S&P, etc.) provide the investment community with a standard to
quantify and understand the performance of markets and asset classes. Market capitalization–weighted
indexes are replicated by passive investors, and used as allocation guidelines for sector diversification by
the majority of investors. Analysis indicates that indexes usually reflect business-as-usual scenarios,
where for instance high-carbon sectors (e.g., oil and gas) are overweighed in terms of achieving the Paris
goal, and they lack a good indication of energy technology exposure. The measurement of relative risk is
also related to these indexes, further limiting the possibility to allocate investments in line with climate
goals, and away from the current unsustainable business-as-usual market (2dii 2014). FIs should drive
demand to index providers to tackle these shortcomings in the design of indexes. This issue is critical for
passive investors that essentially rely on indexes to define their default capital market exposures. The
following actions are recommended for FIs:
● Require index providers to disclose how their existing products align with the Paris Agreement,
using forward-looking climate scenario analysis;
● Require index providers to develop new products that reflect the performance of markets in a
well-below 2°C transition, to help asset owners benchmark their own investment portfolios
against the Paris Agreement; and
● Publicly signal their climate-related requirements for index providers to urge them to act to
avert a potential devaluation of their reputational capital.
Proxy voting advisors (e.g., ISS, Glass Lewis, Manifest, etc.) consult with FIs to decide how to vote on
matters that require shareholder approval at annual general meetings (and extraordinary general
meetings) of their portfolio companies. As shareholder resolutions are a crucial tool for engagement
with portfolio companies (see section on company engagement above), it is important for FIs to interact
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with proxy voting advisors, with the objective of improving their climate-related advice. The following
actions are recommended for FIs:
● Ensure that proxy voting advisors address climate-related risks and opportunities and adapt
their core services so that they align with the Paris Agreement;
● Request their proxy voting advisors to ensure that voting activities are wholly consistent with
the climate objectives of the FI and support resolutions that call for the adoption of well-below
2°C transition plans; and
● Publicly express their support for climate-related shareholder resolutions at portfolio
companies.
7.3 Public Disclosure of Climate Actions
FIs should publicly disclose their climate decisions and activities to increase impact. The SBTi criteria for
financial institutions requires that FIs annually disclose the actions or strategies that have been taken
during the year to reach their SBTs after target approval. The section below can help FIs frame their
reporting to avenue(s) of their choice for the public disclosure of their climate action (e.g., annual
report, stand-alone reports, communication on the website, press releases, social media, etc.)
Public disclosure of climate actions should cover—depending on the FI—the adoption of climate-related
policies for companies, the integration of the policy in mandates to investment managers and other
service providers, a regular assessment of engagement impact, the filling of or support to relevant
shareholder resolutions, and divestment decisions if engagement is not deemed relevant or does not
deliver within set time frames.
By signaling (i.e., making public) key climate-related decisions and activities, FIs will significantly amplify
their impact. Given the climate urgency, the signaling effect is critical to raise the awareness of peer FIs,
companies, service providers, policymakers, and other stakeholders. It emphasizes the importance of
the issue and helps to accelerate efforts from the abovementioned stakeholders.
Signaling is particularly critical for a meaningful engagement strategy. FIs should disclose which
companies they are engaging with, what their specific demands are, and publish at regular intervals an
assessment of the engagement impact. This will increase pressure on corporations and drive deeper and
faster changes. The Climate Action 100+ initiative is a promising step toward such joint and public
shareholder engagement—and an implicit recognition that bilateral engagement behind closed doors
will not have enough impact to get high-carbon companies to shift their business model at the pace and
scale required by the Paris Agreement.
FIs should also indicate the names of companies from which they have divested or decided not to invest
in, following the example of financial institutions in countries like Denmark and Norway. For very liquid
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asset classes, such as public equity and corporate bonds, the rapid exchange of assets can quickly cancel
out potential impact of divestment on oil and gas producers. Therefore, public signaling is critical for
amplification.
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8. SBTi Call to Action Process: Commit, Develop Target,
Validate, Announce, Disclose
This chapter outlines the four different steps for financial institutions to take in the SBTi Call to Action
(C2A) process, from publicly committing to the SBTi to having approved targets announced (See Figure
8.1).
62
Figure 8.1. The SBTi Call-to-Action Process
Source: SBTi 2020.
Step 1: Commit to Set a Science-based Target
How to commit
Financial institutions that wish to commit to set a science-based target should review and complete the
commitment letter and send it to commitments@sciencebasedtargets.org. Signing the commitment
letter indicates that your institution will work to set a science-based emissions reduction target aligned
with the Science Based Targets initiative’s criteria for financial institutions (the link will be added when
available).
Business Ambition for 1.5°C
Financial institutions are urged to aim for the highest level of ambition in their target setting. The SBTi
encourages financial institutions to join the Business Ambition for 1.5°C Call to Action by signing the
Business Ambition for 1.5°C Commitment Letter that indicates intention to align emissions reduction
targets with 1.5°C. For financial institutions not currently committed to the SBTi, the Business Ambition
62
Please note that the SBTi C2A process for financial institutions is still being finalized, and more details will be added for the
final guidance release in September 2020.
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for 1.5°C Commitment Letter constitutes your commitment to develop and submit emissions reduction
targets aligned with the SBTi criteria.
We Mean Business
We Mean Business, a coalition of organizations working with thousands of the world’s most influential
businesses and investors, provides a platform for businesses and investors to be recognized for their
climate action. Through the We Mean Business campaign, financial institutions can commit to setting
science-based targets as well as other actions such as procure 100 percent of electricity from renewable
sources or put a price on carbon.
By default, financial institutions that commit to the Science Based Targets initiative count toward the We
Mean Business campaign. However, financial institutions that commit to set science-based targets
through the We Mean Business Commit to Action campaign are required to sign the SBTi commitment
letter to be formally recognized by the initiative.
Benefits of Committing
Signing the commitment letter indicates the financial institution will work toward setting science-based
emissions reduction targets. If the financial institution already set its own targets, the letter confirms the
FI’s interest in having its existing targets verified against a set of criteria developed by the SBTi or
developing new targets that will align with these criteria.
After a financial institution submits its commitment letter (either the general commitment letter or the
Business Ambition for 1.5°C Commitment Letter) to commitments@sciencebasedtargets.org, it will be
recognized as “Committed” on our Companies Taking Action webpage, as well as the We Mean Business
and CDP websites. Companies that are engaging in the UN Global Compact will also be recognized on
their website. The list of committed companies is updated every week. Companies that have committed
will receive a “Communications Welcome Pack” with more information on how to communicate their
commitment.
Step 2: Develop a Target
Starting from October 1, 2020, financial institutions will have up to 24 months to complete the following
steps once they sign the commitment letters. Previously committed financial institutions will have 24
months from October 1, 2020 to have their targets approved and announced by SBTi:
(i) Develop science-based targets aligned with the SBTi criteria for financial institutions;
(ii) Submit the targets to the SBTi for a validation; and
(iii) After approval, have the SBTi publish your targets and other related information on the relevant
websites.
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We encourage financial institutions to start this process and submit your targets for validation as early as
possible. If a financial institution fails to complete all the above outlined steps by the end of the 24 months,
its name will be removed from the SBTi Companies Taking Action webpage and our partners’ websites.
The SBTi will not grant extensions beyond the 24 months’ timeline because financial institutions can
submit targets for validation and be added to the website with the status “targets set” independent of
their commitment status. Please refer to the Expired Commitments Protocol for more information.
Targets have to be in line with the criteria for financial institutions for qualifying targets as “science-
based.” The SBTi has developed a suite of tools and guidance to help financial institutions understand
how to meet these criteria.
Step 3: Submit the Targets for a Validation
How Company Information is Treated
The SBTi safeguards the confidentiality of all information provided by the financial institution to assess its
targets. This means that information provided will be used in accordance with the target validation service
contract that financial institutions are asked to sign before target assessments commence.
63
Paid Target Validation Service
The SBTi has implemented a paid service for target validations since 2019. This enables the initiative to
provide a faster target validation process and additional feedback to companies. As of February 2022,
financial institutions are also required to use the paid validation service. Find out more about the SBTi
target validation service here.
Target Submission Form for Financial Institutions
Financial institutions that wish to submit targets for validation should download the latest Target
Submission Form and Guidance for financial institutions and fill it out as clearly, completely, and
accurately as possible. It is highly recommended that financial institutions consult the submission form
guidance available within the document to complete the form, including the guidance on target
language and summary of actions to achieve targets, before filling out the form. Additional documents
should be attached only if they are directly related to the information requested.
64
63
SBTi no longer accommodates requests for signing of Non-Disclosure Agreements (NDAs) as they can take up to six months to
complete. The target validation contract should be sufficient to serve confidentiality purposes.
64
Financial institutions should reference the specific page numbers, figures, or text that is being referred to in accompanying
documents. Missing, unclear, or erroneous information will result in the validation process being delayed.
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It is the financial institution’s responsibility to ensure the integrity of the information provided. Once the
form is completed, financial institutions should send the submission form in Word format, together with
any supporting documents in one e-mail to targets@sciencebasedtargets.org.
Once targets are submitted to the SBTi, the validation team will assess the targets submitted in
accordance with the SBTi Target Validation Criteria and Recommendations for financial institutions
described in Chapter 3 of this guidance.
Step 4: Announce the Targets
Once targets are approved by the SBTi, the financial institution will receive an approval e-mail with a
validation report and a certificate. A target publication date will be chosen and suggested to the
financial institution. If the financial institution would like to request a different publication date, it can
coordinate with the SBTi communication team included in the decision e-mail. Please note that financial
institutions must publicly communicate their targets six months from approval date or must have their
targets revalidated by the SBTi to ensure the targets still meet relevant criteria. A “Welcome Pack” will
be sent to the financial institution, which outlines how the targets can be showcased or communicated,
how the SBTi logo may be used, and how the SBTi approval may be referenced. Once timing is agreed,
the financial institution will be listed as having an “approved target” on our Companies Taking Action
webpage as well as on our partners’ websites at We Mean Business and CDP. Financial institutions that
are engaging in the UN Global Compact will also be recognized on this website.
Step 5: Target Disclosure
Following approval, financial institutions shall disclose their scope 1 and 2 GHG emissions, progress
against all approved targets in the relevant metric,
65
and actions/strategies taken during the year to
meet scope 3 portfolio targets on an annual basis. Recommendations for reporting include annual
reports, sustainability reports, your company’s website, and disclosure through CDP.
65
See Section 6.1 on guidance to disclose progress against targets.
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9. Discussion and Areas for Further Research
The methods, criteria, tools, and case studies presented in this document provide a framework for
guiding financial institutions’ Paris Agreement climate alignment activities. Since publication in
October 2020, this framework has provided a foundation for developing and evaluating financial
institutions’ SBTi target submissions. These targets are intended to catalyze broader financial sector
climate action and support measurable emission reductions in the real economy.
As a voluntary initiative, the SBTi provides a transparent platform for companies and financial
institutions to set targets with the understanding that these entities have information and resources
to achieve emission reductions in their specific realms of influence. Within the enabling role that
financial institutions can play in low-carbon transformation, outstanding questions remain regarding
target design, implementation strategies, policy linkages, and quantification of emissions impacts:
● Criteria described in this document present minimum requirements for target design across a
range of financial institutions and activities. Beyond minimum requirements, there is a need for
more research on the links between existing design approaches, including green investment,
engagement, and divestment targets. As financial institution targets become more prevalent
and the understanding of target design improves, the SBTi expects to update its criteria.
● In addition to target design, there are open questions on target implementation strategy
options, trade-offs, and effectiveness. Rather than prescribing particular implementation
strategies and mitigation levers, the SBTi preserves credibility and expands the evidence base by
requiring financial institutions to annually report on their chosen mitigation activities and
progress toward targets.
● In addition to company- and institution-specific situations, the trade-offs and effectiveness of
particular implementation strategies and mitigation options are also influenced by policy
linkages. Policymakers are increasingly steering financial institutions’ climate activities through a
range of mandatory and voluntary programs. However, beyond the voluntary support and
referencing illustrated in Japan, for example, the link between institution-level SBTs and
government climate programs is yet to be clearly developed.
66
● Finally, a broad area that would benefit from further research revolves around data and
methods for quantifying the emission impacts of financial institutions’ investment and lending
portfolios. Impacts are contingent on assumptions regarding additionality and attribution that
are not widely agreed upon at this point (see Cummis et al. 2018; Kölbel et al. 2019). The 2020
SBTi finance framework provides a foundation for further research to better understand and
resolve these questions.
66
See https://www.wri.org/blog/2019/06/japan-leading-business-climate-engagement-will-ambitious-policies-follow for more
information about Japan’s government-supported SBT programs.
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Following the launch of the framework, the SBTi finance sector team conducted a virtual roadshow
to present the resources to financial institutions, related peer initiatives, and other stakeholders.
The SBTi Finance team also trained the SBTi Target Validation Team (TVT) on the criteria, tool, and
related resources for FI target validation.
From 2021, the SBTi elaborated on the framework with a Phase II project focused on net-zero targets
for financial institutions, resources for additional asset classes and activities (perhaps including
underwriting and sovereign debt), a revised multimethod tool, and updates to the criteria and
reporting guidance related to the research questions described above. The SBTi net-zero framework
for financial institutions is intended to complement the SBTi net-zero framework for companies and
include a definition of net-zero for financial institutions, principles for validating net-zero targets,
case studies, and guidance on how SBTs can be used as milestones to reach net-zero. A central
consideration for financial institutions’ net-zero targets is the treatment of mitigation options
including decarbonization, carbon dioxide removals, and offsetting with carbon credits. Through
clear and robust net-zero targets, financial institutions can provide proof of concept for broader
credit and offsetting mechanisms described in Article 6 of the Paris Agreement.
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Long-term climate stabilization at the well-below 2°C level of the Paris Agreement may require the
development of a new financial system centered on carbon pricing and tradable permits. While
increasing instability, most recently related to the global COVID pandemic, is accelerating a focus on
ESG issues among financial institutions, new systems take time to establish. In the near term, the
resources described in this guidance document are intended to augment the enabling role of financial
institutions to more effectively connect climate insights and capital.
67
See https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_english_.pdf for full text of the Paris
Agreement, including Article 6.
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Appendices
This document includes six appendices describing application of the SDA for mortgages, real estate,
electricity generation project finance, corporate instruments, and the Temperature Rating method. The
final appendix provides instructions for using the tool to apply the Temperature Rating and SBT Portfolio
Coverage method (the full method description is included in Section 5.4.2).
A. SDA for Residential Mortgage
Prepared by technical partner of the SBTi financial sector project, Guidehouse, Inc.
Giel Linthorst: giel.linthorst@guidehouse.com
Angélica Afanador: angelica.afanad[email protected]
guidehouse.com
March 2021
Summary
Table A1. Summary of the Sectoral Decarbonization Approach for Residential Mortgage
Category
Framework
Scope
Target
audience
The target audience for this target setting framework are financial
institutions with portfolios of residential mortgages.
Asset class
Residential mortgage
Sectors
Targets are set at portfolio emissions for residential buildings. For a target
to qualify, it has to be set for a minimum share of the mortgage portfolio
emissions, as defined in the SBTi Target Validation Criteria for financial
institutions.
Mechanics
Inputs –
data
Annual emissions data can be sourced and estimated from disclosure of
buildings’ energy-related emissions or energy performance; or public
database on buildings’ emissions or energy performance, including the
energy consumptions of the household. When using buildings’ energy
performance data, emissions factors are required to convert energy use
(i.e., for heat and electricity) into emissions.
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Inputs –
pathways
Science-based targets are based on a global sectoral decarbonization
pathway in line with keeping global warming well-below 2°C.
Targets set using regional pathways will be assessed against global
pathways. Targets set using regional pathways can be accepted if they are
equally or more ambitious than targets set using global pathways.
Attribution
approach
When calculating financed emissions, a building’s annual emissions are
attributed to the mortgage provider using a loan-to-value approach. Thus,
the attribution is equal to the ratio of the outstanding amount at the time
of GHG accounting to the property value at loan origination.
a
Outputs
The output will be an emission intensity (per floor area) target at the
mortgage portfolio level. Example: Financial Institution A commits to
reduce its mortgage portfolio GHG emissions with ___% per m
2
by 2030
from a 2017 base year.
Portfolio
weighting
Targets are not weighted within portfolios with targets on other asset
classes.
Note:
a
PCAF 2020.
Source: Guidehouse 2020.
Scope
This methodology covers science-based targets for the portfolios of financial institutions consisting of
mortgages. A mortgage is defined as any lending agreement to purchasing a building in exchange for a
regular repayment at interest, which the lender is entitled to with the condition that the loan becomes
void upon the payment of the debt. As mortgages are mainly applied for the purchase of a residential
building, the scope of the methodology is on residential buildings, defined as buildings for a single-
family or multifamily that are used primarily for human dwelling (i.e., apartments and houses) (IEA
2013).
This methodology presents a sector-based approach to set a science-based target for the scope 3,
category 15 (investment) emissions for financial institutions. When accounting for the financed
emissions of a mortgage portfolio, these emissions are based on the energy-related emissions of the
residential building (including the energy consumption of the household) , which cover the following:
• Direct emissions from on-site fuel combustion for space heating, water heating, cooking, etc.;
and
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• Indirect emissions from purchased energy (electricity, steam, heat, and cooling) for space
heating, water heating, space cooling, lighting, cooking, appliances, and miscellaneous
equipment (i.e., including the energy use of the household).
The embodied emissions of the buildings’ materials are not currently included due to high data
uncertainty. It is recognized, though, that as new residential buildings become more energy efficient,
these emissions could become a sizable portion of buildings’ life-cycle emissions (e.g., emissions from
materials and construction could range from 35 to 51 percent depending on the building type) (RICS
2017). When robust approaches and data to measure buildings’ embodied emissions are developed, the
target setting for mortgage portfolios could expand its coverage to include them.
For setting targets on a mortgage portfolio, the Science Based Targets initiative endorses the Sectoral
Decarbonization Approach (SDA). The SDA was developed by CDP, WRI, and WWF together with
technical partner Guidehouse. In the SDA, emissions reduction targets are assessed based on sectoral
emissions reduction pathways, using the absolute emissions and activity data projection from
International Energy Agency’s (IEA) Energy Technology Perspectives (ETP). The initial SDA publication
does not include emissions reduction pathways for the residential buildings, but this method extends
SDA’s sector coverage by using IEA’s modeled data for residential buildings (SBTi 2015).
Mechanics
Data input
The first step of the science-based target setting process is defining the baseline emissions of the
residential mortgage portfolio for which a target will be set. The Partnership for Carbon Accounting
Financials (PCAF) provides GHG accounting methodologies for various asset classes, including residential
mortgages. When disclosure of buildings’ energy-related emissions is not available, emissions should be
calculated based on (average) asset-level energy use and emission factors (PCAF 2020). In principle,
setting science-based targets for residential mortgage portfolios requires the following data points:
• Data to estimate buildings’ direct energy-related emissions (i.e., energy performance certificates
or labeling, or average/estimated building energy consumption linked to on-site fuel combustion);
• Data to estimate buildings’ indirect energy-related emissions, including emissions-related energy
consumptions of the household (i.e., energy performance certificates or labeling, or
average/estimated building energy consumption linked to purchased electricity, steam, heat, and
cooling);
• Floor area
68
of current properties; and
68
Floor area here refers to the total building area as defined in IEA’s Energy Technology Perspectives 2017 (IEA 2017). Financial
institutions could possibly apply a different definition of floor area as long as it is consistent with the scenarios used to derive
the decarbonization pathway(s).
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• Portfolio growth rate in target year (optional).
There are two approaches to sourcing data to establish the baseline:
• Direct disclosure of buildings’ energy performance. Annual energy use of buildings can be
sourced from actual energy consumption collected from mortgage clients when financial
institutions have implemented such data collection systems.
69
Alternatively, annual energy use
can be estimated based on energy performance certificates or labeling, which mandatory
disclosure is in place in some countries. Floor area data could also be found as part of the legal
documents and property registrations.
• Public database on average buildings’ energy performance. There are also some sources
available to estimate the energy consumption in the case of limited data availability. Average
building energy efficiency in the region is available in publicly available databases such as the IEA
Data and Statistics, EU Buildings Database, which covers service and residential buildings in
Europe; or the EIA Residential Energy Consumption Survey 2015, which covers residential
buildings in the United States. It is important to note that using regional averages requires fewer
resources on collecting data but does not reflect portfolio-specific performance nor improvement
over time.
Measuring financed emissions of the mortgage portfolio to set the baseline should rely on asset-level data
as much as possible, filling in any data gaps with regional proxies. While data availability varies across
regions, financial institutions can assess the specificity and accuracy of the available data using a data
hierarchy (see, for example, Figure A1) and explore ways to improve data quality over time. For example,
one may focus on moving from sector average data to building specific energy-use data by refining the
mortgage application process in countries with the most mortgage exposure. Any significant changes to
the portfolio emissions should result in recalculation of the target baseline as defined in the SBTi Target
Validation Criteria for financial institutions.
Figure A1. Generic Data Quality Scorecard for Portfolio Emissions
70
69
Some financial institutions are already using data analytics to measure emissions of their clients. See example here.
70
For a residential mortgage specific score card, refer to the PCAF’s Global GHG Accounting and Reporting
Standard (PCAF, 2020)
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Sources: PCAF 2019b, 2019c, and PCAF 2020.
To translate the emissions intensity targets into an absolute target, financial institutions have to project
the annual percentage of the activity growth of their portfolio (Compound Annual Growth Rate [CAGR])
toward the target year (i.e., preferably measured in m
2
, kWh, tonne of products). Financial institutions
can project this in three ways:
1. By using the activity growth projection in the climate scenario (default growth projection). For
instance, for residential buildings, this is 2.16 percent annually in m
2
gross floor area from 2020
toward 2030 (see Table A2 and Table A3. );
2. By using the growth of their portfolio over the past 5–10 years; and
3. By using the growth projections of the specific business departments and extrapolating this
toward the target years, if this growth projection is too short term.
Decarbonization pathway
By applying the SDA, the final emissions targets (expressed in emissions intensity per m
2
or in absolute
emissions for the mortgage portfolio) shall be consistent with keeping global warming well-below 2°C.
The application of the SDA uses the IEA ETP 2017 Beyond 2°C Scenario (B2DS). The IEA models the building
sector into subsectors (residential and services buildings) based on sectoral growth and technology
development trajectory. The emissions and floor area projections from the B2DS will serve as the basis to
derive the relevant targets for mortgage portfolios. Figure A2 illustrates the B2DS emissions intensity
pathways for residential buildings.
Currently, there is no 1.5°C scenario available that is specific for the residential building. If the IEA or
another scientific body publishes a 1.5°C scenario for this sector, the Science Based Targets initiative will
consider incorporating it in the future.
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The emissions trajectory of a mortgage portfolio shall continuously decline from the base year toward the
target level, even if the emissions are below the pathway benchmark. The calculation method for the
intensity pathway will be further explained in the instructions for implementation below. Note that IEA
only provides pathways in a five-year interval; thus, a financial institution may derive the pathway data
through interpolation if the target year falls in between these five-year intervals. Also see Table A1 and
Table A2 for the data of the global B2DS pathways.
In addition, building emissions often vary across regions due to differences in emissions trajectory,
climatic zone, existing building performance and stock, urban planning and development, etc. Therefore,
financial institutions may use regional emission pathways to assess their targets. Targets modeled using
regional emission pathways will be assessed against global pathways.
Figure A2. Global Decarbonization Pathway for Residential Buildings
Source: IEA 2017.
Attribution approach
This method proposes to attribute the building’s annual emissions to the mortgage
provider using a loan-to-value approach. Thus, the attribution is equal to the ratio of the
outstanding amount at the time of GHG accounting to the property value at loan origination.
. Using a fixed property value at loan origination avoids changes in attributed emissions performances due
to fluctuating property values. This approach is consistent with the GHG accounting method for mortgages
developed by the Partnership for Carbon Accounting Financials (PCAF 2020). To align with a
decarbonization pathway, this methodology requires using the the same attribution to gross floor area of
the buildings in the mortgage portfolio to derive the emissions intensity metric (e.g., tCO
2
/m
2
).
Outputs
0
5
10
15
20
25
30
2015 2020 2025 2030 2035 2040 2045 2050
GHG Intensity (kgCO
2
/ m
2
)
B2DS Residential buildings
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The output will be an emission intensity target (per m
2
floor area) at the mortgage portfolio level. Financial
institutions can decide to translate this emissions intensity target per m
2
floor area into an absolute target
by taking the growth projection in m
2
floor area of their mortgage portfolio toward the target year into
account.
A sample target output could be, Financial Institution A commits to reduce its mortgage portfolio GHG
emissions with ___% per m
2
by 2030 from a 2017 base year.
Portfolio weighting
Targets are not weighted within the portfolio with targets on other asset classes.
Instructions for Implementation
Calculating the base year absolute emissions
The first step is to calculate the GHG emissions intensity of the mortgage portfolio in the base year.
Specifically, this involves the following steps:
1. Collecting or estimating the annual energy consumption of residential buildings, including the
energy consumption of the household in the mortgage portfolio for which the financial institution
seeks to set a target.
2. Calculating the base year scope 1 and 2 emissions per residential buildings using fuel- and energy-
specific emissions factors, such as those provided by the IEA or national energy agencies.
3. Attributing the annual scope 1 and 2 emissions per building based on the ratio between the
outstanding amount versus the total property value at time of origination; and
4. Summing up all attributed scope 1 and 2 emissions per building to derive the total annual scope
1 and 2 emissions of buildings in the mortgage portfolio.
Base year absolute emissions should be assessed at a fixed point in time in line with the financial
reporting cycle.
Calculating the base year emissions intensity
Translating the absolute emissions in the base year into an emissions intensity at portfolio level involves
the following steps:
1. Collecting the gross floor area of residential buildings (in m
2
) for which the financial institution
seeks to set a target
2. Attributing the gross floor area per building (in m
2
) based on the ratio between the outstanding
amount versus the total property value at time of origination;
3. Summing up the attributed gross floor area per building to derive total gross floor area at portfolio
level; and
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4. Dividing the total annual scope 1 and 2 emissions of buildings in the mortgage portfolio by the
total gross floor area at portfolio level.
Defining the science-based target
Science-based targets on mortgages shall be set at the portfolio level, in alignment with the global
decarbonization pathway for residential buildings. Based on the SDA approach, the current emissions
intensity of a mortgage portfolio shall converge to the same level as the sectoral decarbonization pathway
by 2050.
The emission intensity target is defined as a decrease in emissions per floor area (tCO
2
/ m
2
). The
minimum level of emission intensity decrease is derived from the global decarbonization pathway for
the residential buildings. A target-setting tool is available for the purpose of modeling SDA mortgage
targets. The tool presents two options for projecting target year output in square meter:
- Fixed market share, which assumes that the portfolio grows at the same rate as the sector.
This option is suitable for FIs who have difficulties projecting their portfolio growth.
- Target year output. This option enables FIs to input their own projected output in the target
year in square meter.
Specifically, the following formula is used to calculate the emission intensity target for a mortgage
portfolio when 1) the FI selected the “Fixed market share” option or 2) the FI selects the “Target year
output” option and the projected growth of the mortgage portfolio (measured in growth of floor area)
towards the target year is lower or equal to the sectoral growth as predicted by the IEA:
Where:
•  and  are the sectoral and portfolio emissions per floor area,
• the subsector for buildings (i.e. residential or service),
• the base year, and
• the target year.
For portfolios growing at a rate lower than the sector growth as predicted by the IEA, the market share
factor included in the original SDA formula published in the original Nature Climate Change Publication
(Krabbe et al. 2015) is removed to prevent results that would lead to increase in emissions intensity in
the accompanying target setting tool.
When the FI selects the “Target year output” option and projects a growth (measured in growth of floor
area) that’s higher than the sectoral growth, the following formula applies. This formula is the same as
the original SDA formula published in Nature Climate Change (Krabbe et al. 2015):
  
 
=

,

2050,
×

,
2050,
(
,
2050,
)
+ 
2050,
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123
























Where
•  and  are the sectoral and portfolio emissions per floor area,
•  and  the sectoral and portfolio total floor area,
• the subsector for buildings (i.e. residential or service),
• the base year, and
• the target year.
Portfolios growing at a rate higher than the sector rate are subject to a stricter intensity reduction
pathway to discount the growth in market share.
This approach allows financial institutions to converge their emissions intensity for the mortgage portfolio
to the sectoral pathway in 2050, taking into account its base year performance relative to sector intensity
in 2050, and the decarbonization level of the sector in the target year.
71
Box A1 below shows an example
calculation of an intensity target for a mortgage portfolio based on this formula.
Box A1. Example on Setting an Intensity Target for a Mortgage Portfolio
71
See the SDA methodology paper for more details (SBTI 2015).
Financial Sector Science-Based Targets Guidance
124
Note: CAGR = Compound Annual Growth Rate.
Source: Guidehouse 2020.
IEA ETP 2017 B2DS pathways – mortgage
Table A2 and Table A3 show the global floor area projections and emissions intensities pathway for
residential buildings based on the IEA ETP 2017 data.
Table A2. Emission Intensity
(kgCO
2
/m
2
)
Region
Subsector
2016
a
2025
2030
2035
2040
2045
2050
WORLD
Residential buildings
26.30
16.92
11.71
7.69
4.60
2.26
0.81
Source: IEA ETP 2017.
Table A3. Gross Floor Area
Assume a financial institution has a global mortgage portfolio of residential buildings. Based on annual
energy consumption, building certificates and other data the scope 1 + 2 emissions of these buildings
are assessed. The emission intensity of the portfolio is 37 kgCO
2
/m
2
for the total floor area of 0.95
million m
2
in 2017. The projected portfolio growth rate toward 2030 is 2% annually (CAGR), which is
lower than the sectoral growth rate.
Based on the IEA ETP B2DS, the global decarbonization pathway for residential buildings has
approximately:
• 25 kgCO
2
/m
2
at 193,862 million m
2
2017
• 12 kgCO
2
/m
2
at 257,077 million m
2
2030
• 0.81 kgCO
2
/m
2
at 339,220 million m
2
2050
To set an intensity target for 2030 converging to the 2050 sectoral emissions level:
Intensity target =














=
  


 
= 17.55 kgCO
2
/m
2
Since this portfolio started with an emission intensity higher than the sector level in 2017, this
approach allows the portfolio to stay at an intensity higher than the sectoral pathway to reduce its
emissions at a faster pace, converging to the sectoral level by 2050.
Taking the annual growth projections of 2 percent toward 2030, the mortgage portfolio will correspond
to a total floor area of 1.2 million m
2
in 2030. The emissions intensity targets can be translated into an
absolute emissions target of 21.6 kton CO
2
in 2030.
Financial Sector Science-Based Targets Guidance
125
(Million, m
2
)
Region
Subsector
2016
a
2025
2030
2035
2040
2045
2050
WORLD
Residential buildings
189,288
230,454
257,077
275,529
295,306
316,502
339,220
Note:
a. The 2016 data points are estimated based on the 2014 and 2025 data points provided by IEA, assuming linear interpolation between
the years.
Source: IEA ETP 2017.
B. SDA for Commercial Real Estate
Prepared by technical partner of the SBTi financial sector project, Guidehouse, Inc.
Giel Linthorst: giel.linthorst@guidehouse.com
Angélica Afanador: angelica.afanad[email protected]
guidehouse.com
March 2021
Summary
Table B1. Summary of the Sectoral Carbonization Approach for Commercial Real Estate
Category
Framework
Scope
Target
audience
The target audience for this target setting framework are financial
institutions with portfolios of real estate investment.
Asset class
Real estate loans and investments (including REITs).
Sectors
Targets are set at portfolio emissions for service and residential buildings.
For a target to qualify, it has to be set for a minimum share of the real
estate portfolio emissions, as defined in the SBTi Target Validation Criteria
for financial institutions.
Mechanics
Inputs –
data
Annual emissions data can be sourced and estimated from direct disclosure
of buildings’ energy-related emissions or energy performance; or public
database on buildings emissions, energy performance and energy
consumption of tenants. When using buildings’ and tenants’ energy
performance data, emissions factors are required to convert energy (i.e.,
for heat and electricity) use into emissions.
Financial Sector Science-Based Targets Guidance
126
Inputs –
pathways
Science-based targets are based on a global sectoral decarbonization
pathway in line with keeping global warming well-below 2°C.
Targets set using regional pathways will be assessed against global
pathways. Targets set using regional pathways can be accepted if they are
equally or more ambitious than targets set using global pathways.
Attribution
approach
Emissions associated with real estate loans and investments should be
attributed proportionally to the financial institutions based on the ratio
between the outstanding amount versus the total property value at time
of origination.
a
When CRE is fully financed by an asset owner, 100% of the building’s
emissions are attributed to the asset owner. When CRE is jointly financed
by a group of asset owners, the attribution is based on the share invested
by each asset owner.
a
Outputs
The output will be an emission intensity target (per gross floor area) at the
portfolio level. Example: Financial Institution A commits to reduce its real
estate portfolio GHG emissions intensity with___% per m
2
by 2030 from a
2017 base year.
Portfolio
weighting
Targets are not weighted within portfolios with targets on other asset
classes.
Note:
a
PCAF 2020.
Source: Guidehouse 2020.
Scope
This methodology covers science-based targets for the portfolios of financial institutions consisting of real
estate loans and investments. Real estate loans and investments are defined as the allocation of capital
to finance the purchase of a property with a commercial purpose, including real estate investment trust
(REIT), etc. Both residential and service buildings under real estate loans and investments are included
in this methodology. Residential buildings refer to private dwellings such as apartments and houses,
whereas service buildings include properties related to trade, finance, retail, public administration, health,
food and lodging, education, and commercial services (IEA 2013).
This methodology presents a sector-based approach to set a science-based target for scope 3, category
15 (investment) emissions for financial institutions. When accounting for the financed emissions of real
estate loan and investment portfolio, these emissions are based on the energy-related emissions of the
buildings, and the energy consumptions of the tenants (often accounted under scope 3):
Financial Sector Science-Based Targets Guidance
127
• Direct emissions from on-site fuel combustion for space heating, water heating, cooking purposes
in the full building; and
• Indirect emissions from purchased energy (electricity, steam, heat, and cooling) for space heating,
water heating, space cooling, lighting, cooking, appliances, and miscellaneous equipment. These
indirect emissions include energy use by tenants.
The embodied emissions of the buildings’ materials are not currently included due to high data
uncertainty. Therefore, this method is not applicable to construction or rehabilitation of properties. It is
recognized, though, that as new buildings become more energy efficient, these emissions could become
a sizable portion of buildings’ life-cycle emissions (e.g., emissions from materials and construction could
range from 35 to 51 percent depending on the building type) (RICS 2017). When robust approaches and
data to measure buildings’ embodied emissions are developed, the target setting for real estate could
expand its coverage to include these emissions.
For setting targets on a commercial real estate portfolio, the Science Based Targets initiative endorses the
Sectoral Decarbonization Approach (SDA). The SDA was developed by CDP, WRI, and WWF, together with
technical partner Guidehouse. In the SDA, emissions reduction targets are assessed based on sectoral
emissions reduction pathways, using the absolute emissions and activity data projection from
International Energy Agency’s (IEA) Energy Technology Perspectives (ETP).
Mechanics
Data input
The first step of the science-based target setting process is defining the base year emissions intensity (kg
CO
2
/m
2
) of the commercial real estate portfolio for which a target will be set. A 2020 report by the
Partnership for Carbon Accounting Financials (PCAF) detailed the carbon accounting methodology for
various asset classes, including commercial real estate. When direct disclosure of buildings’ energy-
related emissions and tenants’ energy-related emissions are not available, emissions should be
calculated based on (average) asset-level and average tenants energy use and emission factors (PCAF
2020). In principle, setting science-based targets for real estate portfolios requires the following data
points:
• Data to estimate buildings’ direct energy-related emissions (i.e., energy performance certificates
or labeling, or average/estimated building energy consumption linked to on-site fuel combustion);
• Data to estimate buildings’ indirect energy-related emissions (i.e., energy performance
certificates or labeling, or average/estimated energy consumption linked to purchased electricity,
steam, heat and cooling, including the energy consumption of the tenants);
• Outstanding loan or investment amount of properties;
• Property values at the time of investment;
Financial Sector Science-Based Targets Guidance
128
• Building type (i.e., residential or service);
• Floor area
72
of current properties; and
• Portfolio growth rate in target year (optional).
When there is no disclosure of building’s energy-related emissions by, for instance, the tenant or property
manager, there are two approaches to estimate these emissions for establishing the baseline:
• Based on buildings’ energy performance (asset-level data). Annual energy consumption of
buildings and tenants can be sourced from energy bills collected from tenants when financial
institutions have implemented such data collection systems. Alternatively, annual energy
consumption can be estimated based on energy performance certificates or labeling, a mandatory
disclosure that is in place in some countries. Floor area data can be found as part of the legal
document and property registration of the real estate.
• Public database on average buildings’ energy performance. There are also some sources
available to estimate the energy consumption in the case of limited data availability. Average
building energy efficiency in the region is available in publicly available databases such as (i) the
Global Services Real Estate Sustainability Benchmark (GRESB) (global service buildings, but
subscription is required), (ii) EU Buildings Database (service and residential buildings in Europe),
(iii) EIA Residential Energy Consumption Survey 2015 (residential buildings in the United States),
and (iv) EIA Commercial Buildings Energy Consumption Survey 2012 (service buildings in the
United States). Using regional averages requires fewer resources on collecting data but does not
reflect performance specific to the portfolios nor improvement over time.
Measuring financed emissions of the commercial real estate portfolio to set the baseline should rely on
asset-level data as much as possible, filling in any data gaps with regional proxies.
While data availability varies across regions, financial institutions can assess the specificity and accuracy
of available data using a data hierarchy (see, for example, Figure B1) and explore ways to improve data
quality over time. For example, one may focus on moving from sector average data to building-specific
energy-use data by refining the due diligence or loan application process in countries with the most real
estate exposure. Any significant changes to the portfolio emissions should result in recalculation of the
target baseline as defined in the SBTi Target Validation Criteria for financial institutions.
72
Floor area here refers to the total building area (gross floor area) as defined in IEA’s Energy Technology Perspectives 2017
(IEA 2017). Financial institutions could possibly apply a different definition of floor area as long as it is consistent with the
scenarios used to derive the decarbonization pathway(s).
Financial Sector Science-Based Targets Guidance
129
Figure B1. Generic Data Quality Scorecard for Portfolio Emissions
73
Sources: PCAF 2019b, 2019c, and PCAF 2020.
To translate the emission intensity targets into an absolute target, financial institutions have to project
the annual percentage of the activity growth of their portfolio (Compound Annual Growth Rate [CAGR])
toward the target year (i.e., preferably measured in m
2
, kWh, tonne of products). Financial institutions
can project this in three ways:
1. By using the activity growth projection in the climate scenario (default growth projection). For
instance, for residential buildings, this is 2.16 percent annually in m
2
gross floor area from 2020
toward 2030, and for service buildings this is 2.15 percent annually in m
2
gross floor area from
2020 toward 2030 (see Table B2 and Table B3);
2. By using the growth of their portfolio over the past 5–10 years; and
3. By using the growth projections of the specific business departments and extrapolating this
toward the target years, if this growth projection is too short term.
Decarbonization pathway
By applying the SDA, the final emission targets (expressed in emissions intensity per m
2
or in absolute
emissions for the real estate portfolio) have to be consistent with keeping global warming well-below 2°C.
The application of the SDA uses the IEA ETP 2017 Beyond 2°C Scenario (B2DS). The IEA models the building
sector into subsectors (residential and services buildings) based on sectoral growth and technology
development trajectory. The emissions and floor area projections from the B2DS will serve as the basis to
derive the relevant targets for real estate. Figure B2 illustrates the B2DS emissions intensity pathways for
residential and service buildings.
73
For a commercial real estate specific score card, refer to the PCAF’s Global GHG Accounting and Reporting Standard (PCAF,
2020)
Financial Sector Science-Based Targets Guidance
130
Currently, there is no 1.5°C scenario available, specific for residential buildings. If the IEA or another
scientific body publishes a 1.5°C scenario for this sector, the Science Based Targets initiative will consider
incorporating it in the future.
The emissions trajectory of a commercial real estate portfolio shall continuously decline from the base
year toward the target level, even if the emissions are below the pathway benchmark. The calculation
method for portfolio emission intensity pathway will be further explained in the instructions for
implementation below. Note that IEA only provides the data of ETP pathways in a five-year interval; thus,
financial institutions may derive the pathway data through interpolation if the target year falls in between
these five-year intervals. Also see Table B2 and Table B3 for the data of the global ETP B2DS pathways.
In addition, building emissions often vary across regions due to differences in emissions trajectory,
climatic zone, existing building performance and stock, urban planning and development, etc. Therefore,
financial institutions may use regional emission pathways to assess their targets. Targets modeled using
regional emission pathways will be assessed against global pathways.
Figure B2. Global Decarbonization Pathway for Buildings
Note: B2DS = Beyond 2°C Scenario.
Source: IEA 2017.
Attribution approach
This methodology attributes emissions associated with commercial real estate loan and investments
proportionally based on the ratio between the outstanding loan or investment amount versus the total
property value at the time of loan or investment origination. When the commercial real estate investment
is fully financed by an asset owner, 100% of the building’s emissions are attributed to the asset owner.
When the investment is jointly financed by a group of asset owners, the attribution is based on the share
invested by each asset owner. This approach is consistent with the GHG accounting method for real estate
0
10
20
30
40
50
60
70
80
2015 2020 2025 2030 2035 2040 2045 2050
GHG Intensity (kgCO
2
/ m
2
)
B2DS Service buildings
B2DS Residential buildings
Financial Sector Science-Based Targets Guidance
131
developed by the Partnership for Carbon Accounting Financials (PCAF 2019b, 2019c, and PCAF 2020). To
align with the IEA decarbonization pathway for the building sector, this methodology requires using the
same attribution to the gross floor area of the buildings in the real estate portfolio in order to derive the
emissions intensity (e.g., tCO
2
/m
2
).
Outputs
The output will be an emissions intensity target (per m
2
floor area) at the commercial real estate portfolio
level, split between residential and service buildings if relevant to the financial institutions. Financial
institutions can decide to translate this emissions intensity target per m
2
floor area into an absolute target
by taking into account the growth projection in m
2
floor area of their real estate portfolio toward the
target year.
A sample target output could be, Financial Institution A commits to reduce its real estate portfolio GHG
emissions with ___% per m
2
by 2030 from a 2017 base year.
Portfolio Weighting
Targets are not weighted within the portfolio with targets on other asset classes.
Instructions for Implementation
Calculating the base year absolute emissions
The first step is to calculate the annual GHG emissions of the commercial real estate portfolio in the base
year. Specifically, this involves the following steps:
1. Collecting or estimating the annual energy consumption of buildings (including the energy
consumption of the tenants) for which the financial institution seeks to set a target, if relevant,
split between residential and service buildings in the portfolio;
2. Calculating the base year scope 1 and 2 emissions and scope 3 tenant’s energy-related emissions
per building using fuel- and energy-specific emissions factors, such as those provided by the IEA
or national energy agencies;
3. Attributing the annual scope 1,2 and scope 3 tenant’s energy-related emissions per building based
on the ratio between the outstanding amount versus the total property value at time of
origination; and
4. Summing up all scope 1,2 and scope 3 tenant’s energy-related emissions per building to derive
the total annual absolute emissions of buildings in the real estate portfolio.
Base year absolute emissions should be assessed at a fixed point in time in line with the financial reporting
cycle.
Financial Sector Science-Based Targets Guidance
132
Calculating the base year emissions intensity
Translating the emissions in the base year into an emissions intensity at portfolio level involves the
following steps:
1. Collecting of the gross floor area of buildings (in m
2
) for which the financial institution seeks to set
a target, if relevant split between residential and service buildings in the portfolio;
2. Attributing the gross floor area per building (in m
2
) based on the ratio between the outstanding
amount versus the total property value at time of origination;
3. Summing up the attributed gross floor area per building to derive total gross floor area at portfolio
level; and
4. Dividing the total annual absolute emissions at portfolio level by the total gross floor area at
portfolio level.
Defining the science-based target
Science-based targets on real estate investments shall be set at the real estate portfolio level, in alignment
with the global decarbonization pathway for residential and/or service buildings. Based on the SDA
approach, the current emissions intensity of a real estate portfolio shall converge to the same level as the
sectoral decarbonization pathway by 2050.
The emission intensity target is defined as a decrease in emissions per floor area (tCO
2
/m
2
). The minimum
level of emission intensity decrease is derived from the global decarbonization pathway for the residential
and service buildings.
A target-setting tool is available for modeling SDA real estate targets. The tool presents two options for
projecting target year output in square meter:
- Fixed market share, which assumes that the portfolio grows at the same rate as the sector.
This option is suitable for FIs who have difficulties projecting their portfolio growth.
- Target year output. This option enables FIs to input their own projected output in the target
year in square meter.
Specifically, the following formula is used to calculate the emission intensity target for a commercial real
estate portfolio when 1) the FI selected the “Fixed market share” option or 2) the FI selects the “Target
year output” option and the projected growth of the real estate portfolio (measured in growth of floor
area) towards the target year is lower or equal to the sectoral growth as predicted by the IEA:
Where:
•  and  are the sectoral and portfolio emissions per floor area,
• the subsector for buildings (i.e. residential or service),
  
 
=

,

2050,
×

,
2050,
(
,
2050,
)
+ 
2050,
Financial Sector Science-Based Targets Guidance
133
• the base year, and
• the target year.
For portfolios growing at a rate lower than the sector growth as predicted by the IEA, the market share
factor included in the original SDA formula published in the original Nature Climate Change Publication
(Krabbe et al. 2015) is removed to prevent results that would lead to increase in emissions intensity in
the accompanying target setting tool.
When the FI selects the “Target year output” option and projects a growth (measured in growth of floor
area) that’s higher than the sectoral growth, the following formula applies. This formula is the same as
the original SDA formula published in Nature Climate Change (Krabbe et al. 2015):
























Where
•  and  are the sectoral and portfolio emissions per floor area,
•  and  the sectoral and portfolio total floor area,
• the subsector for buildings (i.e. residential or service),
• the base year, and
• the target year.
Portfolios growing at a rate higher than the sector rate is subject to a stricter intensity reduction
pathway to discount the growth in market share.
This approach allows financial institutions to converge their emissions intensity for the real estate
portfolio to the sectoral pathway in 2050, taking into account its base-year performance relative to
sector intensity in 2050, and the decarbonization level of the sector in target year. Box B1 below shows
an example calculation of an intensity target.
Box B1. Example on Setting an Intensity Target for a Real Estate Portfolio
Financial Sector Science-Based Targets Guidance
134
Note: CAGR = Compound Annual Growth Rate.
Source: Guidehouse 2020.
IEA ETP 2017 B2DS pathways – real estate
The following tables provide the global emissions intensities and the global gross floor area pathways
based on the IEA ETP 2017 data.
Assume a financial institution has a global commercial real estate portfolio of various
service buildings. Based on energy consumption, building certificates, or other data, the
emissions of these buildings are assessed. Taking the attribution factor per building into
account, the emission intensity of the portfolio is 117 kgCO
2
/m
2
for the total floor area
of 2.4 million m
2
in 2017. The projected annual portfolio growth rate toward 2030 is 2
percent (CAGR), which is lower than the sectoral growth rate.
Based on the IEA ETP B2DS, the global decarbonization pathway for service buildings
has the following approximate emissions:
• 71 kgCO
2
/m
2
at 47,404 million m
2
, in 2017
• 27 kgCO
2
/m
2
at 62,760 million m
2
2030
• 1 kgCO
2
/m
2
at 81,039 million m
2
2050
To set an intensity target for 2030 converging to the 2050 sector level:
Intensity target =














=
  


 
= 44 kgCO
2
/m
2
Since this portfolio started with an emission intensity higher than the sector level in
2017, this approach allows the portfolio to stay at an intensity higher than the sectoral
pathway to reduce its emissions at a faster pace, converging to the sectoral level by
2050.
Taking the annual growth projections of 2 percent toward 2030, the commercial real
estate portfolio will correspond to a total floor area of 3.1 million m
2
in 2030. The
emissions intensity targets can be translated into an absolute emissions target of 136.6
kton CO
2
in 2030.
Financial Sector Science-Based Targets Guidance
135
Table B2. Emission Intensity
(kgCO
2
/m
2
)
Region
Subsector
2016
a
2025
2030
2035
2040
2045
2050
WORLD
Service buildings
75.64
42.56
26.97
17.33
9.71
4.21
1.00
WORLD
Residential buildings
26.30
16.92
11.71
7.69
4.60
2.26
0.81
Source: IEA ETP 2017.
Table B3. Gross Floor Area
(Million, m
2
)
Region
Subsector
2016
a
2025
2030
2035
2040
2045
2050
WORLD
Service buildings
46,292
56,296
62,760
66,901
71,316
76,022
81,039
WORLD
Residential buildings
189,288
230,454
257,077
275,529
295,306
316,502
339,220
Note:
a
The 2016 data points are estimated based on the 2014 and 2025 data points provided by IEA, assuming linear interpolation
between the years.
Source: IEA ETP 2017.
C. SDA Electricity Generation Project Finance
Prepared by technical partner of the SBTi financial sector project, Guidehouse, Inc.
Giel Linthorst: giel.linthorst@guidehouse.com
Angélica Afanador: angelica.afanad[email protected]
guidehouse.com
November 2020
Summary
Table C1. Summary of the Sectoral Decarbonization Approach for Electricity Generation Project Finance
Category
Framework
Scope
Target
audience
The target audience for this target-setting framework are financial
institutions with project finance portfolios in the power sector.
Asset class
Project finance for electricity generation.
Sectors
Targets are set at portfolio emissions for project finance for the power
sector. For a target to qualify, it has to be set for a minimum share of the
Financial Sector Science-Based Targets Guidance
136
financed emissions from portfolio of electricity generation project finance,
as defined in the SBTi Target Validation Criteria for financial institutions.
Mechanics
Inputs –
data
Annual emissions data can be sourced and estimated from direct disclosure
of projects’ GHG emissions or fuel use; or public database on average
emissions factors for power generation.
Inputs –
pathways
Science-based targets are derived from a global sectoral decarbonization
pathway in line with keeping global warming well-below 2°C.
Targets set using regional pathways will be assessed against global
pathways. Targets set using regional pathways can be accepted if they are
equally or more ambitious than targets set using global pathways.
Attribution
approach
The financial institution accounts for a portion of the annual emissions of
the financed project determined by the ratio between the institution’s
outstanding amount (numerator) and the total equity and debt of the
financed project (denominator).
a
Outputs
The output will be an emission intensity target (gCO
2
/kWh) at the portfolio
level. Example: Financial Institution A commits to reduce its electricity
generation project finance portfolio GHG emissions with ___% per kWh by
2030 from a 2017 base year.
Portfolio
weighting
Targets are not weighted within portfolios with targets on other asset
classes.
Note:
a
PCAF 2020.
Source: Guidehouse 2020.
Scope
This methodology covers science-based targets for the financial portfolios of financial institutions
consisting of project finance for electricity generation. Project finance is defined as equity or loan
(including mezzanine debt) with known use of proceeds that are designated for a clearly defined activity
or set of activities, that is, the construction and operations of a project to generate electricity.
The scope of the methodology covers projects contributing to electricity generation from fuels such as oil,
coal, natural gas, nuclear, biomass and waste, hydro, geothermal, wind, solar photovoltaics (PV) and
concentrate solar power (CSP), ocean, hydrogen, and other (IEA 2017). Treatment of investments leading
to negative emissions from the power sector, such as bioenergy with carbon capture and storage (BECCS)
and carbon capture and storage (CCS) are currently out of scope. This topic will be revisited once the GHG
Protocol removal guidance is developed and as part of the SBTi’s net-zero target discussion.
Financial Sector Science-Based Targets Guidance
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Project finance for other types of projects are currently out of scope in this methodology and will be
considered in the future.
This methodology details how to align emissions of the underlying projects in the power sector with a
low-carbon transition pathway toward well-below 2°C or toward 1.5°C. It applies the decarbonization
pathway of power generation to the portfolio of underlying projects and is applicable to pathways from
any transition scenarios available in the market.
74
The emissions subject to target setting are scope 1 and 2 emissions from the underlying projects:
• Scope 1: Direct emissions from on-site fuel combustion for electricity generation; and
• Scope 2: Indirect emissions from project’s own use of purchased steam, heat, and electricity for
electricity generation, if any.
Note that Scope 3 emissions (such as embodied carbon in materials and emissions from waste) are not
included in this methodology due to high data uncertainty. When robust approaches and data to measure
scope 3 emissions of these projects are well developed, the target setting for electricity generation
portfolios could expand its coverage to include scope 3 emissions.
Published well-below 2°C alignment methodologies for project finance are currently spread across
research on different project types. Some existing work focuses on the necessary capacity for certain
technologies and the required amount of investment per sectors for the alignment. For setting targets on
an electricity generation project finance portfolio, the Science Based Targets initiative endorses the
Sectoral Decarbonization Approach (SDA). The SDA was developed by CDP, WRI, and WWF, together with
technical partner Guidehouse. In the SDA, emissions reduction targets are assessed based on sectoral
emissions reduction pathways, using the absolute emissions and activity data projection from
International Energy Agency’s (IEA) Energy Technology Perspectives (ETP). In the SDA a decarbonization
pathway for the power sector is included (IEA 2017). In June 2020, the Science Based Targets initiative,
with technical support from Guidehouse, published a quick start guide for electric utilities to set 1.5°C-
aligned science-based targets using the SDA (SBTi 2020e).
Mechanics
Data input
The first step of the science-based target setting process is defining the baseline emissions of the portfolio
of electricity generation projects for which a target will be set. PCAF’s Global GHG Accounting and
74
For example, the Energy Technology Perspectives (ETP) and World Energy Outlook (WEO) by the International Energy Agency
(IEA), International Renewable Energy Agency (IRENA) Remap, Greenpeace Advanced Energy [R]evolution, etc. (TCFD 2017).
Financial Sector Science-Based Targets Guidance
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Reporting Standard provides GHG accounting methods for various asset classes, including project finance.
According to the Standard, project’s emissions should be calculated based on asset-level energy use and
emission factors. These emissions are attributed to the financial institution by the ratio between the
institution’s outstanding amount (numerator) and the total equity and debt of the financed project
(denominator) (PCAF 2020).
In principle, setting science-based targets for electricity generation project finance portfolios requires the
following data points:
• Scope 1 emissions from electricity generation projects;
• Scope 2 emissions from electricity generation projects;
• Outstanding loan or investment per project;
• Total project size per project (equity, debt, and mezzanine);
• (Estimated) annual electricity production per project (kWh); and
• (Estimated) future electricity production of portfolio (kWh) or portfolio growth target
(percentage) toward the target year (optional).
There are two approaches to sourcing data to measure emissions:
• Disclosure of projects’ energy use or GHG emissions. Fuel type, annual electricity generation
(e.g., MWh), annual GHG emissions, installed capacity (e.g., MW) or operating hours of electricity
generation projects are often included in project descriptions. Actual annual fuel use and emission
data of each project are most accurate and effective to reflect any improvement over time.
• Public database on average emissions factors for power generation. Sources such as IEA,
national energy agencies, or utilities often provide average emission factors for electricity
generation by regions or fuel type. Financial institutions could use these proxies to estimate the
emissions for power generation projects if they have the annual output (e.g., MWh) of projects
by fuel type or region. Using regional averages requires fewer resources on collecting data but
does not reflect performance specific to the portfolios nor improvement over time.
Science-based target analysis for electricity generation projects should rely on asset-level data as much
as possible and fill in any data gaps with regional proxies.
While data availability varies across regions, financial institutions could assess the specificity and accuracy
of the available data using a data hierarchy (see, for example, Figure C1 and explore ways to improve data
quality over time. For example, one may focus on moving from sector average data to region- or project-
specific energy use data by refining the due diligence or loan application process in countries with the
most project finance exposure. Any significant changes to the portfolio emissions should result in
recalculation of target baseline as defined in the SBTi Target Validation Criteria for financial institutions.
Financial Sector Science-Based Targets Guidance
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Figure C1. Generic Data Quality Scorecard for Portfolio Emissions
75
Sources: PCAF 2019b, 2019c, and PCAF 2020.
To translate the emissions intensity targets into an absolute target, financial institutions have to project
the annual percentage of the activity growth of their portfolio (Compound Annual Growth Rate [CAGR])
toward the target year (i.e., preferably measured in m
2
, kWh, tonne of products). Financial institutions
can project this in three ways:
1. By using the activity growth projection in the climate scenario (default growth projection). For
instance, for electricity generation projects, this is 1.69 percent in kWh from 2020 toward 2030
(see Table C2);
2. By using the growth of their portfolio over the past 5–10 years; and
3. By using the growth projections of the specific business departments and extrapolating this
toward the target years, if this growth projection is too short term.
Decarbonization pathway
By applying the SDA, the final emission targets, expressed in emissions intensity (gCO
2
/kWh), have to be
consistent with keeping global warming well-below 2°C.
The SDA for the power sector details how to align emissions of investments in electricity generation
projects with a decarbonization pathway toward well-below 2°C and uses the IEA ETP Beyond 2°C Scenario
(B2DS). The IEA models the power sector based on sectoral growth and technology development
trajectories. The emissions and electricity growth projections from the B2DS will serve as the basis to
derive the relevant targets for electricity generation project finance. Figure C2 illustrates the emissions
intensity pathways for the power sector in the B2DS.
75
For a project finance specific score card, refer to the PCAF’s Global GHG Accounting and Reporting Standard
(PCAF, 2020)
Financial Sector Science-Based Targets Guidance
140
The emissions intensity trajectory of a project portfolio in the power sector shall continuously decline
from the base year toward the target level, even if the emissions are below the pathway benchmark. The
calculation method will be further explained in the instructions for implementation. Note that IEA only
provides pathways in a five-year interval, financial institutions may derive the pathway data through
interpolation if the target year falls in between these five-year intervals. Also see Table C2 for the data on
the global B2DS pathway.
Figure C2. Global Decarbonization Emission Pathway for the Power Sector
Source: IEA 2017.
Attribution approach
Attribution of projects’ emissions to a financial portfolio is based on the ratio of outstanding loan or
investment over the total project size on an annual basis (e.g., 2018 project emissions x 2018 year-end
outstanding loan/project’s total size [equity + debt]) (PCAF 2019b, 2019c, and PCAF 2020). This approach
is consistent with the GHG accounting method for project finance developed by the Partnership for
Carbon Accounting Financials (PCAF 2020). To align with a decarbonization pathway, this methodology
requires using the total electricity output (e.g., kWh) to derive the emissions intensity of electricity
generation projects (i.e., gCO
2
/kWh).
Outputs
The output will be an emissions intensity target (in gCO
2
/kWh) at the portfolio level of all electricity
generation projects. Financial institutions can decide to translate this emissions intensity target per kWh
-100
0
100
200
300
400
500
600
700
2014 2024 2034 2044
GHG Intensity (gCO
2
/ kWh)
B2DS power generation
Financial Sector Science-Based Targets Guidance
141
into an absolute target by taking the growth projection in kWh of FIs’ electricity generation project
portfolio toward the target year into account.
A sample target output could be, Financial Institution A commits to reduce the GHG emissions of its
electricity generation project finance portfolio with ___% per kWh by 2030 from a 2017 base year.
Portfolio weighting
Targets are not weighted within the portfolio with targets on other asset classes.
Instructions for Implementation
To assess the science-based targets for electricity generation project finance, financial institutions can use
the SDA in the general Science-based Target Setting Tool (Version 1.1) that is available on the Science
Based Targets website. Next to this resource, also the quick start guide for electric utilities to set 1.5°C-
aligned science-based targets using the SDA (SBTi 2020e) is a valuable resource, including the updated
SDA Tool to set targets in line with 1.5°C.
As input into this tool, base year financed emissions and base year output should be calculated following
the instructions below.
Calculating the base year financed emissions
The first step is to calculate the annual financed GHG emissions of the portfolio of electricity generation
projects in the base year. Specifically, this involves the following steps:
1. Collecting or estimating the fuel and energy use of each electricity generation project in the
portfolio for which the financial institution seeks to set a target.
2. Calculating the base year scope 1 and 2 emissions per project using fuel- and energy-specific
emissions factors, such as those provided by the IEA or national energy agencies.
3. Attributing the annual scope 1 and 2 emissions per project based on the ratio between the
institution’s outstanding amount (numerator) and the total equity and debt of the financed
project (denominator). The result is financed emissions of the financial institution’s project
finance portfolio.
4. Summing up all scope 1 and 2 financed emissions per project to derive the total annual scope 1
and 2 financed emissions at portfolio level.
Base year financed emissions of all electricity generation project finance in the portfolio should be
assessed at a fixed point in time in line with the financial reporting cycle.
Calculating the base year output
Financial Sector Science-Based Targets Guidance
142
Next to emissions, base year output should also be provided as input in the Science-based Target Setting
Tool. Calculating the base year output should involve the following steps:
1. Collecting or estimating the annual electricity generated (in kWh) of the portfolio of electricity
generation projects for which the financial institution seeks to set a target;
2. Attributing the annual electricity generated (in kWh) based on the ratio between the outstanding
amount versus the total project size (equity + debt); and
3. Summing up the attributed annual electricity generated (in kWh) per project to derive total annual
electricity generated (in kWh) at the portfolio level.
Defining the science-based target
Science-based targets shall be set at the electricity generation project portfolio level, in alignment with
the decarbonization pathway for power generation. Based on the SDA approach, the base year
emissions intensity of an electricity generation project finance portfolio shall converge to the same level
as the power decarbonization pathway by 2050.
The emission intensity target is defined as a decrease in emissions per electricity production (gCO
2
/kWh).
The minimum level of emission intensity decrease is derived from the global decarbonization pathway for
the power sector.
The following formula is used to calculate the emission intensity target for an electricity generation project
finance portfolio when the projected growth of the project finance portfolio (measured in kWh) towards
the target year is lower or equal to the sectoral growth as predicted by the IEA (Table C2),:
76













Where:
•  and  are the sectoral and portfolio emissions per kWh;
• the base year; and
• the target year.
When the projected growth of the project finance portfolio (measured in kWh) towards the target year
is higher than the sectoral growth, the following formula applies:

















Where
•  and  are the sectoral and portfolio emissions per kWh,
76
After the publication of the SDA in Nature Climate Change, the SBTi simplified the formula by removing the correction factor
for changes in market share to prevent a potential increase of emissions intensity when growth is projected lower as sectoral
growth. This adjustment is documented in Box 4 in the Foundations of SBT setting paper.
Financial Sector Science-Based Targets Guidance
143
•  and  the sectoral and portfolio total kWh,
• the base year, and
• the target year.
This approach allows financial institutions to converge their emissions intensity for their electricity
generation project portfolio to the sectoral pathway in 2050, taking into account its base year
performance relative to sector intensity in 2050, and the decarbonization level of the sector in the
target year.
77
Box C1. Example on Setting an Intensity Target for an Electricity Generation Project Finance Portfolio
Note: CAGR = Compound Annual Growth Rate.
Source: Guidehouse 2020.
Global B2DS pathway – project finance
77
See the SDA methodology paper for further details (SBTi 2015).
Assume a financial institution has a project finance portfolio of various electricity generation projects.
Based on electricity output and fuel type, the emissions of these projects are assessed. The emission
intensity of the portfolio is 600 gCO
2
/kWh for the total electricity production of 15 TWh
in 2017. The
annual projected portfolio growth rate for 2030 is 1 percent (CAGR), which is lower than the sectoral
growth rate.
Based on the IEA ETP B2DS, the global decarbonization pathway for power generation has
approximately:
• 497 gCO
2
/kWh at 25,062 TWh in 2017
• 229 gCO
2
/kWh at 30,959 TWh in 2030
• -8 gCO
2
/kWh at 44,321 TWh in 2050
To set an intensity target for 2030 converging to the 2050 sectoral emissions level:
Intensity target =











=
  


 
= 277 gCO
2
/kWh
Since this portfolio started with an emission intensity higher than the sector level in 2017, this
approach allows the portfolio to stay at an intensity higher than the sectoral pathway to reduce its
emissions at a faster pace, converging to the sectoral level by 2050.
Financial Sector Science-Based Targets Guidance
144
Here are the global activity and emissions intensities pathway based on the IEA ETP 2017 data:
Table C2. Global Electricity Production and Emission Intensity
Power generation
2014
2025
2030
2035
2040
2045
2050
Production (TWh)
23,819
28,377
30,959
33,825
37,015
40,481
44,321
Emission intensity (gCO
2
/
kWh)
572.02
330.18
228.79
140.69
71.91
20.35
-8.02
Source: IEA ETP 2017.
D. SDA for Corporate Debt and Equity
Prepared by technical partner of the SBTi financial sector project, Guidehouse, Inc.
Giel Linthorst: giel.linthorst@guidehouse.com
Angélica Afanador: angelica.afanad[email protected]
guidehouse.com
March 2021
Summary
Table D1. 1 Summary of the Sectoral Decarbonization Approach for Corporate Debt and Equity
Category
Framework
Scope
Target
audience
The target audience for this target setting framework are financial
institutions with portfolios of financial assets issued by companies.
Asset classes
Corporate debt, listed equity and bonds, and private equity and
debt.
Sectors
Targets are set at individual sector level within the portfolio, for
which specific Sectoral Decarbonization Approaches (SDA) are
available (i.e., electricity, iron and steel, cement, aluminum, pulp
and paper, transport, and service buildings).
Mechanics
Inputs –
company data
The SDA requires physical activity and emissions data per sector.
Activity and GHG emissions data can be sourced from direct
emission disclosures by issuers/clients; and/or business
intelligence databases (e.g., asset-level data).
Inputs –
scenarios
Global decarbonization pathways of the sectors for which targets
will be set, i.e., the IEA ETP 2017 B2DS scenarios are the basis of
the SDA.
Financial Sector Science-Based Targets Guidance
145
Allocation
approaches
As a basic attribution principle, the financial institution accounts
for a portion of the annual emissions of the financed company
determined by the ratio between the institution’s outstanding
amount (numerator) and the value of the financed company
(denominator). as follows:
a
.
• For listed companies the attribution is the ratio of
outstanding amount versus the Enterprise Value Including
Cash (EVIC
78
).
• For private companies the attribution is the ratio of
outstanding amount versus the total balance sheet (i.e.,
equity + debt).
Outputs
The output will be an emission intensity target at the portfolio
level. Example: Financial Institution A commits to reduce CO
2
e
emissions from the steel sector in its equity portfolio with ___%
per tonne of steel by 2030 from a 2017 base year.
Note:
a
PCAF 2020.
Source: Guidehouse 2020.
Scope
This methodology covers science-based targets for the financial portfolios consisting of corporate debt,
listed equity and bonds, and private equity and debt. The methodology presents a sector-based
approach to set a science-based target for the scope 3, category 15 (investments) emissions for financial
institutions. When accounting for the emissions of a portfolio of listed equity, private equity, corporate
bonds, and corporate loans, these emissions are based on the scope 1 and 2 emissions of the assets in
each sector covered.
• Scope 1: Direct emissions from sources (i.e., on-site fuel combustion) owned or controlled by the
company (i.e., investee or borrower).
• Scope 2: Indirect emissions from purchased energy (electricity, steam, heat, and cooling) by the
company (i.e., investee or borrower).
• Scope 3, where relevant: FIs shall refer to relevant SBTi sector-specific guidance for inclusion of
portfolio companies’ scope 3 emissions in targets. For instance, the scope 3 ‘use of sold products’
78
EVIC is defined as: The sum of the market capitalization of ordinary shares at fiscal year-end, the market capitalization of
preferred shares at fiscal year-end, and the book values of total debt and minorities’ interests. No deductions of cash or cash
equivalents are made to avoid the possibility of negative enterprise values.
Financial Sector Science-Based Targets Guidance
146
emissions of auto manufacturers shall be included in FIs’ targets (see Table 3-1 of the SBT
manual).
79
Sector targets are set at individual sector level within the portfolio, for which specific Sectoral
Decarbonization Approaches (SDA) are available. It is expected that there will be portions of the
portfolio that are not covered by the SDA.
Mechanics
Data Input
To assess the science-based targets for a portfolio of corporate instruments, financial institutions can use
the SDA in the general Science-based Target Setting Tool Version 1.1), or the specific SDA Transport Tool
that is available on the Science Based Targets website. In addition, the quick start guide for electric utilities
to set 1.5°C-aligned science-based targets using the SDA (SBTi 2020e) is a valuable resources for corporate
instruments to electric utilities.
As input into these tools, base year emissions and base year activity/output should be calculated
following the instructions below.
The first step of the process is defining the base year emissions of the portfolio for which a target will be
set. PCAF’s Global GHG Accounting and Reporting Standard details the emissions accounting methods for
various asset classes, including listed equity and corporate bonds, and business loans and unlisted equity
(PCAF 2020).
In principle, setting science-based target for these asset classes requires the following data points:
• Company’s disclosed annual scope 1 and 2 emissions, and scope 3 emissions where relevant (e.g.,
company sustainability report or verified third-party data providers); alternatively, company
physical activity data that serves to estimate scope 1 and 2 emissions, and scope 3 emissions
where relevant, in the base year;
• Annual activity or output data per company in the base year (e.g., MWh, building gross floor area,
tonne-km transported, passenger-km traveled, tonne of product, etc.);
• Outstanding amount (equity and/or debt) per company;
• Enterprise value including cash (EVIC) or balance sheet total per company; and
79
The Global GHG Accounting and Reporting Standard for the financial industry provides methods for measuring emissions
associated with these asset classes. It includes scope 1 and 2 emissions for all sectors and the phase-in of scope 3 emissions for
business loans and listed equity and corporate bonds, in line with the recommendation for the EU Benchmark by the EU
Technical Expert Group (TEG) on sustainable finance sector list. In practice this means a gradual phase-in of scope 3 emissions
of lenders and investees over five years. Starting with the most carbon-intensive sectors (oil, gas, and mining) from 2021.
Financial Sector Science-Based Targets Guidance
147
• Portfolio growth rate per sector in target year .
When direct disclosure of scope 1 and 2 emissions (and scope 3 emissions where relevant) is not available,
emissions can be calculated via two approaches (PCAF 2020):
▪ Approach 1: Physical activity-based emissions: Primary physical activity data of the investee or
borrower (e.g., MWh of natural gas consumed or tonne of steel produced) are converted to
emissions, using verified emission factors expressed per physical activity (e.g., tCO
2
e/MWh or
tCO
2
e/t of steel), issued or approved by a credible independent body.
▪ Approach 2: Economic activity-based emissions: Economic activity data of the investee or borrower
(e.g., EUR of turnover or EUR of asset) are converted to emissions, using official statistical data
and/or acknowledged environmentally extended input-output (EEIO) tables providing region-
/sector-specific average emission factors expressed per economic activity (e.g., tCO
2
e/EUR of
revenue or tCO
2
e/EUR of asset).
80
It is important to note, that from a data quality perspective, approach 2 is preferred when emissions
disclosure is not available to the financial institution.
While data availability varies across regions, financial institutions can assess the specificity and accuracy
of the available data using a data hierarchy (see Figure D1 as an example) and explore ways to improve
data quality over time.
80
Sampling tests based on actual data on company level, which is extrapolated to portfolio level, can help test the accuracy of
calculations based on this data from statistics and/or EEIO tables. This may also be used to refine the data for specific sectors or
regions, if the reporting financial institution has a strong presence in and specific knowledge of the respective sector and/or
region. National agencies and regional data providers or statistical offices in individual regions may assist reporting financial
institutions and investee companies in various regions in finding regional and more relevant financial and/or emissions data
information.
Financial Sector Science-Based Targets Guidance
148
Figure D1. Generic Data Quality Scorecard for Portfolio Emissions
81
Sources: PCAF 2019b, 2019c, and PCAF 2020.
Decarbonization Pathway
By applying the SDA, the final emissions targets expressed in emissions intensity (e.g., CO
2
per kWh, tonne
of product, etc.) shall be consistent with keeping global warming well-below 2°C at a minimum.
The SDA uses the B2DS scenarios developed by the IEA (2017), which are compatible with the
Representative Concentration Pathway (RCP) 2.6 scenario from IPCC Fifth Assessment Report (AR5).
82
The SDA assumes global convergence of key sectors’ emissions intensity by 2050. For example, the
emissions intensity of steel production in China, the United States, and Brazil is assumed to reach the
same level in 2050, regardless of its current diversity.
83
Regional pathways have not been incorporated
into the SDA method.
Currently, the SDA provides sector-specific pathways for the following homogenous and energy-
intensive sectors:
84
● Power generation
● Iron and steel
81
For corporate debt and equity specific score cards, refer to the PCAF’s Global GHG Accounting and
Reporting Standard (PCAF, 2020)
82
The B2DS scenarios are emissions scenarios modeled by IEA. Based on this scenario data, sectoral emissions intensity
pathways are derived.
83
For specific values and background, see Krabbe et al. 2015.
84
The SDA sectors are drawn from the International Energy Agency (IEA). An appendix of the SDA user guidance maps the IEA
sectors against common industrial classification systems: http://sciencebasedtargets.org/wp-
content/uploads/2015/05/Sectoral-Decarbonization-Approach-Report.pdf.
Financial Sector Science-Based Targets Guidance
149
● Cement
● Aluminum
● Pulp and paper
● Services/Commercial buildings
● Passenger and freight transport
The IEA models these sectors based on sectoral growth and technology development trajectories. The
emissions and sector activity growth projections from the B2DS will serve as the basis to derive the
relevant targets for each sector under the selected asset class. Figure D2 illustrates the emission intensity
pathways for the power sector in the B2DS.
In this example, the emissions intensity trajectory of the power utilities in the portfolio shall continuously
decline from the base year toward the target level, even if the emissions are below the pathway
benchmark. Note that IEA only provides pathways in a five-year interval, financial institutions may derive
the pathway data through interpolation if the target year falls in between these five-year intervals.
Figure D2. Global Decarbonization Emission Pathway for the Power Sector
Source: IEA 2017.
Attribution approach
Setting the emissions baseline requires the allocation of companies’ (i.e., investees or borrowers)
emissions and activity data to the financial institutions. In line with GHG Protocol and the Partnership for
-100
0
100
200
300
400
500
600
700
2014 2024 2034 2044
GHG Intensity (gCO
2
/ kWh)
B2DS power generation
Financial Sector Science-Based Targets Guidance
150
Carbon Accounting Financials (PCAF), emissions should be allocated to financial institutions based on
their proportional share of investment in the investee.
85
For listed companies, the attribution is calculated by the ratio of outstanding investment versus the
Enterprise Value Including Cash (EVIC).
• Outstanding investment (numerator): The actual outstanding investment (if listed equity or
bonds) or loan amount (if corporate loan).
• Company value (denominator): The Enterprise Value Including Cash (EVIC) of the respective
company. In case elements of the enterprise value are not available, for example, due to data
issues, the total balance sheet value expressed as the sum of total company equity and debt is
used.
For private companies, the attribution is the ratio of outstanding investment or outstanding loan versus
the total balance sheet (equity + debt):
• Outstanding investment (numerator): The actual outstanding investment (if private equity) or
loan amount (if corporate loan).
• Company value (denominator): The total balance sheet value expressed as the sum of total
company equity and debt.
The Global GHG Accounting and Reporting Standard for the financial industry (PCAF 2020) aligns the
definition of EVIC with the definition provided by the following:
1. The Technical Expert Group on sustainable finance set up by the European Commission (EU TEG)
in its “Handbook of Climate Transition Benchmarks, Paris-aligned Benchmark and Benchmarks’
ESG Disclosure”(December 2019) (Hoepner et al. 2019).
2. The (draft) “Supplementing Regulation (EU) 2016/1011 of the European Parliament and of the
Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-
aligned Benchmarks,” which has defined that the EVIC should be used to determine the GHG
intensities for the benchmarks.
After applying the attribution factor to both absolute emissions, the same attribution factor should be
applied to calculate the total activity or output of the portfolio companies in a specific sector. These
total activity or output data are needed as input into the SBTi tools to calculate the emissions intensity
in the base year (i.e., the ratio of absolute emissions to activity data, for example, tonne CO
2
e/kWh,
tonne CO
2
e/tonne of steel, etc.).
85
This differs from a portfolio weight approach that works by applying the portfolio weight of each investment to the emissions
intensity of the underlying company. For example, if 10 percent of the total equity portfolio in assets under management
(AUM) is invested in Company A, the emissions intensity of the portfolio is calculated by applying the 10 percent to the
emissions intensity of Company A, etc., and summing up all allocated emission intensities of the companies in the portfolio. This
approach is often used for (ESG-) benchmarking of funds. However, this approach deviates from accounting principles in the
GHG Protocol and the Partnership for Carbon Accounting Financials (PCAF).
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Method output
The output will be a percentage reduction in emissions intensity relative to a specific activity or
production output of the companies in the portfolio (e.g., tonne CO
2
e per MWh, per tonne of steel,
etc.).
Sample target outputs could be, as follows:
• Financial Institution A commits to reduce CO
2
e emissions from the power sector in its loan
portfolio with 30 percent per kWh by 2025 from a 2019 base year.
• Financial Institution B commits to reduce CO
2
e emissions from the steel sector in its equity
portfolio with 20 percent per tonne of steel by 2025 from a 2019 base year.
E. Temperature Rating Method
This method is an open-source framework to enable the translation of corporate GHG emissions
reduction targets into temperature scores at a target, company, and a portfolio level. The method can
be used to generate temperature scores for individual targets to translate target ambition to a common
intuitive metric.
The method provides a protocol to enable the aggregation of target-level scores to generate a
temperature rating for a company based on the ambition of its GHG emissions reduction targets. Finally,
the method defines a series of weighting options that can enable financial institutions and others to
produce portfolio-level temperature ratings.
Codeveloped by CDP and WWF, in collaboration with the SBTi, the methodology is, as follows:
• Transparent,
• Public/Open source, and
• Science-based.
The methodology:
• Enables assessment of corporate emissions reduction targets;
• Enables comparison of relative ambition of corporate emissions–reduction targets;
• Provides a framework for building engagement strategies; and
• Helps with strategic security selection and allocation decisions.
The target protocol represents the first step of the process, which is to convert individual targets of
various formats into temperature scores. This is achieved by generating simple regression models for
estimated warming in 2100 from climate scenarios with short-, medium-, and long-term trends in
metrics like absolute emissions or emissions intensities. Regression models are generated based on
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scenarios in the IPCC special report on 1.5°C scenario database (CDP and WWF 2020). In addition to
defining methods for disclosed targets, this step outlines the methodology used to define a default score
to be applied to all companies that do not disclose any emissions reduction targets publicly.
Since many companies have multiple climate targets, covering different scopes and time frames, a
protocol is then used to aggregate all target data into scores at a company level. This protocol defines
the minimum quality criteria for determining the acceptability of a target to be scored and the steps
required to identify and aggregate multiple targets to produce an overall company score.
The final step is used to weight company scores when assessing an index or portfolio of companies, such
as in the context of financial portfolios.
Seven potential options for aggregating individual company temperature scores at the index/portfolio
are currently available. These include the following:
● Option 1: Weighted average temperature score (WATS);
● Option 2: Total emissions weighted temperature score (TETS);
● Option 3: Market owned emissions weighted temperature score (MOTS);
● Option 4: Enterprise owned emissions weighted temperature score (EOTS);
● Option 5: EV + Cash emissions weighted temperature score (ECOTS);
● Option 6: Total Assets emissions weighted temperature score (AOTS); and
● Option 7: Revenue owned emissions weighted temperature score (ROTS).
Table E1 below provides a description and formula for calculating the portfolio temperature scores using
each of these options.
Table E1. Portfolio Weighting Options
Option
Method
Temperature Score Formula
(where TS = Company temperature score)
Weighted
average
temperature
score
(WATS)
Temperature scores
are allocated based
on portfolio
weights.
For instance, if a
company is allocated
10% of the overall
invested value, it is
weighted at 10%.


Financial Sector Science-Based Targets Guidance
153
Total
emissions
weighted
temperature
score (TETS)
Temperature scores
are allocated based
on historical
emission weights
using total
company GHG
emissions.



Market
owned
emissions
weighted
temperature
score
(MOTS)
Temperature scores
are allocated based
on an equity
ownership
approach.


 

  
Enterprise
Owned
emissions
weighted
temperature
score (EOTS)
Temperature scores
are allocated based
on an enterprise
ownership
approach


 

  
Enterprise
value + cash
emissions
weighted
temperature
score
(ECOTS)
Temperature scores
are allocated based
on an enterprise
value (EV) plus cash
and equivalents
ownership
approach.

 
 
 
  
Total assets
emissions
weighted
temperature
score (AOTS)
Temperature scores
are allocated based
on a total assets
ownership
approach.


 

  
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154
Revenue
owned
emissions
weighted
temperature
score (ROTS)
Temperature scores
are allocated based
on the share of
revenue.


 

  
Sources: Temperature Rating Methodology, CDP Worldwide and WWF International 2020.
Figure E1 presents an overview of how the three protocols fit together to form the temperature rating
methodology.
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155
Figure E1. Temperature Rating Methodology Overview
Sources: Temperature Rating Methodology, CDP Worldwide and WWF International 2020
The full methodology can be found here.
Target type and time frame criteria
No targets
Regression models for each target type
Translation of ambition to temperature ranges for
each target type
Protocol for selecting/interpreting corporate targets
Default Methodology for all nondisclosing
companies and scopes with no targets
Targets
Aggregation methods to combine multiple target
scores into company level scores
Weighting method for index/portfolio aggregation
Temperature scores per target type
Temperature scores per portfolio
IPCC Special Report 1.5°
CDP Corporate Targets Data Set
Temperature scores per company
Index constituents
CDP GHG emissions data set
Index constituents are weighted by total GHG
emissions (scope 1+2+3)
Target type and time frame criteria
No targets
Regression models for each target type
Translation of ambition to temperature ranges for
each target type
Protocol for selecting/interpreting corporate targets
Default Methodology for all non-disclosing
companies and scopes with no targets
Targets
Aggregation methods to combine multiple target
scores into company level scores
Weighting method for index/portfolio aggregation
Step 1: Temperature
score at target level
Step 2: Temperature
score at company
level
Step 3: Temperature
score at portfolio
level
Temperature scores per target type
Temperature scores per index / portfolio
IPCC Special Report 1.5°
CDP Corporate Targets Data Set
Temp scores per company
Index constituents
CDP GHG emissions data set
Index constituents are weighted by total GHG
emissions (Scope 1+2+3)
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F. SBTi Finance Temperature Rating and Portfolio Coverage Tool
Based on the Temperature Rating method, developed by CDP and WWF, this tool helps companies and
financial institutions to assess the temperature alignment of current emissions reduction targets,
commitments, and investment and lending portfolios. They can for instance use this information to
develop their own GHG emissions reduction targets for official validation by the SBTi, develop
engagement strategies, and help with strategic security selection and allocation decisions.
This chapter provides a nontechnical introduction and overview of what the tool is for, the types of
outputs it delivers, what data are required, how it works, and where you can find more information and
documentation to start using the tool.
Why has the SBTi Built this Tool?
There has been a growing interest in methods to measure the alignment of companies and investment
portfolios with the Paris Agreement. The success of the Science Based Targets initiative has seen a rapid
growth in the number of companies with emissions reduction targets approved by the SBTi, and
therefore, a growing number of companies claiming alignment to the long-term temperature goals set
out in the Paris Agreement.
The SBTi has developed a codebase to function as a calculator for the Portfolio Coverage and
Temperature Rating methods. This tool is fed with the necessary data to generate temperature scores at
the company and portfolio level, in addition to providing analytics on target setting and company
emissions reduction ambitions. It also gives users access to what-if analysis, to aid their decision-making
process. The code reflects the logical steps that are outlined in the publicly available temperature rating
methodology, developed by CDP and WWF.
The tool was created to enable the widespread implementation of the method by data providers and
financial institutions, to work with any data source and in most IT environments. For each method, the
tool provides the following outputs:
• Portfolio coverage: Generate the percentage of the portfolio currently covered by SBTi-
approved targets; and
• Temperature rating: Generate the current temperature score of the portfolio (in addition to the
individual temperature scores of the portfolio companies). It also enables the generation of a
series of what-if scenarios to showcase how this temperature score could be reduced.
Why have We Built the SBTi Finance Tool in this Way?
To help financial institutions fight climate change, the SBTi wants the tool to be accessible, useful, and
widely used by finance professionals and other users. If it is easy to access, not seen as a compliance
tool only used once a year, but a tool to support the investment process, it will more likely be utilized
widely. Therefore, when the SBTi started the development process, we set up a list of requirements for
the tool. Some of the high-level requirements were, as follows:
• Distribution—most investment professionals should have easy access to the tool;
• Transparent—with full output audit trail and open methodology;
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• Data agnostic—to be used with any data provider or an institution’s own data lake;
• Any infrastructure—to be integrated with service providers’ or homegrown decision support
solutions;
• Workflow tool—to be integrated in investment professionals’ daily workflow;
• Data security—to make sure financial portfolio data are not compromised;
• Scale—to be able to use the tool at scale for many portfolios and aggregated on financial
institution level; and
• Continued development—ensure enhancement of the method and tool for future requirements.
Given these requirements, the SBTi determined an open-source Python-based solution to be most
appropriate. Such a tool can be integrated into existing solutions, in many cases making use of the same
secure infrastructure as inhouse or commercial applications. As the tool pulls data from existing
integration of data providers and/or internal data lakes, there is no need to go outside this
infrastructure to access or deliver necessary data. Hence, no data that are not already within the
institution’s domain need to enter or exit the institution to use the tool. The approach brings the model
to the data, rather than the other way around.
SBTi Finance launched a request for proposal (RfP) for building the codebase to turn the methodology
into a calculation engine in early 2020. The selected SBTi Finance Tool development project partners are
Ortec Finance and the OS-Climate.
To make sure we built a tool that from the outset could work in as many different environments and for
as many different users as possible, we reached out to users and data and service providers and invited
them to work with us in our project team. This gave both users and data providers the opportunity to
influence the development process and to prepare and develop their own solutions, data, and processes
to work with the tool. This has been very helpful in getting their perspectives, to make sure the tool
work with as many data providers’ data as possible, and that it fits with many users’ existing workflow.
A strong confirmation of the various tool use cases is the fact that a number of data/service providers
have developed or are in the process of developing various solutions based on the tool and the
methodology, to offer their clients. This collaboration also gives the SBTi Finance Tool a wider reach
than what the SBTi could have achieved otherwise, and the tool should be available natively in their
existing infrastructure for a significant proportion of the financial institutions globally. This integration
should also ensure that the tool can be used at scale, to help large and small financial institutions alike
to quickly analyze all their portfolios’ and constituents’ temperature scores.
The open-source nature of the codebase means that any user, data or service provider can use the code
to build their own applications around the SBTi Finance Tool. It also means that it is available for all
users to integrate into their own infrastructure, without any licensing cost. This should also ensure that
the code continues to be developed both by the SBTi, data and service providers, and the open source
community.
The tool also provides full transparency with regard to how the tool and methodology fit together
through the open-source nature of both the codebase and the methodology. We have also provided
easy to use functionality to extract every single data point generated by the tool, to provide a full audit
trail, and transparency into how the temperature score is calculated.
During Summer 2020 we ran a public beta-testing phase, open to any organization or individual. The
beta-testing phase included more than 110 registered beta testers. Users provided feedback on the
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158
tool’s functionality, documentation requirements, performance, and usability. This feedback has been
incorporated in the final release version.
Altogether, our conversations with users and data providers and the feedback from 110 beta testers
indicates that the development process and the structure of the SBTi Finance Tool has the potential to
become an integrated experience and that it could become as natural for a portfolio manager or
analysts to use as their discounted cash flow model or attribution report. In turn, this should ensure that
portfolio and company temperature scores stay top-of-mind for finance professionals and that this
ultimately leads to more efficient engagement processes and GHG emissions reductions in the real
economy.
What Can You Use the SBTi Finance Tool For?
The SBTi Finance Temperature Rating and Portfolio Coverage Tool enables analysis of companies,
sectors, countries, investment strategies, and portfolios to understand how they contribute to climate
change. You can, for example:
• Measure your portfolio's current temperature score;
• Identify the biggest contributors on an individual company, country, and sector basis;
• Use the tool as an aid for strategic allocation and securities selection decisions;
• Analyze what effect changes in your portfolio might have on the portfolio temperature score;
• Model impact of engagement on your temperature score; that is, how your score can improve if
you are able to convince an investee company to set or improve GHG emissions reduction
targets;
• Identify which company engagements would have the biggest impact on your portfolio's
temperature score;
• Plan engagement strategies based on your modeling;
• Fulfill regulatory reporting criteria, for example, Article 173 in France and the EU Disclosure
regulation, regarding current portfolio alignment with the Paris Agreement; and
• Help you to create an action plan for reaching your emissions reduction target.
Given these possible insights, as confirmed by our beta-testing survey, the tool is relevant for a wide
range of stakeholders, for instance:
▪ Portfolio managers—to support strategic allocation decisions and input into ESG discussions
with corporate management;
▪ Financial analysts—to use the temperature score as an input into the cost of capital for
valuation modeling;
▪ ESG analysts—to plan and execute corporate engagement strategies;
▪ Risk managers—for input into climate-related risk models;
▪ Compliance officers—for EU Disclosure Regulation and Article 173 reporting;
▪ Data and service providers—to provide company temperature scores and portfolio analytics for
their users;
▪ Chief investment officers (CIOs)—to help to understand the portfolios’ ESG position; and
▪ Nongovernmental organizations (NGOs)—for further research to enhance climate-related
methodologies.
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What Outputs Does the Tool Generates?
The temperature score can be calculated for all time frames (short-, medium-, long-term) and scope
(scope 1, 2, 3) combinations covered by the SBTi methodology. Table F1 provides an overview of the six
temperature ratings that can be generated.
Table F1. Six Categories for Each Company Based on GHG Emission Scope Coverage and Target Time
Frame
Source: Authors.
The temperature score calculation is available for the following levels:
▪ Portfolio temperature score: The aggregated score over all companies in the portfolio;
▪ Grouped temperature score: Using the “group by” option, the user can get the aggregated
temperature score per category in a chosen field (e.g., per region or per sector); and
▪ Company temperature score: The temperature score of an individual company.
Figure F1 below provides illustrative outputs for grouped temperature scores by region and sector.
These insights help inform use cases such as more targeted engagement strategies, aiding securities
selection decisions, etc.
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Figure F1. Illustrative Output of the Temperature Score on Portfolio Level, Grouped by Region and
Sector
Source: Authors.
Figure F2 provides a visualization of the outputs when looking at the temperature score per company.
This level of granularity of the tool enables users to zoom in on individual scores, for example, for
informing engagement and/or monitoring temperature score progress of investees.
Figure F2. Illustrative Visualization of the Temperature Score Outputs per Company
Source: Authors.
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For the portfolio temperature score and the grouped temperature score, additional more granular
information is reported about the composition of the score:
▪ Contributions: The level to which each company contributes to the total temperature score
based on the chosen aggregation method. This value is split up into company temperature score
and relative contribution (e.g., the weight of the investment in the company relative to the total
portfolio when using the WATS aggregation method).
▪ The percentage of the score that is based on targets vs. the percentage based on the default
score.
▪ For the grouped temperature scores: The percentage each group contributes to the portfolio
temperature score. For example: how much each region or sector contributes to the total
score.
Table F2, taken from a Jupyter Notebook implementation of the tool (see, http://getting-started.sbti-
tool.org/ for executing your own rungs of the Jupyter Notebook) highlights the companies with the
highest contribution to the portfolio temperature score and at the same time displays ownership and
portfolio weight to give the user an indication of where an engagement may be more successful, purely
from a quantitative perspective.
Table F2. Illustrative Output Table of the Temperature Score and Contribution Analysis on Company
Level
Source: Authors.
Figure F3 depicts similar analysis in a more visual format. What can be seen in the figure is the relative
contributions to the sector temperature scores.
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Figure F3. Illustrative Visualization of the Temperature Score Outputs and Contribution Results
Grouped per Sector
Source: Authors.
For the company temperature scores, you can let the tool generate all underlying data, which provides
full transparency and gives the user the full audit trail for how the final temperature score has been
calculated. This data output provides:
▪ Portfolio data;
▪ Financial data;
▪ GHG emissions;
▪ Used target and all its parameters; and
▪ Values used during calculation such as the linear annual reduction (LAR), mapped regression
scenario, and parameters for the formula to calculate the temperature score.
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You can also anonymize the output data, which removes all names and identifiers. This is particularly
useful for sharing results of your temperature score without having to reveal your holdings, for example,
for submitting your temperature score to the SBTi Target Validation Team to get your own GHG
emissions reduction target approved. At the same time, it provides the opportunity to audit the scores
during the validation process.
For more detailed examples, please see Jupyter notebook examples found at http://getting-started.sbti-
tool.org/.
What Data are Needed to Use the Tool?
The tool itself is data agnostic and has no built-in databases. This means that users need to import all
needed data to perform the analysis and can use any data source with the necessary data available.
These data can come from a variety of sources but must be inputted in the required formats. The data
providers we have worked with during the development have built or are in the process of building
solutions to help with this process. Four types of data are needed to run the tool. These are described in
the Table F3.
Table F3. Overview of Data Inputs
Portfolio
holdings
• Company name
• ISIC sector classification
• ISIN and/or FIGI, if available. Other company identifier can also be used together with
ISINs or FIGIs and are required to match identifiers from the three data sources
below.
• Market value of portfolio position for each company, using one common portfolio
currency
Corporate
GHG targets
This refers to the data required to analyse corporate GHG emissions reduction targets,
including:
• Target types (absolute/intensity)
• Base year
• Target year
• Scope coverage
• Boundary coverage within scope
• Percentage achieved
• Intensity activity (if appliable)
Corporate
GHG
emissions
data
Scope 1 + 2 and scope 3 emissions data, reported or modelled
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Corporate
financial data
Seven weighting option are currently available to aggregate company scores to produce
portfolio scores. Depending on the option chosen, the following data may be required:
a. Invested value (holdings)
b. Market capitalization
c. Enterprise value
d. Cash and equivalents
e. Total assets
f. Revenue
Notes: ISIC = International Standard Industrial Classification; ISIN = International Securities Identification Number;
FIGI = Fiscal Instrument Global Identifier.
Source: Authors.
Refer to the data requirements section at http://getting-started.sbti-tool.org/ for full documentation.
Also refer to the full methodology for temperature rating.
Where Can I Find the Data?
Commercial data providers such as Bloomberg, CDP, ISS, MSCI, TruCost, and Urgentem can provide
some or all the data needed for the SBTi Finance Tool.
There is also a free data set available with corporate GHG targets data on the SBTi's website. This
includes data of all the companies that have set emissions reduction targets that have been approved by
the SBTi and is updated on a weekly basis. You can download an Excel-file with the data
here: https://sciencebasedtargets.org/companies-taking-action/.
It is likely that your portfolio includes companies that are not in the list of companies with SBTi-
approved targets, but that have publicly announced targets. Commercial data providers such as those
listed above can provide target data for these companies.
Overview of How the Tool Works
The calculation methodology consists of four key steps (Figure F4), each requiring specific data points
that are inputted at the beginning of the process. These data points are then used to convert the
corporate GHG emissions reduction targets into temperature scores at the company and the portfolio
level.
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Figure F4. Data Points for the Four-Step Process
Source: Authors 2020.
Step 1: Converting publicly stated targets to temperature scores. The targets are first filtered and are—
if valid—translated to a specific temperature score, based on the relevant regression model (Section 1.3
in the methodology). The sector classification of the company is used to ensure that the target is
correctly mapped to the appropriate regression model; for example, a target for power generation must
be mapped to the power sector pathway and corresponding regression model. This process enables the
translation of target ambition over a certain target time period into a temperature score. For example, a
30 percent reduction target in absolute GHG emissions over 10 years can be converted into a
temperature score of 1.76°C. It should be noted that those companies without a valid target are
assigned a default temperature score (Section 1.4 in the methodology), rather than being excluded from
the analysis.
Step 2: Aggregate across targets (if applicable) to a company-level temperature score. Reported
corporate GHG emission data are employed to aggregate company-level temperature scores.
Step 3: Aggregate individual company temperature scores to portfolio-level scores. All the individual
temperature scores per company in a portfolio are then combined with portfolio financial data to
generate scores at the portfolio level.
Step 4: Run what-if analysis via the scenario generator. After the initial score calculations, a scenario
generator can be used to determine how certain actions, for example, engagement, can change the
portfolio temperature score over time. When running these what-if scenarios, the temperature score is
recalculated with the assumption that, based on various engagements, some or all the companies in the
portfolio decided to set (more ambitious) targets. The following what-if analyses are included in the tool
in Table F4:
Table F4. What-If Analysis Options
Scenario 1
In this scenario all companies in the portfolio that did not yet set a valid target have been
persuaded to set 2.0°C targets. This is simulated by changing all scores that used the default
score to a score of 2.0°C.
Scenario 2
In this scenario all companies that already set targets are persuaded to set “well-
below 2.0°C (WB2C) targets. This is simulated by setting all scores of the companies that have
valid targets to at most 1.75°C.
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Scenario 3
In these scenarios the top 10 contributors to the portfolio temperature score are persuaded to
set 2.0°C targets.
o Scenario 3a: All top 10 contributors set 2.0°C targets.
o Scenario 3b: All top 10 contributors set WB2C, i.e., 1.75°C targets.
Scenario 4
In this scenario the user can specify (by adding “TRUE” in the engagement targets column in
the portfolio data file) which companies it wants to engage with to set 2.0°C or WB2C targets.
o Scenario 4a: All companies that are marked as engagement targets set 2.0°C targets
o Scenario 4b: All companies that are marked as engagement targets set WB2C targets.
Source: Authors.
How can I Run the tool?
The SBTi Finance Tool has been built as an open-source, data-agnostic tool and works with input data
from any data provider and in many different IT infrastructures.
As such, the SBTi Finance Tool for temperature rating and portfolio coverage can be used in several
ways, depending on the specific preferences of the user.
If you are unsure whether the tool will be useful for your application and workflow, or you would first
like to run some examples to get a better idea of how the tool works and what types of outputs it
generates, the ‘1_analysis_example’ notebook
(https://github.com/OFBDABV/SBTi/blob/master/examples/1_analysis_example.ipynb) offers a quick
and no-code opportunity for such testing. The notebook combines text and code to provide a testing
environment for your research, to give you an understanding of how the tool can help you analyze
companies’ and portfolios’ temperature scores, and to aid your engagement and investment decisions.
The notebook is loaded with example data, but you can also use your own data. For your first test, you
can simply run the code cells one by one in the current sequence, to get an understanding of how it
works. If you are not familiar with Notebooks, please refer to this introduction.
Technical Structure
Figure F5 provides an overview of the different parts of the full tool kit and their dependencies:
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167
Figure F5. Overview of the Tool Kit
Source: Authors.
As shown above, the Python code forms the core codebase of the SBTi Finance Tool. The Python
package is recommended if users would like to integrate the tool in their own codebase. In turn, the
second option is running the tool via the application programming interface (API) if users’ preference is
to include the tool as a Microservice in their existing IT infrastructure in the cloud or on premise. The
development project also included the creation of a simple user interface (UI), which can be used for
easier user interaction in combination with the API.
The SBTi tool enables three main ways of installing and/or running the tool:
▪ Users can integrate the Python package in their codebase. For more detailed and up-to-date
information on how to run the tool via the Python package, please consult the “Getting Started
Using Python” section at http://getting-started.sbti-tool.org/.
▪ The tool can be included as a Microservice (containerized REST API) in any IT infrastructure (in
the cloud or on premise). For more detailed and up-to-date information on how to run the tool
via the API, please consult the “Getting Started Using REST API” section at http://getting-
started.sbti-tool.org/. Optionally, the API can be run with a frontend UI. This simple user
interface makes testing by nontechnical users easier. For more detailed and up-to-date
information on how to use the UI as a frontend to the API, please consult the “Getting Started
Using REST API” section at http://getting-started.sbti-tool.org/.
▪ During the development of this tool, we have worked with several data and service providers to
the financial and ESG markets, some who have or are in the process of implementing the tool
and methodology into their commercial solutions. These providers include Bloomberg, CDP, ISS,
MSCI, Ortec Finance, TruCost, and Urgentem. Making use of their solutions can for some users
be the easiest way to integrate the tool into existing infrastructure and workflow, to analyze
portfolios’ and companies’ temperature scores.
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Given the open-source nature of the tool, the community is encouraged to make contributions (refer to
“Contributing” section at http://getting-started.sbti-tool.org/) to further develop and/or update the
codebase. Contributions can range from submitting a bug report, to submitting a new feature request,
all the way to further enhancing the tool’s functionalities by contributing code.
For more information on the tool, illustrative use cases, as well as how to install and run the tool, please
consult http://getting-started.sbti-tool.org/.
Financial Sector Science-Based Targets Guidance
169
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