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首页文档碳中和资料研究报告金融部门科学碳目标指南（英）

金融部门科学碳目标指南（英）VIP专享VIP免费

FINANCIAL SECTOR SCIENCE-BASED
TARGETS GUIDANCE
VERSION 1.0
February 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
2
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
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FINANCIALSECTORSCIENCE-BASEDTARGETSGUIDANCEVERSION1.0February2022TableofContentsTableofContents...............................................................................................................................1Acknowledgments.............................................................................................................................3ExecutiveSummary............................................................................................................................6Glossary...........................................................................................................................................101.Introduction.............................................................................................................................161.1PurposeofthisDocument................................................................................................................161.2TheSBTi’sFinancialSectorProjectAudience...................................................................................191.3TheSBTi’sFinancialSectorProjectContext......................................................................................191.4WhatAreScience-BasedTargets(SBTs)?.........................................................................................201.5HowistheFinancialSectorAddressingClimate?.............................................................................222.BusinessCaseforFinancialInstitutionstoSetScience-BasedTargets.........................................253.SBTiTargetValidationCriteriaandRecommendationsforFinancialInstitutions.........................263.1GHGEmissionsInventoryandTargetBoundary...............................................................................273.2Scope1and2TargetTimeFrame.....................................................................................................293.3Scope1and2TargetAmbition.........................................................................................................293.4Scope2..............................................................................................................................................303.5Scope3–PortfolioTargetSettingRequirements.............................................................................313.6Reporting...........................................................................................................................................343.7RecalculationandTargetValidity.....................................................................................................354.HowtoSetScience-BasedTargets.................................................................................................374.1CompilingaGHGInventory...............................................................................................................374.2MeasuringFinancedEmissionstoFacilitateTargetSetting.............................................................404.3HowtoSetaSBTforScope1and2Emissions.................................................................................445.ApproachestoSettingScope3PortfolioTargets...........................................................................495.1BackgroundandBriefLiteratureReview..........................................................................................495.2OverviewofAvailableAssetClass–SpecificMethods,BroaderMethods,andExistingGaps..........505.3DefiningtheBoundaryofPortfolioTargets......................................................................................535.4DescriptionofMethodstoSetPortfolioTargets..............................................................................58FinancialSectorScience-BasedTargetsGuidance25.5ApproachestoSettingTargetsontheRestoftheScope3Categories............................................925.6CoalPhaseoutandFossilFuelDisclosure.........................................................................................936.HowtoCommunicateScience-BasedTargetsandTrackingProgress..............................................966.1TrackingandReportingTargetProgress...........................................................................................996.2TargetRecalculationandValidity...................................................................................................1007.HowtoAchieveSBTs..............................................................................................................1027.1IntegrationofClimateChangeinGovernanceandDecision-Making.............................................1027.2EngagingKeyStakeholders:Companies,ServiceProviders,andPolicymakers.............................1037.3PublicDisclosureofClimateActions...............................................................................................1078.SBTiCalltoActionProcess:Commit,DevelopTarget,Validate,Announce,Disclose.................109Step1:CommittoSetaScience-basedTarget.....................................................................................109Step2:DevelopaTarget.......................................................................................................................110Step3:SubmittheTargetsforaValidation..........................................................................................111Step4:AnnouncetheTargets...............................................................................................................112Step5:TargetDisclosure......................................................................................................................1129.DiscussionandAreasforFurtherResearch..............................................................................113Appendices....................................................................................................................................115A.SDAforResidentialMortgage.......................................................................................................115B.SDAforCommercialRealEstate...................................................................................................125C.SDAElectricityGenerationProjectFinance..................................................................................135D.SDAforCorporateDebtandEquity..............................................................................................144E.TemperatureRatingMethod........................................................................................................151F.SBTiFinanceTemperatureRatingandPortfolioCoverageTool...................................................156References.....................................................................................................................................169FinancialSectorScience-BasedTargetsGuidance3AcknowledgmentsPRIMARYAUTHORSChendanYan,WorldResourcesInstituteNateAden,WorldResourcesInstituteCynthiaCummis,WorldResourcesInstituteEoinWhite,CDPWorldwideJanVandermosten,WorldWildlifeFundDonaldLinderyd,WorldWildlifeFundChrisWeber,WorldWildlifeFundTECHNICALPARTNERSGielLinthorst,GuidehouseAngélicaAfanador,GuidehouseEXPERTADVISORYGROUPThefollowingindividualsprovidedexpertfeedbackanddirectiononguidancedevelopment.Theydidsoinapersonalcapacity,andtheirviewsdidnotnecessarilyrepresenttheviewsoftheiremployers.1AnnaViefhues,AMFPensionStuartPalmer,AustralianEthicalInvestmentJochenKrippner,BarclaysJean-YvesWilmotte,Carbone4TimStumhofer,ClimateWorksFoundationIanMonroe,EthoCapitalandStanfordUniversityKaitlinCrouch,INGBankMaximilianHorster,ISSESGDr.NicoleRöttmer,PricewaterhouseCoopersGmbHWirtschaftsprüfungsgesellschaftMarcusLun,RBCGlobalAssetManagementJohnGelston,StandardCharteredGregLiddell,SuncorpGroupJesAndrews,UnitedNationsEnvironmentProgramme,FinanceInitiativeNeilPatel,VoyaFinancialPhilipTapsall,WestpacEricChristensen,WSP1ThislistdoesnotrepresentallExpertAdvisoryGroup(EAG)memberswhohavecontributedtotheframeworkdevelopment.Moremembersmaybeaddedtothelist.FinancialSectorScience-BasedTargetsGuidance4METHODROADTESTERSThefollowingorganizationsprovidedvaluablefeedbackontherobustnessandpracticalityofthedraftscience-basedtargetsettingmethodsthroughthemethodroad-testingprocessledbyScienceBasedTargetsinitiative(SBTi)in2019.ABNAMROBankACTIAMAMFPensionASNBankASRNederlandNVBankAustraliaBankinterBNPParibasINGItaúUnibancoLaBanquePostaleandLaBanquePostaleAssetManagementMorganStanleyNetherlandsDevelopmentFinanceCompany(FMO)NordeaLifeandPensionSkandiaSompoHoldings,Inc.SwedbankABYESBANK,Ltd.TEMPERATURERATINGANDSBTPORTFOLIOCOVERAGETOOLTheSBTitooldevelopmentprocessincludedmanypartnersandbetatesters.Wewouldliketoparticularlythank:ChristianSchmidli;representativesfromAllianz;Bloomberg;ISSESG;MSCI;OrtecFinance;OS-Climate;Trucost;Storebrand;andUrgentumfortheirparticipation.Wewouldalsoliketothankallbetatesterswhoprovidedvaluablefeedbackonthetooldevelopmentprocess.ProjectTeamTechnicalPartnersDaanvandeMeeberg,OrtecFinanceLisaEichler,OrtecFinanceJorisCramwinckel,OrtecFinanceHewsonBaltzell,HeliosExchangeTrumanSemans,OS-ClimateWilderMarsh,OS-ClimateFinancialSectorScience-BasedTargetsGuidance5DataandServiceProviderCollaboratorsBloombergL.P.CDPISSESGMSCITrucostUrgentemUserGroupCollaboratorsAllianzNetZeroAssetOwnerAllianceStorebrandToolBetaTestersMohammadFesangharyandArunVerma,BloombergL.P.CarbonIntelligenceCEMAsys.comASDr.NicoleRöttmer,PricewaterhouseCoopersGmbHWirtschaftsprüfungsgesellschaftEcoActGoldman,Sachs&Co.LombardOdierInvestmentManagersManulifeInvestmentManagementOliverCanosaShareActionTribeImpactCapitalLLPWearethankfultoCaissededépôtetplacementduQuébec(CDPQ),ClimateWorksFoundation,PartnershipforCarbonAccountingFinancials(PCAF),KeelingCurvePrize,HewlettFoundation,andtheBankofNewYorkMellonfortheirgenerousfinancialsupport.FinancialSectorScience-BasedTargetsGuidance6ExecutiveSummaryContextTheCOVID-19pandemichasacceleratedseveralongoingtransitions,includingtheinterdependencebetweenfinancialinstitutionsandourchangingclimate.Whilefinancialinstitutions’businessmodelsarevulnerabletoclimatedisruptions,greaterattentionisalsobeinggiventotheinfluenceofinvestmentandlendingportfoliosonclimateoutcomes.Thistransitionismarkedbyunprecedentedgrowthofenvironmental,social,andcorporategovernance(ESG)investments,aprofusionofhigh-levelclimatecommitmentsbyfinancialinstitutions,andburgeoningfinancialregulatoryactiononclimate-relatedfinancialdisclosures.2Financialinstitutionsareseekingtoleadzero-carbontransformationratherthanjustminimizerisksrelatedtoclimateimpacts.TodecarbonizetheglobaleconomyinalignmentwiththegoalsestablishedbytheParisAgreement,alleconomicactorsintherealeconomyneedtoreducetheirgreenhousegas(GHG)emissionsataratesufficienttobeconsistentwiththeemissionspathwaysestablishedbyclimatescience.Financialinstitutions(FIs)differfromothereconomicsectors:theyprovidefinanceandotherservicestothecompaniesthatareresponsibleforreducingGHGemissions,ratherthanexercisedirectcontroloverGHGemissionreductions.ThecentralenablingroleoffinanceisrecognizedintheParisAgreement’sArticle2.1(c)on“makingfinanceflowsconsistentwithapathwaytowardslowgreenhousegasemissionsandclimate-resilientdevelopment.”TheScienceBasedTargetsinitiative(SBTi)definesfinancialinstitutionsascompanieswhosebusinessinvolvesthedealingoffinancialandmonetarytransactions,includingdeposits,loans,investments,andcurrencyexchange.If5percentormoreofacompany’srevenueorassetscomesfromactivitiessuchasthosedescribedabove,theyareconsideredtobefinancialinstitutions.TheSBTiframeworkforfinancialinstitutionsaimstosupportFIsintheireffortstoaddressclimatechangebyprovidingresourcesforscience-basedtargetsetting.Theframeworkincludestargetsettingmethods,criteria,atargetsettingtool,andthisguidancedocument.Thisguidancedocumentincludesthefollowing:●Businesscaseforsettingscience-basedtargets(SBTs);●GuidanceforFIstousethetargetvalidationcriteriaandrecommendations,targetsettingmethodologiesandtoolstopreparetargetsforsubmissiontotheSBTiforapproval;●Casestudiesfromglobalfinancialinstitutionsontheirapplicationoftargetsettingmethods;2OnSeptember14,2020,NewZealandannounceditwasthefirstcountrytorequireannualclimateriskreportingbylargebanks,assetmanagers,andinsurers;seehttps://www.afr.com/companies/financial-services/new-zealand-makes-climate-reporting-compulsory-20200915-p55vno.FinancialSectorScience-BasedTargetsGuidance7●RecommendationsabouthowFIscancommunicatetheirscience-basedtargets,aswellashowtheyaimtocontributetoreducinggreenhousegasemissionsintherealeconomythroughtheimplementationoftheirtargets;and●RecommendationsonstepsthatFIscantaketoachievetheirtargets,buildingontheunderstandingthatsettingtargetsisonlyoneofvarioussteps(high-levelcommitments,measuringfinancedemissions,scenarioanalysis,targetsetting,enablingaction,reporting)thatFIsneedtotaketoultimatelyreducegreenhousegasemissionsintherealeconomy.ThebusinesscaseforsettingSBTsFinancialinstitutionshavehistoricallyfocusedonmaximizingeconomicreturnoninvestmentasaguidingprincipleandbusinessmodel.However,themeaningoffiduciaryduty,thatisfinancialinstitutions’legalandethicalobligationtoactintheirclients’bestinterests,isshiftinginthefaceofclimatechange.ThenewbusinesscaseforfinancialinstitutionstosetSBTsfortheirinvestmentandlendingportfoliosisbasedonafour-partrationale:resilience,policy,demand,andinnovation.AdoptionofSBTscanhelpfinancialinstitutionsaugmenttheirresilienceandcompetitivenessinthefaceofextremeweathereventsandotherclimate-relatedrisks.Bybecomingchangemakersratherthanchangetakers,financialinstitutionscaneffectivelyanticipateclimatepolicyandregulatoryshifts.Clientsareincreasinglydemandingclimateactionsbytheirfinancialinstitutions,andSBTshelptoprovidetransparentcredibility.Finally,SBTshelpdirectfinancialinstitutioninnovationtowardpotentiallyhigher-marginproductsthatsupportemissionsreductionsintherealeconomy.HowtosetSBTsFIs’largestimpactonclimatechangeisthroughtheirinvestmentandlendingactivities;thus,itisessentialtheyprioritizetargetsettingintheseareas.TheSBTihasadoptedanassetclass–specificapproachtoenablerobustandmeaningfultargets.Afteranextendedstakeholderengagementprocess,theSBTihasselectedthreemethodsthatlinkfinancialinstitutions’investmentandlendingportfolioswithclimatestabilizationpathways,eachofwhichcanbeusedforoneormoreassetclasses:●SectoralDecarbonizationApproach(SDA):Emissions-basedphysicalintensitytargetsaresetforrealestateandmortgage–relatedinvestmentsandloans,aswellasforthepowergeneration,cement,pulpandpaper,transport,ironandsteel,andbuildingssectorswithincorporateinstruments.●SBTiPortfolioCoverageApproach:EngagementtargetsaresetbyfinancialinstitutionstohaveaportionoftheirinvesteessettheirownSBTi-approvedscience-basedtargetssuchthatthefinancialinstitutionisonalinearpathto100percentportfoliocoverageby2040.●TheTemperatureRatingApproach:Financialinstitutionscanusethisapproachtodeterminethecurrenttemperatureratingoftheirportfoliosandtakeactionstoaligntheirportfoliostoambitiouslong-termtemperaturegoalsbyengagingwithportfoliocompaniestosetambitioustargets.FinancialSectorScience-BasedTargetsGuidance8TheSBTirecognizesthatthesemethodsareneitherexhaustivenorcomprehensiveandwelcomesreviewofadditionalmethods.Inadditiontosettingtargetsfortheirinvestmentandlendingactivities,FIsarerequiredtosettargetsfortheiroperations(i.e.,scope1and2emissions)consistentwithawell-below2°Cpathway,andareencouragedtosetthemforamoreambitious1.5°Cscenario.Financialinstitutionsmayalsosettargetsfortheremainingscope3categories,asdefinedbytheGHGProtocolScope3Standard.HowtocommunicatetargetsScience-basedtargetsgiveFIsanindicationofhowmuchisneededtoaligntheiractivitieswiththeParisclimategoals.Asoutlinedabove,FIs’primarymeansforaffectingGHGemissionreductionsisthroughthecompaniestheyinvestinorfinance.Topreservecredibilityandrobustness,FIsmustcommunicateclearlyabouttheirSBTsandtheactionstheytaketoimplementtheirSBTs.TheSBTihasdevelopedatemplatethatprovidesinstructionsforFIsonhowbesttodothefollowing:●Defineaheadlinetargetthatsetsoutwhichassetclassesareincludedintheirtargetsandhowmuchoftheirtotalportfolioiscovered;●Definetargetsforindividualassetclassesthatincludethemethodtheyhaveusedaswellasspecifictargetlanguage;and●Outlinetheactionstheywilltaketoreachtheirheadlineandassetclass–specifictarget(s).TheSBTirecognizesthatcurrentlythereisinsufficientclarityaboutwhichFIactionsleadtogreenhousegasemissionsintherealeconomy.TomakefurtherprogressinthisfieldtheSBTirequiresthat,aftertargetapproval,FIsdiscloseactionsorstrategiestakenduringtheyeartomeetscope3portfoliotargets,anddisclosureofprogressagainstallapprovedtargetsonanannualbasis.AsFIssettargets,thisreportingwillhelptoidentifywhichactionsaremosteffectivetorealizeGHGemissionreductionsintherealeconomy.HowtotrackprogressandachievetargetsActionsFIscantaketofullyintegrateclimatechangeintheirorganizationsandservicesandpotentiallyinfluencegreenhousegasemissionreductionsintherealeconomyincludethefollowing:●Engagingkeystakeholders,suchascompanies,serviceproviders,andpolicymakersoncomplementarycomponentsofclimateaction;●PublicdisclosureofstrategiesemployedtoreducetheimpactoftheFIonclimatechange;and●Integrationofclimatechangeingovernanceanddecision-making.FinancialSectorScience-BasedTargetsGuidance9HowtojointheSBTiandsubmittargetsforapprovalThepublicationofthisframeworkinOctober2020commencedapilottargetvalidationprojectfor20financialinstitutions.Aswithcompanies,thefirstgenerationofSBTsprovidesproofofconceptthatcatalysesfurtheractionandtargetsettingamongpeerfinancialinstitutions.FollowingtheconclusionofthepilotinFebruary2022,allinterestedFIsareinvitedtofollowthefive-stepSBTiCalltoActionprocess:committosetanSBT,developatarget,submitthetargetsforvalidation,announcetheapprovedtargets,anddisclosetargetprogress.In2022,theSBTiplanstopublishupdatedtargetcriteriaandrecommendationsforfinancialinstitutionsbasedonthelatestavailableclimatescienceandtarget-settingmethods,aswellaslessonslearnedintheearlytargetvalidationphase.FinancialSectorScience-BasedTargetsGuidance10GlossaryTermDefinitionAbsoluteemissionsGreenhousegasemissionsattributedtoafinancialinstitution’slendingandinvestingactivity,expressedinmetrictonnesofCO2equivalent(tCO2e).AssetclassAgroupoffinancialinstrumentsthathavesimilarfinancialcharacteristics.AttributionshareorattributionfactorTheshareoftotalgreenhousegasemissionsoftheborrowerorinvesteethatareallocatedtotheloanorinvestments.AvoidedemissionsEmissionreductionsthatthefinancedprojectproducesversuswhatwouldhavebeenemittedintheabsenceoftheproject(thecounterfactualbaselineemissions);avoidedemissionsarenotincludedinSBTs.BiogenicCO2eemissionsEmissionsfromastationarysourcedirectlyresultingfromthecombustionordecompositionofbiologicallybasedmaterialsotherthanfossilfuels.BusinessloanOn-balancesheetloansandlinesofcreditwithunknownuseofproceedstobusinesses,nonprofits,andanyotherstructureoforganization.Revolvingcreditfacilitiesandoverdraftfacilitiesaswellasbusinessloanssecuredbyrealestate,suchascommercialrealestate–securedlinesofcredit,arealsoincludedinthebusinessloansassetclass.CarbonaccountingoffinancialportfoliosTheannualaccountinganddisclosureofGHGemissionsassociatedwithloansandinvestmentsatafixedpointintimeinlinewithfinancialaccountingperiods.Thisisalsocalled“portfoliocarbonaccounting.”ClimateimpactInthecontextofthisframework,climateimpactreferstotheGHGemissionsthatoccurasaresultoffinancingofloansandinvestments.Climate-relatedrisksFinancialriskassociatedwithclimate-relatedinvestmentsandactivities,includingcarbonassetriskortransitionrisk,physicalrisk,andlegalrisk.FinancialSectorScience-BasedTargetsGuidance11CO2-equivalent(CO2e)TheamountofCO2thatwouldcausethesameintegratedradiativeforcing(ameasureforthestrengthofclimatechangedrivers)overagiventimehorizonasanemittedamountofanotherGHGormixtureofGHGs.Conversionfactorsvarybasedontheunderlyingassumptionsandasthescienceadvances.CommercialrealestateloansOn-balancesheetloansforthepurchase,refinance,construction,orrehabilitationofcommercialrealestate(CRE).Thisdefinitionimpliesthatthepropertyisusedforcommercialpurposes.ConsolidationapproachReferstohowanorganizationsetsboundariesforcorporateGHGaccounting.Typesincludeequityapproach,financialcontrolandoperationalcontrolaspertheGHGProtocolCorporateStandard.ConsumerloanAloangiventoconsumerstofinancespecifictypesofexpenditures.Aconsumerloanisanytypeofloanmadetoaconsumerbyacreditor.Forexample,amortgageoramotorvehicleloan.CorporatedebtMoneythatisowedbycompaniesratherthanbygovernmentsorindividualpeople.DebtAfinancinginstrumentthatrequiresrepaymentbytheborrower.DirectemissionsEmissionsfromsourcesthatareownedorcontrolledbythereportingentityand/ortheborrowerorinvestee.DoublecountingOccurswhenasingleGHGemissionreductionorremoval,achievedthroughamechanismissuingunits,iscountedmorethanoncetowardattainingmitigationpledgesorfinancialpledgesforthepurposeofmitigatingclimatechangewithinoneormultipleorganizations.EmissionintensitymetricEmissionsperaspecificunit,forexample:tCO2e/$millioninvested,tCO2e/MWh,tCO2e/tonproduced,tCO2e/$millioncompanyrevenue.EmissionremovalTheactionofremovingGHGemissionfromtheatmosphereandstoringitthroughvariousmeans,suchasinsoils,trees,undergroundreservoirs,rocks,theocean,andevenproductslikeconcreteandcarbonfiber.FinancialSectorScience-BasedTargetsGuidance12EmissionscopesTheGHGProtocolCorporateStandardclassifiesanorganization’sGHGemissionsintothreescopes.Scope1emissionsaredirectemissionsfromownedorcontrolledsources.Scope2emissionsareindirectemissionsfromthegenerationofpurchasedenergy.Scope3emissionsareallindirectemissions(notincludedinscope2)thatoccurinthevaluechainofthereportingorganization,includingbothupstreamanddownstreamemissions.EnterpriseValueIncludingCash(EVIC)Thesumofthemarketcapitalizationofordinarysharesatfiscalyear-end,themarketcapitalizationofpreferredsharesatfiscalyear-end,andthebookvaluesoftotaldebtandminorities’interests.Toavoidthepossibilityofnegativeenterprisevaluesandconsideringthatcashasanimportantfinancingsourcesformanycompaniesshouldcarryitsfairshareofemissions,nodeductionsofcashorcashequivalentsaremade.Environmentallyextendedinput-output(EEIO)dataEEIOdatarefertoEEIOemissionsfactorsthatcanbeusedtoestimatecradle-to-gate(allupstream)GHGemissionsforagivenindustryorproductcategory.EEIOdataareparticularlyusefulinscreeningemissionssourceswhenprioritizingdatacollectionefforts.EquityBank’sorinvestor’sownershipinacompanyorproject.Therearevarioustypesofequity,butequitytypicallyreferstoshareholderequity,whichrepresentstheamountofmoneythatwouldbereturnedtoacompany’sshareholdersifalloftheassetswereliquidatedandallofthecompany'sdebtwerepaidoff.EXIOBASEAglobal,detailedMulti-RegionalEnvironmentallyExtendedSupply-UseTable(MR-SUT)andInput-OutputTable(MR-IOT).Itwasdevelopedbyharmonizinganddetailingsupply-usetablesforalargenumberofcountries,estimatingemissionsandresourceextractionsbyindustry.FinancedemissionsAbsoluteemissionsthatbanksandinvestorsfinancethroughtheirloansandinvestments.Financedemissionscanbecalculatedanddisclosedatanassetclasslevel.FinancialinstitutionsTheSBTidefinesfinancialinstitutionsascompanieswhosebusinessinvolvesthedealingoffinancialandmonetarytransactions,includingdeposits,loans,investments,andcurrencyexchange.If5percentormoreofacompany’srevenueorassetscomesfromactivitiessuchasthosedescribedabove,theyareconsideredtobefinancialinstitutions.Developmentfinancialinstitutionsarecurrentlyoutofprojectscope.FinancialSectorScience-BasedTargetsGuidance13Greenhousegas(GHG)emissionsThesevengasescoveredbytheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)—carbondioxide(CO2),methane(CH4),nitrousoxide(N2O),hydrofluorocarbons(HFCs),perfluorocarbons(PFCs),sulphurhexafluoride(SF6),andnitrogentrifluoride(NF3).GreenhouseGas(GHG)ProtocolComprehensiveglobalstandardizedframeworkstomeasureandmanagegreenhousegas(GHG)emissionsfromprivateandpublicsectoroperations,valuechains,andmitigationactions.TheGHGProtocolsuppliestheworld'smostwidelyusedgreenhousegasaccountingstandards.TheCorporateAccountingandReportingStandardprovidestheaccountingplatformforvirtuallyeverycorporateGHGreportingprogramintheworld.Greenhousegas(GHG)accountingGreenhousegasaccountingtechniquesthatincludetwoprimaryapproachestotrackingGHGemissionsresultingfromacompany’soperations:corporateaccountingthroughanannualGHGinventory,whichinvolvesfinancedemissionsaspartoftheaccounting;andprojectaccountingthroughestimatingnetemissionreductionsorincreasesfromindividualprojectsoractivitiesrelativetoabaselinescenario.GreenfinancingFinancialflows(suchaslending,equitypositions,orunderwritingandadvisoryservices)associatedwithzero-orlow-carbonassetsoractivities.Thistermisoftenusedtoreflectnon-climate-specific“green”activitiesaswell,suchas“green”bonds,whichcansupportclimate-relevantactivitiesorwater,conservation,andotherrelatedactivities.GreyfinancingFinancialflowstowardactivitiesandtechnologiesthatcontributesignificantlytoGHGemissions.IndirectemissionsEmissionsthatareaconsequenceoftheactivitiesofthereportingentitybutoccuratsourcesownedorcontrolledbyanotherentity.InvestmentTheterminvestmentisbroadlydefinedas“puttingmoneyintoactivitiesororganizationswiththeexpectationofmakingaprofit.”Mostformsofinvestmentinvolvesomeformofrisktaking,suchasinvestmentinequities,debt,property,projects,andevenfixedinterestsecurities,whicharesubjecttoinflationrisk,amongotherrisks.ListedequityandbondsThisassetclassincludesallcorporatebondswithoutknownuseofproceedsandalllistedequityonthebalancesheetand/oractivelymanagedbythefinancialinstitution.FinancialSectorScience-BasedTargetsGuidance14MortgageOn-balancesheetloansusedtopurchaseresidentialproperty,includingmultifamilypropertieswithnolimitonthenumberofunits.Thisdefinitionimpliesthatthepropertyisusedforresidentialpurposes.MotorvehicleloanOn-balancesheetloansthatareusedtofinanceoneorseveralmotorvehicles.NonlistedcorporatefinanceFinanceprovidedtocompaniesthatisnottradedonamarketsuchasbusinessloansorcommercialrealestate.ParisAgreementTheParisAgreement,adoptedwithintheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)inDecember2015,commitsallparticipatingcountriestolimitglobaltemperaturerisetowell-below2°Cabovepreindustriallevelsandpursueeffortstolimitwarmingto1.5°C,toadapttochangesalreadyoccurring,andtoregularlyincreaseeffortsovertime.ProjectfinanceOn-balancesheetloanorequity(private)withknownuseofproceedsthataredesignatedforaclearlydefinedactivityorsetofactivities,suchastheconstructionofagas-firedpowerplant,awindorsolarproject,orenergyefficiencyprojects.ScenarioanalysisAprocessofanalyzingfutureeventsbyconsideringalternativepossibleoutcomes.Science-basedreductiontargets(SBTs)TargetsadoptedbycompaniestoreduceGHGemissionsareconsidered“science-based”iftheyareinlinewithwhatthelatestclimatesciencesaysisnecessarytomeetthegoalsoftheParisAgreement—tolimitglobalwarmingtowell-below2°Cabovepreindustriallevelsandpursueeffortstolimitwarmingto1.5°C.Scope1emissionsEmissionsfromoperationsthatareownedorcontrolledbythereportingcompany.Scope2emissionsEmissionsfromthegenerationofpurchasedoracquiredelectricity,steam,heating,orcoolingconsumedbythereportingcompany.Scope3emissionsAllindirectemissions(notincludedinscope2)thatoccurinthevaluechainofthereportingcompany,includingbothupstreamanddownstreamemissions.FinancialSectorScience-BasedTargetsGuidance15Scope3,category15(investments)emissionsThiscategoryincludesscope3emissionsassociatedwiththereportingcompany’sloansandinvestmentsinthereportingyear,notalreadyincludedinscope1orscope2.Forcategory15,theGreenhouseGasProtocolScope3Standardonlyrequirestheinclusionofcorporatedebtholdingswithknownuseofproceeds.TheSBTifinancialsectorprojectgoesbeyondthisrequirementandthusexpandstheminimumboundaryofcategory15.Financialinstitutionsshallfollowtheemissionsmeasurementrequirementsintherelevantassetclassmethodsandmeasureemissionsofdebtinvestmentswithoutknownuseofproceeds,whereapplicable.SequesteredemissionsReferstoatmosphericcarbondioxide(CO2)emissionsthatarecapturedandstoredinsolidorliquidform,therebyremovingtheirharmfulglobalwarmingeffect.Sector-specificmetricsEnergyorcarbonintensitymetricsthatuseaphysicalunitdenominatorandareapplicabletoaspecificsector.ExamplesincludekgCO2/MWh(power),MWh/m2(realestate),etc.Smallandmedium-sizedenterprises(SMEs)AsthedefinitionofSMEscanvaryfromregiontoregion,financialinstitutionsmayusetheirowndefinitionsofSMEstodefinethiscategory.Forcompanies,theSBTiprovidesastreamlinedtargetvalidationrouteforSMEs,whereanSMEisdefinedasanon-subsidiary,independentcompanywithfewerthan500employees.FinancialinstitutionsinterestedinengagingSMEstosetSBTsandwhosethresholdforSMEsishigherthan500employees(e.g.,1,000employees)mayberequiredtodirecttheirSMEclientsorinvesteestotheregularSBTivalidationroute.TotalbalancesheetvalueAbalancesheetisafinancialstatementthatreportsacompany'sassets,liabilities,andshareholders'equity.Thebalancesheetvaluereferstothevalueoftotaldebtplusequity.WorldInput-OutputDatabase(WIOD)WorldInput-OutputTablesandunderlyingdata,covering43countries,andamodelfortherestoftheworldfortheperiod2000–2014.Datafor56sectorsareclassifiedaccordingtotheInternationalStandardIndustrialClassificationrevision4(ISICRev.4).FinancialSectorScience-BasedTargetsGuidance161.IntroductionTheformergovernoroftheBankofEngland,MarkCarney,haswarnedthattheglobalfinancialsystemisbackingcarbon-producingprojectsthatwillraisethetemperatureoftheplanetbyover3°C—severelyovershootingwhatisrequiredtostaywell-below2°Casagreedinthe2015ParisAgreement.3Atthesametime,extremeweathereventsandotherclimateimpactsposegrowingthreatstofinancialinstitutions’(FIs)economicmodels.WhilemanyFIsareworkingonreducingtheirexposuretorisksfromclimateimpacts,theScienceBasedTargetsinitiative’s(SBTi)financesectorguidanceprovidesaframeworkforfinancialinstitutionstoreducetheirimpactontheclimate.Morespecifically,itisdesignedtoclarify,improve,andacceleratefinancialinstitutions’alignmentwiththegoalsoftheParisAgreement.TodecarbonizetheglobaleconomyinalignmentwiththegoalsestablishedbytheParisAgreement,alleconomicactorsintherealeconomyneedtoreducetheirgreenhousegas(GHG)emissionsataratesufficienttoremainalignedwiththeemissionspathwaysestablishedbyclimatescience.Corporateemissionsdonotoccurinavacuum,butratherwithinabroadereconomicandregulatorysystemthatcreatesacomplexwebofincentivesanddisincentivesforeconomicactorstoreduceemissions.Inmanyways,allactorsacrossagivenvaluechain,namelytheupstreamanddownstreamactivitiesassociatedwitheachcompany’soperation,andthoseconnectedthroughpolicyandotherincentives,shareinfluenceoverthedirectemissionsofeachactorand,therefore,shareresponsibilityforreducingthem.FIshaveuniqueinfluenceoverotheractorsthroughtheirprovisionofinvestmentandlendingservices.TodriveParis-alignedsystemicdecarbonization,itiscriticaltoleveragesharedinfluenceandresponsibilityforaligningincentivesaswellaseliminatingbarrierstoemissionreductions.1.1PurposeofthisDocumentTodate,morethan70financialinstitutionshavepubliclycommittedtosetemissionsreductiontargetsthroughtheSBTi.ThelistofcommittedfinancialinstitutionsasofMarch2021isincludedbelowinalphabeticalorder:1ABNAmroBankN.V.25E.SUNFinancialHoldingCo.,Ltd.49PiraeusBankSA2ActiamNV26EQTAB50PrincipalFinancialGroup,Inc.3AlbarakaTürkParticipationBank27Eurazeo51RaiffeisenBankInternationalAG4AllianzInvestmentManagementSE28FubonFinancialHoldings52Schroders5AmalgamatedBank29FullCycle53ShinhanFinancialGroup6ASNBank30GrupoFinancieroBanorteSABdeCV54SKSecurities,Co.,Ltd3FormoreinformationonMarkCarney’sstatement,pleaseseehttps://www.theguardian.com/business/2019/oct/15/bank-of-england-boss-warns-global-finance-it-is-funding-climate-crisis?CMP=share_btn_link.FinancialSectorScience-BasedTargetsGuidance177AustralianEthicalInvestment31HannonArmstrong55SocieteGenerale8AvivaPLC32HitachiCapitalCorporation56SompoHoldings,Inc.9AXAGroup33HSBCHoldingsplc57StandardCharteredBank10BancodoBrasilS.A.34INGGroup58StorebrandASA11BanColombiaSA35KLP59SwedbankAB12BankAustralia36LaBanquePostale60SwissRe13BankJ.SafraSarasinAG37Legal&GeneralGroupPLC61TurkiyeGarantiBankasiA14BBVA38LloydFondsAG62TeachersMutualBank15BNPParibas3963TokioMarineHoldings,Inc.16CaixaGeraldeDepósitos40Mahindra&MahindraFinancialServicesLimited64TribeImpactCapitalLLP17CapitasFinanceLimited41MetLife,Inc.65TSBBank18ChambersFederation42MPPension66TSKB19CommercialInternationalBankEgypt(SAE)CIB43MS&ADInsuranceGroupHoldings,Inc.67TürkiyeİşBankası20CommerzbankAG44NatWestGroupplc68Vakifbank21CreditAgricole45NovoBanco,SA69WestpacBankingCorporation22CreditSuisseGroup46OXI-ZENSolutionsSA70YESBank23DGBFINANCIALGROUP47PensionDanmark71YuantaFinancialHoldingCoLtd24DirectLineInsuranceGroupplc48PhoenixGroupHoldingsplc72ZurichInsuranceGroupLtdAnadditional80institutionsinthefinancialsectorreportedtoCDPin2019thattheyintendtosetascience-basedtargetwithinthenexttwoyears.Recognizingthepressingneedforatailored,yetstandardizedapproachforfinancialinstitutions,theSBTilaunchedaprojectin2018todeveloptargetsettingmethods,targetvalidationcriteriaandrecommendations,atargetsettingtool,andaguidanceforfinancialinstitutionstoaligntheirlendingandinvestmentportfolioswiththeambitionsoftheParisAgreement(seeFigure1.1).FinancialSectorScience-BasedTargetsGuidance18Figure1.1.FourComponentsoftheSBTi'sFrameworkforFinancialInstitutionsSource:Authors2020.Thisguidancedocumentisapartofthescience-basedtargetsettingframeworkforfinancialinstitutionsthattiesthethreeothercomponentstogether,namelythetargetvalidationcriteriaandrecommendations,targetsettingmethods,anddescriptionofanopen-sourcetoolfortargetsettingmethods.Financialinstitutionsareinvitedtousethecriteriaandrecommendations(Chapter3)andmethods(Chapters4and5)describedinthisdocumenttoformulatetheirtargets.ThecriteriaandrecommendationswillalsobeusedbytheSBTiTargetValidationTeam(TVT)toassessfinancialinstitutions’targetsubmissions.TheSBTiFinanceTooldescribedhereisfreelyavailablethroughtheprojectwebsite4alongwithallotherprojectresourcestofacilitatetargetsetting.Finally,thecasestudiesandotherinformationincludedinthisguidancedocumentareintendedtofurtherinformfinancialinstitutions’targetdevelopment,submission,andimplementationprocesses.Inaddition,thisdocumentprovidesrecommendationstofinancialinstitutionsonhowtosetscience-basedtargetsforscope1,2,and3emissions(Chapters4and5),informedsuggestionsoncommunicatingtargetsandactions(Chapter6),examplesofactionsFIscantaketoachievetheirtargets(Chapter7),andinstructionsoncommittingtotheSBTiandsubmittingtargetsforvalidation(Chapter8).Thedocumentfinishesbyoutliningareasfordiscussionandfurtherresearch(Chapter9).4Pleasefindtheprojectwebsitehere:https://sciencebasedtargets.org/financial-institutions/.FinancialSectorScience-BasedTargetsGuidance191.2TheSBTi’sFinancialSectorProjectAudienceTheSBTidefinesafinancialinstitutionasacompanywhosebusinessinvolvesthearrangementandexecutionoffinancialandmonetarytransactions,includingdeposits,loans,investments,andcurrencyexchange.Morespecifically,theSBTideemsacompanyafinancialinstitutionif5percentormoreofitsrevenueorassetscomesfromtheactivitiesdescribedabove.Inpractice(andforthefirstphaseoftheprojectfrom2018to2020),theprimaryaudienceincludesuniversalbanks,assetmanagers(mutualfunds),assetowners(pensionfunds,closed-endfunds,insurancecompanies),andmortgagerealestateinvestmenttrusts(REITs).Theframeworkisalsorelevantforotherfinancialinstitutionsthathaveholdingsinthefollowingassetclasseswheremethodsarecurrentlyavailable:-Realestate-Mortgages-Electricitygenerationprojectfinance-Corporateandconsumerloans,bonds,andequityAssetclassesbeyondthislistarecurrentlyoutofscope.Bilateralandmultilateraldevelopmentfinancialinstitutions(e.g.,theWorldBank)arenottheprimaryaudienceoftheproject.EquityREITs,namelyrealestatecompaniesthatownormanageincome-generatingpropertiesandleasethemtotenants,arenotatargetaudienceofthisprojectandshallpursuetheregulartargetvalidationrouteforcompanies.AdditionalaudiencesandassetclassesareexpectedtobeincludedinPhaseIIoftheproject.1.3TheSBTi’sFinancialSectorProjectContextFinancialinstitutionsdifferfromothereconomicsectors:theyprovidefinanceandotherservicestothecompaniesthatareresponsibleforreducingGHGemissions,ratherthanexercisedirectcontroloverGHGemissionreductions.ThecentralenablingroleoffinanceisrecognizedintheParisAgreement,whichcontainsArticle2.1(c)on“makingfinanceflowsconsistentwithapathwaytowardslowgreenhousegasemissionsandclimate-resilientdevelopment.”AsreflectedbyArticle2.1(c),financialinstitutionsrequireanapproachwithintheSBTithatistailoredtotheirroleandrecognizesthatclimatetargetsettingisoneofnumerousactivitiesneededforsystemictransformation.Duetothelackofcompleteunderstandingandevidenceregardingtheclimateimpactsoffinancialinstitutions'investmentandlendingportfolios,theSBTi’sfinancesectorprojectfocusesontrackableactivities.ActivitiesthatconnectfinancialflowswithGHGemissionreductionsintherealeconomyincludephysicalandtransitionriskassessment,emissionsmeasurementanddisclosure,targetsetting,trackingofmitigationactions,andperformanceanddisclosure.Thus,theSBTiframeworkforfinancecontributestothewiderportfoliotransitionframeworkthroughitstransparentandrobustFinancialSectorScience-BasedTargetsGuidance20targetsettingplatformanddisclosurerequirementregardingactionstakenbyfinancialinstitutionstoachievetargets.1.4WhatAreScience-BasedTargets(SBTs)?1.4.1SBTsforCompaniesTargetsadoptedbycompaniestoreduceGHGemissionsareconsidered“science-based”iftheyareinlinewithwhatthelatestclimatesciencesaysisnecessarytomeetthegoalsoftheParisAgreement—tolimitglobalwarmingtowell-below2°Cabovepreindustriallevelsandpursueeffortstolimitwarmingto1.5°C.Amongcompaniesglobally,thereisagrowingmomentumforscience-basedtargetsettingthroughtheSBTi.AsofSeptember2020,989companiesand58financialinstitutionshavepubliclyjoinedtheSBTi,amongwhich467companieshavehadtheirtargetsofficiallyapproved(seeFigure1.2).5ThepaceatwhichcompaniesjointheSBTidoubledbetweenApril2018andOctober2019comparedtotheprevious36months.WhentheSBTiwaslaunchedin2015,science-basedtargetsettingemergedasanovelcorporatesustainabilitypractice.TheonsetoftheglobalCOVIDpandemicin2020hasnotslowedthepaceofcompanycommitmentssuchthatSBTiremainsontracktohitits“1,000committedcompaniesbyendof2020”goal.Today,SBTshavebecomeasharedlanguageforambitiouscorporateclimateambition.TheSBTihasmadesubstantialprogressagainstitsgoalofmakingscience-basedtargetsettingastandardbusinesspracticeforcompaniesseekingtoplayaleadingroleindrivingdownglobalGHGemissions.5Formoreinformationoncommittedandapprovedcompanies,pleasevisithttps://sciencebasedtargets.org/companies-taking-action/.FinancialSectorScience-BasedTargetsGuidance21Figure1.2.CompanyActivityintheSBTisinceJune2015Source:SBTi.1.4.2OverviewoftheScienceBasedTargetsinitiativeTheSBTimobilizescompaniestosetscience-basedtargetsandbooststheircompetitiveadvantageinthetransitiontoalow-carboneconomy.ItisacollaborationbetweenCDP,theUnitedNationsGlobalCompact,WorldResourcesInstitute(WRI),andtheWorldWideFundforNature(WWF),andisoneoftheWeMeanBusinesscoalitioncommitments.6ThefinanceprojectisoneoftheSBTi’songoingsectordevelopmentprojects.Theinitiative:●ShowcasescompaniesthathavesetSBTsthroughcasestudies,events,andmediatohighlighttheincreasedinnovation,reducedregulatoryuncertainty,strengthenedinvestorconfidence,andimprovedprofitabilityandcompetitivenessgeneratedbysettingSBTs;●DefinesandpromotesbestpracticeinsettingSBTswiththesupportofaTechnicalAdvisoryGroupandaScientificAdvisoryGroup;●Offersresources,workshops,andguidancetoreducebarrierstoadoption;and●Independentlyassessesandapprovescompanies’targetsthroughaCalltoActioncampaignthatcallsoncompaniestodemonstratetheirleadershiponclimateactionbypubliclycommittingtosetSBTs.CompaniesthenhavetwoyearstogettheirtargetsapprovedandpublishedthroughtheSBTi.76PleaserefertotheSBTi’swebsiteforfurtherdetailsonitsgovernance:https://sciencebasedtargets.org/governance/.7Formoreinformation,seehttp://sciencebasedtargets.org/.FinancialSectorScience-BasedTargetsGuidance221.5HowistheFinancialSectorAddressingClimate?Financialinstitutionsareincreasinglyattunedtoclimate,bothintermsofadaptationtowarmingandreducingclimateimpactsofinvestmentandlendingportfolios.Actionsinthislattermitigationcategorycanbecategorizedintosixrubrics:high-levelcommitmentstoact,measurementoffinancedemissions/disclosure,scenarioanalysis,targetsetting,implementationactions,andreporting.Table1.1belowsummarizes15relatedfinancialsectorinitiativesalongsidethesesixrubrics.Table1.1.RelevantInitiativesThatSupportFinancialInstitutions'ClimateActionsNotes:UNEP=UnitedNationsEnvironmentProgram;IIGCC=InstitutionalInvestorsGrouponClimateChange;CDP=CarbonDisclosureProject.Source:Authors.TheSBTi’sfinancialsectorprojectisfocusedonthetargetsettingcomponentinthebroaderportfoliotransitionprocess.Thefirstclimatemitigationstepformanyfinancialinstitutionsisahigh-levelcommitmenttoactthroughaninternationalinitiativesuchastheUN-convenedNet-ZeroAssetOwnersFinancialSectorScience-BasedTargetsGuidance23Alliance,PrinciplesforResponsibleBanking,theInvestorAgenda,oracommitmenttoTaskForceonClimate-relatedFinancialDisclosures(TCFD)reporting.Todevelopemissionsmetrics,thePartnershipforCarbonAccountingFinancials(PCAF)providesassetclassmethodsanddataresourcesforquantificationoffinancedemissions.TheInstitutionalInvestorsGrouponClimateChange(IIGCC)ParisAlignedInvestmentInitiativebuildsfromahigh-levelcommitmenttosetoutarangeofactionsinvestorsshouldtaketoaligntheirportfolios.TargetsettingwiththeSBTiisintendedtoprovidespecific,shorter-termcomponentsofthehigh-levelcommitmentsandbuildonthefinancedemissionsandscenarioanalysis.Afterthetargetsaresetandpublished,theSBTiseekstoharmonizewithactionandreporting–focusedinitiativestofacilitateimplementation,accountability,andcompilationofevidence.OutsideoftheareasdescribedinTable1.1above,financialinstitutionsarealsomitigatingtheirclimateimpactbymeasuringemissionsintensityoftheirportfolios,distinguishinggreenversusgreyfinancing,anddivestingfromfossilfuels.Theemissionsintensityapproachcalculatesemissionspereconomicunit,oftengramsCO2equivalent(gCO2e)/$assetsundermanagement,toquantifysectordifferencesandtrackchangesovertime.GreenversusgreymetricsareexemplifiedbyWRI’sGreenTargetstool,whichillustratesthedistributionofbanks’sustainablefinancecommitmentsrelativetotheirfossilfuelfinance.8Universityendowmentandotherfinancialinstitutions’commitmentstodivestfromfossilfuelsrepresentanothertypeofaction.TheSBTifinancesectorprojectcomplementsandaugmentstheseapproacheswithitsfocusontargetsetting.1.5.1FrameworkDevelopmentProcessScience-basedtargetsettingresourceforfinancialinstitutionshasbeendevelopedthroughatwo-yearinclusivemulti-stakeholderprocess,includingconsultationwithanExpertAdvisoryGroup(EAG)representingfinancialinstitutions,consultants,nongovernmentalorganizations(NGOs),andacademicinstitutions;financialinstitutionsparticipatinginmethodroadtesting;andabroad,inclusiveStakeholderAdvisoryGroup(SAG),whichprovidesinputatkeymilestonesintheframeworkdevelopmentprocess.Belowarehighlightsandmilestonesfromthedevelopmentprocess:●September2018:FirstEAGmeeting;●December2018:EAGmeetingtointroducethedraftmethodsandsolicitinitialfeedback;●February2019:EAGmeetingtoobtainfeedbackontheroad-testingprocess;●April2019:Launchofdraftmethodsforroad-testingprocess;●April–September2019:Gatheredfeedbackfromfinancialinstitutionsandotherstakeholdersondraftassetclass–basedmethodsthroughroad-testingprocessandanopenstakeholderconsultation;8FormoreinformationonWRI’sGreenTargetstoolforbanks,seehttps://www.wri.org/finance/banks-sustainable-finance-commitments/.FinancialSectorScience-BasedTargetsGuidance24●October2019:Hostedawebinartoshareasummaryoffeedbackreceivedfromcompaniesparticipatingintheroad-testingprocess;●November2019:CohostedawebinarwithGlobalCompactNetworkAustraliaandWWFtoshareprogressonmethodologieswithfinancialinstitutionsinOceaniaandAsiaPacific;●February2020:HostedworkshopsinLondonandTokyotogatherfeedbackfromstakeholdersondrafttargetvalidationcriteria;●April2020:Hostedawebinartoinitiatepubliccallforfeedbackondevelopmentofanewtemperatureratingdraftmethodologyforcompaniesandinvestmentportfolios;●April–May2020:ConductedpublicconsultationtogatherinputfromstakeholdersondrafttargetvalidationcriteriaandtooldevelopmentprocessthatwillserveascentralcomponentsoftheSBTi’sframeworkforfinancialinstitutions;●May2020:Hostedawebinartoshareasummaryofstakeholderfeedbackondrafttargetvalidationcriteria;●May2020:ParticipatedinawebinarhostedbytheInstituteofInternationalFinancetoshareaprojectoverviewandupdate;●April–May2020:Hostedawebinartolaunchtheconsultationprocessforthetemperatureratingmethodology;●July2020:HostedawebinartolaunchtheTemperatureRatingandSBTPortfolioCoveragetoolbeta-testingprocessandprovidedanoverviewoftheFinancialSectorScienceBasedTargetsGuidanceandthefeedbackprocess;●August2020:SharedthefirstdraftoftheFinancialSectorScienceBasedTargetsGuidanceforpubliccomments;●August2020:PublicconsultationonthefirstdraftoftheFinancialSectorScienceBasedTargetsGuidancetookplacefromAugust6to27,2020;●July–August2020:Betatestingofanopen-sourcetool,whichcoverstheTemperatureRatingandSBTPortfolioCoveragemethods,targetsettingtoollaunchedonJuly23.Twowebinarswerehostedforbetatesters:BetaTesterTechnicalDeepDive:SettingUpandIntegratingtheToolinYourWorkflow(August6);BetaTesterWorkshop:HowToRuntheToolandUseCases(August7).Thetoolisbasedonanewopen-sourceTemperatureRatingmethodologydevelopedbyCDPandWWF.Themethodologyandtoolaresuitableforsettingtargetsforunlistedandlistedequityandcorporatedebtportfolios;●August–October2020:Revisedthefirstdraftoftheguidancebasedonfeedbackreceivedinthesurveyandotherengagedstakeholders;revisedtheTemperatureRatingandSBTPortfolioCoveragetoolandtooldocumentationbasedonfeedbackreceivedinthebeta-testingprocess.99Moredocumentationoftheframeworkdevelopmentprocesscanbefoundontheprojectwebsite:https://sciencebasedtargets.org/financial-institutions/.FinancialSectorScience-BasedTargetsGuidance251.BusinessCaseforFinancialInstitutionstoSetScience-BasedTargetsFinancialinstitutionsareuniquelypositionedtoinfluenceotheractorsthroughtheirinvestmentandlendingactivities.TodriveParis-alignedsystemicdecarbonization,itiscriticaltoleveragesharedinfluenceandresponsibilityforaligningincentivesaswellaseliminatingbarrierstoemissionsreductions.Financialinstitutionsthatsetscience-basedtargetscommittoaligntheirlendingandinvestmentportfolioswiththelevelofambitionrequiredtoachievethegoalsoftheParisAgreement.Thiscommitment,alongwiththestrategyandactionsthatwillbetakentoachievethetargetsnotonlycontributetothetransitiontoanet-zeroeconomybutalsobringsubstantialbenefitstothefinancialinstitution.Keybenefitsincludethefollowing:●Buildbusinessresilienceandincreasecompetitiveness:PerformingscenarioanalysisandapplyingmethodstosetSBTsenablefinancialinstitutionstoalignwiththezero-carboneconomy,toidentifyandcapitalizeonarangeofopportunities,andtomitigateclimaterisksandincreasecompetitivenessbygaininginsightsintothetransformationsfacedbytheeconomicsectorstheylendtoandinvestin.●Driveinnovation:AsSBTsincludealong-termvision,financialinstitutionscanplanfuturefinancingoptionsthatprioritizethelow-carbontransition.Engagingwiththeirclients,financialinstitutionscandevelopinnovativefinancialproductsandservicesthatenablecustomerstoreduceemissionsintherealeconomy.●Buildcredibilityandreputation:Ascomparedtotargetsinitiatedsolelybyfinancialinstitutions,SBTshavehighercredibilitywithstakeholderssincetheyarebasedonthelatestavailablescienceandvalidatedagainstasetofrobustcriteriadevelopedthroughamulti-stakeholderconsultativeprocess.FinancialinstitutionswithSBTscanserveaslower-riskoptionsforlong-termshareholdersandinvestorsthatareseekingtohedgeclimate-relatedrisks.Inaddition,financialinstitutionswithSBTsdemonstrateleadershipinsustainability,whichimprovesafinancialinstitution'sreputationwithallstakeholders.●Influenceandprepareforshiftsinpublicpolicy:SBTshelpfinancialinstitutionsadapttochangingpoliciesandsendastrongersignaltopolicymakers,allowingtheindustrytobetterinfluencepolicydecisions.FinancialinstitutionswithSBTsaremuchbetterpositionedtorespondtofutureregulatoryadjustmentsasgovernmentsrampuptheirclimateaction.●Demonstrateleadership:WhilemetricsandmethodstosetSBTstargetsforfinancialinstitutionsarenewandbestpracticeisstillevolving,thisisnoreasontodelayaction.Financialinstitutionsthatundertakethetargetsettingprocessleadthewayandpushthemarkettowardthemostcredibleandpracticalsolutions.FinancialSectorScience-BasedTargetsGuidance262.SBTiTargetValidationCriteriaandRecommendationsforFinancialInstitutionsThischapterpresentsVersion1.0oftheSBTitargetvalidationcriteriaandrecommendationsforfinancialinstitutions.Thesesector-specificcriteriasupersedethegeneralSBTicriteriaforcompanies.Sections1to4and7ofthecriteria(Section3.1,3.2,3.3,3.4and3.7)focusonGHGinventory,scope1and2targets,andtargetvalidityandrecalculations.Version4.1oftheSBTigeneralcriteriaforcompaniesservesasthebasisforthesesections,withslightdeviationsforfinancialinstitutions.10Whererelevant,thesecriteriaaresubjecttotheSBTi’sannualupdateofcorporatecriteria.Developedthroughextensivestakeholderconsultation,Sections5and6(Section3.5and3.6)ofthecriteriaaredesignedspecificallyforfinancialinstitutions’targetsetting,progress-tracking,andactionreportingrelatedtotheirinvestmentandlendingactivities.In2022,theSBTiplanstoupdatethisinitialsetofcriteriabasedonlessonslearnedinthetargetvalidationpilotphaseforfinancialinstitutions(seeChapter8formoreinformationoncommittingandsubmittingtargetstoSBTi).TheSBTialsoreservestherighttomakeadjustmentstothecriteria,asneeded,toreflectthemostrecentemissionsscenarios,partnerorganizationpolicies,greenhousegasaccountingapproaches,andevolvingunderstandingofbestpracticeinscience-basedtargetsetting.Allthecriteriapresentedheremustbemetforfinancialinstitutions'targetstoberecognizedbytheSBTi.Inaddition,financialinstitutionsshallfollowtheGHGProtocolCorporateStandard,Scope2Guidance,andCorporateValueChain(Scope3)AccountingandReportingStandardfortheiremissionsaccountingandreporting.11Inthecontextofthecriteriaandthisguidance,theterm“shall”isusedtodescriberequirementsrelatedtorelevantcriteriaandaccountingguidance,whereastheterm“should”isusedtodescriberecommendations.TheSBTirecommendationsareimportantfortransparencyandbestpractices,butarenotrequired.Unlessotherwisenoted(includingspecificsections),allcriteriaapplytoscopes1,2,and3.AselectgroupofcriteriaandrecommendationsmostrelevanttoFIsareexpandedoninfurthersectionsthroughoutthisdocument,whichincludeadditionalinformationonsuccessfullyfulfillingtheserequirements.12TheSBTistronglyrecommendsthatfinancialinstitutionsthoroughlyreviewtheguidancebeforetargetdevelopment.10PleaseseeVersion4.1oftheSBTigeneralcriteriaforcorporateshere:https://sciencebasedtargets.org/wp-content/uploads/2019/03/SBTi-criteria.pdf.11Limiteddeviationsfromthescope3standardinthisframeworkaredescribedinSection4.1CompilingaGHGInventory.12Formoreinformationoncriterianotexpandedfurtherinthisguidance,pleaserefertotheSBTiTargetValidationProtocolthatdescribestheunderlyingprinciples,process,andcriteriafollowedtoassesstargetsandtodetermineconformancewiththeSBTicriteria.FinancialSectorScience-BasedTargetsGuidance27TheinitiativealsoreservestherighttowithdrawatargetapprovaldecisionifitbecomesapparentthattheFIprovidedincorrectinformationduringthetargetvalidationprocessthatresultsinanyofthecriteriaexistingduringtheassessmentnotbeingmet,orifrequirementsfollowingtheapprovalofthetargetarenotrespected(i.e.,targetprogress-reportingandrecalculations).3.1GHGEmissionsInventoryandTargetBoundaryCriteriaFI-C1–Scopes:Financialinstitutions(FIs)mustsetatarget(s)thatcoversinstitution-widescope1andscope2emissions,asdefinedbytheGHGProtocolCorporateStandard,andscope3investmentandlendingactivitiesasperFI-C15andFI-C16.FIsmaysettargetsforremainingscope3emissionscategoriesasperFI-R9.FI-C2–SignificanceThresholds:Financialinstitutionsmayexcludeupto5percentofscope1andscope2emissionscombinedintheboundaryoftheinventoryandtarget.13FI-C3–GreenhouseGases:Scope1and2targetsmustcoverallrelevantGHGsasrequiredpertheGHGProtocolCorporateStandard.Ifoptionaltargetsonscope3,categories1–14areset,theyshallalsocoverallrelevantGHGs.CoverageofallrelevantGHGsarerecommended,wherepossible,forFIs’scope3portfoliotargets.IffinancialinstitutionsareunabletocoverallGHGsforscope3portfoliotargets,theyshallcoverCO2emissionsataminimum.FI-C4–BioenergyAccounting:DirectemissionsfromthecombustionofbiomassandbiofuelsforInstitution-wideoperationaluse,aswellasGHGremovalsassociatedwithbioenergyfeedstock,14mustbeincludedalongsidethefinancialInstitution’sinventoryandmustbeincludedinthetargetboundarywhensettingascience-basedtargetandwhenreportingprogressagainstthattarget.Ifbiogenicemissionsfrombiomassandbiofuelsareconsideredclimateneutral,thefinancialinstitutionmustprovidejustificationoftheunderlyingassumptions.FinancialinstitutionsmustreportemissionsfromN2OandCH4frombioenergyuseunderscope1,2,or3,asrequiredbytheGHGProtocol,andmustapplythesamerequirementsoninventoryinclusionandtargetboundaryasforbiogeniccarbon.FI-C5–Subsidiaries:Itisrecommendedthatfinancialinstitutionssubmittargetsonlyattheparent-orgroup-level,notthesubsidiarylevel.Parentcompaniesmustincludetheemissionsofallsubsidiariesintheirtargetsubmission,inaccordancewithboundarycriteriaabove.Incaseswherebothparent13Wherefinancialinstitutions’scope1or2emissionsaredeemedimmaterial(i.e.,under5percentoftotalcombinedscope1and2emissions),FIsmaysettheirSBTsolelyonthescope(eitherscope1orscope2)thatcoversmorethan95percentofthetotalscope1and2emissions.Financialinstitutionsmustcontinuetoreportonbothscopesandadjusttheirtargetsasneeded,inaccordancewiththeGHGProtocol’sprincipleofcompletenessandasperFI-C21-Mandatorytargetrecalculation.14Non-bioenergy–relatedbiogenicemissionsmustbereportedalongsidetheinventoryandincludedinthetargetboundary.GHGremovalsthatarenotassociatedwithbioenergyfeedstockarecurrentlynotacceptedtocountasprogresstowardSBTsortowardnetemissionsintheinventory.FinancialSectorScience-BasedTargetsGuidance28companiesandsubsidiariessubmittargets,15theparentcompany’stargetmustalsoincludetheemissionsofthesubsidiaryifitfallswithintheparentcompany’semissionsboundary,giventhechoseninventoryconsolidationapproach.16RecommendationsandAdditionalGuidanceFI-R1–DirectLandUseChangeEmissions:Whenrelevant,financialinstitutionsareencouragedtoaccountfordirectlandusechangeemissionsandincludethemintheirtargetboundary.FinancialinstitutionsseekingtoimplementmitigationactionsaimedatreducinglandusechangeaspartoftheirSBTs(e.g.,throughpreventingdeforestationfromtheirsupplychains)shouldincludelandusechangeemissionsintheirbaseyearinventory.Sincemethodstocalculatelandusechangecandifferwidely,andthereiscurrentlynostandardizedmethodrecognizedundertheGHGProtocol,companiesshoulddisclosethemethodusedtocalculatetheseimpactsintheirGHGinventory.17Financialinstitutionswithindirectlanduseemissionscanreporttheseseparatelyalongsidetheinventoryandsimilarlydisclosethemethodusedtocalculatetheseimpacts.FI-R2–BioenergyAccounting:Assumptionsofneutralityforbioenergytendtooverlookthatthereisasignificanttimelagbetweenthebio-basedresourceremoval(wood/crop)andlaterregeneration.Theyalsooverlookpossibledifferencesinproductivityamongforest/cropsystemsusedasbioenergyfeedstockandtheeffectsoflong-termcarbonstorageinbio-basedproductsand/ordisposal.Forthesereasons,untilastandardizedmethodforbioenergyGHGaccountingisdevelopedundertheGHGProtocol,theSBTistronglyrecommendsfinancialinstitutionstakeintoaccountthetimeofemissions(i.e.,wood/cropremoval)andsequestration(i.e.,forest/cropregrowth)intheiraccountingmethodologies.15Thiscriterionappliesonlytosubsidiaries.Brands,licensees,and/orspecificregionsorbusinessdivisions(withtheexceptionofbanks’assetmanagementdivisions)ofafinancialinstitutionwillnotbeacceptedasseparatetargetsunlesstheyfalloutsideofaparentcompany’schosenconsolidationapproach.16Underthisversionofthecriteria,itisoptionalforbankstoincludetheirassetmanagementdivisionsintheirscope1,2,and3targetboundaries.Ifsuchexclusionismade,itshallbedisclosedclearlyinthetargetlanguage.SeeSection5.3formoreinformation.17Atthemoment,theGHGprotocolprovidesonlylimitedguidanceonagriculture,forestry,andotherland-use(AFOLU)emissionsaccounting,andtherearenosector-specificSBT-settingmethodologiesavailableforcompaniesinland-intensivesectorsthatincludeAFOLUemissions.TheScienceBasedTargetsinitiativeisundertakingasectordevelopmentproject,theSBTiForest,LandandAgricultureproject(“SBTiFLAG”),ledbyWWF,toaddressthismethodologygap.Theeffortwillfocusonthedevelopmentofmethodsandguidancetoenablethefood,agriculture,andforestsectorstosetscience-basedtargets(SBTs)thatincludedeforestation,andpossiblyotherland-relatedimpacts.Inparalleltothiseffort,WRIandWorldBusinessCouncilforSustainableDevelopment(WBCSD)areleadingthedevelopmentofthreenewGHGProtocolStandardsonhowcompaniesshouldaccountforGHGemissionsandremovalsintheirannualinventories.Thethreestandardswillcover:CarbonRemovalsandSequestration;LandSectorEmissionsandRemovals;andBioenergy.Formoreinformationonthisworkandhowtoparticipate,seehere.TheFLAGprojectandthenewGHGProtocolStandardsarecomplementaryworkstreamsthatwillprovidetheinfrastructureneededforcorporatetargetsetting,accounting,andreportingofAFOLU-relatedemissions.FinancialSectorScience-BasedTargetsGuidance293.2Scope1and2TargetTimeFrameCriteriaFI-C6–BaseandTargetYears:Targetsmustcoveraminimumof5yearsandamaximumof15yearsfromthedatethetargetissubmittedtotheSBTiforanofficialvalidation.18FI-C7–ProgresstoDate:TargetsthathavealreadybeenachievedbythedatetheyaresubmittedtotheSBTiarenotacceptable.TheSBTiusestheyearthetargetissubmittedtotheinitiative(orthemostrecentcompletedGHGinventory)toassessforward-lookingambition.ThemostrecentcompletedGHGinventorymustnotbeearlierthantwoyearspriortotheyearofsubmission.RecommendationsandAdditionalGuidanceFI-R3–BaseYear:TheSBTirecommendschoosingthemostrecentyearforwhichdataareavailableasthetargetbaseyear.FI-R4–TargetYear:Targetsthatcovermorethan15yearsfromthedateofsubmissionareconsideredlong-termtargets.Financialinstitutionsareencouragedtodevelopsuchlong-termtargetsupto2050inadditiontomidtermtargetsrequiredbyC6.Ataminimum,long-termtargetsmustbeconsistentwiththelevelofdecarbonizationrequiredtokeepglobaltemperatureincreasetowell-below2°CcomparedtopreindustrialtemperaturestobevalidatedandrecognizedbytheSBTi.FI-R5–Consistency:Itisrecommendedthatfinancialinstitutionsusethesamebaseandtargetyearsforalltargetswithinthemidtermtimeframeandalltargetswithinthelong-termtimeframe.3.3Scope1and2TargetAmbitionCriteriaFI-C8–LevelofAmbition:Ataminimum,scope1andscope2targetswillbeconsistentwiththelevelofdecarbonizationrequiredtokeepglobaltemperatureincreasetowell-below2°Ccomparedtopreindustrialtemperatures,thoughfinancialinstitutionsareencouragedtopursuegreatereffortstowarda1.5°Ctrajectory.Boththetargettimeframeambition(baseyeartotargetyear)andtheforward-lookingambition(mostrecentyeartotargetyear)mustmeetthisambitioncriteria.1918Fortargetssubmittedforanofficialvalidationinthefirsthalfof2020,thevalidtargetyearsare2024–2034inclusive.Fortargetssubmittedinthesecondhalfof2020,thevalidtargetyearsarebetween2025and2035inclusive.19Fortargetssubmittedforanofficialvalidationin2020,themostrecentinventorydatasubmittedmustbefor2018attheearliest.FinancialSectorScience-BasedTargetsGuidance30FI-C9–Absolutevs.Intensity:Intensitytargetsforscope1andscope2emissionsareonlyeligiblewhentheyleadtoabsoluteemissionsreductiontargetsinlinewithclimatescenariosforkeepingglobalwarmingtowell-below2°Corwhentheyaremodeledusinganapprovedsectorpathway.Absolutereductionsmustbeatleastasambitiousastheminimumoftherangeofemissionsscenariosconsistentwiththewell-below2°CgoaloralignedwiththerelevantsectorreductionpathwaywithintheSectoralDecarbonizationApproach.FI-C10–MethodValidity:Targetsmustbemodeledusingthelatestversionofmethodsandtoolsapprovedbytheinitiative.TargetsmodeledusingpreviousversionsofthetoolsormethodscanonlybesubmittedtotheSBTiforanofficialvalidationwithinsixmonthsofthepublicationoftherevisedmethodorthepublicationofrelevantsector-specifictools.FI-C11–Offsets:Theuseofoffsetsisnotcountedasemissionsreductiontowardtheprogressoffinancialinstitutions’science-basedtargets.TheSBTirequiresthatfinancialinstitutionssettargetsbasedonemissionreductionsthroughdirectactionwithintheirownoperationsortheirinvestmentandlendingportfolios.Offsetsareonlyconsideredtobeanoptionforfinancialinstitutionsseekingtosupportadditionalemissionreductionsbeyondtheirscience-basedtargets.FI-C12–AvoidedEmissions:Avoidedemissionsfallunderaseparateaccountingsystemfromcorporateandfinancialinstitutions’inventoriesanddonotcounttowardscience-basedtargets.RecommendationsandAdditionalGuidanceFI-R6–Choosinganapproach:TheSBTirecommendsusingthemostambitiousdecarbonizationscenariosthatleadtotheearliestreductionsandtheleastcumulativeemissions.3.4Scope2CriteriaFI-C13–Approaches:FinancialInstitutionsshalldisclosewhethertheyareusingalocation-ormarket-basedapproachpertheGHGProtocolScope2Guidancetocalculatebaseyearemissionsandtotrackperformanceagainstascience-basedtarget.FinancialInstitutionsshalluseasingle,specifiedscope2accountingapproach(“location-based”or“market-based”)forsettingandtrackingprogresstowardtheirSBTs.FI-C14–RenewableElectricityProcurement:Targetstoactivelysourcerenewableelectricityataratethatisconsistentwithwell-below2°Cscenariosareanacceptablealternativetoscope2emissionsreductiontargets.TheSBTihasidentified80percentrenewableelectricityprocurementby2025and100percentby2030asthresholds(portionofrenewableenergyovertotalenergyuse)forthisapproachFinancialSectorScience-BasedTargetsGuidance31inlinewiththerecommendationsofRE100.FinancialInstitutionsthatalreadysourceelectricityatorabovethesethresholdsshallmaintainorincreasetheiruseshareofrenewableelectricitytoqualify.RecommendationsandAdditionalGuidanceFI-R7–PurchasedHeatandSteam:Forscience-basedtargetmodelingpurposesusingthesectoraldecarbonizationapproach(SDA),itisrecommendedthatfinancialinstitutionsmodelpurchasedheatandsteam–relatedemissionsasiftheywerepartoftheirdirect(i.e.,scope1)emissions.FI-R8–EfficiencyConsiderationsforTargetModeling:Iffinancialinstitutionsareusingamethodthatdoesnotalreadyembedefficiencygainsforthespecificsector,market,andthedecarbonizationprojectedforthepowersectorbasedonwell-below2°Cscenario,itisrecommendedthatthesefactorsbetakenintoaccountwhenmodelingelectricity-relatedscope2targets.3.5Scope3–PortfolioTargetSettingRequirementsCriteriaFI-C15–RequirementtoSetTarget(s)onInvestmentandLendingActivities:AllfinancialinstitutionsshallsettargetsontheirinvestmentandlendingactivitiesasrequiredbyFI-C16,irrespectiveoftheshareofquantifiedscope3portfolioemissionsascomparedtothetotalscope1+2+3emissionsofthefinancialinstitution.FIsmaychoosefromtheapplicablemethodsfortargetsetting,byassetclass,asdefinedinTable5.2.FI-C16–PortfolioTargetBoundary:Financialinstitutionsshallsettargetsonall“RequiredActivities”intheRequiredActivitiesandMethodsTable(Table5.2)followingtheminimumboundarycoveragerequirement.FI-C17.1–SectoralDecarbonizationApproachTargets20:Financialinstitutions’targetsusingthesectoraldecarbonizationapproach(SDA)areconsideredacceptablewhenthefollowingconditionsaremet:•Boundary:FinancialinstitutionsshallsetSDAtargetsontheirrealestateandelectricitygeneration–relatedactivitiesasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).SDAtargetsmayalsobesetonotheractivitieslistedinTable5.2,suchasresidentialmortgages,corporateloans,listedandprivateequityanddebtforsectorswheremethodsareavailable.•Ambition:PortfolioSDAtargetsmustmeetminimumambitionindicatedbysector-specificmethodsforwell-below2°Cpathways.20PleaseseeSection5.4.1formoreinformationontheSectoralDecarbonizationApproach.FinancialSectorScience-BasedTargetsGuidance32•Timeframe:PortfolioSDAtargetsmustcoveraminimumof5yearsandamaximumof15yearsfromthedatethefinancialinstitution’stargetissubmittedtotheSBTiforanofficialvalidation.Financialinstitutionsarefurtherencouragedtodeveloplong-termtargetsupto2050inadditiontotherequiredmidtermtargets.•ScopeofBorrowerand/orInvesteeTargets:Targetsonscope1and2emissionsarerequiredforrealestateandelectricitygenerationrelatedactivitiesasdefinedbySDAmethods(ifrelevant).ForotherRequiredActivitiesintheTable5-2,FIsshallsettargetsonemissionsscopesasrequiredbytherelevantSBTisector-specificguidance.21FI-C17.2–SBTPortfolioCoverageTargets:Financialinstitutions’targetstodrivetheadoptionofscience-basedemissionsreductiontargetsbytheirborrowersand/orinvesteesareconsideredacceptablewhenthefollowingconditionsaremet:•Boundary:FinancialinstitutionsshallsetengagementtargetsoncorporateinstrumentsasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).•TargetLevelofAmbition:Financialinstitutionsshallcommittohavingaportionoftheirborrowersand/orinvesteessettheirownapprovedscience-basedtargetssuchthatthefinancialinstitutionisonalinearpathto100percentportfoliocoverageby2040(usingaweightingapproachintheSBTFinanceTool).Forexample,afinancialinstitutionstartingwith10percentcoveragein2020wouldneedtoincreasecoverageby4.5percentperyear(90/(2040–2020)=4.5)andreachatleast32.5percent(10+[5x4.5]=32.5)coverageby2025.•TargetFormulation:Financialinstitutionsshallprovideinformationinthedisclosedtargetlanguageonwhatpercentageofthecorporateequityanddebtportfolioiscoveredbythetarget,usingaweightingapproachintheSBTiFinanceToolconsistentlythroughoutthetargetperiod.•TargetTimeframe:Financialinstitutions’portfoliocoveragetargetsmustbefulfilledwithinamaximumoffiveyearsfromthedatetheFI’stargetissubmittedtotheSBTiforvalidation.Fulfillmentofportfoliocoveragetargetsmeanthatborrowers’and/orinvestees’SBTshavebeenapprovedbySBTi.•ScopeofBorrowerand/orInvesteeTargets:Financialinstitutions’borrowersand/orinvesteesshallfollowthelatestSBTicriteriaforcompaniestosetscope1and2targets,aswellasscope3targetswhentheirscope3emissionsaremorethan40percentoftotalscope1,2,and3emissions.21Alistofthesector-specificguidanceandrequirementsisavailableinSection9oftheSBTITargetValidationProtocol(forthcomingMay2021).FinancialSectorScience-BasedTargetsGuidance33FI-C17.3–PortfolioTemperatureRatingTargets:Financialinstitutions’targetstoaligntheTemperatureRatingoftheircorporatedebtandequityportfolioswithambitionoftheParisAgreementareconsideredacceptablewhenthefollowingconditionsaremet:•Boundary:FinancialinstitutionsshallsetportfolioTemperatureRatingtargetsoncorporateinstrumentsasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).•TargetLevelofAmbition:Financialinstitutionsshallaligntheirportfolioscope1+2temperaturescorewithaminimumwell-below2°Cscenarioandinadditionaligntheirportfoliotoaminimum2°Cscenarioforthescope1+2+3portionby2040.Alignmentwithmoreambitiousscenariossuchas1.5°Cishighlyencouraged.Separatetargetsforscope1+2andforscope1+2+3shallbeset.Financialinstitutionsshallcommittoreducingtheirportfoliotemperaturescoressuchthatthefinancialinstitutionisonalinearpathtothestatedgoalby2040.Forexample,afinancialinstitutionstartingwithscope1+2portfoliotemperaturescoreof2.9°Cin2020wouldneedtodecreaseitsportfoliotemperaturebyatleast0.0575°Cperyear([2.9°C–1.75°C]/[2040–2020])=0.0575°C,andreachatleast2.61°Cportfoliotemperaturescoreby2025.Forexample,afinancialinstitutionstartingwithscope1+2+3portfoliotemperaturescoreof3.2°Cin2020wouldneedtodecreaseitsportfoliotemperaturebyatleast0.06°Cperyear([3.2°C–2°C]/[2040–2020])=0.06°C,andreachatleast2.9°Cportfoliotemperaturescoreby2025.•TargetTimeframe:PortfolioalignmenttargetsmustbefulfilledwithinamaximumoffiveyearsfromthedatethetargetsaresubmittedtotheSBTiforanofficialvalidation.•ScopeofBorrowerand/orInvesteeTargets:Financialinstitutions’borrowers’and/orinvestee’stargetsshallincludecoverageofscope1and2emissions,aswellasscope3emissionswhentheirscope3emissionsaremorethan40percentoftotalscope1,2,and3emissions.RecommendationsandAdditionalGuidanceFI-R9–MeasuringEmissionsandSettingTargetsforScope3,Categories1–14:Itisrecommendedbutnotrequiredforfinancialinstitutionstomeasureandsettarget(s)oncategories1–14emissionsasdefinedbyGHGPScope3standard.Optionaltargetsonthesecategoriesmustmeetcriteria19–20.1inthelatestSBTicriteriaforcompaniestobeapprovedbytheSBTi.FI-R10–PhaseoutofThermalCoalInvestments:Financialinstitutionsshouldestablishapolicywithinsixmonthsfromthetimeoftargetapprovalthattheywillphaseoutfinancialsupporttothermalcoalacrossalltheiractivitiesinlinewithafullphaseoutby2030globally.Notably,thisincludesimmediatelyceasingallfinancialorothersupporttothermalcoalcompaniesthatarebuildingnewinfrastructureorFinancialSectorScience-BasedTargetsGuidance34investinginneworadditionalthermalcoalexpansion,mining,production,utilization(i.e.,combustion),retrofitting,oracquiringofcoalassets.Coalcompaniesaredefinedascompanieswithgreaterthan5percentofrevenuesfromthermalcoalmining,explorationanddrilling,miningservices,processing,trading,transportandlogistics,equipmentmanufacturing,operationsandmaintenance(O&M)services,engineering,procurementandconstruction(EPC)services,transmissionanddistributionofcoal-firedelectricity,coaltoliquids(Ctlg)andcoaltogas(CtG).FI-R11–DisclosureofFossilFuelInvestmentsandLending:FinancialinstitutionswithapprovedSBTs,shouldannuallydisclosetheannualinvestments(publicequity,privateequity,corporatebonds),directprojectfinancingandlendingtofossilfuel(oil,gas,andthermalcoal)projectsandcompaniesinU.S.dollaramount(orothercurrencies)(SeeFI-R12forrecommendationsonwheretodisclose).Financialinstitutionsthatfailtophaseoutcoalinvestmentsordisclosefossilfuelinvestmentsandlendingmakethemselvessusceptibletoriskofstrandedassetsandreputationaldamage.Thisincludes:(1)Companiesthathaveactivities(i.e.,identifiedasshareofrevenues)intheexploration;extraction;refining;transportationanddistribution;storage;retailing;marketing;trading;orpower,heat,orcoolingproductionfromoilandgas.FIsshoulddisclosethethresholdusedtodelineateoilandgascompanies;theSBTirecommendsa5percentthresholdandforthethresholdtonotexceed30percent.(2)InlinewithFI-R10,companieswithgreaterthan5percentofrevenuesfromthermalcoalmining,explorationanddrilling,miningservices,processing,trading,transportandlogistics,equipmentmanufacturing,operationsandmaintenance(O&M)services,engineering,procurementandconstruction(EPC)services,transmissionanddistributionofcoal-firedelectricity,coaltoliquids(Ctlg)andcoaltogas(CtG).3.6ReportingCriteriaFI-C18–DisclosureofTarget(s)PortfolioCoverage:Atthetimeoftargetannouncementandalongwithapprovedtargets,financialinstitutionsshalldisclosethepercentageoftheirtotalinvestmentandlendingactivitiescoveredbyportfoliotargetsontheSBTiwebsite,inametricrepresentativeofthemagnitudeofFIs’mainbusinessactivities,whichmayinvolveanycombinationofcommercialbanking,investmentbanking,andassetmanagement.Examplesincludetotalfinancedemissionsassociatedwithinvestmentandlendingactivities(ifquantified),totalbalancesheet,totalinvestments,totallendingbook,andtotalassetsundermanagement.FinancialSectorScience-BasedTargetsGuidance35FI-C19–ImplementationReporting:Atthetimeoftargetsubmission,thefinancialinstitutionshallsubmitabriefsummaryofhowitintendstomeetitsscope3portfoliotargetsinconformitywiththetemplateprovidedinthetargetsubmissionform.Thisdisclosureisintendedtocreatetransparency.Thecontentofthesummarywillnotbeusedasabasisforvalidationoftargets.Atthetimeoftargetannouncement,thesummaryofhowthefinancialinstitutionintendstoachieveitstargetsshallbemadepublic.22FI-C20–TrackingandReportingTargetProgress:Aftertargetapproval,theSBTirequiresannualdisclosureofscope1and2GHGemissions,disclosureofprogressagainstallapprovedtargetsintherelevantmetric,23anddisclosureofactions/strategiestakenduringtheyeartomeetscope3portfoliotargets.Ifoptionaltargetsonscope3categories1–14asdescribedinFI-R9aresubmittedandapprovedbytheSBTi,theirprogressshallbeincludedinthedisclosureofprogressaswell.RecommendationsandAdditionalGuidanceFI-R12—WheretoDisclose:Therearenospecificrequirementsregardingwherethescope1and2inventory,progressagainstallapprovedtargets,andactions/strategiestomeetscope3portfoliotargetsshouldbedisclosed,aslongasitispubliclyavailable.Recommendationsincludeannualreports,sustainabilityreports,thefinancialinstitutions’website,and/orCDP’sannualquestionnaire.3.7RecalculationandTargetValidityCriteriaFI-C21–MandatoryTargetRecalculation:Toensureconsistencywithmostrecentclimatescienceandbestpractices,targetsmustbereviewed,and,ifnecessary,recalculatedandrevalidated,ataminimum,everyfiveyears.Financialinstitutionswithanapprovedtargetthatrequiresrecalculationmustfollowthemostrecentlyapplicablecriteriaatthetimeofresubmission.Targetsshouldberecalculatedandreset,asneeded,toreflectsignificantchangesthatwouldcompromiserelevanceandconsistencyoftheexistingtarget.FI-C22–TargetValidity:FinancialinstitutionswithapprovedtargetsmustannouncetheirtargetpubliclyontheSBTiwebsitewithinsixmonthsoftheapprovaldate.Targetsunannouncedaftersixmonthswillhavetogothroughtheapprovalprocessagain,unlessadifferentpublicationtimeframewasagreedwiththeSBTi.22FinancialinstitutionswillhaveopportunitiestoreviewthesummarylanguagebeforetheSBTipublishesitonthewebsite.23SeeSection6.1onguidancetodiscloseprogressagainsttargets.FinancialSectorScience-BasedTargetsGuidance36RecommendationsandAdditionalGuidanceFI-R13–TriggeredTargetRecalculation:Targetsshouldberecalculated,asneeded,toreflectsignificantchangesthatwouldcompromiserelevanceandconsistencyoftheexistingtarget.Thefollowinglistincludesexamplechangesthatshouldtriggeratargetrecalculation:●Exclusionsintheinventoryortargetboundarychangesignificantlyand/orexceedallowableexclusionlimits;●Significantchangesininstitutionalstructureandactivities(e.g.,acquisitions,divestitures,mergers,insourcingoroutsourcing,shiftsinproductorserviceofferings,changesinproportionofinvestmentsbyassetclasses,additionofnewproductscoveredbyavailablemethods,majorupdatesinthelatestclimatescience)thatwouldaffectthefinancialinstitution'stargetboundaryorambition;●Significantchangesindatausedtocalculatethetargetssuchaschangesingrowthprojectionsanddiscoveryofsignificanterrorsorseveralcumulativeerrorsthatarecollectivelysignificant;and●Othersignificantchangestoprojections/assumptionsusedwithscience-basedtargetsettingmethods.FI-R14–ValidityofTargetProjections:TheSBTirecommendsthatfinancialinstitutionscheckthevalidityoftarget-relatedprojectionsannually.ThefinancialinstitutionshouldnotifytheSBTiofanysignificantchanges,reportthesemajorchangespublicly,andconsideratargetrecalculation,asrelevant.FinancialSectorScience-BasedTargetsGuidance374.HowtoSetScience-BasedTargets4.1CompilingaGHGInventory4.1.1SettingOrganizationalandOperationalBoundariesforaGHGInventoryAninstitution-wideGHGinventoryisthefoundationtosettingSBTs.TheSBTirequiresthatfinancialinstitutionsfollowtheGHGProtocolCorporateStandard,Scope2Guidance,andCorporateValueChain(Scope3)AccountingandReportingStandardtomeasureandreportGHGemissions.ThissectionpresentstargetvalidationcriteriathatarerelevanttoGHGemissionsinventoryandtargetboundary,andintroducestheconceptsoforganizationalandoperationalboundariesfromtheGHGPCorporateStandard.ItalsodenoteswherethisframeworkdeviatesfromorgoesbeyondtheseexistingstandardsforsettingtargetsonFIs’investmentandlendingactivities.CriteriaFI-C1–Scopes:Financialinstitutions(FIs)mustsetatarget(s)thatcoversinstitution-widescope1andscope2emissions,asdefinedbytheGHGProtocolCorporateStandard,andscope3investmentandlendingactivitiesasperFI-C15andFI-C16.FIsmaysettargetsforremainingscope3emissionscategoriesasperFI-R9.FI-C2–SignificanceThresholds:Financialinstitutionsmayexcludeupto5percentofscope1andscope2emissionscombinedintheboundaryoftheinventoryandtarget.24FI-C3–GreenhouseGases:Scope1and2targetsmustcoverallrelevantGHGsasrequiredpertheGHGProtocolCorporateStandard.Ifoptionaltargetsonscope3,categories1–14areset,theyshallalsocoverallrelevantGHGs.CoverageofallrelevantGHGsarerecommended,wherepossible,forFIs’scope3portfoliotargets.IffinancialinstitutionsareunabletocoverallGHGsforscope3portfoliotargets,theyshallcoverCO2emissionsataminimum.4.1.2EnsuretheSBTTargetBoundaryIsAlignedwiththeGHGInventoryBoundaryAsafirststeptocompileaGHGinventory,afinancialinstitutionshoulddefineitsorganizationalboundarybyselectingasingleconsolidationapproachbasedonarangeofinstitution-specific24Wherefinancialinstitutions’scope1or2emissionsaredeemedimmaterial(i.e.,under5percentoftotalcombinedscope1and2emissions),FIsmaysettheirSBTsolelyonthescope(eitherscope1orscope2)thatcoversmorethan95percentofthetotalscope1and2emissions.Financialinstitutionsmustcontinuetoreportonbothscopesandadjusttheirtargetsasneeded,inaccordancewiththeGHGProtocol’sprincipleofcompletenessandasperFI-C21-Mandatorytargetrecalculation.FinancialSectorScience-BasedTargetsGuidance38considerations.Thechosenconsolidationapproachshouldbeappliedconsistentlyacrossitsinstitutionalstructure.TheboundariesofitsSBTsmustalignwiththeorganizationalboundariesoftheGHGinventory.TheGHGProtocolCorporateStandarddefinesthreedifferentapproachesfordeterminingtheorganizationalboundariesofinstitutionalGHGinventories:1.Operationalcontrol:Afinancialinstitutionaccountsfor100percentoftheemissionsfromoperationsatwhichithasthefullauthoritytointroduceandimplementoperatingpoliciesasitsdirect(i.e.,scope1)emissions.Itdoesnotaccountforanyoftheemissionsfromoperationsinwhichitownsaninterestbutdoesnothaveoperationalcontrolasdirectemissions.2.Financialcontrol:Afinancialinstitutionaccountsfor100percentoftheemissionsfromoperationsatwhichitcandirectfinancialandoperatingactivitieswithaviewtogainingeconomicbenefitsfromthoseactivitiesasitsdirectemissions.3.Equityshare:AfinancialinstitutionaccountsfordirectGHGemissionsandemissionsfrompurchasedelectricity,heat,andsteamfromoperationsaccordingtoitsshareofequityintheoperation.Theequitysharereflectseconomicinterest,whichistheextentofrightsacompanyhastotherisksandrewardsflowingfromanoperation.TheGHGProtocolCorporateStandardprovidesfurtherguidanceonthistopic.4.1.3SettingtheOperationalBoundaryAfterselectinganorganizationalboundary,afinancialinstitutionsetsitsoperationalboundarytodistinguishbetweendirectemissionsfromsourcesitownsorcontrolsfromindirectemissions.TheGHGPCorporateStandardsdefinesthreescopesofemissionsforsettingorganizationalboundaries:●Scope1:DirectGHGemissionsthatareemittedfromsourcesownedandcontrolledbyacompany;●Scope2:GHGemissionsfromthegenerationofelectricity,heat,andsteampurchasedbyacompany;and●Scope3:“Indirect”emissionsfromacompany’svaluechainactivities.TheGHGProtocolCorporateValueChain(Scope3)Standardfurthercategorizesscope3emissionsinto15categories,wherecategory15(investments)isdesignedprimarilyforprivatefinancialinstitutionsandislikelythemostsignificantcategoryfortheseinstitutions(seeFigure4.1).TogetherwiththeTechnicalGuidanceforCalculatingScope3emissions,theScope3Standardprovidesinitial,high-levelguidancetoaccountforemissionsfromasetofassetclasses.FinancialSectorScience-BasedTargetsGuidance39Forcategory15,thescope3standardonlyrequirestheemissionsmeasurementofcorporatedebtholdingswithknownuseofproceeds.25Thisframeworkgoesbeyondthisrequirementandthereforeexpandstheminimumboundaryofcategory15.Thismeans,financialinstitutionsshallfollowtheemissionsmeasurementrequirementsintherelevantassetclassmethodsandmeasureemissionsofdebtinvestmentswithoutknownuseofproceeds,whereapplicable.Section4.2andSection5.4.1explainthatamongthecurrentmethodssupportedbytheSBTi,onlytheSDArequiresthemeasurementoffinancedemissionsoftherelevantassetclasses.Therefore,financialinstitutionsarenotrequiredtomeasureandannuallyreporttotalfinancedemissionsforthe“RequiredProducts”inTable5.2.NorarefinancialinstitutionssettingSDAtargetsrequiredtoannuallyreporttheabsoluteamountoffinancedemissionsinmetrictonnesofCO2equivalent(tCO2e)ormetrictonnesofCO2(tCO2)coveredbythesetargets(SeeSection6.1formoreinformationonreportingtargetprogress).MeasurementofallsevenGHGs(CO2,CH4,N2O,HFCs,PFCs,SF6,andNF3)isrequiredforscope1and2emissions.Consideringdataavailabilitychallenges,financialinstitutionsshouldcoverallGHGsforcategory15ifpossible,withmeasurementofCO2astheminimumrequirement.Figure4.1.OverviewofGHGProtocolScopesandEmissionsacrosstheValueChainSource:GreenhouseGasProtocol,Scope3Standard.25Pleasefindmoreinformationonpage52oftheCorporateValueChain(Scope3)AccountingandReportingStandard.FinancialSectorScience-BasedTargetsGuidance404.1.4ChoosinganInventoryConsolidationApproachTheGHGPScope3Standardspecifiesthatfinancialinstitutionsmaydecideunderwhichscopeinvestmentandlendingactivitiesareincluded,dependingonthechosenconsolidationapproach.Forinstance,ifafinancialinstitutionchoosestheequityshareapproach,ithastheflexibilitytoaccountforinvestment-relatedemissionsfromequityinvestmentsinscope1andscope2.26Tosimplifythetargetsettingprocess,financialinstitutionsshouldusetheoperationalcontrolorfinancialcontrolapproachandincludeallinvestmentandlendingactivitiesinscope3,category15.4.2MeasuringFinancedEmissionstoFacilitateTargetSettingHarmonizedmeasurementanddisclosureoffinancedemissionsarekeytoensuringcomparabilityandtransparencyamongfinancialinstitutions.TheSBTihasidentifiedtheGlobalGHGAccountingandReportingStandardforthefinancialindustry,developedbythePartnershipforCarbonAccountingFinancials(PCAF),asafreelyavailableapproachtomeasureportfolio-wideorasset-level–financedemissions.ThestandardhasbeenreviewedbytheGHGProtocolandisinconformancewiththerequirementssetforthintheCorporateValueChain(Scope3)AccountingandReportingStandard,forCategory15investmentactivities.”TheStandardprovidesdetailedmethodologicalguidanceonmeasurementanddisclosureofGHGemissionsassociatedwithloansandinvestments.ThestandardisapplicabletomultiplegeographiesandincludesGHGaccountingmethodsfortheassetclassescoveredinthisSBTiguidancedocument(i.e.,mortgages,realestate,electricitygenerationprojectfinance,andcorporateequityanddebt).SeeFigure4.2belowformoreinformation.Forfinancialinstitutionsthatareinterestedinunderstandingtheoverallexposuretoemissionsoftheirportfolios,theymayusePCAFmethodstoconductaportfolio-wideemissionsscreeningandprioritizewhichpartofaportfoliotofocusonfortargetsetting(i.e.,assetclassesandsectors).Followingthisprioritization,financialinstitutionsmeasureemissionsassociatedwiththeirinvestingandlendingactivitiestodeterminetheemissionbaselinesfromwhichemission-basedSBTsareset.WhiletheSBTihasdeterminedrequiredactivitiesthatfinancialinstitutionsshallincludeinthetargetboundary,FIsmaystillsettargetsonoptionalactivitiesiftheseactivitiesaredeemedsignificant(seeSection5.3formoreinformationonthistopic).Forinstance,whileresidentialmortgagehasbeendeterminedasanoptionalactivityinthecurrentprojectphase,financialinstitutionswithsignificantmortgageholdingsarestillencouragedtoincludethisassetclassintheirtargets.Atthemonitoringstage,financialinstitutionssettingSDAtargetsshallannuallymeasuretheirprogressagainstthetarget,atwhichpoint,measuringportfolioemissionsintensityandcomparingitwiththebaselineintensityisrequired.FormoredetailedexplanationonhowtousePCAFasastartingpointfortargetsetting,seeSection5.4.1ontheSectoralDecarbonizationApproach.26Pleasefindmoreinformationonpage51oftheCorporateValueChain(Scope3)AccountingandReportingStandard.FinancialSectorScience-BasedTargetsGuidance41PCAF’sassetclass–specificmethodsfacilitateaharmonizedapproachformeasuringfinancialinstitutions’year-on-yearabsoluteemissionsofloansandinvestments,fosteringtransparencyandaccountabilityinthefinancialindustry.PCAF’sassetclassmethodsareshowninFigure4.2.Figure4.2.AssetClassCoverageofPartnershipforCarbonAccountingFinancials27Note:SME=Smallandmedium-sizedenterprise.Source:PCAF2020.ThePCAFGlobalGHGAccountingandReportingStandardforthefinancialindustryalsoincorporatesadataqualityscoringwithspecificguidanceperassetclass(seeFigure4.3).Dataqualityrangesfromestimateddatawithverylimitedsupportwithscore5(i.e.,economic-basedsectoralemissionsfactors)toauditedGHGemissionsdataonclient-levelwithhighestqualityscore1.Economic-basedsectoralemissionsfactorscaneasilybeappliedandareoftenthefirststepusedforscreeningpurposestoidentifyhotspotsinadiversifiedlendingandinvestmentportfolio.Scoringanddisclosingonthedataqualityenablesfinancialinstitutionstodevelopastrategytoimprovethedataqualityovertime,collectingclient-leveldataespeciallyforthehotspot.27PCAFassetclasscoveragereflectsthemethodsdevelopedforthefirsteditionoftheGlobalGHGAccountingandReportingStandard.ItisexpectedthatPCAFwilldevelopfinancedemissionsmethodsforadditionalassetclassesinthefuture.FinancialSectorScience-BasedTargetsGuidance42Figure4.3.PCAF’sGeneralDataQualityScoreCard28Source:PCAF2020.CaseStudy:WellsFargo-TestingPCAFMethodologyBackgroundonWellsFargoWellsFargo&Company(NYSE:WFC)isadiversified,community-basedfinancialservicescompanywith$1.97trillioninassets.Foundedin1852andheadquarteredinSanFrancisco,WellsFargoprovidesbanking,investmentandmortgageproductsandservices,aswellasconsumerandcommercialfinance,through7,300locations,morethan13,000ATMs,digitalplatforms,andcontactcenters.WellsFargohasofficesin31countriesandterritoriestosupportcustomerswhoconductbusinessintheglobaleconomy.Withapproximately266,000active,full-timeequivalentteammembers,WellsFargoservesoneinthreehouseholdsintheUnitedStatesandisrankednumber30onFortune’s2020rankingsofAmerica’slargestcorporations.OperationalSustainabilityFocusWellsFargofirstappearedontheCDPDisclosureLeadershipIndexin2008andcontinuestoevolveitssustainabilityprogramwithenterprise-levelGHGemissionsreductiontargets.Since2017,thecompanyhaspurchasedrenewableelectricitytomeet100percentofitsglobaloperations’needs.28Thisisagenericdataqualityscorecard.ThePCAFStandardhasasset-classspecificdataqualityscorecardswithdetaileddescriptionofdatainrelationtoeachscore.FinancialSectorScience-BasedTargetsGuidance43Partofthatcommitmentincludesutilizingrenewableenergycredits(RECs)aswellastransitioningtolong-termagreementsthatfundgreensourcesofpowergenerationandsupportgridmodernization.FinancialSustainabilityFocusUnderstandingtheimportanceofscope3,category15(investments)alsoreferredtoas“financedemissions,”meansreassessinghowtoquantifyandqualifytheseparticulardownstreamemissions.EarlierengagementwithWRIandpeersdemonstratedthedifficultyofcalculation,andnewinitiativessuchasthePartnershipforCarbonAccountingFinancials(PCAF)helptoaddresscommonchallenges.Measuringtheemissionsassociatedwithproductsandservicesacrossvariousgeographies,sectors,producttypes,andlineofbusinessoriginationspresentsuniquechallengestoanyfinancialinstitution.OnegoalofportfolioormultisectoraggregationsofGHGemissionsistodetermineconsistentandrepeatablecarbon-relatedmetricsforsustainabilityreporting,anddisclosures.Determiningscopingboundaries,calculationapproaches,andrelevanttouchpointswiththefinancialproduct,customer,geography,sector,andunderlyingoperatingassetsisessential.Adisciplinedprocedureensuresdataintegrity,purposealignment,andultimateutilityforinternalandexternalstakeholders.PCAFMethodologyOverviewTobegintheprocess,WellsFargonarroweditsfocustoidentifythemostsuitableandpracticalwaytoquantifyaportfolioormultisectorapproachforfinancedemissionsusingoneofPCAF’smethodologies.Theselectedapproachrequireddataonloanexposures(“investment”),sector-levelcodes,andeconomicactivity–basedemissionsfactors,whichtogetheryieldahigh-levelscreeningmechanism.WellsFargoutilizedatrialrunofthePCAFemissionsfactordatabase,whichwasinanearlybetaformat,todownloadthecorrectemissionsfactorsin-scopeforthetesting.Thereferencedemissionsfactorsusedconstitutedaratioofsectoralemissionstosectoraltotalassets,whichcouldalsobeconsideredcarbonintensitiesatthesectorlevel(SeeFigureB1.1).FigureB1.1.PCAFMethodologyOverview:EconomicActivity–basedEmissionsforBusinessLoansNote:NAICS=NorthAmericanIndustryClassificationSystem.FinancialSectorScience-BasedTargetsGuidance44Source:WellsFargobasedonPCAFGlobalGHGAccountingandReportingStandard(PCAF2020).Asvisualizedabove,PCAFassignsitslowestdataqualityscore(“5”)tothismethodbecauseitutilizesapureestimationapproachsuitedtoscreeningandidentifyinghotspotsinadiversifiedloanportfolio.Thismethodreliesonattributingemissionsfactorsstatedperdollaroflending(e.g.,tCO2e/million$),whichcanbemultipliedagainstanoutstandingloanexposure(e.g.,M$)toresultinatotalemissionsestimatestatedintonsofcarbondioxideequivalent(tCOe).ApplyingPCAFMethodologyTobegintheprocess,multisectorcommercialandindustrialloanexposurevalueswereextractedfrominternalsystemswithalook-backperiodoftwoyearstoensuretimevarianceelementssuchaslevelandtrendwerealsoconsideredinthecarbonaccounting.TheseexposureswerethenaggregatedusingNorthAmericanIndustryClassificationSystem(NAICS)codesatthemostgranularlevelpossibletomatchwithPCAFsector-basedemissionfactors.Thefirstrunyieldedemissionsestimatesthatwerefurtherassessedafterconferringwithcorporateeconomistsandcross-referencingagainstexternalresearchandNGOstock-takesofsystem-levelemissionssuchasnationalaccounting.LessonsLearnedThemainlearningpointwasthattheappliedapproachatatop-downlevelprovidedagoodstartingpointforscreeningdiversifiedloanportfolios.WellsFargoappreciatedtheopportunitytotestthePCAFdatabaseasitilluminatedthecomplexmovingpartsofconductingtop-down(i.e.,sectorormultisectordown)analysisandencouragedfurtherworkonbottom-up(i.e.,productsorcustomersup)andsector-specificapproacheswherehotspotswereidentified.WellsFargowillcontinuetoengagewithPCAFandotherexternalinitiativesonimprovingthetop-downandbottom-upapproachestocontextualizeGHGintensitiesrelevantforscience-basedtargets,temperaturealignment,andnonfinancialdisclosures.4.3HowtoSetaSBTforScope1and2EmissionsScope1and2emissionsarethestartingpointforsettingSBTs.Whilescope3emissions,inparticularcategory15(investments)aremoresignificantforfinancialinstitutionsthanscope1and2emissions,scope1and2targetsconsistentwithawell-below2°Cpathwayataminimumarerequiredforallfinancialinstitutions.Financialinstitutionsareencouragedtoaligntheirscope1and2targetambitionwithamoreambitious1.5°Cscenario.ThissectionpresentsthelatestSBTitargetvalidationcriteriaforscope1and2targets.Detailedguidanceonapplyingthescope1and2criteriacanalsobefoundinChapter8oftheSBTiTargetValidationProtocolandChapter5oftheSBTTargetSettingManual.FinancialSectorScience-BasedTargetsGuidance45CriteriaFI-C6–BaseandTargetYears:Targetsmustcoveraminimumof5yearsandamaximumof15yearsfromthedatethetargetissubmittedtotheSBTiforanofficialvalidation.29FI-C7–ProgresstoDate:TargetsthathavealreadybeenachievedbythedatetheyaresubmittedtotheSBTiarenotacceptable.TheSBTiusestheyearthetargetissubmittedtotheinitiative(orthemostrecentcompletedGHGinventory)toassessforward-lookingambition.ThemostrecentcompletedGHGinventorymustnotbeearlierthantwoyearspriortotheyearofsubmission.FI-C8–LevelofAmbition:Ataminimum,scope1andscope2targetswillbeconsistentwiththelevelofdecarbonizationrequiredtokeepglobaltemperatureincreasetowell-below2°Ccomparedtopreindustrialtemperatures,thoughfinancialinstitutionsareencouragedtopursuegreatereffortstowarda1.5°Ctrajectory.Boththetargettimeframeambition(baseyeartotargetyear)andtheforward-lookingambition(mostrecentyeartotargetyear)mustmeetthisambitioncriteria.30FI-C9–Absolutevs.Intensity:Intensitytargetsforscope1andscope2emissionsareonlyeligiblewhentheyleadtoabsoluteemissionsreductiontargetsinlinewithclimatescenariosforkeepingglobalwarmingtowell-below2°Corwhentheyaremodeledusinganapprovedsectorpathway.Absolutereductionsmustbeatleastasambitiousastheminimumoftherangeofemissionsscenariosconsistentwiththewell-below2°CgoaloralignedwiththerelevantsectorreductionpathwaywithintheSectoralDecarbonizationApproach.4.3.1MethodsforSettingScope1and2SBTsforFinancialInstitutionsVarioustargetsettingmethodsareavailableforsettingscope1and2SBTsanddifferintermsofwhethertheycalculatetargetsasapercentagereductioninabsoluteemissionsoremissionsintensitybasedonaphysicaloreconomicindicator.Thissectiondescribesthemethodsthataremostapplicabletofinancialinstitutionsforsettingscope1and2targets.Anintegratedscience-basedtargetsettingtoolisavailableandprovidestargetmodelingoptionsforthemethodsdescribedbelow.FinancialinstitutionsareencouragedtousetheAbsoluteContractionapproachtosetscope1and2emissionsreductiontargets.TheAbsoluteContractionapproachisthemoststraightforwardapproachforlinkingtargetstothewell-below2°Cand1.5°Cpathways.Itrequiresaminimumof2.5percent29Fortargetssubmittedforanofficialvalidationinthefirsthalfof2020,thevalidtargetyearsare2024–2034inclusive.Fortargetssubmittedinthesecondhalfof2020,thevalidtargetyearsarebetween2025and2035inclusive.30Fortargetssubmittedforanofficialvalidationin2020,themostrecentinventorydatasubmittedmustbefor2018attheearliest.FinancialSectorScience-BasedTargetsGuidance46annuallinearreductionintermsofabsoluteemissionsforwell-below2°Ctargetsandaminimumof4.2percentabsoluteannualreductionfor1.5°Ctargets.31Financialinstitutionscanalsosetphysicaloreconomicintensitytargetsforscope1and2emissions.ThemainmethodavailablethroughSBTiforsettingphysicalintensitytargetsistheSectoralDecarbonizationApproach(SDA),whichusesconvergenceofemissionsintensityandleveragestheBeyond2°Cscenario(B2DS)fromtheInternationalEnergyAgencyreport,EnergyTechnologyPerspectives2017.SDAprovidesmultiplesector-specificpathways,andthepathwaymostrelevanttofinancialinstitutionsis“Services/CommercialBuildings.”Thispathwaymainlyencompassesthe“spaceheatingandcooling,waterheating,lighting,appliances(HVACisthetechnicalterm),andmiscellaneousequipment(suchasofficeequipmentandothersmallplugloadsintheservicesectors)”ofbuildings(SBTi2015,p.63).Duetothelackof1.5°CscenariodatafromIEA,however,SBTicurrentlydoesnotprovideanoptionforfinancialinstitutionstoset1.5°CtargetsusingthispathwaywithinSDA.AnalternativeapproachtosettingphysicalintensitytargetsthatrequireslessdatainputandallowsformoreflexibilitywithTemperatureRatingoptionsistosettargetsinlinewiththeAbsoluteContractionapproachbutexpresstheminphysicalintensityterms.Financialinstitutionsmaychoosephysicalunitsthatarerepresentativeoftheiroperationalactivitiesandhavedirectphysicalrelationshipstothequantityofemissionsgenerated.Consideringtheprojectedgrowthofthechosenunit,financialinstitutionsshallensurethattheunderlyingabsoluteemissionsreductionisinlinewiththeAbsoluteContractionapproachwitha2.5percentannuallinearreductionforawell-below2°Calignmentataminimum,ora4.2percentannuallinearreductionfora1.5°Calignment.Somecommonphysicalunitsfortargetsettingforthefinancialservicesindustryincludeperemployee(e.g.,full-timeequivalent)orsquaremeter.AlthoughsquaremeteristhesameunitastheoneusedinSDA,underthisoption,thetargetambitionisassessedagainsttheabsolutecontractionapproach.Lastly,financialinstitutionsmayalsoseteconomicintensitytargetsusingeconomicindicators.Scope1and2economicintensitytargetsshallonlybesetiftheunderlyingabsoluteemissionsreductionalignswithataminimumwell-below2°CscenarioundertheAbsoluteContractionapproach.Ingeneral,however,economicunitsmaynotbeusefulfortrackingemissionsforfinancialinstitutionswhosefinancialgrowthisnottiedcloselytoquantityofemissions.Forinstance,revenueforbankscanbegeneratedthroughthedifferenceinrateschargedforcreditaccountsandpaidtodepositors,whichhaslittlerelationshipwithemissionsgeneratedintheiroperations.Table4-1summarizesavailablemethodsforsettingambitiousscope1and2targets,asdefinedinVersion4.1oftheSBTicriteria.31ThepaperFoundationsofScience-basedTargetSettingprovidessupplementarytechnicalinformationtoChapter3onhowscience-basedtargetsettingmethodshavebeendevelopedinaccordancewiththebestavailableclimatescience.FinancialSectorScience-BasedTargetsGuidance47Table4-1.SummaryofScope1and2TargetSettingMethodsMethodMethodDescriptionExamplesofApprovedTargetsAbsoluteContractionThisapproachassumesthatallfinancialinstitutionsreduceabsoluteemissionsatthesamerate:•Well-below2°C:Min.2.5%annuallinearreduction•1.5°C:Min.4.2%annuallinearreductionRobertBoschGmbHcommitstoreduceabsolutescope1and2GHGemissions85%andabsolutescope3GHGemissions15%by2030froma2018baseyear.GermanmultinationalconglomerateThyssenkruppcommitstoreduceabsolutescope1and2GHGemissions30%by2030froma2018baseyear.PhysicalintensityOption1:Physicalintensitytargetsmodeledusingthe“Services/CommercialBuildings”inSDAinlinewiththeB2DSscenario.Theoptiontoset1.5°CtargetsusingthisSDApathwayiscurrentlynotavailableduetothelackofscenariodatafromIEA.Propertydeveloper,owner,andoperatorSwirePropertiesLimitedcommitstoreducescope1and2GHGemissions35%persquaremeterby2025and52%persquaremeterby2030froma2018baseyear.Option2:Physicalintensitytargetswithphysicalunitsthatarerepresentativeoftheiroperationalactivitiesandhavedirectphysicalrelationshipstothequantityofemissionsgenerated(e.g.,peremployeeorsquaremeter).Translatedintoabsoluteterms,thetargetmustresultinaminimumof2.5%annuallinearreductionintermsofabsoluteemissionsforwell-below2°Ctargetsand4.2%for1.5°Ctargets.FrenchrealestateandpropertymanagementcompanyMercialyscommitstoreducescope1and2GHGemissions47%persquaremeterby2030froma2017baseyear.EconomicintensityEconomicintensitytargetsthatleadtoaminimumof2.5%annuallinearreductioninabsoluteemissionsforwell-below2°Ctargetsand4.2%for1.5°Ctargets.Keringcommitstoreducescope1,scope2,andscope3emissionsfromupstreamtransportationanddistribution,businessairtravel,andfuel-andenergy-relatedemissions50%perunitofvalueaddedby2025froma2015baseyear.Multinationalinspection,verification,testing,andFinancialSectorScience-BasedTargetsGuidance48certificationcompanySGScommitstoreducescope1,scope2,andscope3(businesstravel)emissionsperunitofrevenue45%by2025and55%by2030,froma2014baseyear.Note:IEA=InternationalEnergyAgency.Source:Authors2020.FinancialSectorScience-BasedTargetsGuidance495.ApproachestoSettingScope3PortfolioTargets5.1BackgroundandBriefLiteratureReviewAtthestartofthiswork,theSBTiassessedvariousmethodsandtoolsontheirapplicabilitytosupporttargetsettingforfinancialinstitutions.TriggeredbytherecommendationoftheTaskForceonClimate-relatedFinancialDisclosures(TCFD),multi-dataandserviceprovidershavedevelopedmethodsandtoolstoperformscenarioanalysisandassessclimate-relatedfinancialrisks,whicharenotdesignedtosetclimatetargets.Priortothisproject,existingtargetsettingmethodsforfinancialinstitutionscouldbecategorizedintofourapproaches:●Sector-basedapproach:Globalcarbonbudgetisdividedbysectorandemissionreductionsareallocatedtothesector(sometimeswithinanassetclass)ontheportfoliobasedonthesector’sbudget.●Absolute-basedapproach:Percentreductioninabsoluteemissionsrequiredbyagivenscenarioisappliedtoallportfoliosequally.●Economic-basedapproach:Basedontheassumptionthatthesumofalleconomicactors’grossprofitsworldwideequatetoglobalGDP,aportfolio’sshareofemissionsisdeterminedbythesumofthegrossprofitofportfoliocompanies.●Capacity-basedapproach:Alignmentwithvariousclimatescenariosisassessedbasedonphysicalasset–levelproductioncapacityandtechnology-typedata(e.g.,vehiclesmanufacturedperyear,gigawatts[GW]electricity,etc.)Thelackofcomprehensiveemissionsdatahasledsomestakeholderstoexploretheuseofcapacity-basedapproachesthatusephysicalassetdataforclimatealignmentassessmentpurposes.Anexampleofacapacity-basedapproachistheParisAgreementCapitalTransitionAssessment(PACTA)methodproducedbythe2DegreesInvestingInitiative(2dii).32Thecapacity-basedmethodprovidesdatathatfinancialinstitutionscouldusetounderstandsector-basedalignmentwithtechnology-specificmetrics,ratherthanaGHGemissions–basedmetric.Previouslyin2019,theSBTiroadtestedthePACTAmethodwithaselectgroupoffinancialinstitutions.However,furtherdevelopmentisneededforthismethodtobeincorporatedintotheSBTiframeworkforfinanceandacceptedasamethodtoformulatetargetsinlinewiththecriteria.Amongtheapproachesdevelopedpriortothisproject,thesector-basedapproachisconsideredmostvaluableforthefinancialsectorbecauseitenablesfinancialinstitutionstomanagetheemissionstheyfinancedinspecificsectorsoftheeconomy.Assuch,financialinstitutionscanassesstheirportfoliosper32AdditionalinformationisavailableviathePACTAwebsite.FinancialSectorScience-BasedTargetsGuidance50assetclassorsector,steerasset-levelfinancedemissionswithintheglobalcarbonbudgetassignedtoeachsector,andmonitortheirimprovementsinemissionreductionsmoretransparently.Thislevelofinfluenceintherealeconomyisdifficulttoachievewiththeotherthreeapproaches.Absolute-basedtargetscouldbeachievedbyshiftingorloweringtheexposuretocertainsectorswithintheportfoliowithouthavingaclearimpactintherealeconomy.Aneconomic-basedapproachissensitivetoeconomicfluctuationsingrossprofitsofportfoliocompanies(e.g.,targetachievementscanbeinfluencediftheactualgrossprofitoftheportfoliocompaniesdeviatesstronglyfromtheglobalGDPprojections).Lastly,thecapacity-basedapproachcanbelimitedasarobustlinkagebetweencapacityfactorsandutilizationrateswiththeglobalcarbonbudgetshasyettobeproven.5.2OverviewofAvailableAssetClass–SpecificMethods,BroaderMethods,andExistingGapsForthefirstphaseofthisproject,theSBTisupportsthreemethodsforfinancialinstitutions:theSectoralDecarbonizationApproach(SDA),theSBTPortfolioCoverageApproach,andtheTemperatureRatingApproach.TheSBTidevelopedcriteriaspecifictothesethreemethods(FI-C17.1–FI-17.3),whichareusedtoassessthetargetssetusingthesemethods.Thesemethodsuseassetclassapproachestolinkfinancialinstitutions’investmentandlendingportfolioswithclimatestabilizationpathways.Anassetclass–orientedapproachwaschosenforthisframeworktotakeintoconsiderationthevaryingdegreeofdataavailability,marketliquidity,andlevelsofownershipofdifferentassetclasses.33Amongthesethreemethods,SDAistheonlyapproachthatrequiresemissionsmeasurementonanassetclasslevel.SDAisalsotheonlysector-basedapproach,34andit’sapplicabletoallassetclassescoveredinthecurrentprojectphasewhereversectormethodsareavailable.TheSBTPortfolioCoverageandTemperatureRatingmethodstakeanengagement-orientedapproachfocusedonportfoliocompanies’actionstomeasureandreduceemissions.Bothmethodsareapplicabletoallsectorsforthecorporateinstrumentassetclasses.35SBTPortfolioCoverageisafinancialsectoranaloguetosupplierengagementtargetsfor“realeconomy”companies’scope3emissions.TheTemperatureRatingApproachexpandsthescopeoftheSBTPortfolioCoverageApproachandenablesFIstoassesstheambitionofportfoliocompaniesbasedontheirpublicGHGreductiontargets,ascomparedtoapprovedSBTsonly.33AninitialprojectsurveydistributedinFebruary2018with34responsesfromfinancialinstitutionsandotherstakeholdersalsoindicatedthat,intheorderofvotesreceived,corporateloans,listedequity,projectfinance,realestate,andmortgagesareassetclassesconsideredmostimportantforinclusionintheframework.34ThesectorandassetclasscoverageofSDAislistedinTable5.3.35SeeTable5.2formoreinformationontheapplicabilityofmethodstodifferentassetclasses.FinancialSectorScience-BasedTargetsGuidance51Financialinstitutionsmayuseoneormoreofthesethreemethodstodevelopassetclass–leveltargetsforaSBTsubmission(seeSection5.3formoreguidanceonthistopic).36Table5.1belowprovidesanoverviewofthemethodsbyassetclass,followedbyadescriptionofeachmethod;morein-depthmethoddescriptionsareprovidedintheAppendices.Table5.1.PortfolioTargetSettingMethodsforFinancialInstitutionsAssetClassMethodDescriptionPotentialTargetOutputExampleRealestateSectorDecarbonizationApproach(SDA)Emissions-basedphysicalintensitytargetsaresetfornonresidentialbuildings’intensityandtotalGHGemissions.FinancialInstitutionAcommitstoreduceitsrealestateportfolioGHGemissions___%persquaremeterby2030froma2018baseyear.MortgagesSDAEmissions-basedphysicalintensitytargetsaresetforresidentialbuildings’intensityandtotalGHGemissions.FinancialInstitutionAcommitstoreduceitsmortgageportfolioGHGemissions___%persquaremeterby2030froma2018baseyear.ElectricitygenerationprojectfinanceSDAEmissions-basedphysicalintensitytargetsaresetforelectricitygenerationprojects’intensityandtotalGHGemissions.FinancialInstitutionAcommitstoreduceitselectricitygenerationprojectfinanceportfolioGHGemissions___%per36Ifalternatemethodsbecomeavailable,SBTiwillconsiderthemonacase-by-casebasis.FinancialinstitutionsandmethoddevelopersinterestedinanassessmentofalternativemethodsshouldcontacttheSBTifinancesectorteambeforesubmittingtargetssetusingthesemethodsforavalidation.In2019,theSBTiTechnicalWorkingGroupdevelopedthefollowingcriteriafornewmethods:maintainsglobalcarbonbudget,consistencywithSBTitheoryofchangeandGHGmeasurementanddisclosurepractices,technologyagnostic,andpracticalityofapplication,aswellasthatthemethodshouldbefreelyavailable.Ingeneral,SBTmethodsforfinancialinstitutions’portfoliosareexpectedtofollowtheGHGProtocolprinciplesofrelevance,completeness,consistency,transparency,andaccuracy.Formoreinformation,seehttps://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf.FinancialSectorScience-BasedTargetsGuidance52kWhby2030froma2018baseyear.Corporateinstruments(equity,bonds,loans)SDAEmissions-basedphysicalintensitytargetsaresetatsectorlevelwithintheportfolioforthefollowingsectors:powergeneration,cement,pulpandpaper,transport,ironandsteel,andbuildings.FinancialInstitutionAcommitstoreduceGHGemissionsfromthesteelsectorwithinitscorporatelendingportfolioX%pertonofcementby2030froma2018baseyear.SBTPortfolioCoverageFinancialinstitutionscommittohavingaportionoftheirinvesteessettheirownSBTi-approvedscience-basedtargetssuchthatthefinancialinstitutionisonalinearpathto100%portfoliocoverageby2040(inconsistentemissionsormonetaryterms).InvestmentFirmAcommitsthat30%ofitsequityportfoliowithintheassetclass/sectorbytotalassetswillhavescience-basedtargetsby2025.TemperatureRatingThisapproachenablesfinancialinstitutionstodeterminethecurrenttemperatureratingoftheirportfolioandtakeactionstoaligntheirportfoliostoambitiouslong-termtemperaturegoalsbyengagingwithportfoliocompaniestosetambitioustargets.InvestmentFirmAcommitstoalignitsscope1+2portfoliotemperaturescorewithintheassetclassorsectorfrom2.6°Cin2018to1.75°Cby2025.InvestmentFirmAalsocommitstoaligntheirscope1+2+3portfoliotemperaturescorewithintheassetclassorsectorfrom3.1°Cin2018to2°Cby2025.Source:Authors2020.FinancialSectorScience-BasedTargetsGuidance535.3DefiningtheBoundaryofPortfolioTargetsToseekapprovalfromtheSBTi,financialinstitutionsshallfollowFI-C15andFI-C16tosettarget(s)ontheirinvestmentandlendingactivities.37Dependingonthecompositionoftheirportfolios,anFImaybeabletomeetFI-C16usingmethodsthatdonotrequiremeasurementoffinancedemissions.Therefore,it’spossiblethatFIsdonotneedtoquantifyanyfinancedemissionsoftheirholdingsoronlyneedtodosoinapartialmanner.CriteriaFI-C15–RequirementtoSetTarget(s)onInvestmentandLendingActivities:AllfinancialinstitutionsshallsettargetsontheirinvestmentandlendingactivitiesasrequiredbyFI-C16,irrespectiveoftheshareofquantifiedscope3portfolioemissionsascomparedtothetotalscope1+2+3emissionsofthefinancialinstitution.FIsmaychoosefromtheapplicablemethodsfortargetsetting,byassetclass,asdefinedinTable5.2.FI-C16–PortfolioTargetBoundary:Financialinstitutionsshallsettargetsonall“RequiredActivities”intheRequiredActivitiesandMethodsTable(Table5.2)followingtheminimumboundarycoveragerequirement.Financialsectoractivitieshavebeenorganizedintothreecategories:required,optional,andout-of-scopeactivitiestodeterminethetargetboundary(SeeTable5.2):1)Requiredactivities,ifrelevant,shallbeincludedinthetargetboundary.Forexample,FIsshallinclude100percentoftheactivitybykWhfromelectricitygenerationprojectfinanceinthetargetboundary(ifrelevant).Forlong-termcorporateloans,otherthanelectricitygenerationandrealestate,minimumtargetcoveragethresholdshavebeenestablishedforcompaniesandprojectsinthefossilfuelsectorandallothersectors:-Fossilfuelsector:Long-termcorporateloanSBTsshallcover95percentoflong-termlendingtofossilfuelcompanies.Inthecontextofthisproject,coalcompaniesaredefinedascompanieswithgreaterthan5percentofrevenuesfromthermalcoalmining,explorationanddrilling,miningservices,processing,trading,transportandlogistics,equipmentmanufacturing,operations,andmaintenance(O&M)services,engineering,procurementandconstruction(EPC)services,transmissionanddistributionofcoal-firedelectricity,coaltoliquids(Ctlg)andcoalto37FIsmayhavepartsoftheirportfolios,suchasaspecificassetclassorafund,assessedbySBTithroughthepartialsubmissionoptiondetailedinthetargetsubmissionform.However,partialtargetswillnotbeofficiallyrecognizedandpublishedbytheSBTieveniftheymeetallrelevantcriteria.FinancialSectorScience-BasedTargetsGuidance54gas(CtG).38Oilandgascompaniesaredefinedascompaniesthatderivemorethan30percentofrevenuesfromtheexploration,extraction,refining,transportationanddistribution,storage,retailing,marketing,trading,orpower,heat,orcoolingproductionfromoilandgas.39-Allothersectors:Financialinstitutionsshallcoverataminimum67percentoftheirlendingactivitiestocompaniesinallothersectors.2)OptionalactivitiesthatFIsmayincludeinthetargetboundary.40Thereisnominimumcoveragerequirementonoptionalactivities,andFIsmaycoverasmuchoftheseactivitiesastheywish.Forexample,FIsthatwishtosettargetsontheoptionalcategoryofresidentialmortgageloansshouldusetheSDAmethodandcoulddeterminethetargetboundarythemselves.Theseactivitiesaredeemedoptionalastheycanbeimpracticaltosettargetsfor,givenchallengessuchasunavailabilityofdataorshort-termperiodofaninvestment/loan.3)Out-of-scopeactivitiesthatcannotbecoveredbyavailablemethodsordonotapplytotheprojectaudience.ProductsnotlistedinTable5.2arelikelyalsooutofscope.Forassetmanagers,FI-C15andFI-C16alsoapplytofundsmanagedunderdiscretionarymandates.TheSBTirecommendsbutdoesnotrequirethatbanks’assetmanagementdivisionsfollowTable5.2tosettargetsonthesefunds.Ifbanksdecidetoexcludetheirassetmanagementdivisionsfromtheirparentcompany–leveltargets,theyshoulddisclosethisexclusioninthetargetwordingfortransparencyandcomparability.Table5.2isall-compassingandmaynotapplytocertainfinancialinstitutions.IfanFIinvestssolelyormainlyinoptionalassetclasses,theyshouldcontactSBTitodiscussaminimumtargetcoverageboundaryoftheseassetclass(es)fortheportfoliotargetstobeconsideredcredible.SBTihasdevisedminimumtargetcoveragerequirementsformortgageREITsandprivateequityfirmsdescribedbelow,whicharetwoexceptionstoTable5.2.MortgageREITsthatinvestinresidentialandcommercialmortgages,residentialmortgage-backedsecuritiesandcommercialmortgage-backedsecuritiesshall,ataminimum,cover67percentofresidentialmortgagesbybaseyearactivityinsquaremeter.PrivateequityfirmsarerecommendedtousetheSBTportfoliocoverageapproachtocoverallprivateequityinvestments,regardlessofthepercentagesharethefirmhasinitsinvestees.TheSBTportfoliocoveragemethodisencouragedgiventhatprivateequityfirmsoftenhavemoreinfluenceovertheirinvesteescomparedtootherfinancial38The5percentthresholdisdeterminedbasedona1–5percentrangefortheshareofrevenuetheEuropeanCommission(“CommissionDelegatedRegulation[EU]”2020)andfinancialinstitutionssuchasKLP(“KLPGoesCoalFree”2020)usetoidentifycoalcompanies.39The30percentthresholdisbasedona20-30percentrangefortheshareofrevenueusedtoexcludeoilandgascompaniesbyfinancialinstitutionssuchasRobecoInstitutionalAssetManagement(RobecoInstitutionalAssetManagementB.V.2020)andNatixis(NATIXIS2018).40Overtime,SBTimayupdate“optionalactivities”toberequired,dependingonfactorssuchaschangesinavailabilityofdataorfinancialinstitutions’readinesstosettargetsoncertainassetclasses.FinancialSectorScience-BasedTargetsGuidance55institutions.Ifprivateequityfirmshaveequityinvestmentsinrealestatecompaniesorfunds,100percentoftheseshallbecoveredeitherwithintheboundaryoftheSBTportfoliocoveragetarget,oraseparatetargetusingtheSDAmethod.Forthetimebeing,privatedebtandventurecapitalareconsideredoptionalforprivateequityfirms.TheSBTiaimstostriketherightbalancebetweenrobustnessandpracticalityforthecriteria.Factorssuchasdataavailability,financialinstitutions’levelofinfluence,andsector’scontributiontoclimatechangehavebeentakenintoconsiderationwhendeterminingifanactivityshouldberequiredandthecorrespondingminimumcoveragerequirements.Asmoredatabecomeavailable,methodsbecomemoremature,andfinancialinstitutionsgainmoreexperienceintargetsetting,theSBTimayreviseTable5.2throughtheannualcriteriaupdateprocess.Financialinstitutionsmayalsosetadditionaltargetstoincreasethecoverageoftargetsontheirportfoliosasmethodsbecomeavailableforadditionalassetclassesandsectors.Table5.2belowpresentsthesethreecategoriesofactivities,theminimumcoverageforrequiredactivities(onlyrelevanttorequiredactivities),andapplicablemethod(s)foreachactivitytype:•Whenonlyonemethodislisted,itmeansthatitistheonlyapplicablemethodforthespecificfinancialactivity.Forexample,onlytheSDAcanbeappliedtoelectricitygenerationprojectfinance.•Whenmultiplemethodsarelisted,FIsmaychooseoneormoreofthemethodstosettargetsthatcollectivelymeetthespecificminimumcoveragerequirementfortheseproducts.Forexample,financialinstitutionsmayusebothSDA(forsectorswherethemethodisavailable)andthetemperatureratingmethodtocollectivelycover100percentoftheircorporatebondsportfolios.Table5.2.Required,Optional,andOut-of-ScopeActivitiesandApplicableMethodsLegendRequiredActivitiesOptionalActivitiesOutofScopeAssetclassProductsandRequirementforInclusioninTargetsRequiredMinimumCoverageforRequiredActivitiesApplicableMethodsConsumerloanResidentialmortgagesOptionalaSDAMotorvehicleloanNotapplicableNotavailableFinancialSectorScience-BasedTargetsGuidance56PersonalloansNotapplicableNotavailableProjectfinanceElectricitygenerationprojectfinance100%ofbaseyearactivity(kWh)SDAOtherprojectfinance(e.g.,infrastructure)NotapplicableNotavailableCorporateloanCorporateloan:commercialrealestateMin.67%ofbaseyearactivity(m2)SDASBTPortfolioCoverageTemperatureRatingCorporateloan:electricitygeneration100%ofbaseyearactivity(kWh)SDACorporateloan:otherlong-termdebt(morethanoneyear),excludingelectricitygenerationprojectfinanceandrealestateFossilfuelcompanies:min.95%ofbaseyearcorporatelending(loanvalue)Othercompanies:min.67%ofbaseyearcorporatelendingb(loanvalue)SDA,wheresector-specificmethodsareavailableSBTPortfolioCoverageTemperatureRatingCorporatelending:SMEloanscOptionalSDASBTPortfolioCoverageTemperatureRatingCorporatelending:short-termdebt(lessthanoneyear,suchaslineofcredit,intraday,andoverdraftfacilities)OptionalSDASBTPortfolioCoverageTemperatureRatingCorporateloan:otherprojectfinanceNotapplicableNotavailableListedequityandbondsdCommonstock100%SDASBTPortfolioCoverageTemperatureRatingPreferredstock100%SDASBTPortfolioCoverageTemperatureRatingCorporatebonds100%SDASBTPortfolioCoverageTemperatureRatingExchangetradedfunds100%SDASBTPortfolioCoverageTemperatureRatingFinancialSectorScience-BasedTargetsGuidance57Investmentsinrealestateinvestmenttrusts(REITs),listedrealestatecompanies,andrealestatemutualfunds100%SDASBTportfoliocoverageTemperatureRatingFundsoffundsOptionalSDASBTPortfolioCoverageTemperatureRatingDerivativesNotapplicableNotavailableSovereignandgovernmentbondsNotapplicableNotavailableSupranational,sub-sovereign(includingmunicipal)bondsNotapplicableNotavailableAgencybondsNotapplicableNotavailableSecuritizedfixedincome(includesasset-backedsecurities/mortgage-backedsecurities,coveredbonds)NotapplicableNotavailablePrivateequityanddebtf,includesventurecapitalPrivateequityanddebt,e.g.,mezzaninecapital,ordinaryshares,preferredshares,shareholderloans,privaterealestatecompaniesOptionaleSDASBTPortfolioCoverageTemperatureRatingAdvisoryservices,ifrelevantAdvisoryservices(e.g.,Mergersandacquisitions),debtandequityunderwriting,brokerage-securitiesandcommodities,tradingsecuritiesandcommodities,creditguarantees,insurancecontracts,transactionservicesNotapplicableNotavailableNotes:aAsanexceptiontothistable,mortgageREITsshallcoverataminimumof67percentofresidentialmortgagesbybaseyearactivityinsquaremeter.FinancialSectorScience-BasedTargetsGuidance58bThe67percentappliestocompaniesinallothersectors,notpersector.cAsthedefinitionofSMEscanvaryfromregiontoregion,financialinstitutionsmayusetheirowndefinitionsofSMEstointerpretthiscategory.Forcompanies,theSBTiprovidesastreamlinedtargetvalidationrouteforSMEs,whereanSMEisdefinedasanon-subsidiary,independentcompanywithfewerthan500employees.FinancialinstitutionsinterestedinengagingSMEstosetSBTsandwhosethresholdforSMEsishigherthan500employees(e.g.,1,000employees)mayhavetodirecttheirSMEclientstotheregularSBTivalidationroute.FormoreinformationontheSBTi’stargetsettingoptionforSMEs,pleaseseehttps://sciencebasedtargets.org/faqs-for-smes/.dMutualfundscoveringrequiredactivitiesinlistedequityandbondsarealsorequired.eAsanexceptiontothistable,privateequityfirmsshallcovertheirprivateequityinvestmentsandotherrelevantassetclasses,detailedabove.fPrivatedebtreferstodebttoprivatecompanieswhosesharesarenottradedonastockmarket.Source:Authors2021.Table5.2.showsthatinvestmentsandcorporateloansinrealestaterequireaminimumcoverageof67percentofinvestmentandlendingactivity(m2).Inensuringthiscoverage,financialinstitutionsshouldprioritizetheinclusionofassetsinregionswherebuildings’emissionsdataorbuildings’energy-relateddataareavailable,orwheredataqualityisgenerallyhigherquality.However,thisshouldnotdeterinstitutionsfromincludingassetsinregionswhereonlyproxyoraveragedataareavailable.41Similarly,corporatelendingfornon-fossilfuelsectorsrequiresminimumcoverageof67percentoflendingbookvalue.Todeterminethecoverage,financialinstitutionscouldscreentheemissionsoftheirlendingportfoliotoidentifyemissionshotspots,whichwouldhelpinmakinganinformeddecisiononwhichsectorstocoverfortargetsetting.Theycouldalsoprioritizeloansissuedtocompaniesinhigh-emittingsectors.5.4DescriptionofMethodstoSetPortfolioTargetsThissectionprovidesanoverviewofmethodsavailabletosettargetsonfinancialinstitutions’investmentandlendingportfolios,alongwithcasestudiesoffinancialinstitutionsgloballythathavetestedthesemethodsinthemethodroad-testingprocessforSDAandSBTPortfolioCoveragein2019,andtheSBTiFinanceToolbeta-testingprocessin2020.Giventhatthesecasestudieswereconductedbeforethefinalreleaseoftheguidance,thetargetsettingexercisesdescribedmaynotalignfullywiththecriteriapresentedintheguidance.FinancialinstitutionsshallfollowthecriteriaandrecommendationstopreparetargetsforsubmissionstoSBTi.4241Thisrecommendationisalsoapplicabletotheoptional(requiredformortgageREITs)residentialmortgageassetclass.42SeveralFIsalsomentionedthattheyhavesetnet-zerotargetsinthecasestudies.PleasenotethesetargetshavenotbeenapprovedbySBTi.SBTiiscurrentlydevelopingaframeworktoenablecompaniesandfinancialinstitutionstosetrobustandcrediblenet-zerotargetsinlinewitha1.5°Cfuture.FinancialSectorScience-BasedTargetsGuidance59DetailedmethoddescriptionsandinstructionsforapplicationareincludedintheAppendices.5.4.1TheSectoralDecarbonizationApproachTheSectoralDecarbonizationApproach(SDA)isamethodforsettingphysicalintensitytargetsthatusesconvergenceofemissionsintensity.Anintensitytargetisdefinedbyareductioninemissionsrelativetoaspecificbusinessmetric,suchasproductionoutputofthecompany(e.g.,metrictonneCO2epertonneproductproduced).TheSDAassumesglobalconvergenceofkeysectors’emissionsintensityby2050.Forexample,theemissionsintensityofsteelproductioninChina,theUnitedStates,andBrazilisassumedtoreachthesamelevelby2050,regardlessofitscurrentdiversity.43Regionalpathwayshavenotbeenincorporatedintothismethod.TheSDAistheonlyapplicablemethodforseveralassetclasses,asspecifiedinTable5.2.Fortheremainingassetclasses,SDAcanbeusedonitsownorwithoneorbothothermethodstocollectivelymeettheminimumrequiredboundarycoverage.TheSBTifirstdevelopedtheSDAforcompaniesin2015usingtheInternationalEnergyAgency(IEA)EnergyTechnologyPerspectives(ETP)scenariodata.ThemethoddevelopmentprocessisdescribedintheSBTi’sSectoralDecarbonizationApproachreportpublishedin2015.44Currently,theSDAusestheB2DSscenariofromtheEnergyTechnologyPerspectives2017report,whichcomprisesemissionsandactivityprojectionsusedtocomputesectoralpathwaysalignedwithlimitingwarmingtowell-below2°C(IEA2017).TheSBTialsoprovidesa1.5°C-alignedpathwayforthepowersectorthatenableselectricutilitiestosubmit1.5°C-alignedtargetsforofficialrecognition.45Duetothelackof1.5°CscenariodatafromIEA,onlyawell-below2°Calignmentisavailableforothersectors.ThecriteriaboxbelowpresentsrequirementsforSDAtargets.CriteriaFI-C17.1–SectoralDecarbonizationApproachTargets46:Financialinstitutions’targetsusingthesectoraldecarbonizationapproach(SDA)areconsideredacceptablewhenthefollowingconditionsaremet:43Eachsectoralbudgetismaintained,totheextentthesumofsectoralactivitydoesnotgobeyondthatprojectedforthescenario(forhomogeneoussectors)andnonewbusinessesarecreated.44Pleasefindthereporthere:https://sciencebasedtargets.org/wp-content/uploads/2015/05/Sectoral-Decarbonization-Approach-Report.pdf.TheoriginalmethodwasalsodescribedinKrabbeetal.2015.45Pleasefindmoreprojectinformationhere:https://sciencebasedtargets.org/sector-development/power-sector/.46PleaseseeSection5.4.1formoreinformationontheSectoralDecarbonizationApproach.FinancialSectorScience-BasedTargetsGuidance60•Boundary:FinancialinstitutionsshallsetSDAtargetsontheirrealestateandelectricitygeneration–relatedactivitiesasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).SDAtargetsmayalsobesetonotheractivitieslistedinTable5.2,suchasresidentialmortgages,corporateloans,listedandprivateequityanddebtforsectorswheremethodsareavailable.•Ambition:PortfolioSDAtargetsmustmeetminimumambitionindicatedbysector-specificmethodsforwell-below2°Cpathways.•Timeframe:PortfolioSDAtargetsmustcoveraminimumof5yearsandamaximumof15yearsfromthedatethefinancialinstitution’stargetissubmittedtotheSBTiforanofficialvalidation.Financialinstitutionsarefurtherencouragedtodeveloplong-termtargetsupto2050inadditiontotherequiredmidtermtargets.•ScopeofBorrowerand/orInvesteeTargets:Targetsonscope1and2emissionsarerequiredforrealestateandelectricitygenerationrelatedactivitiesasdefinedbySDAmethods(ifrelevant).ForotherRequiredActivitiesintheTable5-2,FIsshallsettargetsonemissionsscopesasrequiredbytherelevantSBTisector-specificguidance.47OncetheIEApublishesitsupdated2020ETPscenarios,theSBTimaydevelopacustomizedSDAtoolforfinancialinstitutions’portfolios.Inthemeantime,financialinstitutionscanusetheexistingSBTitargetsettingtoolandtransporttooldevelopedforcompaniestosettargetsontherelevantassetclassesorsectors(seeTable5.3).Aninventoryofassetclassemissionsmustbeconductedbeforemodelingtargetsinthetool.Adedicatedcalculationsheetisavailableforrealestateandmortgagesrelatedassetclasses.Table5.3belowsummarizesthesectorscoveredbytheSDA,thecorrespondingemissionintensityunitsrequiredbythemethod,theavailabletemperaturepathways,andrelevanttargetsettingtools.Table5.3.SectorandAssetClassCoverageofSectoralDecarbonizationApproachandAvailableTemperatureRatingandTargetSettingResourcesAssetClassSectorandEmissionIntensityUnitsTemperatureRatingAvailableTargetSettingToolMortgageResidentialbuildings(kgCO2e/m2)Well-below2°C(min.requirement)MortgagesandRealEstateCalculationSheetRealestateResidentialandservicebuildings(kgCO2e/m2)Well-below2°C(min.requirement)MortgagesandRealEstateCalculationSheet47Alistofthesector-specificguidanceandrequirementsisavailableinChapter3oftheSBTTargetSettingManual(Table3-1).FinancialSectorScience-BasedTargetsGuidance61ElectricitygenerationprojectfinancePowergeneration(kgCO2e/kWh)Well-below2°C(min.requirement)1.5°CSBTiTargetSettingtool-SDAforPowerCorporateequity,bonds,andloanAluminum(kgCO2e/ton)Well-below2°C(min.requirement)SBTiTargetSettingtool-SDAforAluminumBuildings(kgCO2e/m2)Well-below2°C(min.requirement)MortgagesandRealEstateCalculationSheetCement(kgCO2e/tonne)Well-below2°C(min.requirement)SBTiTargetSettingtool-SDAforCementChemicalNotavailableThechemicalsectorSDApathwaycannotbeusedatpresent.ChemicalcompaniesshouldusethegeneralSBTmethodsintheSBTiTargetSettingtool.SBTiisdevelopingsector-specificguidanceforthechemicalandpetrochemicalindustry.FossilfuelNotavailableOilandgassectorongoingdevelopmentbySBTiNotavailableIronandsteel(kgCO2e/ton)Well-below2°C(min.requirement)SBTiTargetSettingtool-SDAforIronandSteelPowergeneration(kgCO2e/kWh)Well-below2°C(min.requirement)SBTiTargetSettingtool-SDAforPowerFinancialSectorScience-BasedTargetsGuidance621.5°CPulpandPaper(kgCO2e/tonne)Well-below2°C(min.requirement)SBTiTargetSettingtool-SDAforPulpandPaperTransport:passenger,freight,automanufacturing(scope3–useofsoldproducts)(kgCO2e/vehicle-kilometer,kgCO2e/tonne-kilometer,kgCO2e/vehicle-kilometer)Well-below2°C(min.requirement)SBTiTransportToolSource:Authors2020.HowtoCalculatePhysicalEmissionsIntensityforSDATargetsForfinancialinstitutions,determiningportfolioemissionsintensityisthestartingpointtoapplytheSDAfortargetsetting.Portfolioemissionsintensityreferstofinancedemissionsperunitofactivitydata(e.g.,kgCO2e/m2,kgCO2e/kWh,kgCO2e/tonnecement).Threestepsaretakentoderivethis:1.MeasuretheabsoluteGHGemissionsofeachinvestmentand/orloaninaspecificassetclass(i.e.,scope1and2emissionsofborrowersand/orinvesteesandscope3emissionswherepossible);2.Calculatetheshareofborrowers’and/orinvestees’emissionsthatshouldbeattributedtothefinancialinstitution(i.e.,financedemissions);and3.Dividethesumoffinancedemissionsbythesumofattributedactivitydataofallinvestmentsand/orloansinthespecificassetclass.Figure5.1illustratesthethreestepstoderivetheemissionsintensitybaselineofafinancialinstitutionthatappliestheSDA.Figure5.1.StepstoCalculateBaselineEmissionsIntensityforSettingSDATargetsFinancialSectorScience-BasedTargetsGuidance63Source:PCAF2020.ItisimportanttonotethattheattributionfactortocalculateFI’sshareofemissionsandshareofactivitydatavariesacrossassetclasses,asshowninFigure5.2below.Figure5.2.AttributionFactorsforVariousAssetClassesinthePartnershipforCarbonAccountingFinancialsFrameworkFinancialSectorScience-BasedTargetsGuidance64Source:PCAF2020.DetailedguidanceonthemethodstocalculatefinancedemissionsperassetclassisprovidedintheGlobalGHGAccountingandReportingStandardforthefinancialindustry(PCAF2020).Calculatingtheportfolioemissionintensityisthefirststepfinancialinstitutionsneedtotaketosetemissions-basedtargets.Thisisfollowedbyconvergingtheprojectedemissionintensitytothesamelevelasthesector-specificdecarbonizationpathwayin2050.SectoralDecarbonizationApproachforMortgagesAmortgageisalendingagreementtopurchasingaresidentialpropertyinexchangeforaregularrepaymentatinterest,whichthelenderisentitledtowiththeconditionthattheloanbecomesvoiduponthepaymentofthedebt.Residentialpropertyreferstoabuildingforasinglefamilyormultifamilythatisusedprimarilyforhumandwelling(i.e.,apartmentsandhouses).Targetsonamortgageportfolioaresetusingtheglobaldecarbonizationpathwayforresidentialbuildings(i.e.,theglobalfloorareaprojectionsandemissionsintensitypathwaysforresidentialbuildingsdefinedinIEAETP2017B2DS).Acalculationsheetisavailableforsettingtargetsonmortgageportfolios.CaseStudy:DeVolksbank-TestingSDAforMortgagesBackgroundondeVolksbankDeVolksbankisthefourth-largestretailbankintheDutchmarket,with3.2millioncustomersandnearly3,000employees.Thebankprovidesmortgages(€47.8billionin2018),managessavings(€37billion)andoffers1.5millioncustomersacurrentaccount.Italsooffersalimitedrangeofinsuranceandinvestmentproductsandloans.Thebankprovidesitsservicesthroughfourbrands:ASNBank,BLGWonen,RegioBank,andSNS.DeVolksbankstartedmeasuringtheclimateimpactofitsportfolioin2015andcontinuedtodosoonaquarterlybasis.In2018,85percentofdeVolksbank’sfinancedemissionswereattributedtomortgages.Thus,sustainablehousingisthefocalpointofdeVolksbank’sclimateambition,creatingcustomervaluebyincreasingcomfortandenergy-efficientliving.Assuch,applyingthescience-basedtargets(SBTs)methodformortgageshelpsdeVolksbankanswerthekeyquestion:Towhatextentandatwhatpaceshouldthebankhelpitscustomersto“decarbonize”theirownhomes?SDAappliedtodeVolksbank’smortgageportfolioDeVolksbankappliedtheSDAmethodformortgagesinApril2019andpresentedtheresultstotheSBTicommunityinJune2019.FinancialSectorScience-BasedTargetsGuidance65Themethodologycombinesthefloorareaofthebuildingsitfinanced,thegrowthforecastofitsmortgageportfoliountil2030,andtheabsolutefinancedemissionsitregularlymeasuresusingtheGHGaccountingmethodsdevelopedbythePartnershipforCarbonAccountingFinancials(PCAF).Floorarea:ThesurfaceareadatafromthehousingunitsfinancedbythebankwereretrievedfromtheDutchCadastre,whichcollectsandregistersadministrativeandspatialdataonallDutchproperties.Absolutefinancedemissions:Thisincludestotalscope1and2emissionsforeachhousingunitindeVolksbank’sportfolio.DeVolksbankderivedtheseemissionsbyconvertingtheaverageelectricityandgasconsumptionperenergylabel48toCO2emissions,usingnationalaverageemissionfactors.49SeeFigureB2.1.FigureB2.1.DistributionofEnergyLabelsindeVolksbank’sMortgagePortfolioandEmissionsProfileSource:DeVolksbank2020.Emissionsintensity:DeVolksbankcombinedtheabsolutefinancedemissionswiththefloorareatoderivetheemissionsintensityofitsmortgageportfolioin2018.Thebaselineemissionsintensitywascalculatedtobe30.8kgCO2/m2,fromwhichdeVolksbankprojectedintothefutureuntil2050.Selectingthedecarbonizationpathway:DeVolksbankcompareditsprojectedemissionsintensitywiththreebuildingemissionspathwaysfromthefollowingscenarios(seeFigureB2.2):48EnergylabelsexpresstheenergyperformanceofdwellingsandareprovidedbytheDutchEnterpriseAgency(DeRijksdienstvoorOndernemendNederland(RVO]).Where“A”labelisthebestand“G”labelistheworst.49AveragegasandelectricityconsumptionderivedfromWoneninOngewone;www.rijksoverheid.nl/documenten/rapporten/2013/04/11/cijfers-over-wonen-en-bouwen-2013andconvertedtoemissionsusingfactorsfromwww.CO2emissiefactoren.nl.FinancialSectorScience-BasedTargetsGuidance66•DutchClimateAgreement,50•EuropeanUnionBeyond2°CScenario(EUB2DS)forresidentialbuildings,and•WorldB2DSforresidentialbuildings.DeVolksbankselectedtheEUB2DSresidentialbuildingdecarbonizationpathwaytomodeltheSBTsonitsmortgageportfolio.FigureB2.2.EmissionIntensityofdeVolksbank’sMortgagePortfolioComparedwithThreePathwaysSource:DeVolksbank2020.OutcomeandpotentialactionstoachievetargetsUsingtheEUB2DS,deVolksbankidentifiedtheintensityandabsolutetargetsshowninFigureB2.3.FigureB2.3.AbsoluteandIntensityTargetsResultingfromThisCaseStudySource:DeVolksbank2020.50TheDutchClimateAgreementscenariogoesuntil2030,andweassumeitconvergestotheEuropeanUnionBeyond2°Cscenario(B2DS).FinancialSectorScience-BasedTargetsGuidance67ThechallengedeVolksbankencounteredwiththesetargetsisthatsteeringemissionsonenergylabelswillnotbesufficienttoachievea91percentreductionofemissionintensityby2050.Evenifthebankachieves“A”labelsfortheentireportfolio,itwouldonlybeabletoreduce40percentofemissions.WhiledeVolksbankwouldneedmoregranularemissionsdatapermortgage,thebankidentifiedacrucialdriverthatcouldhelpitsteeremissions.IntheNetherlands,mostofthebuildings’scope1and2emissionsarecausedbynaturalgascombustion.Thus,thebankseesgreatvalueinfocusingitsstrategyonengagingwithclientsinfosteringelectrificationoftheheatingsystems(i.e.,heatpumps),installationofmorerenewableenergysystems(e.g.,solarpanels),andincreasingenergyefficiency.ConclusionsandrecommendationsTheresultsshowthepaceandtheextenttowhichemissionspersquaremeterfinancedbydeVolksbank’smortgageportfoliomustbereducedtoalignitsportfoliowithnational,European,andglobalemissionsscenarios.In2020,deVolksbankisexaminingwhetherandhowitcanincorporatetheresultsintoitspresenttargetofaclimate-neutralbalancesheetby2030.Inthemeantime,asthebankworkswithpeerswithinPCAFtoincreasedatagranularityformortgageportfolios,auniquecollaborationbetweenPCAFandtheDutchCentralBureauofStatistics(CentraalBureauvoordeStatistiekorCBS),alsoknownasStatisticsNetherlands)ledtoaccessactualelectricityandgasconsumptiondataofforsevenfinancialinstitutionsintheNetherlands,includingdeVolksbank.51Thebankplanstorecalculatetheemissionintensitybaselineofitsmortgageportfoliousingthisactualenergyconsumptiondataandrerunthetargetsettinganalysis.SectoralDecarbonizationApproachforRealEstateArealestateinvestmentistheallocationofcapitalforpartialorfullownershipofproperty,realestateinvestmentgroups,realestatetrading,realestateinvestmenttrust(REIT),etc.Bothresidentialandservicebuildingsunderrealestateinvestmentareincludedinthismethodology.Residentialbuildingsrefertoprivatedwellingssuchasapartmentsandhouses,whereasservicebuildingsincludepropertiesrelatedtotrade,finance,retail,publicadministration,health,foodandlodging,education,andcommercialservices.Targetsonarealestateportfolioaresetusingtheglobaldecarbonizationpathwayforservicebuildingsand/orresidentialbuildingsaccordingly(i.e.,theglobalfloorareaprojectionsandemissionsintensitiespathwaysdefinedintheIEAETP2017B2DS).Acalculationsheetisavailableforsettingtargetsonrealestateportfolios.51FormoreinformationabouttheresultsofthecollaborationbetweenPCAFandCBSonactualenergyconsumptionformortgageportfolios,seehttps://carbonaccountingfinancials.com/newsitem/cbs-publishes-co2-emissions-of-dutch-banks-mortgage-portfolios#newsitemtext.FinancialSectorScience-BasedTargetsGuidance68CaseStudy:BankJ.SafraSarasin,Ltd.-TestingSDAforRealEstateBackgroundonBankJ.SafraSarasin,Ltd.BankJ.SafraSarasin,Ltd.isaleadingSwissprivatebankandpioneerwithover30yearsofexperienceinsustainableinvestments.ThebankispartoftheinternationalJ.SafraSarasinGroupandhasmorethan25locationsinEurope,Asia,theMiddleEast,andLatinAmerica.Bytheendof2019,theJ.SafraSarasinGrouphadassetsundermanagementinexcessofCHf180billion.BankJ.SafraSarasinassetmanagementclimatepledgeInMay2020,BankJ.SafraSarasinAssetManagementlaunchedaClimatePledgeaimingforacarbon-neutraloutcomeby2035inassetsundermanagementandbankingoperations(BankJ.SafraSarasin2020).TheJ.SafraSarasinInvestmentFoundation(SAST)wasestablishedbyBankJ.SafraSarasin,Ltd.in1991.UnderSAST,thesustainableinvestmentgroup,“SustainableRealEstateSwitzerland”wasestablishedin2009asaportfolioofdirectlyheldrealestatepropertiesinSwitzerland.BankJ.SafraSarasin,Ltd.developedaholisticsustainabilityapproach,whichfullyintegratesenvironmental,social,andcorporategovernance(ESG)criteriaineverystepoftheinvestmentprocessatSAST“SustainableRealEstateSwitzerland.”AnimportantcomponentofthesustainabilityapproachistheEnvironmentalManagementSystem(EMS),establishedin2017.Itmonitorstheenergyandwaterconsumptionoftherealestatepropertiesand,basedonSwissemissionfactors,calculatestheresultinggreenhousegas(GHG)emissions(scope1and2).TheEMSservesasthefoundationforimplementingtheBankJ.SafraSarasinAssetManagementClimatePledge.SDAappliedtoSAST“SustainableRealEstateSwitzerland”AsofSeptember2020,SwitzerlandisintheprocessofoverhaulingitsCO2-lawanddeterminingtheclimateregulationuntil2030.Thisalsoincludesbuilding-relatedCO2benchmarksrelatedtoretrofitmeasures(SwissParliament2020).InJuly2020,BankJ.SafraSarasin,Ltd.appliedtheSectoralDecarbonizationApproach(SDA)forRealEstateincludedintheScienceBasedTargetinitiative’s(SBTi)financesectorframeworkontherealestateportfolioofSAST“SustainableRealEstateSwitzerland.”BankJ.SafraSarasin,Ltd.aimstovalidatetheambitionformulatedbyitsownClimatePledgeanddeliverambitiousclimateactionfortheassetsundermanagement,investors,andtenants.Fortherealestateportfolio,itconsequentlymeanstovalidatetheproposeddecarbonizationpathwayandcompareittothelevelofdecarbonizationrequiredforthesectorasproposedbytheSDAapproach.Therealestateportfolioconsistsof30builtrealestatepropertiesinSwitzerlandwithapproximately75percentmultifamilyhouses,20percentcommercial,andtheremaining5percentmixed-useproperties.Ofthe30realestateproperties,29arereportingintheEMSasofJune2020.Fiveprojectswereunderconstruction,andthegrossassetvaluewasatCHf0.72billionwithatotalfloorareaof0.1millionm2.Themethodologycombinestheentirefloorareaoftheportfolio,floorareagrowthforecastuntil2035,andresultingGHGemissionsbasedonscope1and2emissionsoftherealestateproperties.Scope1emissionsincludeallemissionsresultingfromenergyproductionatthesiteoftherealestateproperties,suchasphotovoltaic(PV)systems,heatpumps,etc.Scope2emissionsincludeallpurchasedFinancialSectorScience-BasedTargetsGuidance69electricityandenergycarriersforheating,and,whereavailable,measuredorotherwisestatisticallyestimatedtenantelectricityconsumptions.Theenergyconsumptionwasnormalizedwithaverageactivefloorareaforthereportingperiod.BankJ.SafraSarasin,Ltd.calculatedthetotalannualGHGemissionsusingemissionfactorspublishedbytheSwissgovernment(BFU2016)52(energyconsumptiontype[kWh]xemissionfactor=GHGemissions[kgCO2e]).Theemissionintensityresultsinusingthefloorareanormalizedbyactivearea,whereunoccupiedfloorareaisexcluded.Todevelopadecarbonizationpathway,2018wasdefinedasbaseyearandannualgrowthwasassumedatapproximately3percent.OutcomeBankJ.SafraSarasinAssetManagementaimsforanalignmentofthedecarbonizationpathwaywitha1.5°Cwarmingscenario(FigureB3.1).Therefore,thedecarbonizationpathwayspublishedbyCarbonFigureB3.1.GHGEmissionIntensityofJ.SafraSarasin’sAssetManagementClimatePledgeComparedwithThreePathwaysSource:J.SafraSarasin2020.RiskRealEstateMonitor(CRREM)(CRREM2020),53whichincludesa1.5°Cwarmingscenario,wasusedasareferencebenchmarkforSwisscommercialandresidentialmultifamilyrealestate.ThedecarbonizationpathwaymodeledbytheSDAmethodusedtheglobaldecarbonizationscenario,andtheresultwascomparedtothedecarbonizationpathwaybasedontheJ.SafraSarasinAssetManagementClimatePledgeaimingforacarbon-neutraloutcomeby2035.ByutilizingtheSDA,theresultingabsoluteandintensitytargetsareshowninTableB3.1,comparedagainstthegoalsoftheClimatePledge:52BAFU(2016),LifecycleInventoryDataintheBuildingSector:https://www.kbob.admin.ch/kbob/de/home/publikationen/nachhaltiges-bauen/oekobilanzdaten_baubereich.html.53AccordingtotheCRREM“GlobalPathways”documentation,the1.5°CscenariowasdevelopedbyFriendsoftheEarthwithaGHGemissionbudgetby2050of890GtCO2e;https://www.crrem.org/pathways/.FinancialSectorScience-BasedTargetsGuidance70TableB3.1.AbsoluteandIntensityTargetsofJ.SafraSarasin’sRealEstatePortfolioResultedfromtheAnalysisIntensitytargets[kgCO2e/m2]AbsoluteTargets[tCO2e]2018202520302035205020182025203020352050SDA22.716.611.98.31.0SDA19892271188315235ClimatePledge22.711.44.70.00.0ClimatePledge1989155374810Intensitytargets[%comparedto2018]Absolutetargets[%comparedto2018]2018202520302035205020182025203020352050SDA--27%-48%-63%-96%SDA-14%-5%-23%-86%ClimatePledge--50%-79%-100%-ClimatePledge--22%-62%-100%-Source:J.SafraSarasin2020.ConclusionByapplyingtheSDAmethod,BankJ.SafraSarasin,Ltd.wasabletocompareasectoraldecarbonizationpathwaywithitsownClimatePledge,leadingtoachievingsimilarreductiontargets,although15yearsaheadofthetargetdeadline.Furthermore,itshowsthattheBankJ.SafraSarasinAssetManagementClimatePledgeisalignedwitha1.5°CwarmingscenariobasedontheCRREMdecarbonizationpathways,usedasareferencebenchmark.Thechallengewillbeinimplementinganumberofsustainabilitymeasuresonanassetlevel,necessarytodeliverthecarbon-neutraloutcomeoftheClimatePledgeby2035.AsofJune2020,theSAST“SustainableRealEstateSwitzerland”portfolioisat85percentrenewableenergyuseforwarmwaterandheating.Therefore,anecessarymeasurewillincludeabandoningfossilfuels,forexample,switchingtobiogasatpropertieswithgasheatingandeventuallytoentirelyrenewableheatingsystems.Renewableelectricitypurchasingneedstobeextendedtoallproperties,and,whereapplicable,on-sitePVsystemsneedtobeinstalled.HereSwisslawenablesthecreationofself-consumptionassociations(ZusammenschlusszumEigenverbrauch)withtenants,wheretheypurchasesolarelectricitygeneratedon-sitefromtheowner(SAST2019).54AttworealestatepropertiesoftheSAST“SustainableRealEstateSwitzerland”portfolio,suchZEVswerelaunchedandtheaimistoimplementthemineverynewconstructionproject.Regardingenergyefficiency,therealestateportfoliobenefitedfromastrategyofusingbuildingcertificationswherepossiblefornewconstructionprojects.Tofurtherdecreaseandoptimizeenergyconsumption,furtherefficiencymeasuressuchasenergyretrofitswillbenecessary.Moregenerally,adecarbonizationpathwaycanserveasaforward-lookingindicator,guidingthejourneytowardnet-zero.Onthisbasis,theEMSwillincludereportingontheClimatePledgeandbecontinuouslyupdatedwithhigher-qualityandmoretopicaldata.BankJ.SafraSarasin,Ltd.iscommittedtosettingscience-basedtargetsthroughtheScienceBasedTargetsinitiativeandtodeliverexemplaryclimateactionbasedontheJ.SafraSarasinAssetManagementClimatePledge.54SAST(2010)SustainableRealEstateSwitzerland,SustainabilityReport;https://product.jsafrasarasin.com/internet/product/en/dl-fl?dl=0E9D7D47EBCEAC30.FinancialSectorScience-BasedTargetsGuidance71CaseStudy:Storebrand-TestingSDAforRealEstateBackgroundonStorebrandTheStorebrandGroupisaleadingplayerintheNordicmarketforlong-termsavingsandinsurance.ThegroupmanagesmorethanNOK830billion,makingStorebrandNorway'slargestprivateassetmanager.Asasignificantassetowner,insurerandassetmanager,weseegreateconomicopportunitiesinthealignmentofinvestmentportfoliostoasustainableagenda.Hence,sustainabilityisintegraltoStorebrand’sbusiness.Storebrand’sstandardforsustainableinvestmentsisbasedontheexpectationthatcompanieswhocontributetosolvingsociety’sproblemsinasustainablewaywillbemoreprofitableinthelongrun.StorebrandwasthefirstNorwegiancompanytoestablishasustainableinvestmentdepartmentin1995.Environmental,social,andcorporategovernance(ESG)analysishasbeenincreasinglyintegratedintothedailyriskmanagementandcompanyselectionprocessesofStorebrand’sfundmanagers.Customersarethusenabledtoinvestmoresustainably.CurrentlyNOK277billionundermanagementareinvestedinfossilfuel-freeproducts,andNOK53.7billioninSustainableSolutions,definedasinvestmentscontributingtosustainabledevelopmentwithoutcausingsubstantialharmtotheenvironmentorsociety.ThisdefinitionincludesawhitelistofSolutioncompanies,GreenBonds,andrealestatewithGreenBuildingCertificates.In2019,Storebrandwasoneofthe12foundingmembersoftheUN-backedNet-ZeroAssetOwnerAlliance,committingtotransitionitsinvestmentstonet-zeroGHGemissionsby2050.SettingSBTforStorebrand'srealassetsStorebrandRealEstatemanagespropertiesofaround1millionsquaremeters,whicharemostlycommercialbuildingslocatedinNorwayandSweden.Thesedirectinvestmentsintherealestateassetclassisadiversificationfromequitiesandbonds.TheyconstituteNOK45billion,orabout5percentoftheStorebrandGroup'stotalassetsundermanagement,andhavemorethandoubledsince2013.Externalinvestorsholdaboutone-thirdofthecapital,throughtheentitiesStorebrandEiendomsfondNorgeKSandSPPFastigheterAB,whiletheentitiesStorebrandTrygg,VekstandUtviklingASarewhollyownedbytheStorebrandpensionfund.Withnearfullcoverageofmeteringdatafromthebuildings,includingenergyconsumptionoftenants,Storebrandhasconductedcarbonaccountingforitsrealestateportfoliooverthelastfewyears.Sinceits2016realestatepledgetomeettheParisAgreement,Storebrandrealizedthatshiftingtheemissionstrendtomeetitspledgewasachallengingtask.Quantifyingscience-basedtargetsiscrucialtobringingclaritytothenecessarypathaheadforStorebrand.Forthetargetsettingexercise,Storebrandchose2019asthebaselineyear,and2030stoodoutasthenaturalmedium-termtargetyear.AmodelingtoolbuiltbyGuidehouse,aconsultancy,wasusedtomodeltherealestatescience-basedtargetsaccordingtotheSectoralDecarbonizationApproachintheSBTiframeworkforfinancialinstitutions.Underthisframework,theSDAapproachisappliedonfinancialinstitutions’realestateportfoliostoderivephysicalintensitytargets.Storebrandhasrecentlycommittedtoa1.5°Cscenarioin2050,sothetargetsweremodeledinlinewiththisgoal.55FinancialSectorScience-BasedTargetsGuidance72UndertheSDAapproach,scope2emissionsinthemodelingcoversonlyelectricityconsumed.Emissionsfromdistrictheating/coolingarecategorizedasscope1emissions.Becausetheportfolio’sinitialscope1emissionsintensitywasalreadylowerthanthelevelofsectoralintensityrequiredin2050,theconvergencemodelwasnotappropriate,andthusthemodelingassumesthatscope1emissionsintensityremainsconstant.Thefinaltargetisbasedonthecombinedpathwayofscope1andscope2emissionsintensity,wherethelatterplaysthemajorroleinachievingthetarget.Emissionsfromtenants’energyusewereincludedintheassessment.Outcome/ExperienceComparedtopreviousmodelsexploredbyStorebrandRealEstate,theappliedSDAmethodfor1.5°Cscenariogivesasteeperpathwaydecreasetoward2030,resultingin60to75percentreductionsfrom2019to2030.Forthescope2emissions,includingtheenergyuseofthetenants,Storebrandmodeledthetargetbasedonbothlocation-basedemissionsfactorsandmarket-basedemissionsfactors,asshowninFigureB4.1andFigureB4.2.Theassumedactivitygrowthratewas2percentperyear.FigureB4.1.Location-basedIntensityPathway,TryggandVekstEntitiesSource:Storebrand2020.Inthelocation-basedtrialshowninFigureB4.1,initialscope1+2emissionintensityin2019was5.80kgCO2/m2,whichdecreasesto1.97kgCO2/m2in2030.Thisrepresentsa66percentdecreasefromthebaseyearlevel.55Guidehouse,theconsultancythatsupportedthecasestudydevelopment,adjustedthepowerpathwayinlinewiththe1.5°CbasedontheSBT1.5°Cguidanceforutilities.AsStorebrand’sscope1emissionsintensitywasalreadyverylow,onecanassumethatthecombinedscope1+2isinlinewith1.5°C.FinancialSectorScience-BasedTargetsGuidance73FigureB4.2.Market-basedIntensityPathway,TryggandVekstEntitiesSource:Storebrand2020.Inthemarket-basedtrialshowninFigureB4.2,initialscope1+2emissionintensityin2019was27.05kgCO2/m2,whichdecreasesto6.89kgCO2/m2in2030.Thisrepresentsa75percentdecreasefromthebaseyearlevel.ConclusionsandrecommendationsTheappliedSDAmodeltoStorebrand’sRealEstateassetsresultedin60–75percentemissionsintensityreductions(CO2perm2)from2019to2030,mainlyduetothesteepemissionsreductionsinthescope2emissionsinlinewitha1.5°Cscenario.Tosetascience-basedtargetonarealestateportfolio,anFImustfirstchoosebetweenlocation-basedormarket-basedscope2emissionsaccountingasthebasisformodelingatarget.Thetwomethodsmayresultinquitedifferentemissionsandtargetfiguresasshowninthegraphsabove,buttheresultsalsoallowsfordifferentoptionstoreachthetarget.Goingbeyondtheoperationalandtechnologicalmeasuresofthelocation-basedmethodimpliesflexibilitytoutilizemarket-basedmeasureslikeRenewableEnergyCertificates.Beforeconcluding,furtherinvestigationintoopportunitiesandchallengesofmeetingthetwodifferenttargetsisneeded.Storebrandwillalsoexplorescope3realestateemissionstargetsandmeasuresforwasteandtransport-relatedemissions,althoughthesearenotwithinthescopeoftheSDAforrealestatemethod.FinancialSectorScience-BasedTargetsGuidance74SectoralDecarbonizationApproachforElectricityGenerationProjectFinanceProjectfinanceisthefinancingofaproject,suchasinfrastructure,andpublicandindustrialassetsusingalimited-resourcestructure,includingdebt,equity,and/ormezzanine.Thismethodfocusesonprojectsinthepowersector;othertypesofprojectfinancearecurrentlyoutofscope(seeTable5.2).Targetsonanelectricitygenerationprojectfinanceportfolioaresetusingtheglobaldecarbonizationpathwayforpowergeneration(i.e.,theglobalelectricityproductionprojectionsandemissionsintensitypathwaysdefinedintheIEAETP2017B2DS,whichseescoalgenerationwithoutcarboncaptureandstorage[CCS]phasedoutgloballyby2040).Tosettargetsonelectricitygenerationprojectfinance,financialinstitutionscanusetheSDApowersectorpathwayinthegeneralScience-basedTargetSettingTool.Thetoolnowalsoincludesa1.5°C-alignedpathwayforthepowersector,andaquickstartguideisavailabletosupporttargetdevelopment(SBTi2020e).CaseStudy:MizuhoFinancialGroup-TestingSDAforElectricityGenerationProjectFinanceBackgroundonMizuhoFinancialGroupTheMizuhoFinancialGroupisoneofthelargestfinancialinstitutionsinJapan,offeringabroadrangeofservicesincludingbanking,trustandsecurities,andotherbusinessrelatedtofinancialservicesthroughitsgroupcompanies.ThegroupwasestablishedinSeptember2000.UndertheumbrellaoftheholdingcompanyMizuhoFinancialGroup,themajorgroupcompaniesincludeMizuhoBank(MHBK),MizuhoTrust&Banking(MHTB),andMizuhoSecurities(MHSC).Asaninitiativetoaddressclimatechange,MizuhoBank(“Mizuho”)hasalreadydevelopeditsowncarbonaccountingmethodologytomeasureCO2emissionsandCO2emissionreductionstargetedforlarge-scalepowergenerationprojects.Mizuho’scarbonaccountingapproachmeasuresemissionsfrombusinessaswellasthedegreetowhichbusinessactivitiescontributetoreducingCO2emissions.Mizuhohavebeendisclosingtheresultsofitscarbonaccountingsince2006andhasbeenutilizingtheseresultsasinformationforfuturemanagementtosupportthemovementtowardadecarbonizedsociety.MizuhoFinancialGroupparticipatedintheSBTiroad-testingprogramtoenhanceitsevaluationsystemandsupporteffortstoreduceGHGemissions.ApplicationoftheSDAforelectricitygenerationforprojectfinanceMizuhoappliedtheSDAforMizuho’sprojectfinanceportfoliooffossilfuel–firedpowergenerationandrenewableenergypowergeneration.ToapplytheSDAforfossilfuel–firedpowerprojects,MizuhouseditsloanoutstandingdataasofMarch31,2019(theendofFY2018)andannualGHGemissiondataforeachprojectestimatedatthetimingoffinancialclose.Ifnotavailable,MizuhoFinancialSectorScience-BasedTargetsGuidance75usedtheactualAnnualEnergyProduction(AEP)fortheprojectunderoperationandtheestimatedAEPfortheprojectunderconstruction.TocalculatetheannualGHGemissionwithAEP,MizuhousedtheemissionfactorsfromJBICJ-MRVguideline(https://www.jbic.go.jp/en/business-areas/sectors/images/jmrv_guideline_en.pdf),whichisbasedonthelatestdataeditionbyIEA.MizuhoisstillworkingtoincorporateitsrenewableenergyprojectportfoliointoMizuho’smodelingbasedonthemethodologyofSDA.Basedonthedatacollectedfromeachofitsprojectfinancefrontoffices,Mizuhocalculatedbaselineemissionsfromitsprojectfinanceportfoliooffossilfuelselectricitygenerationglobally.Whenrenewableenergyprojectdataarecollected,Mizuhoplanstoimprovethemodeling,takingthesedataintoconsiderationinthefuture.Project-levelApproachAdvantageGiventhatMizuhohasengagedintheprojectfinancebusinessgloballyandhasplayedaleadroleinprojectdevelopment,MizuhohasaccesstoGHGemissiondataatthestageofloanarrangement.Throughoutengagementwiththeborrowerandtheprojectduediligenceprocesswithexternalconsultants,Mizuhohasbeenabletomaintaindataaccuracyandseekdataverification.ChallengesItwaschallengingtocollectdataofannualGHGemissionand/orAEPandtotalprojectcostofeachproject.MizuhocommunicatedwithitsofficerslocatedgloballytoprovideMizuhowiththenecessarydata,whichtookmoretimethanexpectedtocollect.Additionally,itwasdifficulttoconfirmtheaccuracyofthisdatawithinsuchalimitedtimeframeandwithalimiteddatainfrastructure.Totrackprogress,Mizuhotriestomonitorthecontinuousemissionstatusofprojectsduringtheoperationperiod.However,Mizuhofrequentlyconfrontspracticaldifficultiesduetothelackofemissiondata.Forexample,theprojectborrowerisnotobligedtoobtainemissiondataafteraprojectentersintotheoperationstage.Undersuchasituation,itisdifficultforMizuhotoverifytheemissiondataandreconciletheestimateddatawiththeactualdata.Therefore,Mizuhooccasionallyhastorelyonatheoreticalcalculationmethodusinginformationonannualenergyproductionandthird-partyaverageemissionfactors.ConclusionsandrecommendationsMizuhorecognizesthatregardingfossilfuel–firedpowerprojects,itisimportanttoimprovetheaccessibilitytotheemissiondataandthequalityoftheverificationprocess.Takingadvantageofitsmarketpresenceundertheprojectfinancearrangement,MizuhoconsideritimportanttoseekmorepracticalcollaborationwithMizuho’sclientstoobtainmoreaccuratedata,especiallyattheFinancialSectorScience-BasedTargetsGuidance76monitoringstageofeachproject.MizuhoconsidersthatthisengagementtoimprovedataqualitywouldimprovetheabilitytodriveGHGemissionsreductions.Evenifthequalitydataissuescanbeaddressed,Mizuhoconsidersthatactionstakenbyfinancialinstitutionshavelimitedabilitytodirectlyreduceemissionsfromelectricitygenerationprojects.Giventhisperceivedlimitation,Mizuhoplanstostrategicallyincreasetheportfolioofrenewableenergyprojects.SectoralDecarbonizationApproachforCorporateEquity,Bonds,andLoansThismethodologycoverslistedequity,privateequity,corporatebonds,andcorporateloans.Targetsaresetonrelevant“RequiredActivities”inTable5.2,forwhichspecificsectoraldecarbonizationpathwaysareavailable(e.g.,electricity,ironandsteel,cement,aluminum,pulpandpaper,transport,andcommercialbuildings).Regardingemissionsscopesofportfoliocompaniesthatshallbeincludedinthetargets,FIsshallrefertotherelevantSBTisector-specificguidanceforSDAmethods.Forinstance,FIs’targetsonportfolioautoOriginalEquipmentManufacturers(OEMs)shallincludetheirscope1and2emissions,aswellasscope3‘useofsoldproducts’emissionsofsoldvehicles.Specifically,‘useofsoldproducts’targetsshallmeettheminimumlevelofambitiondeterminedbytheSBTi’stransportsectorguidance,coveringWell-to-Wheelemissionsofsoldvehicles.Alistofthesector-specificrequirementsandguidanceisavailableinChapter3oftheTargetSettingManual(Table3.1).PleaserefertoTable5.3fortargetsettingresourcesavailablefordifferentsectors.AdetaileddescriptionoftheSDAmethodsperassetclassisprovidedintheAppendices.CaseStudy:ApplyingtheSDAandSBTPortfolioCoverageMethodtoLaBanquePostale’sCorporateEquityandBondPortfoliosContextofthestudyLaBanquePostaleisasubsidiaryofLeGroupeLaPoste,theFrenchnationalpostalservicescompany.LaBanquePostaleisentrustedwithabankingaccessibilitymission,whichguaranteesuniversalandnondiscriminatoryaccesstofree,simple,andindispensablebankingservicesforpeoplewhoareexcludedfromtraditionalbankingservicesandwhohavespecificneeds.LaBanquePostaleisorganizedaroundthreeareasofexpertise:(i)retailbanking,(ii)lifeinsurance,personalriskinsurance,propertyandhealthinsurance;and(iii)assetmanagement,carriedoutthroughFinancialSectorScience-BasedTargetsGuidance77theassetmanagementsubsidiaries(LaBanquePostaleAssetManagementandToquevilleFinance),whichprovidesavingsandinvestmentproductstoindividualcustomersandlegalentities.Withaggregatedassetsundermanagement(AUM)(LBPAM-TocquevilleFinance)of€235billionatDecember31,2019,LaBanquePostaleAssetManagement(LBPAM)isthefifth-largestassetmanagementcompanyinFrance.Itoffersopenfunds,dedicatedfunds,andmandatestoitsinstitutionalinvestors,insurers,mutuals,majorcompanies,anddistributors,Asafullmanager,LBPAMoperatesinallassetclasses.Asanearlyadopterofresponsiblebanking,LaBanquePostalehasalwayssupportedassetfinancingandenergyprojectsonrenewableenergydevelopmentandexcludedfossilfuels.Inaddition,theBankhasmeasuredtheexposureofitscorporateandinvestmentbankingactivitytoclimaterisksince2013(carbonintensityofcorporateissuers).Together,LaBanquePostaleandLaBanquePostaleAssetManagementplacetheecologicalandenergytransition,thefightagainstglobalwarming,andtheprotectionofecosystemsattheheartoftheirstrategicconcerns.LaBanquePostaleisengagedinthereductionofitscarbonfootprintandcommittedtosettingscience-basedtargetsthroughtheSBTiin2017.Theclimatestrategyconsultingcompany,EcoAct,appliedtheSBTiFinancemethodsonbehalfofLaBanquePostale,onselectedcorporateequityandbondportfolios.ApplicationoftheSDAmethodologytothepowergenerationequityandbondportfoliosApplicationofthemethodologyandchallengesLaBanquePostalechosetoassessthealignmentofaportionofitsinvestmentsinthepowergenerationandrealestatesectorwithawell-below2°Ctrajectory.TheportfoliosassessedwerebondandequitiesportfoliosfromLaBanquePostaleAssetManagement,mainlypositionedongreenassetstoanalyzetheiralignment.ThisanalysisaimsatprovidingLaBanquePostalewithalong-termtargetintheinvestmentdecision-makingchoices;thatis,decidingwhethertoinvestinacompanybasedonitsowntrajectory,thetrajectoryoftheportfolio,ortoengagewithaninvesteeoncarbonintensitygoals.Theassessmentontheseequitiesandbondsportfoliosfocusedontwosectors:powergenerationandrealestate,asaconstraintwastohaveenoughissuersintothesectorsassessedtodrawunbiasedconclusions.Inthiscasestudy,LaBanquePostalechosetopresenttheresultsforthepowergenerationsectoronly.Attheendof2017,theseinvestmentsrepresented8.3percentofthevalueoftheequityportfoliostudied(8companies,€47million)and3.9percentofthecorporatebondportfoliostudied(12companies,€42million).TheremainingpartoftheportfoliofocusesonsectorsoftheeconomynotincludedintheSDAmethodologiesorthesectoroftheeconomywhereLaBanquePostaleinvestsintoofewcompaniesforthetrajectorytobeameaningfulinvestmentdecision-makingtool.Theassessmentfocusedonfinancedemissionsfrominvestmentsinelectricityproduction,asectorthatisexpectedtoprogressivelytransitiontolow-carbonpowergeneration.Thedatacovering2017powergenerationcompanies’GHGemissionsandelectricityoutputwereobtainedfromthepublicreportsofthecompaniesshowninTableB6.1:TableB6.1.EquitiesandBondsPortfolioEquitiesportfolioBondsportfolioAccionaSAIberdrolaInternationalBVFinancialSectorScience-BasedTargetsGuidance78ScatecSolarASAAllianderNVNeoenSAEngieSAVoltaliaSARenFinanceBVOrstedA/SEnelSpAFalckRenewablesSpAIberdrolaFinanzasSAIberdrolaSATernaReteElettricaNazionaleSpASource:LaBanquePostale2020.GlobalsectorGHGemissionsandoutputdataweredirectlyretrievedfromtheInternationalEnergyAgencyBeyond2°CScenario(B2DS)asshowninTableB6.2.TableB6.2.GlobalActivityandEmissionsIntensitiesintheB2DSParameterIEADataUnitsSectoractivity20172,56E+10MWhSectoractivity20303,10E+10MWhSectoractivity20504,43E+10MWhSectorintensity20171,36E+00tCO2e/MWhSectorintensity20307,15E-01tCO2e/MWhSectorintensity20501,07E-01tCO2e/MWhNotes:MWh=Megawatts/hour;tCO2e=TonnesofCO2equivalent.Source:IEA2017.Projectinginvestees’2030productionvalues(inmegawatts/hour[MWh])waschallengingascompaniesgenerallydonotdiscloseforecaststhatfarahead.Therefore,2030productionvalueswereforecastedasfollows:•Sectoralactivitygrowthwasextrapolatedasthepercentagedifferencebetweenthereferenceyearin2017andtheyear2030intheIEAB2DSscenario.Thispercentagegrowth(20.8percent)wasappliedtotheannualpowergenerationofallcompaniesincludedinthesectoralanalysis.•Moreover,itwasassumedthattheownershipvaluesandallocationwillremainconstantacrosstheperiodfortheportfolios.ResultsofthestudyAfterapplyingtheSBTi’sSectoralDecarbonizationApproach(SDA)tothepowergenerationsectoronitsequityandbondsportfolio,LaBanquePostalewasabletodrawthetwofollowingtrajectoriesallowingtheportfoliostoremaininlinewithawell-below2°Cscenario.SeeFigureB6.1.FigureB6.1.LaBanquePostale’sPowerSectorPortfolioIntensityPathwayFinancialSectorScience-BasedTargetsGuidance79LaBanque’sPostale’spowergenerationportfoliointensitycomparedtothesectoralintensityinaB2DS.Source:LaBanquePostale2020.TheseintensityreductiontrajectoriesshowthatLaBanquePostale’sinvestments,incompaniesthathavelargerenewableenergyinstalledcapacities,havepaidoff:theirintensityin2017isalreadylowerthanthesectoralintensityoftheIEABeyond2°C(B2DS)sectoralintensity.Fromthatbaseyear,theSDAmethodologycalculatesatrajectoryfortheportfolio:thetrajectoriesshowthattoconvergethesectoralandportfoliotrajectoriestoward2030,LaBanquePostale’sprojectedportfolioneedstodecreaseitsmodeledemissionintensitybyhalfbetween2017and2030(from0.20to0.11fortheequityportfolioandto0.10tCO2/MWhforthebondportfolio).Thesetrajectoriesareapowerfulindicatoranddecision-makingtoolforLaBanquePostale:ifLaBanquePostalewantstostayaligned,itsportfolioswouldneedtoreachthe2030target.ConclusionsandrecommendationsApplyingtheSDAapproachtoLaBanquePostale’spowergenerationcorporateequityandbondportfoliosallowedthebanktomeasurethecurrentcarbonintensityofitsportfoliosandtodefinewhatyearlytargetsaretobereacheduntil2030tokeepglobalwarmingtowell-below2°Cby2050.AspertheSDAapproach,LaBanquePostaleusedtheglobalB2DSpathwayscenariotocalculatethesectorintensityforthetargetyear.Furthermore,theportfolio’scarbonintensitywillhavetoberecalculatedperiodically.Indeed,investmentchoiceswillhavetobecheckedagainstLaBanquePostale’strajectorytoassesswhethertheportfolioisstillalignedwiththeobjectivesoftheParisAgreement.However,thechangingportfolio’scarbonintensitiesmayresultinfluctuationsoftheendtarget(2030).Calculatingeachcompany’spowergenerationcarbonintensityallowsforidentificationofGHGemissionshotspotswithintheportfolio,whichisafirststeptoimplementinvestmentstewardshipstrategies.FinancialSectorScience-BasedTargetsGuidance80TheSBTiframeworkincludesothermethodstoalignthepowergenerationportfolio’scarbonintensitywiththeParisAgreement,includingtheSBTPortfolioCoverageApproach,whichcanrevealadditionalinsightsintotheinvestees’2030trajectory.ApplicationoftheSBTPortfolioCoveragemethodtoLaBanquePostale’scorporateequityandbondportfoliosApplicationofthemethodologyandchallengesTheportfoliosstudiedwerebondandequitiesportfoliosfromLaBanquePostaleAssetManagement,mainlypositionedongreenassetsfortheassessmentoftheiralignment.TheportfoliocoveragemethodwasconductedonLaBanquePostale’scorporateequityandbondportfolio,onascopecovering100percentofthevalueheld,asallsectorsareincludedinthismethod.Thestudywascarriedoutusingpublicnonfinancialinformationandthelistofcompaniesthatpublishedscience-basedcommitmentsextractedfromtheSBTiwebsiteinMarch2020.Companies’scope1and2emissionswereretrievedfromnonfinancialdatabases.Basedonthisdata,fivecategoriesofcommitmentsweredefined,asshowninTableB6.3.TableB6.3.Science-basedTargetCommitmentCategoriesStatusCategorySBTi:set1SBTi:committed2Ongoingprocess3Noemissionreductionsinitiative4Noinformation5Source:LaBanquePostale2020.Thesefivecategoriesallowedustomakepredictionsonambitiousyetattainableportfoliocoveragetargetsascategories2and3arelikelytosettargetswithinthenextfiveyears,whileincategories4and5itislesslikely.56ResultsofthestudyAfterapplyingthesefivecategoriestotheequityandbondportfolios,welookedatthreedifferentmetricstodefinecoverage:percentageofassetsundermanagement,percentageofGHGemissions,andpercentageofenterprisevalues/marketcapitalization(TableB6.4).57TableB6.4.FiveCategoriesUsedtoDefineCoverageCategoryEquityPortfolioBondsPortfolioAUM(%)CO2(%)MCap(%)AUM(%)CO2(%)EV(%)SBTi:Set161416102916SBTi:Committed181918111723Ongoingprocess232523139956PerthecriterionforSBTPortfolioCoveragetargets,investees’orborrowers’targetsshallbeapprovedbySBTi.57FinancialinstitutionsshalluseoneoftheweightingapproachesintheSBTiFinanceToolconsistentlythroughoutthetargetperiod.FinancialSectorScience-BasedTargetsGuidance81Noemissionreductionsinitiative161416Noinformation423642624346Notes:AUM=Assetsundermanagement;MCap=Marketcapitalization;EV=Enterprisevalue.Source:LaBanquePostale2020.Thesemetricsallowperformanceoftheportfoliostobemeasuredintermsofinvestees’engagementasoftoday.TheythenserveasabasistosettargetsofapercentageofissuerswithintheportfoliotobecoveredbyaSBTtargetinthefuture(e.g.,engagewithissuerstohaveadefinedpercentageoftheportfoliocoveredbya“SBTitargetset”withinthenextfiveyears).ConclusionsandrecommendationsLaBanquePostalefoundtheportfoliocoverageanalysisasthefriendliestmethod,forinternalandpublicdisclosurepurposes,amongthethreemethods(SDA,SBTPortfolioCoverage,andPACTA)includedintheSBTiroad-testingprocess.Ontheonehand,itprovidesportfoliomanagerswithinsightfulconclusionsregardingcurrentclimateperformanceofinvestees.Ontheotherhand,itenablesfinancialinstitutionstosetportfoliocoveragetargetstoworktowardawell-below2°Cportfolioalignmentandstartcommunicatingaboutthemtoinvesteesandthegeneralpublic.Basedontheseconclusions,LaBanquePostalehasstartedworkingonahybridmetriccombiningownershipandemissionsindicatorstomaximizetheimpactofitsinvestmentstewardshipstrategyandencourageitsinvesteestosettheirownscience-basedtargets.5.4.2SBTPortfolioCoverageforCorporateInstrumentsFinancialinstitutionsmayusetheSBTPortfolioCoveragemethodtosettargetsontheircorporateinstrumentassetclasses,includingcorporatedebt,listedequityandbonds,andprivateequityanddebt(seerelevant“RequiredActivities”inTable5.2)todriveadoptionofscience-basedtargets.Thismethodcanbeusedonitsownorwiththeothertwomethodstocollectivelymeettheminimumcoverageforall“RequiredActivities.”TousetheSBTPortfolioCoveragemethod,financialinstitutionscommittoengagingwiththeirborrowersand/orinvesteestosettheirownscience-basedtargets,whichshallbevalidatedbytheSBTi,58suchthatthefinancialinstitutionisonalinearpathtoachieve100percentSBTcoverageby2040.Asfulfillmentofportfoliocoveragetargetsmeansthatborrowers’and/orinvestees’SBTshavebeenapprovedbytheSBTi,the2040timelinehasbeendeterminedtoallowborrowersand/orinvestees58ThisdiffersfromSBTi’slatestcriteriaforcompanies’supplierengagementtargets,wheresuppliers’targetsarenotrequiredtobeapprovedbutshouldonlybesetinlinewithSBTi’sresources.SBTisteppeduptherequirementforinvestee’stargetsgiventherapidlyincreasingadoptionofSBTsandSBTi’simprovedcapacitytodelivertimelytargetvalidations.Inaddition,requiringSBTiapprovalensuresthatborrowers’and/orinvestees’scope3emissionsareaddressedasperSBTi’sgeneralcriteriaforcompanies,wherecompaniesmustsetscope3targetsiftheirscope3emissionsaremorethan40percentofthetotal.FinancialSectorScience-BasedTargetsGuidance82enoughtimetoimplementtheirtargettoultimatelyachieveaneconomy-widetransitiontonetzeroby2050.Table3.1oftheScienceBasedTargetSettingManualpresentsinformationontheapplicabilityofavailableSBTmethodstovarioussectorsandongoingsectordevelopmentwork,whichcanhelpinformfinancialinstitutions’engagementeffortswithborrowersand/orinvestees.TodefinethecoverageoftheSBTPortfolioCoveragetarget,financialinstitutionsshalluseoneoftheweightingapproachesintheSBTiFinanceToolconsistentlythroughoutthetargetperiod.MoreinstructionsonapplyingthismethodintheSBTiFinanceToolcanbefoundinAppendixF.TheambitionoftheSBTPortfolioCoveragemethoddependsonthefinancialinstitution’sstartingpoint.Whereasafinancialinstitutionstartingwith10percentcoveragein2020wouldneedtoincreasecoverageby4.5percentperyear(90/20=4.5),afinancialinstitutionstartingwith30percentcoveragewouldneedtoincreasecoverageby3.5percentperyear.AnexampleofaportfoliocoveragetargetcouldbethatInvestmentFirmAcommitsthat32.5percentofitsequityportfoliobytotalassetswillhavescience-basedtargetsby2025.SBTisausefulindicatorforinvestorstounderstandtheirborrowers’and/orinvestees’publiclycommittedtrajectoriestomitigateGHGemissions.However,itdoesnotreplacearobustassessmentofthecompanies’businessmodelorassociatedrisks.ForfurtherrecommendationsonstepsFIscantaketointegrateclimatechangeintheirorganizationandachievetheirtargetsinamannerthatleadstoGHGemissionsreductionintherealeconomy,pleaserefertoChapter7.CriteriaFI-C17.2–SBTPortfolioCoverageTargets:Financialinstitutions’targetstodrivetheadoptionofscience-basedemissionsreductiontargetsbytheirborrowersand/orinvesteesareconsideredacceptablewhenthefollowingconditionsaremet:•Boundary:FinancialinstitutionsshallsetengagementtargetsoncorporateinstrumentsasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).•TargetLevelofAmbition:Financialinstitutionsshallcommittohavingaportionoftheirborrowersorinvesteessettheirownapprovedscience-basedtargetssuchthatthefinancialinstitutionisonalinearpathto100percentportfoliocoverageby2040(usingaweightingapproachintheSBTFinanceTool).Forexample,afinancialinstitutionstartingwith10percentcoveragein2020wouldneedtoincreasecoverageby4.5percentperyear(90/(2040–2020)=4.5)andreachatleast32.5percent(10+[5x4.5]=32.5)coverageby2025.•TargetFormulation:Financialinstitutionsshallprovideinformationinthedisclosedtargetlanguageonwhatpercentageofthecorporateequityanddebtportfolioiscoveredbythetarget,usingaweightingapproachintheSBTiFinanceToolconsistentlythroughoutthetargetperiod.FinancialSectorScience-BasedTargetsGuidance83•TargetTimeframe:Financialinstitutions’portfoliocoveragetargetsmustbefulfilledwithinamaximumoffiveyearsfromthedatetheFI’stargetissubmittedtotheSBTiforvalidation.Fulfillmentofportfoliocoveragetargetsmeanthatborrowers’and/orinvestees’SBTshavebeenapprovedbySBTi.•ScopeofBorrowerand/orInvesteeTargets:Financialinstitutions’borrowersand/orinvesteesshallfollowthelatestSBTicriteriaforcompaniestosetscope1and2targets,aswellasscope3targetswhentheirscope3emissionsaremorethan40percentoftotalscope1,2,and3emissions.CaseStudy:Eurazeo-ApplyingtheSBTPortfolioCoverageMethodBackgroundonEurazeoEurazeoisaleadingglobalinvestmentcompany,withadiversifiedportfolioof€18.8billioninassetsundermanagement,including€12.5billionfromthirdparties,investedinover430companies.Withitsconsiderableprivateequity,venturecapital,realestate,privatedebt,andfundoffundsexpertise,Eurazeoaccompaniescompaniesofallsizes,supportingtheirdevelopmentthroughthecommitmentofitsnearly300professionalsandbyofferingdeepsectorexpertise,agatewaytoglobalmarkets,andaresponsibleandstablefootholdfortransformationalgrowth.TargetsproposedbyEurazeo59BelowarethepreliminarytargetsEurazeointendstosetundertheSBTiframework.EurazeocommittedtosetSBTsinJune2020,hassubmittedforvalidationitsscope1and2targets,andplanstofurtheralignitsscope3targetswiththeSBTicriteriaandrecommendationsaftertheframeworkislaunched.Managementcompany:Eurazeocommitstoreduceitsscope1and2GHGemissions71percentperemployeeanditstravel-relatedemissions72percentby2030froma2017baseyear.Portfolio:Eurazeocommitstoscreen100percentofemissionsoftheseinvestmentsandwillengagecompaniesemitting30percentoftheseemissionstosetreductiontargetswithinthenextfiveyears.Scope:Until2025,overascopeofinvestmentsmadewithitsowncapital,forallassetclasses(excludingfundoffunds).Beyond2025,thecoveragewillprogressivelyexpandtothirdpartymoney–financedassets.Whydidyousetascience-basedtarget?Eurazeoisstronglyawarethatclimatechangeismorethaneveramajorchallengetopeople,ecosystems,andtheeconomy.Representing5to10percentofGDPinEuropeandintheUnitedStates,Eurazeobelievesthatprivateequityhasaspecialroletoplayinthefightagainstclimatechange.Being59ThesetargetshavenotbeenapprovedbySBTi.FinancialSectorScience-BasedTargetsGuidance84thefirstprivateequitycompanytocommittoaSBTclimatetrajectory,Eurazeohopestopavethewayfornumerousotherfellowcompetitors,henceacceleratingthetransitiontoalow-carboneconomy.Todriveeffectiveactionagainstclimatechange,Eurazeoactsattwodifferentlevels.First,Eurazeoiscommittedtoreducingitsdirectoperationalimpactmostlyrelatedtoitsbuildingsandemployeestravel.Since2015ithasreducedthedirectfootprintofitsParisianofficesby73percentandaimstogobeyondandcoverallofitsgeographieswithitsSBTcommitment.Second,Eurazeoactsatitsportfoliolevel.Nonfinancialimpact—includingCO2emissions—oftheportfoliocompaniesismeasuredonayearlybasisandprogressplansareimplementedandthoroughlymonitored.Since2011,Eurazeohasencourageditsportfoliocompaniestoimplementcorporatesocialresponsibility(CSR)programsthathaveenabledthemtoreduce1,068,000metrictonsofCO2equivalentinemissionsthroughtheimplementationofoperationalenergy-savingprograms.60Theseprogramsalsohelpedsavemorethan€243millioninexpendituredirectlythroughthereductionofenergyandfuelconsumptionsandindirectlythroughdedicatedprogramsdeployedbyeachcompany.2020marksanewchapterinthegroup’scombatagainstclimatechange.Withtheaccelerationofthiscrisis,itisnownecessarytogobeyonditsbesteffortandstrengthenitscommitmentwithinascience-basedtargetwell-below2°Ctrajectory.FranceInvest,theFrenchAssociationofInvestorsforGrowth,bringstogetherprivateequitycompaniesactiveinFranceandtheassociatedprofessionsthatsupportthem.ItsmembersplayamajorroleinthegrowthandtransformationofcompaniesandinsupportingtheFrencheconomy.Whatwastheprocessofsettingyourtargets?Since2008,Eurazeohasdevelopedrobustcarbonmeasurementsforitsownoperationalactivitiesandforitsportfolio.Scope1,2,and3emissionsaremeasuredforEurazeo’sownactivitiesandforitsfullyconsolidatedinvestments(companiesoverwhichthegroupholdsacontrollinginterest,usuallyasaresultofamajoritystake),scope1and2emissionsaremeasuredforitsminorityinvestments.Thesemeasurementsareupdatedonayearlybasisandvalidatedbystatutoryauditors.Withtheconstantportfolioevolution,ithasbeenalongprocesstobuildtheaccuratemethodologiesandtoolsallowingrobustemissionmeasurements.Didyouencounteranychallenges?Itisextremelycomplextodecoupleeconomicgrowthandecologicalimpact.Enablingsuchchangeatscalenecessitatesoutoftheboxthinking,boldness,andpersistencefromallmanagementteams.Implementingsuchanambitioustrajectoryhasraisedalotofquestionsandrequiredalotofpedagogytocreateconfidence,alignment,andultimatelycommitment.60Methodologicaldetailsareavailableinchapter3.4ofEurazeo’s2019UniversalRegistrationDocument:https://www.eurazeo.com/assets-eurazeo/uploads/2020/03/EURAZEO_EN_COMPLET_VBAT3_2020_04_09-1POST_BAT.pdf).FinancialSectorScience-BasedTargetsGuidance855.4.3ThePortfolioTemperatureRatingApproachforCorporateInstrumentsFinancialinstitutionsmayusetheTemperatureRatingApproachtoaddressandcovercorporateinstruments,includingcorporatedebt,listedequityandbonds,andprivateequityanddebt(seerelevant“RequiredActivities”inTable5-2).Underthisapproach,financialinstitutionsdeterminethecurrenttemperaturescoreoftheirportfoliobasedonthepublicGHGemissionsreductiontargetsoftheirinvestees.Itenablesfinancialinstitutionstosettargetstoaligntheirbaseyearportfoliotemperaturescoretoalong-termtemperaturegoal.Thisapproachcanbeusedonitsownorwiththeothertwomethodstocollectivelymeettheminimumcoverageforall“RequiredActivities.”Arangeofmethodscurrentlyexisttodeterminethetemperatureratingofinvestmentportfolios.The“AlignmentCookbook,”publishedbyInstitutLouisBachelier,comparesmanyofthesemethodstomeasurethealignmentofinvestmentportfoliowithtemperaturetrajectories(Raynaudetal.2020).CurrentlytheSBTionlyrecognizesthetemperatureratingmethodologyco-developedbyWWFandCDPfortargetsubmissions.ThisistheonlymethodcurrentlyrecognizedasithasbeencreatedincollaborationwiththeSBTi,isfullyopensource,isfullytransparentinmethodologyandoutput,andhasundergoneapublicconsultationprocess.TheSBTiwillconsidertheuseofalternativemethodstodeterminetemperatureratingonacasebycasebasis.FinancialinstitutionsshouldcontacttheSBTifinancesectorteambeforesubmittingtargetssetusingthesealternativemethodsforvalidation.TemperatureRatingMethodologyThetemperatureratingmethoddevelopedbyCDPandWWFisanextensionoftheSBTPortfolioCoverageapproachtoenableFIstoassessthecurrentambitionofportfoliocompaniesbasedontheirpublicGHGreductiontargets(includingSBTsandanyothervalidpublicGHGtargetsthatmeetthemethodcriteria).ThismethodenablestheassessmentofambitionofanycorporateGHGemissionsreductiontargetsagainstawiderrangeoftemperatureoutcomesandallowsfinancialinstitutionstounderstandtheoveralltemperatureratingoftheirportfoliosandtakeactionstomoveportfoliocompaniestowardbettertemperatureratings(e.g.,2°C,well-below2°C,1.5°C).Themethodisopensourceandhasgonethroughaseparateconsultationprocess.Thelatestversionofthemethodologycanbefoundhere.CriteriaFI-C17.3–PortfolioTemperatureRatingTargets:Financialinstitutions’targetstoaligntheTemperatureRatingoftheircorporatedebtandequityportfolioswithambitionoftheParisAgreementareconsideredacceptablewhenthefollowingconditionsaremet:FinancialSectorScience-BasedTargetsGuidance86•Boundary:FinancialinstitutionsshallsetportfolioTemperatureRatingtargetsoncorporateinstrumentsasspecifiedintheRequiredActivitiesandMethodsTable(Table5.2).•TargetLevelofAmbition:Financialinstitutionsshallaligntheirportfolioscope1+2temperaturescorewithaminimumwell-below2°Cscenarioandinadditionaligntheirportfoliotoaminimum2°Cscenarioforthescope1+2+3portionby2040.Alignmentwithmoreambitiousscenariossuchas1.5°Cishighlyencouraged.Separatetargetsforscope1+2andforscope1+2+3shallbeset.Financialinstitutionsshallcommittoreducingtheirportfoliotemperaturescoressuchthatthefinancialinstitutionisonalinearpathtothestatedgoalby2040.Forexample,afinancialinstitutionstartingwithscope1+2portfoliotemperaturescoreof2.9°Cin2020wouldneedtodecreaseitsportfoliotemperaturebyatleast0.0575°Cperyear([2.9°C–1.75°C]/[2040–2020])=0.0575°C,andreachatleast2.61°Cportfoliotemperaturescoreby2025.Forexample,afinancialinstitutionstartingwithscope1+2+3portfoliotemperaturescoreof3.2°Cin2020wouldneedtodecreaseitsportfoliotemperaturebyatleast0.06°Cperyear([3.2°C–2°C]/[2040–2020])=0.06°C,andreachatleast2.9°Cportfoliotemperaturescoreby2025.•TargetTimeframe:PortfolioalignmenttargetsmustbefulfilledwithinamaximumoffiveyearsfromthedatethetargetsaresubmittedtotheSBTiforanofficialvalidation.•ScopeofBorrowerand/orInvesteeTargets:Financialinstitutions’borrowers’and/orinvestee’stargetsshallincludecoverageofscope1and2emissions,aswellasscope3emissionswhentheirscope3emissionsaremorethan40percentoftotalscope1,2,and3emissions.AsillustratedinFigure5.3below,theTemperatureRatingmethodcoversabroadergroupofcompaniesthanthestrictlySBTi-approvedSBTPortfolioCoveragemethod,enablingtheassessmentofanypublicGHGemissionsreductiontargetthatmeetstheprotocolcriteria.FinancialSectorScience-BasedTargetsGuidance87Figure.5.3.OverviewoftheTemperatureRatingMethodSource:CDPandWWF2020.Themethodiscomposedofthreedistinctcomponentsthatwillallowfinancialinstitutionstofirstquantifythetemperaturescoreoftheirportfolio:1.Target-levelprotocol:Thetargetprotocolconvertsindividualtargetsofvariousformatsintotemperaturescores.Thisisachievedbygeneratingsimpleregressionmodelsforestimatedwarmingin2100fromclimatescenarioswithshort,medium,andlong-termtrendsinmetricslikeabsoluteemissionsoremissionsintensities.RegressionmodelsaregeneratedbasedonscenariosintheIPCCspecialreporton1.5°Cscenariodatabase(CDPandWWF2020).Inadditiontodefiningmethodsfordisclosedtargets,adefaultscoringapproachisappliedtoallnontargetdisclosingcompanies.2.Company-levelprotocol:Sincecompaniesmayhavemultipleclimatetargets,coveringdifferentGHGemissionscopesandtimeframes,aprotocolisusedtoaggregatealltargetdatatoproducescoresatacompanylevel.Thisprotocoldefinestheminimumqualitycriteriafordeterminingtheacceptabilityofatargettobescoredandthestepsrequiredtoidentifyandaggregatemultipletargetstoproduceanoverallcompanyscore.FollowingtheSBTicorporatecriteria,onlyforward-lookingambitionisconsideredwhenassessingthetargets,andpastperformanceisnotcredited.3.Portfolio-levelprotocol:Thecompanyscoresarethenaggregatedtogeneratescoresataportfoliolevel.ThisconsistsofweightingcompanyscoresonthebasisofGHGemissionsandeconomicindicatorstogenerateanoverallweightedscoreforaspecificportfolio.FinancialinstitutionsshalluseoneoftheweightingapproachesintheSBTiFinanceToolconsistentlyFinancialSectorScience-BasedTargetsGuidance88throughoutthetargetperiod.MoreinstructionsonapplyingthismethodintheSBTiFinanceToolcanbefoundintheSBTPortfolioCoverageandtemperatureratingdiscussionincludedintheAppendixF.Aligningcurrenttemperaturescorestotemperaturegoals:Baseyeartemperaturescoresareproducedatascope1+2andascope1+2+3levelforeachportfolio.Financialinstitutionsmustthenformulatetargetstoalignthistemperaturetothedesiredtemperatureoutcome,forexample,1.5°C.Table5.4presentsthekeystepstogeneratetemperaturescoresandaligntargetswithlong-termtemperaturegoals.Table5.4.KeyStepstoGenerateTemperatureScoresunderthePortfolioTemperatureRatingMethodStep1.BaseYearTemperatureScoreTypesofportfolioscoresTwoportfolio-leveltemperaturescoresshallbegeneratedbasedoncompanytargetsand/ordefaultscores:-Scope1+2score(°C)-Scope1+2+3score(°C)BoundaryTheportfoliomustreflecttheholdingsonagivendatee.g.firstorlastdayoffinancialorcalendaryear.OutputsInadditiontothetwoscoresgenerated,FIsmustprovidethefollowinginformationwhensubmittingtargetsforanofficialvalidation:●ThepercentageofportfolioGHGemissionsthatarecoveredbyGHGtargetsandthepercentageofportfolioGHGemissionsthatareassessedusingdefaultscore;and/or●ThepercentageofportfolioinvestedvaluethatiscoveredbyGHGtargetsandtheamountofportfolioinvestedvaluethatisassessedusingdefaultscores.Example:30%oftheportfolio’sGHGemissions/investedvaluearecoveredwithvalidtargets,withtheremaining70%scoredusingdefaultscoresfrominvesteeswithnovalidtargets.Step2.TargetSettingMinimumambitionthresholdsThescope1+2portionoftheportfoliomustbealignedtoatleastawell-below2°C(1.75°C)score,andthescope1+2+3portionmustbealignedtoatleasta2°Cscoreby2040.TargettimeframeTargetsmustbewithinfiveyearsoftheyearthetargetsareFinancialSectorScience-BasedTargetsGuidance89submittedtotheSBTi.Thismeansthatthecompanyhaseffectivelyfiveyearstoengagecompaniestosettargetsortoadjusttheportfolioholdingssotheportfoliotemperatureisalignedtoalinearpathwaythatwillreachinthetemperaturegoalsby2040.TargetwordingTwotargetsmustbesetforeachportfolio,addressingbothoperational(scope1+2)andvaluechain(scope1+2+3)emissionsoftheinvestees.Scope1+2targetwording:InvestmentFirmAcommitstoalignitsscope1+2portfoliotemperaturescorefrom2.6°Cin2018tobeonawell-below2°Cpathwayby2025.Scope1+2+3targetwording:InvestmentFirmAcommitstoalignitsscope1+2+3portfoliotemperaturescorefrom3.1°Cin2018tobeona2°Cpathwayby2025.Step3.TemperatureRatingBoundaryEachreportingyear,andthetargetyeartemperaturescoremustalsobecalculatedonagivendateinthecalendaryearorfinancialyear,consistentwiththeapproachusedtocalculatethebaseyeartemperaturescore.AlignmentambitionAlinearapproachto2040isusedtodeterminetheminimumambitionrequiredperyear.Alinearannualtemperaturereduction(LATR)isgeneratedbasedonthebaseyeartemperaturescoreandthedesiredtemperaturegoalin2040.Theminimumambitionmustbeatleastwell-below2°C(1.75°C)by2040forscope1+2and2°Cforscope1+2+3.LATR=(BaseYearTS–Long-termTS)/(Long-termTargetYear–BaseYear).Where,LATR=Linerannualtemperaturereduction(°C/year)TS=Temperaturescore(°C)AcompanylookingtobeWB2C(1.75C)alignedby2040startingfromaportfolioS1+2temperaturescoreof2.9Cina2020baseyearwouldhavetoreduceitsportfolioscorebyatleasttheFinancialSectorScience-BasedTargetsGuidance90followingamounteachyear:LATR=(2.9–1.75)/(2040–2020)=0.0575C/yearTherefore,ifanFIsetsamaximumfiveyeartarget,themaximumtemperatureoftheportfolioin2025wouldbe:2.9–50.0575=2.61COutputsEachyearleadingtothetargetyear,thefollowingdatapointsshouldbedisclosedbytheFI:●PercentageofportfolioGHGemissionscoveredbytargetsandcoveredbydefaultscoresand/or●PercentageofportfolioinvestedvaluecoveredbytargetsandcoveredbydefaultscoresRecalculationThetypesofdefaultscoresmustremainconsistentacrosssectors.Ifchangestothesemodelsareimplementedoverthetargetperiod,thecompanywillhavetorebaselinethetemperatureofthefund.Thiswillbebasedprimarilyonthesector-specificmodelsthataremodifiedovertime.AlignmentoptionsThetemperaturescoreofanygivenportfoliocanbealignedtoalowertemperaturescoretoachieveatargetthroughthefollowinghierarchyofactions:1.Engagement:Engageexistinginvesteestosetmoreambitioustargets,whichwouldtranslatetolowertemperaturescores2.Adjustment:FIscanadjusttheportfolioholdings,movingthefund’scapitaltoinvesteeswithmoreambitioustargets3.Divestment:FIscanremoveinvesteeswithno/lowambitiontargetsandreplacethemwithcompaniesthathavemoreambitioustargetsTheSBTirecommendsthatFIsfocusondirectengagementasameasurethatcanmosteffectivelyleadtoemissionreductionsontheground,whilerecognizingthatthelattertwoindirectstrategiesshallremainascomplementaryavailablemeasures.Source:Authors2020.FinancialSectorScience-BasedTargetsGuidance91CaseStudy:Amundi-ApplicationoftheTemperatureRatingMethodBackgroundonAmundiAmundiisEurope’slargestassetmanagerbyassetsundermanagement,rankingamongthetop10globalplayers,offersits100millionclients—retail,institutional,andcorporate—acompleterangeofsavingsandinvestmentsolutionsinactiveandpassivemanagement,intraditionalorrealassets.Amundiclientsbenefitfromtheexpertiseandadviceof4,500employeesinnearly40countries.Createdin2010andlistedonthestockexchangein2015,Amundicurrentlymanagesover€1.5trillionofassets.UsingthetemperatureratingmethodologydevelopedbyWWFandCDP,whichisnowincorporatedintheSBTiFinanceTool,Amundideterminedthetemperatureoffourofitsportfolios.Thispilotwasafirststepindemonstratinghowtoapplythismethodtoaninvestmentfundandtoencouragecorporatesandfinancialplayerstotakeactionusingthisapproach.TemperatureratingofAmundi’sportfolioAmundifirstselectedfourequityfunds:onegeneralistfundandthreethematicfundsforresponsibleinvestingforwhichresultsaredisplayedinTableB8.1below.ThefirststepwastoidentifytargetandGHGemissiondataforallportfoliocompanies.ThiswasdonebyusingdatadisclosedtoCDPaspartofits2019disclosureprocess.Whenincludingbothapprovedscience-basedtargetsandtargetsdisclosedthroughCDP,between35and65percentoffundscontainednotargets.Thismeantthatthedefaultscoringapproachusedtoassigntemperaturestocompanieswithnovalidpublictargetsdidhaveasignificantinfluenceontheresults.Thefundwiththelowestdefaultscorecoverage,AmundiGlobalEquitySustainableIncomeFund,alsoobtainedalowertemperaturescore,asitreliedlessonthehighdefaultscoresof3.2°C.Whilethedefaultscorecanheavilyinfluencethefinalportfolioresult,itisalsoaneffectivewaytoidentifywhichcompaniestoengagewithinorderforthemtosettargetsandultimatelylowertheportfolioscore.TableB8.1.TemperatureRatingsforaSelectionofAmundiFundsFundNameTemperatureRating(Scope1+2)TemperatureRating(Scope1+2+3)CPRInvest–ClimateAction2.3°C2.7°CCPRInvest–FoodforGenerations2.6°C2.6°CAmundiGlobalEcology2.6°C2.6°CAmundiGlobalEquitySustainableIncome2.2°C2.7°CFinancialSectorScience-BasedTargetsGuidance92Source:AmundiAssetManagement2020.Amundiobservedthatfunds’currenttemperaturesrangefrom2.2°Cto2.7°C.Fromthisobservationitcanbeseenthatmanycompaniesaresettingambitiouspublictargets,inadditiontoSBTs,butthatmuchremainstobedonetoachieveatrajectoryinlinewiththeParisAgreement.ThisapproachenabledAmunditoratecompanieswithambitioustargets,andimportantly,toidentifycompaniesthatdonothavevalidpublictargetsthatcanbescored.Aspartofitsenvironmental,social,andcorporategovernance(ESG)researchtoolbox,theTemperatureRatingApproachwillbolsterAmundi’sforward-lookingassessmentcapabilitiestoidentifyprioritiesandthedegreeofactionrequired,notablythroughengagementwithcompaniesacrosstheinvestmentuniversetosetmoreambitious,science-basedemissionsreductiontargets.Ascompaniesmakecommitments,itwillbepossibletobuildportfoliosthataremoreinlinewiththeParisAgreement.OutcomesandtargetsettingThetemperatureratingprovidesausefulmetrictodeployengagementwithissuersonclimatetargets.Indeed,resultsshowthatthemobilizationofallportfoliocompaniesisimperativeifwewanttogofurther,withcorporateengagementbeingessentialtoachievethis.ConclusionsandrecommendationsTheresultsofthetemperatureratingexerciseshowedtheextentoftargetsettingwithinthegivenportfoliosanddeterminedhowfartheseportfoliosarefromthelong-termtemperaturegoalssetoutintheParisAgreement.AkeychallengeforAmundinowistobuildcoherentstrategiesthatfosterclimateactionusingthistemperaturedata.Indeed,inadditiontoitsclearengagementpurpose,thetemperatureratingcanprovideausefulsignalforissuerselectionwhencombinedtootherclimate-relatedmetrics.Whilethemethodologywillbesubjecttofuturedevelopmentsandimprovements,currentlydeployingsuchmetricisthefirstnecessarysteptowardsettingmeaningfulclimatetargetsonfunds.5.5ApproachestoSettingTargetsontheRestoftheScope3CategoriesForfinancialinstitutionstofocustheireffortsontheirinvestmentandlendingactivities,theSBTionlyrecommendsbutdoesnotrequirethatfinancialinstitutionsmeasureemissionsandsettargetsonscope3,categories1–14.FinancialSectorScience-BasedTargetsGuidance93RecommendationsandAdditionalGuidanceFI-R9–Measuringemissionsandsettingtargetsforscope3,categories1–14:Itisrecommendedbutnotrequiredforfinancialinstitutionstomeasureandsettarget(s)oncategories1–14emissionsasdefinedbyGHGPScope3standard.Optionaltargetsonthesecategoriesmustmeetcriteria19–20.1inthelatestSBTicriteriaforcompaniestobeapprovedbySBTi.Forfinancialinstitutionsinterestedinsubmittingtargetsoncategories1–14,theymustensurethatthesetargetsmeetcriteria19–20.2inthelatestSBTigeneralcriteriaforthemtobeapprovedandannounced.FIsmayusetheSBTiTargetSettingtooltodevelopthesetargets.Intermsofapplicablemethods,theabsolutecontractionandsupplierengagementapproachescanbeusedtosettargetsonmostcategories.TheabsolutecontractionmethodhasbeenintroducedinSection4.3onscope1and2targetsetting.Forcategories1–14,financialinstitutionsmayconsidersettingabsolutetargetsinlinewithalessambitious2°Cscenario(1.23percentlinearannualreduction),giventhatscope3emissionscanbemoredifficulttoreduceascomparedtoscope1and2emissions.RequirementforsupplierengagementtargetisdetailedinC20.1oftheSBTigeneralcriteria.RelevantSDApathwaysmayalsobeappliedtocategoriessuchasupstreamtransportationanddistribution(transport),businesstravel(transport),employeecommuting(transport),andupstreamleasedassets(buildingservices).However,giventhattheapplicationofSDArequiresmoreinputdatathanabsolutecontraction,financialinstitutionsshouldweightheamountofefforttowardsettingSDAtargetsagainstthesignificanceofthesecategories.Financialinstitutionsmaycombinetargetsonmultiplescope3categories.Forexample,afinancialinstitutionmaysetonesingleupstreamsupplierengagementtargetoncategory1—purchasedgoodsandservices,andcategory4—upstreamtransportationanddistribution,thatengagesrelevantsupplierscoveringbothcategories.5.6CoalPhaseoutandFossilFuelDisclosureFossilfuelcombustionisthelargestsourceofgreenhousegasemissionsandthecentraldriverofclimatechange.Fossilfuelsarealsothedominantsourceofenergyfortheglobaleconomy.FinancialinstitutionsseekingtoalignwiththeParisAgreementshouldexplicitlyandtransparentlyaddresstheroleoffossilfuelsintheirinvestmentandlendingportfolios.Inrecognitionofthecomplexandsocietallyembeddednatureoffossilfuels,theSBTiformulatedtwofossilfuel-relatedrecommendations(FI-R10andFI-R11)forfinancialinstitutions.FinancialSectorScience-BasedTargetsGuidance94Thefirstrecommendationrelatestotheadoptionofathermalcoalphaseoutpolicy.TheIPCC1.5°Cemissionpathwaysindicatethatemissionsfromcoalshouldreducebyfour-fifthsin2030relativeto2010(IPCC2018).Recentresearchonenergytechnologiesshowsthattheshareofuncompetitivecoalplantsworldwideisontracktoincreaserapidlyto60percentin2022andto73percentin2025(RockyMountainInstitute2020).Thesamereportindicatesthatthetrendisnotlimitedtodevelopedcountries.InChinaandIndia,forexample,95percentand85percent,respectively,ofthecoalfleetmaybecomeunprofitableby2025.FIsshouldthusreducetheirexposuretothermalcoalasquicklyaspossible,toreachzeroby2030toavoidstrandedassets,detrimentalclimateimpacts,andrelatedlosses.Thephaseoutofthermalcoalinvestmentsisintendedtoaccelerateenergytransitionanddoesnotprecludesupportforlow-carbontransformationofexistingfacilities.Moreover,effectivecoalphaseoutrequiresconsiderationofajusttransitiontoensureviabilityandlong-termstability(seeJakobetal.2020).Thesecondrecommendationregardsdisclosureandsupportsconsistentunderstandingofthefullrangeoffinancialinstitutions'fossilfuelinvestmentsandrelatedactivities.Fossilfuelinvestmentdisclosurepreservescredibilityandcreatesaninitialmechanismforfinancialinstitutionstohelpaddressjusticeandequitycomponentsofclimateaction.RecommendationsandAdditionalGuidanceFI-R10–Phaseoutofthermalcoalinvestments:Financialinstitutionsshouldestablishapolicywithinsixmonthsfromthetimeoftargetapprovalthattheywillphaseoutfinancialsupporttothermalcoalacrossalltheiractivitiesinlinewithafullphaseoutby2030globally.Notably,thisincludesimmediatelyceasingallfinancialorothersupporttothermalcoalcompaniesthatarebuildingnewinfrastructureorinvestinginneworadditionalthermalcoalexpansion,mining,production,utilization(i.e.,combustion),retrofitting,oracquiringofcoalassets.Coalcompaniesaredefinedascompanieswithgreaterthan5percentofrevenuesfromthermalcoalmining,explorationanddrilling,miningservices,processing,trading,transportandlogistics,equipmentmanufacturing,operationsandmaintenance(O&M)services,engineering,procurementandconstruction(EPC)services,transmissionanddistributionofcoal-firedelectricity,coaltoliquids(Ctlg)andcoaltogas(CtG).FI-R11–DisclosureofFossilFuelInvestmentsandLending:FinancialinstitutionswithapprovedSBTsshouldannuallydisclosetheannualinvestments(publicequity,privateequity,corporatebonds),directprojectfinancingandlendingtofossilfuel(oil,gas,andthermalcoal)projectsandcompaniesinU.S.dollaramount(orothercurrencies)(SeeFI-R12forrecommendationsonwheretodisclose).Financialinstitutionsthatfailtophaseoutcoalinvestmentsordisclosefossilfuelinvestmentsandlendingmakethemselvessusceptibletoriskofstrandedassetsandreputationaldamage.FinancialSectorScience-BasedTargetsGuidance95Thisincludes:(1)Companiesthathaveactivities(i.e.,identifiedasshareofrevenues)intheexploration,extraction,refining,transportationanddistribution,storage,retailing,marketing,trading,orpower,heat,orcoolingproductionfromoilandgas.FIsshoulddisclosethethresholdusedtodelineateoilandgascompanies;SBTirecommendsa5percentthresholdandforthethresholdtonotexceed30percent.(2)InlinewithFI-R10,companieswithgreaterthan5percentofrevenuesfromthermalcoalmining,explorationanddrilling,miningservices,processing,trading,transportandlogistics,equipmentmanufacturing,operationsandmaintenance(O&M)services,engineering,procurementandconstruction(EPC)services,transmissionanddistributionofcoal-firedelectricity,coaltoliquids(Ctlg)andcoaltogas(CtG).FinancialSectorScience-BasedTargetsGuidance966.HowtoCommunicateScience-BasedTargetsandTrackingProgressGiventheimportanceoftransparencytostakeholdersontheactionsoffinancialinstitutionsinreducingGHGemissions,theSBTiprovidesspecificrequirementsandguidanceonhowFIscommunicatetheirSBTsandstrategiestoachievetheirSBTs.Financialinstitutionsshouldnotmakeclaimsaboutemissionreductionsattributedtothesestrategiesorrelatedfinancialproductswithoutcredibleevidencetosupporttheseclaims.TheSBTirequiresFIstodeveloptargetlanguageinthetargetsubmissionformtotheSBTiandthetargetwillbeusedforpubliccommunicationoncetargetsareapproved.FIsshallformulatetargetlanguageforthefollowing:•Ascope1and2targetusingthetargetlanguagetemplateinthefinancialsectortargetsubmissionform;•Atargettocoveranyoptionalscope3,category1–14targetsapprovedbytheSBTi;●Aheadlinetargetforportfoliosthatsetsouttheassetclassesforwhichtheyhavesetscience-basedtargetsandhowmuchoftheirtotalportfolioiscovered,thepurposeofwhichistosimplifythecommunicationofmultipleasset-leveltargets;and●Targetlanguageforasset-leveltargetsusingthespecifictargetlanguagetemplates.Atthetimeoftargetsubmission,FIsshallsubmitabriefsummaryofthestrategyandactionstheFIwillimplementtoreachtheirscience-basedtarget(s)andwhytheyselectedtheseactions.ThissummaryshallbeprovidedbytheFIswiththeirtargetsubmissionandwillbepublished,alongwiththescience-basedtargets,ontheSBTiwebsiteupontargetapproval.ThedetailedtargetlanguagetemplateisprovidedinTable6.1belowandadditionalguidanceonformulatingtargetlanguageisincludedinthefinancialsectortargetsubmissionformandshallbefollowedbyFIswhensettingtargets.Table6.1.TargetLanguageTemplateforFinancialInstitutionsScope1and2TargetsAbsolutetarget:FinancialInstitutionAcommitstoreduceabsolutescope1and2GHGemissions[XX]%by[targetyear]froma[baseyear].Intensitytarget:FinancialInstitutionAcommitstoreducescope1and2GHGemissions[XX]%per[unit]by[targetyear]froma[baseyear].Scope3PortfolioTargets–HeadlineTargetFinancialSectorScience-BasedTargetsGuidance97FinancialInstitutionAcommitstoachieveSBTsin[assetclasses]by[targetyear](iftherearemultipletargetyearsoftheassetclass–specifictargets,usethetargetyearthat’sfarthestintothefuture)froma[baseyear].FinancialInstitutionA’sportfoliotargetscover[XX]%ofitstotalinvestmentandlendingactivitiesby[unit].Scope3PortfolioTargets–AssetClassTargetAssetClassMethodTargetOutputExampleRealestateSectorDecarbonizationApproach(SDA)FinancialInstitutionAcommitstoreduceitsrealestateportfolioGHGemissionsXX%persquaremeterby2030froma2017baseyear.MortgagesSDAFinancialInstitutionAcommitstoreduceitsmortgageportfolioGHGemissionsXX%persquaremeterby2030froma2017baseyear.ElectricitygenerationprojectfinanceSDAFinancialInstitutionAcommitstoreduceitselectricitygenerationprojectfinanceportfolioGHGemissionsXX%perkWhby2030froma2017baseyear.Corporateinstruments(equity,bonds,loans)SDAFinancialInstitutionAcommitstoreduceGHGemissionsfromthesteelsectorwithinitscorporatelendingportfolioXX%pertonneofcementby2030froma2017baseyear.SBTPortfolioCoverageInvestmentFirmAcommitsthat30%ofitsequityportfoliowithinthe[assetclassorsector]by[unit]willhavesetscience-basedtargetsby2024.TemperatureratingInvestmentFirmAcommitstoalignitsscope1+2portfoliotemperaturescorewithinthe[assetclassorsector]fromXX°Cin2018toXX°Cby2025.InvestmentFirmAcommitstoalignitsscope1+2+3portfoliotemperaturescorewithinthe[assetclassorsector]fromXX°Cin2018toXX°Cby2025.ActionPlantoAchieveTargetsFinancialSectorScience-BasedTargetsGuidance98FinancialInstitutionAwillimplementthefollowingstrategyandactionstoachieveitstargets:●Example:FinancialInstitutionAaimstosteerits[XXdollaramount]corporateequity,bonds,andloanbookinpowergeneration,steel,cement,andaviationthroughactivelysupportingclients’low-carbontransition.Forexample,itwilloffermorefavorableinterestratestoinvesteesthatsetandstayontracktomeetambitiousclimategoals.FinancialInstitutionAselectedtheseactionsbecause[addreasons].Source:Authors2020.TheSBTirecognizesthatthereisalackofclarityaboutwhichFIactionscouldleadtogreenhousegasemissionsintherealeconomy.TheSBTi’sannualdisclosurerequirementisintendedtohelpidentifythemosteffectiveactionstorealizeGHGemissionsreductionsintherealeconomyandleadtofurtherprogressinthisarea.TheSBT-FIwelcomescollaborationwithotherclimateinitiativesthatseektodevelopmethodsortoolsthatenablethemeasurementoftheimpactofclimateactions(seealsotheChapter7.HowtoachieveSBTs).WealsoencourageFIstoengagewithrelevantserviceproviderstodevelopsuchtoolsandadjusttheirstrategiesaccordingtothefindingsoftheseanalyses.GiventhatcurrentmethodsdonotcoverallassetclassesorsectorsonFIs’portfoliosandthatthetargetboundaryrequirementremainsflexibleoncertainfinancialproducts,FIsarerequiredtodisclosethecoverageoftheirtotalinvestmentandlendingactivitiesbySBTsinthetargetlanguage(C18)usinganeconomicoremissionsmetricthatisrepresentativeofthemagnitudeoftheirmainbusinessactivities.Thisdisclosurerequirementisintendedtoenhancethetransparencyandcomparabilityofportfoliotargets.Giventhatthisversionofthecriteriaallowsbankstosubmittargetswithouttheirassetmanagementdivisions,banksshallalsobeexplicitaboutsuchexclusionsinthetargetwording.CriteriaFI-C18–DisclosureofTarget(s)PortfolioCoverage:Atthetimeoftargetannouncementandalongwithapprovedtargets,financialinstitutionsshalldisclosethepercentageoftheirtotalinvestmentandlendingactivitiescoveredbyportfoliotargetsontheSBTiwebsite,inametricrepresentativeofthemagnitudeofFIs’mainbusinessactivities,whichmayinvolveanycombinationofcommercialbanking,investmentbanking,andassetmanagement.Examplesincludetotalfinancedemissionsassociatedwithinvestmentandlendingactivities(ifquantified),totalbalancesheet,totalinvestments,totallendingbook,andtotalassetsundermanagement.FI-C19–ImplementationReporting:Atthetimeoftargetsubmission,thefinancialinstitutionshallsubmitabriefsummaryofhowitintendstomeetitsscope3portfoliotargetsinconformitywiththetemplateprovidedinthetargetsubmissionform.FinancialSectorScience-BasedTargetsGuidance99Thisdisclosureisintendedtocreatetransparency.Thecontentofthesummarywillnotbeusedasabasisforvalidationoftargets.Atthetimeoftargetannouncement,thesummaryofhowthefinancialinstitutionintendstoachieveitstargetsshallbemadepublic.616.1TrackingandReportingTargetProgressThissectionpresentsrecommendationsontrackingandreportingprogressofportfoliotargetssetusingSDA,SBTPortfolioCoverage,andTemperatureRatingApproaches.Financialinstitutionsshouldtaketheserecommendationsintoconsiderationfortheannualdisclosureoftargetprogressrequiredbythecriteria.6.1.1TrackingProgressAgainstSDATargetsFinancialinstitutionsshouldtrackanddiscloseprogressagainsttheirSDAtargetsonanannualbasis.Thetrackingmetricisemissionsperactivityunitrelevanttothesector(e.g.,kgCO2perkWh,kgCO2pertonsofsteel,kgCO2perm2),combinedwiththepercentageofportfoliooutstandingvalueinthespecificassetclass/sector.Tomeasureannualprogress,financialinstitutionsshouldusetheGHGaccountingmethodsdevelopedbythePartnershipforCarbonAccountingFinancials(PCAF).Thesemethodsenablefinancialinstitutionstocalculatetheabsoluteemissionsperassetclassataspecificpointintime.Theabsoluteemissionsisthenconvertedtoemissionsintensityusingthephysicalactivitydatathatarelinkedtotheloansandinvestments(e.g.,theamountofkWh,tonsofsteel,orm2thatfinancialinstitutionshavefinanced).Theresultshouldbecomparedwiththeemissionsintensityofthepreviousyear.6.1.2TrackingProgressAgainstTemperatureRatingTargetsEachreportingyear,theFIshoulddisclosebothportfoliotemperatureratings(scope1+2ratingandthescope1+2+3rating).Inaddition,whensubmittingtargetsforofficialvalidation,andwhenreportingandtrackingprogressagainsttargets,financialInstitutionsmustdisclosethefollowinginformation:●ThepercentageofportfolioGHGemissionsthatiscoveredbypublictargetsandthepercentageofportfolioGHGemissionsthatisassessedusingdefaultscoresinthereportingyear;and●Thepercentageofportfolioinvestedvaluethatiscoveredbypublictargetsandthepercentageofportfolioinvestedvaluethatisassessedusingdefaultscoresinthereportingyear.Formoredetailsonthereportingrequirements,pleaseseeSection5.4.3.6.1.3TrackingProgressAgainstSBTPortfolioCoverageTargets61FinancialinstitutionswillhaveopportunitiestoreviewthesummarylanguagebeforetheSBTipublishesitonthewebsite.FinancialSectorScience-BasedTargetsGuidance100Financialinstitutionsshouldreportthepercentageofrelevantassetclass(es)coveredbyapprovedSBTcompaniesonanannualbasis,usingthesameweightingapproachchosenforthebaseyearconsistentlythroughoutthetargetperiod.FinancialinstitutionsmayfurtherindicatewhethertheyareontracktomeetthetargetedcoverageofSBTcompaniessetoutforthefive-yeartargetperiod.Iffinancialinstitutionschoosetodoso,theyshouldprovideevidencetosupportanystatementaboutwhethertheyareonorofftrackandclearlystateanyassumptionused.Anexampleofsuchassumptionscouldbethatthesameprogressachievedinthefirstyearwillbeachievedintheremainingfouryears:FinancialInstitutionAprojectsthatitiscurrentlyontracktomeetthefive-yeartarget.InadditiontoreportingonthepercentageofcompanieswithapprovedSBTs,financialinstitutionsmayalsoreportthecoverageofcompaniescommittedtotheSBTiortheincreaseinthenumberofcompaniesmeasuringandreportingscope1,2,and3emissionstoshowincrementalprogressofportfoliocompanies.CriteriaFI-C20–TrackingandReportingTargetProgress:Aftertargetapproval,SBTirequiresannualdisclosureofscope1and2GHGemissions,disclosureofprogressagainstallapprovedtargetsintherelevantmetric,anddisclosureofactions/strategiestakenduringtheyeartomeetscope3portfoliotargets.Ifoptionaltargetsonscope3categories1–14asdescribedinFI-R9aresubmittedandapprovedbySBTi,theirprogressshallbeincludedinthedisclosureofprogressaswell.6.2TargetRecalculationandValidityAsadditionalmethodsandthelatestclimatesciencebecomeavailable,financialinstitutionsshallcontinuetofollowbestpracticesandensurethattheirtargetsremainrelevant.Therefore,perFI-C21–MandatoryTargetRecalculationFIsmustreview,andifnecessary,recalculateandrevalidatetheirtargets,ataminimum,everyfiveyears.Financialinstitutionswithapprovedtargetsthatrequirerecalculationmustfollowthemostrecentapplicablecriteriaforthefinancesectoratthetimeofresubmission.TheSBTialsorecommendsthatfinancialinstitutionsrecalculatetargets,asneeded,toreflectsignificantchangesthatwouldcompromiserelevanceandconsistencyoftheexistingtarget.ExamplesofsignificantchangesthatshouldtriggerarecalculationareincludedinFI-R13–TriggeredTargetRecalculationinSection3.7.Iffinancialinstitutionssetintensitytargetsandtherearesignificantchangesintheprojectionoftherelatedactivity,thisshouldtriggeratargetrecalculationandresubmissionofthetargettotheSBTi.FinancialSectorScience-BasedTargetsGuidance101Toinstitutionalizethepracticeoftargetadjustments,financialinstitutionsshouldestablishabase-yearrecalculationpolicythatsetsoutaqualitativeorquantitativesignificancethresholdtotriggerarecalculationoftargets.Examplesofchangesthatcouldtriggeratargetrecalculationincludeupdatesinclimatescience,availabilityofhigherqualityinvesteedata,andsignificantchangestothefinancialinstitutionsuchasamergeroracquisition.CriteriaFI-C21–MandatoryTargetRecalculation:Toensureconsistencywithmostrecentclimatescienceandbestpracticesinscience-basedtargetsetting,targetsmustbereviewed,andifnecessary,recalculated,andrevalidated,ataminimum,everyfiveyears.Financialinstitutionswithanapprovedtargetthatrequiresrecalculationmustfollowthemostrecentlyapplicablecriteriaatthetimeofresubmission.Targetsshouldberecalculatedandreset,asneeded,toreflectsignificantchangesthatwouldcompromiserelevanceandconsistencyoftheexistingtarget.FI-C22–TargetValidity:FinancialinstitutionswithapprovedtargetsmustannouncetheirtargetpubliclyontheSBTiwebsitewithinsixmonthsoftheapprovaldate.Targetsunannouncedaftersixmonthswillhavetogothroughtheapprovalprocessagain,unlessadifferentpublicationtimeframewasagreeduponwiththeSBTi.FinancialSectorScience-BasedTargetsGuidance1027.HowtoAchieveSBTsTherearenumerousactionsthatFIscanusetoachievetheirportfolioSBTs.Chapter7buildsontheSBTi’scriteriaandrecommendationsfortargetsettingandreporting,andfurtherrecommendsstepsthatFIscantaketofullyintegrateclimatechangeintheirorganizationandservicesandachievetheirtargetsinamannerthatleadstogreenhousegasemissionsreductionintherealeconomy.7.1IntegrationofClimateChangeinGovernanceandDecision-MakingFIsshouldintegrateclimatechangeacrosstheirinstitution.Thiscanincludethefollowing:●Adoptionofclimate-relatedinvestmentprinciples.TheseshouldrecognizethatportfolioalignmentwiththeParisAgreementwillcontributetoinvestinginthebestinterestsofFIs’beneficiariesorclients.●Establishmentofaclimategovernancestructure.FIsshouldmakeportfolioalignmentwiththeParisAgreementaboardpriority—includingexplicitattributionofthisresponsibilitywithintheboard.Theyshouldalsoputgovernancestructuresinplacethatensurepropersupportandimplementationofthepolicy—includingincentiveschemes,commitmentofresources,capacitybuilding,andinvolvementofbeneficiariesorclients.●Integrationofclimatechangeintheinvestmentand/orlendingpolicy.FIsshouldadoptaninvestmentand/orlendingpolicythatreflectsandalignswiththeirclimate-relatedinvestmentprinciples.Thiscaninclude—dependingonthetypeofFIs—investment/lendingtargets,strategicassetallocation,engagementobjectives,selection/screeningcriteriaandincentivesforserviceprovidersbasedonclimateperformance,andperformancemeasurementandreporting.●Adjustmentofstrategicassetallocationtoharnessclimate-relatedopportunities.FIsshouldconsiderclimaterisksandopportunitiesinstrategicassetallocation(SAA),includingincreasingtheirexposurewherefeasibletoalternativeassetclassesthataremorelikelytohaveadirectpositiveclimateimpactontherealeconomy—suchasinfrastructure(e.g.,gridsandrenewableenergy),realestate(highlyenergy-efficientandresilientbuildings),andprivateequity(renewableandenergyefficiencycompanies).●Adoptionofadditionalsector-specificpolicies.FIsshouldextendtheirinvestmentpolicytosectorsandtechnologiesthatposeparticularclimate-relatedrisksorofferparticularopportunities.Thesearemostnotably:○Sectorswheregreenhousegas-intensivecompanieshaveasignificantpotentialtoofferalternativesolutionsandthusreducetheiremissions—suchaspowerutilities,industrialsectors(steel,cement,chemicals),andautomotive;and○Sectorsthataredeemedtoshrinkandultimatelydisappearwiththeenergytransition(e.g.,coal,oil,andgas),butwheresomecompaniesstillhavethepotentialtomakeatimelyshifttootherbusinessmodels.FinancialSectorScience-BasedTargetsGuidance103ThesectorpoliciesshoulddefinecriteriathatallowtheFItoidentifytowhatextentthecompaniesinitsportfolioareableandwillingtoaligntheirbusinessmodelwiththeParisAgreement,setoutastrategyastohowtheFIwillurgecompaniestoadopt1.5°Ctransitionplansthroughactiveownership,andidentifyatwhichpointexposurereduction/divestmentisdesirableinlightoftheinabilityorunwillingnessofacompanytotransitioninatimelymanner.●Developmentofmethodsortoolsthatenablethemeasurementoftheimpactofclimateactions.TherecurrentlyisinsufficientclarityaboutwhichFIactionsleadtogreenhousegasemissionsintherealeconomy.FIsshouldengagewithrelevantserviceproviderstodeveloptoolsthatallowtheFItobuildabetterunderstandingoftheimpactoftheiractionsongreenhousegasemissions,andadjusttheirstrategiesaccordingtothefindingsoftheseanalyses.7.2EngagingKeyStakeholders:Companies,ServiceProviders,andPolicymakersGeneratingimpactintherealeconomyrequiresallrelevantstakeholderstomoveatthesametime.HenceFIsshouldleveragetheinfluencetheyhaveovercompanies,policymakers,andfinancialserviceproviders.ThiswillensurethattherulesofthegameinwhichFIsoperatearesupportiveoftheirownclimateactions.FIsshouldworkcollectivelywiththeirpeerFIstolearn,seekadvice,sharebestpractice,and,mostimportantly,increasetheimpactofengagementactivitieswithportfoliocompaniesandpolicymakers.TheyshouldengageinFIcoalitionsandparticipateinanddrivecoalitionsthatpromotethealignmentofportfolioswiththeParisAgreement(seeTable1.1formoredetails).7.2.1CompanyEngagementFIsshoulddevelopanengagementstrategytoachievealignmentoftheirportfoliocompanies’businessmodelswiththeParisAgreement—throughtheadoptionandpublicationoftime-bound1.5°Ctransitionplanscomposedofthefollowingelements:●AcommitmenttoalignbusinessmodelswiththeParisAgreementand,moreconcretely,atime-boundclimatescience–basedtargetbuiltonforward-lookingclimatescenarioanalysis.IfFIssetSBTPortfolioCoveragetargets(i.e.,targetstoengageborrowers/investeestosetapprovedSBTs),allcompaniesintheboundaryofthesetargetsshallhaveapprovedSBTsby2040inlinewiththeSBTPortfolioCoveragetargetcriterion.●Capitalmanagementplanstoendcapitalexpenditurefornewhigh-carbonprojects,increasecapitalexpenditureforlow-carbonprojects,andacleartimelinefortheclosureofexistinghigh-carbonassets.Thiscouldincludecashreturnsthroughbuybacksordividends.FinancialSectorScience-BasedTargetsGuidance104●ThedisclosureofthetargetandtransitionplanandalignmentwithTaskForceonClimate-relatedFinancialDisclosures(TCFD)recommendations.Suchinformationshouldbepublishedinmainstreamfinancialreports(integratedreporting).●Acommitmenttoreviewandratchetuptargetsandtransitionplansinlightoftheevolvingclimatescience,inparticularthedevelopmentofmoredetailed1.5°CscenariosdrivenbytheParisAgreement.●ApubliccommitmenttosupportpoliciesthataimtoreduceemissionsinlinewiththeParisAgreement,betransparentaboutlobbyingactivitiesandrelatedexpenditures,andexitthird-partyorganizations(e.g.,businessandtradeassociations)thatpromotepoliciesthatposearisktotheParisAgreement.Giventheurgencytotackleclimatechange,FIsshouldhaveanescalationprocessinplaceforwhenengagementdoesnotleadtosignificantresultswithinsettimeframes(6,12,24,36months),wherearangeofoptionsareavailabletoFIs:openletters,filing/supportingshareholderresolutions,andvotingatannualgeneralmeetings(AGMs),endsupporttocompanies’effortstoraisecapital(notablythroughcorporatebonds),andultimatelydivestment.Figure7.1belowgivesapotentialtimelineforsuchanescalationprocess.Figure7.1.EscalationProcessinCaseofUnsuccessfulEngagementNote:AGM=Annualgeneralmeeting.Source:WWF2019.FinancialSectorScience-BasedTargetsGuidance1057.2.2PolicyEngagementRegulationsandgovernmentpoliciesarekeydriversofsystemicchange.Themostclimate-awareFIsshouldengagewithpolicymakerstoacceleratetheadoptionandimplementationofclimate-friendlypolicies.Strengtheninglong-terminvestorinvolvementinthe“rulesofthegame”thatgovernthefinancialsystemisastrategicareaofinterest:giventhehighurgencyoftheclimatechallenge,FIsshouldengagewithpolicymakersinfavoroftheproperimplementationoftheParisAgreement—asthebestpathwaytomitigatetheirclimate-relatedrisks,maximizetheirpositivecontributiontoclimategoals,protectthelong-termvalueoftheirassets,andinvestinthebestinterestofmembersandbeneficiaries.FIsshouldengagewithpolicymakerstoaskforthefollowingitems:●ClimateandenergypoliciesandregulationsthatdriveatimelyimplementationoftheParisAgreementanditsembeddedclimatetargets;●AdequateclimateandwiderESGcorporatedisclosurepoliciesandregulationstoensurethatrelevantclimateandESGdatabecomeavailabletoinvestors—inparticularbyintegratingtheTCFDrecommendationsintonationallegislation,withanemphasisonforward-lookingclimatescenarioanalysis;and●Financialpoliciesandregulationsthatdrivebetterunderstandingofclimate-relatedrisksandopportunitiesforfinancialinstitutions,throughtheassessmentofclimateandwiderESGrisksforinvestorsandtheirmitigation,withtheultimategoalofportfolioalignmentwiththeParisAgreement.7.2.3ServiceProviderEngagementFIsthatunderstandclimate-relatedfinancialrisksandopportunitieswillfinditnecessarytoaddresstheneedtoaligntheirinvestmentswiththeParisAgreement,togetherwiththeirserviceproviders.Howevertherearemanyreasonswhytheinvestmentsupplychainmaynotactinaccordancewithassetowners’interestsonclimateissues,includingcommercialconflictsofinterests,timehorizons,culturalnorms.Assetownersthereforeneedtocloselymonitoralltheirserviceproviders,includingtheirinvestmentconsultants,indexproviders,proxyvotingadvisors,sellsideanalystsandcreditratingagencies,remunerationconsultants,andauditors.Inmanycases,FIsrelyoninvestmentconsultantstodeveloptheirinvestmentstrategies,climatestrategies,selectserviceproviders(e.g.,investmentmanagers),etc.Therefore,investmentconsultantsoperateatacriticalinterfaceintheinvestmentecosystem,andFIscanpushthemtodriveinnovationwithinthefinancialcommunity.ThefollowingactionsarerecommendedforFIs:FinancialSectorScience-BasedTargetsGuidance106●Ensurethatinvestmentconsultantsaddressclimate-relatedrisksandopportunitiesandadapttheircoreservicesaccordinglyanddemonstratearobusttrackrecordthatshowscapacitytoassessandaddressclimate-relatedissues;●Requireinvestmentconsultantstoadvisesoastohelpthemdevelopclimate-relatedstrategies(principles,policies,targets,processes,andportfolioimplementation)thatwillaligninvestmentswiththeParisAgreementovertime;●Askinvestmentconsultantstoallocatededicatedtimeforinteractionanddiscussiononlong-termrisksandopportunities—particularlyrelatedtoclimatechange—andtoadjustremunerationaccordingly;●Askinvestmentconsultantstoassesstheclimate-relatedperformanceofotherserviceproviders(notablyinvestmentmanagers)andsuggestengagementapproachesforacceleratingtheirclimate-relatedefforts;and●Publiclysignaltheirclimate-relatedrequirementsforinvestmentconsultantstourgethemtoacttoavertapotentialdevaluationoftheirreputationalcapital.Indexproviders(e.g.,MSCI,FTSE,S&P,etc.)providetheinvestmentcommunitywithastandardtoquantifyandunderstandtheperformanceofmarketsandassetclasses.Marketcapitalization–weightedindexesarereplicatedbypassiveinvestors,andusedasallocationguidelinesforsectordiversificationbythemajorityofinvestors.Analysisindicatesthatindexesusuallyreflectbusiness-as-usualscenarios,whereforinstancehigh-carbonsectors(e.g.,oilandgas)areoverweighedintermsofachievingtheParisgoal,andtheylackagoodindicationofenergytechnologyexposure.Themeasurementofrelativeriskisalsorelatedtotheseindexes,furtherlimitingthepossibilitytoallocateinvestmentsinlinewithclimategoals,andawayfromthecurrentunsustainablebusiness-as-usualmarket(2dii2014).FIsshoulddrivedemandtoindexproviderstotackletheseshortcomingsinthedesignofindexes.Thisissueiscriticalforpassiveinvestorsthatessentiallyrelyonindexestodefinetheirdefaultcapitalmarketexposures.ThefollowingactionsarerecommendedforFIs:●RequireindexproviderstodisclosehowtheirexistingproductsalignwiththeParisAgreement,usingforward-lookingclimatescenarioanalysis;●Requireindexproviderstodevelopnewproductsthatreflecttheperformanceofmarketsinawell-below2°Ctransition,tohelpassetownersbenchmarktheirowninvestmentportfoliosagainsttheParisAgreement;and●Publiclysignaltheirclimate-relatedrequirementsforindexproviderstourgethemtoacttoavertapotentialdevaluationoftheirreputationalcapital.Proxyvotingadvisors(e.g.,ISS,GlassLewis,Manifest,etc.)consultwithFIstodecidehowtovoteonmattersthatrequireshareholderapprovalatannualgeneralmeetings(andextraordinarygeneralmeetings)oftheirportfoliocompanies.Asshareholderresolutionsareacrucialtoolforengagementwithportfoliocompanies(seesectiononcompanyengagementabove),itisimportantforFIstointeractFinancialSectorScience-BasedTargetsGuidance107withproxyvotingadvisors,withtheobjectiveofimprovingtheirclimate-relatedadvice.ThefollowingactionsarerecommendedforFIs:●Ensurethatproxyvotingadvisorsaddressclimate-relatedrisksandopportunitiesandadapttheircoreservicessothattheyalignwiththeParisAgreement;●RequesttheirproxyvotingadvisorstoensurethatvotingactivitiesarewhollyconsistentwiththeclimateobjectivesoftheFIandsupportresolutionsthatcallfortheadoptionofwell-below2°Ctransitionplans;and●Publiclyexpresstheirsupportforclimate-relatedshareholderresolutionsatportfoliocompanies.7.3PublicDisclosureofClimateActionsFIsshouldpubliclydisclosetheirclimatedecisionsandactivitiestoincreaseimpact.TheSBTicriteriaforfinancialinstitutionsrequiresthatFIsannuallydisclosetheactionsorstrategiesthathavebeentakenduringtheyeartoreachtheirSBTsaftertargetapproval.ThesectionbelowcanhelpFIsframetheirreportingtoavenue(s)oftheirchoiceforthepublicdisclosureoftheirclimateaction(e.g.,annualreport,stand-alonereports,communicationonthewebsite,pressreleases,socialmedia,etc.)Publicdisclosureofclimateactionsshouldcover—dependingontheFI—theadoptionofclimate-relatedpoliciesforcompanies,theintegrationofthepolicyinmandatestoinvestmentmanagersandotherserviceproviders,aregularassessmentofengagementimpact,thefillingoforsupporttorelevantshareholderresolutions,anddivestmentdecisionsifengagementisnotdeemedrelevantordoesnotdeliverwithinsettimeframes.Bysignaling(i.e.,makingpublic)keyclimate-relateddecisionsandactivities,FIswillsignificantlyamplifytheirimpact.Giventheclimateurgency,thesignalingeffectiscriticaltoraisetheawarenessofpeerFIs,companies,serviceproviders,policymakers,andotherstakeholders.Itemphasizestheimportanceoftheissueandhelpstoaccelerateeffortsfromtheabovementionedstakeholders.Signalingisparticularlycriticalforameaningfulengagementstrategy.FIsshoulddisclosewhichcompaniestheyareengagingwith,whattheirspecificdemandsare,andpublishatregularintervalsanassessmentoftheengagementimpact.Thiswillincreasepressureoncorporationsanddrivedeeperandfasterchanges.TheClimateAction100+initiativeisapromisingsteptowardsuchjointandpublicshareholderengagement—andanimplicitrecognitionthatbilateralengagementbehindcloseddoorswillnothaveenoughimpacttogethigh-carboncompaniestoshifttheirbusinessmodelatthepaceandscalerequiredbytheParisAgreement.FIsshouldalsoindicatethenamesofcompaniesfromwhichtheyhavedivestedordecidednottoinvestin,followingtheexampleoffinancialinstitutionsincountrieslikeDenmarkandNorway.ForveryliquidFinancialSectorScience-BasedTargetsGuidance108assetclasses,suchaspublicequityandcorporatebonds,therapidexchangeofassetscanquicklycanceloutpotentialimpactofdivestmentonoilandgasproducers.Therefore,publicsignalingiscriticalforamplification.FinancialSectorScience-BasedTargetsGuidance1098.SBTiCalltoActionProcess:Commit,DevelopTarget,Validate,Announce,DiscloseThischapteroutlinesthefourdifferentstepsforfinancialinstitutionstotakeintheSBTiCalltoAction(C2A)process,frompubliclycommittingtotheSBTitohavingapprovedtargetsannounced(SeeFigure8.1).62Figure8.1.TheSBTiCall-to-ActionProcessSource:SBTi2020.Step1:CommittoSetaScience-basedTargetHowtocommitFinancialinstitutionsthatwishtocommittosetascience-basedtargetshouldreviewandcompletethecommitmentletterandsendittocommitments@sciencebasedtargets.org.Signingthecommitmentletterindicatesthatyourinstitutionwillworktosetascience-basedemissionsreductiontargetalignedwiththeScienceBasedTargetsinitiative’scriteriaforfinancialinstitutions(thelinkwillbeaddedwhenavailable).BusinessAmbitionfor1.5°CFinancialinstitutionsareurgedtoaimforthehighestlevelofambitionintheirtargetsetting.TheSBTiencouragesfinancialinstitutionstojointheBusinessAmbitionfor1.5°CCalltoActionbysigningtheBusinessAmbitionfor1.5°CCommitmentLetterthatindicatesintentiontoalignemissionsreductiontargetswith1.5°C.ForfinancialinstitutionsnotcurrentlycommittedtotheSBTi,theBusinessAmbition62PleasenotethattheSBTiC2Aprocessforfinancialinstitutionsisstillbeingfinalized,andmoredetailswillbeaddedforthefinalguidancereleaseinSeptember2020.FinancialSectorScience-BasedTargetsGuidance110for1.5°CCommitmentLetterconstitutesyourcommitmenttodevelopandsubmitemissionsreductiontargetsalignedwiththeSBTicriteria.WeMeanBusinessWeMeanBusiness,acoalitionoforganizationsworkingwiththousandsoftheworld’smostinfluentialbusinessesandinvestors,providesaplatformforbusinessesandinvestorstoberecognizedfortheirclimateaction.ThroughtheWeMeanBusinesscampaign,financialinstitutionscancommittosettingscience-basedtargetsaswellasotheractionssuchasprocure100percentofelectricityfromrenewablesourcesorputapriceoncarbon.Bydefault,financialinstitutionsthatcommittotheScienceBasedTargetsinitiativecounttowardtheWeMeanBusinesscampaign.However,financialinstitutionsthatcommittosetscience-basedtargetsthroughtheWeMeanBusinessCommittoActioncampaignarerequiredtosigntheSBTicommitmentlettertobeformallyrecognizedbytheinitiative.BenefitsofCommittingSigningthecommitmentletterindicatesthefinancialinstitutionwillworktowardsettingscience-basedemissionsreductiontargets.Ifthefinancialinstitutionalreadysetitsowntargets,theletterconfirmstheFI’sinterestinhavingitsexistingtargetsverifiedagainstasetofcriteriadevelopedbytheSBTiordevelopingnewtargetsthatwillalignwiththesecriteria.Afterafinancialinstitutionsubmitsitscommitmentletter(eitherthegeneralcommitmentletterortheBusinessAmbitionfor1.5°CCommitmentLetter)tocommitments@sciencebasedtargets.org,itwillberecognizedas“Committed”onourCompaniesTakingActionwebpage,aswellastheWeMeanBusinessandCDPwebsites.CompaniesthatareengagingintheUNGlobalCompactwillalsoberecognizedontheirwebsite.Thelistofcommittedcompaniesisupdatedeveryweek.Companiesthathavecommittedwillreceivea“CommunicationsWelcomePack”withmoreinformationonhowtocommunicatetheircommitment.Step2:DevelopaTargetStartingfromOctober1,2020,financialinstitutionswillhaveupto24monthstocompletethefollowingstepsoncetheysignthecommitmentletters.Previouslycommittedfinancialinstitutionswillhave24monthsfromOctober1,2020tohavetheirtargetsapprovedandannouncedbySBTi:(i)Developscience-basedtargetsalignedwiththeSBTicriteriaforfinancialinstitutions;(ii)SubmitthetargetstotheSBTiforavalidation;and(iii)Afterapproval,havetheSBTipublishyourtargetsandotherrelatedinformationontherelevantwebsites.FinancialSectorScience-BasedTargetsGuidance111Weencouragefinancialinstitutionstostartthisprocessandsubmityourtargetsforvalidationasearlyaspossible.Ifafinancialinstitutionfailstocompletealltheaboveoutlinedstepsbytheendofthe24months,itsnamewillberemovedfromtheSBTiCompaniesTakingActionwebpageandourpartners’websites.TheSBTiwillnotgrantextensionsbeyondthe24months’timelinebecausefinancialinstitutionscansubmittargetsforvalidationandbeaddedtothewebsitewiththestatus“targetsset”independentoftheircommitmentstatus.PleaserefertotheExpiredCommitmentsProtocolformoreinformation.Targetshavetobeinlinewiththecriteriaforfinancialinstitutionsforqualifyingtargetsas“science-based.”TheSBTihasdevelopedasuiteoftoolsandguidancetohelpfinancialinstitutionsunderstandhowtomeetthesecriteria.Step3:SubmittheTargetsforaValidationHowCompanyInformationisTreatedTheSBTisafeguardstheconfidentialityofallinformationprovidedbythefinancialinstitutiontoassessitstargets.Thismeansthatinformationprovidedwillbeusedinaccordancewiththetargetvalidationservicecontractthatfinancialinstitutionsareaskedtosignbeforetargetassessmentscommence.63PaidTargetValidationServiceTheSBTihasimplementedapaidservicefortargetvalidationssince2019.Thisenablestheinitiativetoprovideafastertargetvalidationprocessandadditionalfeedbacktocompanies.AsofFebruary2022,financialinstitutionsarealsorequiredtousethepaidvalidationservice.FindoutmoreabouttheSBTitargetvalidationservicehere.TargetSubmissionFormforFinancialInstitutionsFinancialinstitutionsthatwishtosubmittargetsforvalidationshoulddownloadthelatestTargetSubmissionFormandGuidanceforfinancialinstitutionsandfillitoutasclearly,completely,andaccuratelyaspossible.Itishighlyrecommendedthatfinancialinstitutionsconsultthesubmissionformguidanceavailablewithinthedocumenttocompletetheform,includingtheguidanceontargetlanguageandsummaryofactionstoachievetargets,beforefillingouttheform.Additionaldocumentsshouldbeattachedonlyiftheyaredirectlyrelatedtotheinformationrequested.6463SBTinolongeraccommodatesrequestsforsigningofNon-DisclosureAgreements(NDAs)astheycantakeuptosixmonthstocomplete.Thetargetvalidationcontractshouldbesufficienttoserveconfidentialitypurposes.64Financialinstitutionsshouldreferencethespecificpagenumbers,figures,ortextthatisbeingreferredtoinaccompanyingdocuments.Missing,unclear,orerroneousinformationwillresultinthevalidationprocessbeingdelayed.FinancialSectorScience-BasedTargetsGuidance112Itisthefinancialinstitution’sresponsibilitytoensuretheintegrityoftheinformationprovided.Oncetheformiscompleted,financialinstitutionsshouldsendthesubmissionforminWordformat,togetherwithanysupportingdocumentsinonee-mailtotargets@sciencebasedtargets.org.OncetargetsaresubmittedtotheSBTi,thevalidationteamwillassessthetargetssubmittedinaccordancewiththeSBTiTargetValidationCriteriaandRecommendationsforfinancialinstitutionsdescribedinChapter3ofthisguidance.Step4:AnnouncetheTargetsOncetargetsareapprovedbytheSBTi,thefinancialinstitutionwillreceiveanapprovale-mailwithavalidationreportandacertificate.Atargetpublicationdatewillbechosenandsuggestedtothefinancialinstitution.Ifthefinancialinstitutionwouldliketorequestadifferentpublicationdate,itcancoordinatewiththeSBTicommunicationteamincludedinthedecisione-mail.PleasenotethatfinancialinstitutionsmustpubliclycommunicatetheirtargetssixmonthsfromapprovaldateormusthavetheirtargetsrevalidatedbytheSBTitoensurethetargetsstillmeetrelevantcriteria.A“WelcomePack”willbesenttothefinancialinstitution,whichoutlineshowthetargetscanbeshowcasedorcommunicated,howtheSBTilogomaybeused,andhowtheSBTiapprovalmaybereferenced.Oncetimingisagreed,thefinancialinstitutionwillbelistedashavingan“approvedtarget”onourCompaniesTakingActionwebpageaswellasonourpartners’websitesatWeMeanBusinessandCDP.FinancialinstitutionsthatareengagingintheUNGlobalCompactwillalsoberecognizedonthiswebsite.Step5:TargetDisclosureFollowingapproval,financialinstitutionsshalldisclosetheirscope1and2GHGemissions,progressagainstallapprovedtargetsintherelevantmetric,65andactions/strategiestakenduringtheyeartomeetscope3portfoliotargetsonanannualbasis.Recommendationsforreportingincludeannualreports,sustainabilityreports,yourcompany’swebsite,anddisclosurethroughCDP.65SeeSection6.1onguidancetodiscloseprogressagainsttargets.FinancialSectorScience-BasedTargetsGuidance1139.DiscussionandAreasforFurtherResearchThemethods,criteria,tools,andcasestudiespresentedinthisdocumentprovideaframeworkforguidingfinancialinstitutions’ParisAgreementclimatealignmentactivities.SincepublicationinOctober2020,thisframeworkhasprovidedafoundationfordevelopingandevaluatingfinancialinstitutions’SBTitargetsubmissions.Thesetargetsareintendedtocatalyzebroaderfinancialsectorclimateactionandsupportmeasurableemissionreductionsintherealeconomy.Asavoluntaryinitiative,theSBTiprovidesatransparentplatformforcompaniesandfinancialinstitutionstosettargetswiththeunderstandingthattheseentitieshaveinformationandresourcestoachieveemissionreductionsintheirspecificrealmsofinfluence.Withintheenablingrolethatfinancialinstitutionscanplayinlow-carbontransformation,outstandingquestionsremainregardingtargetdesign,implementationstrategies,policylinkages,andquantificationofemissionsimpacts:●Criteriadescribedinthisdocumentpresentminimumrequirementsfortargetdesignacrossarangeoffinancialinstitutionsandactivities.Beyondminimumrequirements,thereisaneedformoreresearchonthelinksbetweenexistingdesignapproaches,includinggreeninvestment,engagement,anddivestmenttargets.Asfinancialinstitutiontargetsbecomemoreprevalentandtheunderstandingoftargetdesignimproves,theSBTiexpectstoupdateitscriteria.●Inadditiontotargetdesign,thereareopenquestionsontargetimplementationstrategyoptions,trade-offs,andeffectiveness.Ratherthanprescribingparticularimplementationstrategiesandmitigationlevers,theSBTipreservescredibilityandexpandstheevidencebasebyrequiringfinancialinstitutionstoannuallyreportontheirchosenmitigationactivitiesandprogresstowardtargets.●Inadditiontocompany-andinstitution-specificsituations,thetrade-offsandeffectivenessofparticularimplementationstrategiesandmitigationoptionsarealsoinfluencedbypolicylinkages.Policymakersareincreasinglysteeringfinancialinstitutions’climateactivitiesthrougharangeofmandatoryandvoluntaryprograms.However,beyondthevoluntarysupportandreferencingillustratedinJapan,forexample,thelinkbetweeninstitution-levelSBTsandgovernmentclimateprogramsisyettobeclearlydeveloped.66●Finally,abroadareathatwouldbenefitfromfurtherresearchrevolvesarounddataandmethodsforquantifyingtheemissionimpactsoffinancialinstitutions’investmentandlendingportfolios.Impactsarecontingentonassumptionsregardingadditionalityandattributionthatarenotwidelyagreeduponatthispoint(seeCummisetal.2018;Kölbeletal.2019).The2020SBTifinanceframeworkprovidesafoundationforfurtherresearchtobetterunderstandandresolvethesequestions.66Seehttps://www.wri.org/blog/2019/06/japan-leading-business-climate-engagement-will-ambitious-policies-followformoreinformationaboutJapan’sgovernment-supportedSBTprograms.FinancialSectorScience-BasedTargetsGuidance114Followingthelaunchoftheframework,theSBTifinancesectorteamconductedavirtualroadshowtopresenttheresourcestofinancialinstitutions,relatedpeerinitiatives,andotherstakeholders.TheSBTiFinanceteamalsotrainedtheSBTiTargetValidationTeam(TVT)onthecriteria,tool,andrelatedresourcesforFItargetvalidation.From2021,theSBTielaboratedontheframeworkwithaPhaseIIprojectfocusedonnet-zerotargetsforfinancialinstitutions,resourcesforadditionalassetclassesandactivities(perhapsincludingunderwritingandsovereigndebt),arevisedmultimethodtool,andupdatestothecriteriaandreportingguidancerelatedtotheresearchquestionsdescribedabove.TheSBTinet-zeroframeworkforfinancialinstitutionsisintendedtocomplementtheSBTinet-zeroframeworkforcompaniesandincludeadefinitionofnet-zeroforfinancialinstitutions,principlesforvalidatingnet-zerotargets,casestudies,andguidanceonhowSBTscanbeusedasmilestonestoreachnet-zero.Acentralconsiderationforfinancialinstitutions’net-zerotargetsisthetreatmentofmitigationoptionsincludingdecarbonization,carbondioxideremovals,andoffsettingwithcarboncredits.Throughclearandrobustnet-zerotargets,financialinstitutionscanprovideproofofconceptforbroadercreditandoffsettingmechanismsdescribedinArticle6oftheParisAgreement.67Long-termclimatestabilizationatthewell-below2°CleveloftheParisAgreementmayrequirethedevelopmentofanewfinancialsystemcenteredoncarbonpricingandtradablepermits.Whileincreasinginstability,mostrecentlyrelatedtotheglobalCOVIDpandemic,isacceleratingafocusonESGissuesamongfinancialinstitutions,newsystemstaketimetoestablish.Inthenearterm,theresourcesdescribedinthisguidancedocumentareintendedtoaugmenttheenablingroleoffinancialinstitutionstomoreeffectivelyconnectclimateinsightsandcapital.67Seehttps://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_english_.pdfforfulltextoftheParisAgreement,includingArticle6.FinancialSectorScience-BasedTargetsGuidance115AppendicesThisdocumentincludessixappendicesdescribingapplicationoftheSDAformortgages,realestate,electricitygenerationprojectfinance,corporateinstruments,andtheTemperatureRatingmethod.ThefinalappendixprovidesinstructionsforusingthetooltoapplytheTemperatureRatingandSBTPortfolioCoveragemethod(thefullmethoddescriptionisincludedinSection5.4.2).A.SDAforResidentialMortgagePreparedbytechnicalpartneroftheSBTifinancialsectorproject,Guidehouse,Inc.GielLinthorst:giel.linthorst@guidehouse.comAngélicaAfanador:angelica.afanador@guidehouse.comguidehouse.comMarch2021SummaryTableA1.SummaryoftheSectoralDecarbonizationApproachforResidentialMortgageCategoryFrameworkScopeTargetaudienceThetargetaudienceforthistargetsettingframeworkarefinancialinstitutionswithportfoliosofresidentialmortgages.AssetclassResidentialmortgageSectorsTargetsaresetatportfolioemissionsforresidentialbuildings.Foratargettoqualify,ithastobesetforaminimumshareofthemortgageportfolioemissions,asdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.MechanicsInputs–dataAnnualemissionsdatacanbesourcedandestimatedfromdisclosureofbuildings’energy-relatedemissionsorenergyperformance;orpublicdatabaseonbuildings’emissionsorenergyperformance,includingtheenergyconsumptionsofthehousehold.Whenusingbuildings’energyperformancedata,emissionsfactorsarerequiredtoconvertenergyuse(i.e.,forheatandelectricity)intoemissions.FinancialSectorScience-BasedTargetsGuidance116Inputs–pathwaysScience-basedtargetsarebasedonaglobalsectoraldecarbonizationpathwayinlinewithkeepingglobalwarmingwell-below2°C.Targetssetusingregionalpathwayswillbeassessedagainstglobalpathways.Targetssetusingregionalpathwayscanbeacceptediftheyareequallyormoreambitiousthantargetssetusingglobalpathways.AttributionapproachWhencalculatingfinancedemissions,abuilding’sannualemissionsareattributedtothemortgageproviderusingaloan-to-valueapproach.Thus,theattributionisequaltotheratiooftheoutstandingamountatthetimeofGHGaccountingtothepropertyvalueatloanorigination.aOutputsTheoutputwillbeanemissionintensity(perfloorarea)targetatthemortgageportfoliolevel.Example:FinancialInstitutionAcommitstoreduceitsmortgageportfolioGHGemissionswith___%perm2by2030froma2017baseyear.PortfolioweightingTargetsarenotweightedwithinportfolioswithtargetsonotherassetclasses.Note:aPCAF2020.Source:Guidehouse2020.ScopeThismethodologycoversscience-basedtargetsfortheportfoliosoffinancialinstitutionsconsistingofmortgages.Amortgageisdefinedasanylendingagreementtopurchasingabuildinginexchangeforaregularrepaymentatinterest,whichthelenderisentitledtowiththeconditionthattheloanbecomesvoiduponthepaymentofthedebt.Asmortgagesaremainlyappliedforthepurchaseofaresidentialbuilding,thescopeofthemethodologyisonresidentialbuildings,definedasbuildingsforasingle-familyormultifamilythatareusedprimarilyforhumandwelling(i.e.,apartmentsandhouses)(IEA2013).Thismethodologypresentsasector-basedapproachtosetascience-basedtargetforthescope3,category15(investment)emissionsforfinancialinstitutions.Whenaccountingforthefinancedemissionsofamortgageportfolio,theseemissionsarebasedontheenergy-relatedemissionsoftheresidentialbuilding(includingtheenergyconsumptionofthehousehold),whichcoverthefollowing:•Directemissionsfromon-sitefuelcombustionforspaceheating,waterheating,cooking,etc.;andFinancialSectorScience-BasedTargetsGuidance117•Indirectemissionsfrompurchasedenergy(electricity,steam,heat,andcooling)forspaceheating,waterheating,spacecooling,lighting,cooking,appliances,andmiscellaneousequipment(i.e.,includingtheenergyuseofthehousehold).Theembodiedemissionsofthebuildings’materialsarenotcurrentlyincludedduetohighdatauncertainty.Itisrecognized,though,thatasnewresidentialbuildingsbecomemoreenergyefficient,theseemissionscouldbecomeasizableportionofbuildings’life-cycleemissions(e.g.,emissionsfrommaterialsandconstructioncouldrangefrom35to51percentdependingonthebuildingtype)(RICS2017).Whenrobustapproachesanddatatomeasurebuildings’embodiedemissionsaredeveloped,thetargetsettingformortgageportfolioscouldexpanditscoveragetoincludethem.Forsettingtargetsonamortgageportfolio,theScienceBasedTargetsinitiativeendorsestheSectoralDecarbonizationApproach(SDA).TheSDAwasdevelopedbyCDP,WRI,andWWFtogetherwithtechnicalpartnerGuidehouse.IntheSDA,emissionsreductiontargetsareassessedbasedonsectoralemissionsreductionpathways,usingtheabsoluteemissionsandactivitydataprojectionfromInternationalEnergyAgency’s(IEA)EnergyTechnologyPerspectives(ETP).TheinitialSDApublicationdoesnotincludeemissionsreductionpathwaysfortheresidentialbuildings,butthismethodextendsSDA’ssectorcoveragebyusingIEA’smodeleddataforresidentialbuildings(SBTi2015).MechanicsDatainputThefirststepofthescience-basedtargetsettingprocessisdefiningthebaselineemissionsoftheresidentialmortgageportfolioforwhichatargetwillbeset.ThePartnershipforCarbonAccountingFinancials(PCAF)providesGHGaccountingmethodologiesforvariousassetclasses,includingresidentialmortgages.Whendisclosureofbuildings’energy-relatedemissionsisnotavailable,emissionsshouldbecalculatedbasedon(average)asset-levelenergyuseandemissionfactors(PCAF2020).Inprinciple,settingscience-basedtargetsforresidentialmortgageportfoliosrequiresthefollowingdatapoints:•Datatoestimatebuildings’directenergy-relatedemissions(i.e.,energyperformancecertificatesorlabeling,oraverage/estimatedbuildingenergyconsumptionlinkedtoon-sitefuelcombustion);•Datatoestimatebuildings’indirectenergy-relatedemissions,includingemissions-relatedenergyconsumptionsofthehousehold(i.e.,energyperformancecertificatesorlabeling,oraverage/estimatedbuildingenergyconsumptionlinkedtopurchasedelectricity,steam,heat,andcooling);•Floorarea68ofcurrentproperties;and68FloorareaherereferstothetotalbuildingareaasdefinedinIEA’sEnergyTechnologyPerspectives2017(IEA2017).Financialinstitutionscouldpossiblyapplyadifferentdefinitionoffloorareaaslongasitisconsistentwiththescenariosusedtoderivethedecarbonizationpathway(s).FinancialSectorScience-BasedTargetsGuidance118•Portfoliogrowthrateintargetyear(optional).Therearetwoapproachestosourcingdatatoestablishthebaseline:•Directdisclosureofbuildings’energyperformance.Annualenergyuseofbuildingscanbesourcedfromactualenergyconsumptioncollectedfrommortgageclientswhenfinancialinstitutionshaveimplementedsuchdatacollectionsystems.69Alternatively,annualenergyusecanbeestimatedbasedonenergyperformancecertificatesorlabeling,whichmandatorydisclosureisinplaceinsomecountries.Floorareadatacouldalsobefoundaspartofthelegaldocumentsandpropertyregistrations.•Publicdatabaseonaveragebuildings’energyperformance.Therearealsosomesourcesavailabletoestimatetheenergyconsumptioninthecaseoflimiteddataavailability.AveragebuildingenergyefficiencyintheregionisavailableinpubliclyavailabledatabasessuchastheIEADataandStatistics,EUBuildingsDatabase,whichcoversserviceandresidentialbuildingsinEurope;ortheEIAResidentialEnergyConsumptionSurvey2015,whichcoversresidentialbuildingsintheUnitedStates.Itisimportanttonotethatusingregionalaveragesrequiresfewerresourcesoncollectingdatabutdoesnotreflectportfolio-specificperformancenorimprovementovertime.Measuringfinancedemissionsofthemortgageportfoliotosetthebaselineshouldrelyonasset-leveldataasmuchaspossible,fillinginanydatagapswithregionalproxies.Whiledataavailabilityvariesacrossregions,financialinstitutionscanassessthespecificityandaccuracyoftheavailabledatausingadatahierarchy(see,forexample,FigureA1)andexplorewaystoimprovedataqualityovertime.Forexample,onemayfocusonmovingfromsectoraveragedatatobuildingspecificenergy-usedatabyrefiningthemortgageapplicationprocessincountrieswiththemostmortgageexposure.AnysignificantchangestotheportfolioemissionsshouldresultinrecalculationofthetargetbaselineasdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.FigureA1.GenericDataQualityScorecardforPortfolioEmissions7069Somefinancialinstitutionsarealreadyusingdataanalyticstomeasureemissionsoftheirclients.Seeexamplehere.70Foraresidentialmortgagespecificscorecard,refertothePCAF’sGlobalGHGAccountingandReportingStandard(PCAF,2020)FinancialSectorScience-BasedTargetsGuidance119Sources:PCAF2019b,2019c,andPCAF2020.Totranslatetheemissionsintensitytargetsintoanabsolutetarget,financialinstitutionshavetoprojecttheannualpercentageoftheactivitygrowthoftheirportfolio(CompoundAnnualGrowthRate[CAGR])towardthetargetyear(i.e.,preferablymeasuredinm2,kWh,tonneofproducts).Financialinstitutionscanprojectthisinthreeways:1.Byusingtheactivitygrowthprojectionintheclimatescenario(defaultgrowthprojection).Forinstance,forresidentialbuildings,thisis2.16percentannuallyinm2grossfloorareafrom2020toward2030(seeTableA2andTableA3.);2.Byusingthegrowthoftheirportfoliooverthepast5–10years;and3.Byusingthegrowthprojectionsofthespecificbusinessdepartmentsandextrapolatingthistowardthetargetyears,ifthisgrowthprojectionistooshortterm.DecarbonizationpathwayByapplyingtheSDA,thefinalemissionstargets(expressedinemissionsintensityperm2orinabsoluteemissionsforthemortgageportfolio)shallbeconsistentwithkeepingglobalwarmingwell-below2°C.TheapplicationoftheSDAusestheIEAETP2017Beyond2°CScenario(B2DS).TheIEAmodelsthebuildingsectorintosubsectors(residentialandservicesbuildings)basedonsectoralgrowthandtechnologydevelopmenttrajectory.TheemissionsandfloorareaprojectionsfromtheB2DSwillserveasthebasistoderivetherelevanttargetsformortgageportfolios.FigureA2illustratestheB2DSemissionsintensitypathwaysforresidentialbuildings.Currently,thereisno1.5°Cscenarioavailablethatisspecificfortheresidentialbuilding.IftheIEAoranotherscientificbodypublishesa1.5°Cscenarioforthissector,theScienceBasedTargetsinitiativewillconsiderincorporatingitinthefuture.FinancialSectorScience-BasedTargetsGuidance120Theemissionstrajectoryofamortgageportfolioshallcontinuouslydeclinefromthebaseyeartowardthetargetlevel,eveniftheemissionsarebelowthepathwaybenchmark.Thecalculationmethodfortheintensitypathwaywillbefurtherexplainedintheinstructionsforimplementationbelow.NotethatIEAonlyprovidespathwaysinafive-yearinterval;thus,afinancialinstitutionmayderivethepathwaydatathroughinterpolationifthetargetyearfallsinbetweenthesefive-yearintervals.AlsoseeTableA1andTableA2forthedataoftheglobalB2DSpathways.Inaddition,buildingemissionsoftenvaryacrossregionsduetodifferencesinemissionstrajectory,climaticzone,existingbuildingperformanceandstock,urbanplanninganddevelopment,etc.Therefore,financialinstitutionsmayuseregionalemissionpathwaystoassesstheirtargets.Targetsmodeledusingregionalemissionpathwayswillbeassessedagainstglobalpathways.FigureA2.GlobalDecarbonizationPathwayforResidentialBuildingsSource:IEA2017.AttributionapproachThismethodproposestoattributethebuilding’sannualemissionstothemortgageproviderusingaloan-to-valueapproach.Thus,theattributionisequaltotheratiooftheoutstandingamountatthetimeofGHGaccountingtothepropertyvalueatloanorigination..Usingafixedpropertyvalueatloanoriginationavoidschangesinattributedemissionsperformancesduetofluctuatingpropertyvalues.ThisapproachisconsistentwiththeGHGaccountingmethodformortgagesdevelopedbythePartnershipforCarbonAccountingFinancials(PCAF2020).Toalignwithadecarbonizationpathway,thismethodologyrequiresusingthethesameattributiontogrossfloorareaofthebuildingsinthemortgageportfoliotoderivetheemissionsintensitymetric(e.g.,tCO2/m2).Outputs05101520253020152020202520302035204020452050GHGIntensity(kgCO2/m2)B2DSResidentialbuildingsFinancialSectorScience-BasedTargetsGuidance121Theoutputwillbeanemissionintensitytarget(perm2floorarea)atthemortgageportfoliolevel.Financialinstitutionscandecidetotranslatethisemissionsintensitytargetperm2floorareaintoanabsolutetargetbytakingthegrowthprojectioninm2floorareaoftheirmortgageportfoliotowardthetargetyearintoaccount.Asampletargetoutputcouldbe,FinancialInstitutionAcommitstoreduceitsmortgageportfolioGHGemissionswith___%perm2by2030froma2017baseyear.PortfolioweightingTargetsarenotweightedwithintheportfoliowithtargetsonotherassetclasses.InstructionsforImplementationCalculatingthebaseyearabsoluteemissionsThefirststepistocalculatetheGHGemissionsintensityofthemortgageportfoliointhebaseyear.Specifically,thisinvolvesthefollowingsteps:1.Collectingorestimatingtheannualenergyconsumptionofresidentialbuildings,includingtheenergyconsumptionofthehouseholdinthemortgageportfolioforwhichthefinancialinstitutionseekstosetatarget.2.Calculatingthebaseyearscope1and2emissionsperresidentialbuildingsusingfuel-andenergy-specificemissionsfactors,suchasthoseprovidedbytheIEAornationalenergyagencies.3.Attributingtheannualscope1and2emissionsperbuildingbasedontheratiobetweentheoutstandingamountversusthetotalpropertyvalueattimeoforigination;and4.Summingupallattributedscope1and2emissionsperbuildingtoderivethetotalannualscope1and2emissionsofbuildingsinthemortgageportfolio.Baseyearabsoluteemissionsshouldbeassessedatafixedpointintimeinlinewiththefinancialreportingcycle.CalculatingthebaseyearemissionsintensityTranslatingtheabsoluteemissionsinthebaseyearintoanemissionsintensityatportfoliolevelinvolvesthefollowingsteps:1.Collectingthegrossfloorareaofresidentialbuildings(inm2)forwhichthefinancialinstitutionseekstosetatarget2.Attributingthegrossfloorareaperbuilding(inm2)basedontheratiobetweentheoutstandingamountversusthetotalpropertyvalueattimeoforigination;3.Summinguptheattributedgrossfloorareaperbuildingtoderivetotalgrossfloorareaatportfoliolevel;andFinancialSectorScience-BasedTargetsGuidance1224.Dividingthetotalannualscope1and2emissionsofbuildingsinthemortgageportfoliobythetotalgrossfloorareaatportfoliolevel.Definingthescience-basedtargetScience-basedtargetsonmortgagesshallbesetattheportfoliolevel,inalignmentwiththeglobaldecarbonizationpathwayforresidentialbuildings.BasedontheSDAapproach,thecurrentemissionsintensityofamortgageportfolioshallconvergetothesamelevelasthesectoraldecarbonizationpathwayby2050.Theemissionintensitytargetisdefinedasadecreaseinemissionsperfloorarea(tCO2/m2).Theminimumlevelofemissionintensitydecreaseisderivedfromtheglobaldecarbonizationpathwayfortheresidentialbuildings.Atarget-settingtoolisavailableforthepurposeofmodelingSDAmortgagetargets.Thetoolpresentstwooptionsforprojectingtargetyearoutputinsquaremeter:-Fixedmarketshare,whichassumesthattheportfoliogrowsatthesamerateasthesector.ThisoptionissuitableforFIswhohavedifficultiesprojectingtheirportfoliogrowth.-Targetyearoutput.ThisoptionenablesFIstoinputtheirownprojectedoutputinthetargetyearinsquaremeter.Specifically,thefollowingformulaisusedtocalculatetheemissionintensitytargetforamortgageportfoliowhen1)theFIselectedthe“Fixedmarketshare”optionor2)theFIselectsthe“Targetyearoutput”optionandtheprojectedgrowthofthemortgageportfolio(measuredingrowthoffloorarea)towardsthetargetyearislowerorequaltothesectoralgrowthaspredictedbytheIEA:Where:•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperfloorarea,•𝑖thesubsectorforbuildings(i.e.residentialorservice),•𝑏thebaseyear,and•𝑡thetargetyear.ForportfoliosgrowingataratelowerthanthesectorgrowthaspredictedbytheIEA,themarketsharefactorincludedintheoriginalSDAformulapublishedintheoriginalNatureClimateChangePublication(Krabbeetal.2015)isremovedtopreventresultsthatwouldleadtoincreaseinemissionsintensityintheaccompanyingtargetsettingtool.WhentheFIselectsthe“Targetyearoutput”optionandprojectsagrowth(measuredingrowthoffloorarea)that’shigherthanthesectoralgrowth,thefollowingformulaapplies.ThisformulaisthesameastheoriginalSDAformulapublishedinNatureClimateChange(Krabbeetal.2015):𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑟𝑒𝑎𝑙𝑒𝑠𝑡𝑎𝑡𝑒=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖−𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖−𝑆𝐼2050,𝑖)+𝑆𝐼2050,𝑖FinancialSectorScience-BasedTargetsGuidance123𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑟𝑒𝑎𝑙𝑒𝑠𝑡𝑎𝑡𝑒=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖−𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖−𝑆𝐼2050,𝑖)×𝑃𝐴𝑏,𝑖/𝑆𝐴𝑏,𝑖(𝑃𝐴𝑡,𝑖/𝑆𝐴𝑡,𝑖)+𝑆𝐼2050,𝑖Where•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperfloorarea,•𝑆𝐴and𝑃𝐴thesectoralandportfoliototalfloorarea,•𝑖thesubsectorforbuildings(i.e.residentialorservice),•𝑏thebaseyear,and•𝑡thetargetyear.Portfoliosgrowingataratehigherthanthesectorratearesubjecttoastricterintensityreductionpathwaytodiscountthegrowthinmarketshare.Thisapproachallowsfinancialinstitutionstoconvergetheiremissionsintensityforthemortgageportfoliotothesectoralpathwayin2050,takingintoaccountitsbaseyearperformancerelativetosectorintensityin2050,andthedecarbonizationlevelofthesectorinthetargetyear.71BoxA1belowshowsanexamplecalculationofanintensitytargetforamortgageportfoliobasedonthisformula.BoxA1.ExampleonSettinganIntensityTargetforaMortgagePortfolio71SeetheSDAmethodologypaperformoredetails(SBTI2015).FinancialSectorScience-BasedTargetsGuidance124Note:CAGR=CompoundAnnualGrowthRate.Source:Guidehouse2020.IEAETP2017B2DSpathways–mortgageTableA2andTableA3showtheglobalfloorareaprojectionsandemissionsintensitiespathwayforresidentialbuildingsbasedontheIEAETP2017data.TableA2.EmissionIntensity(kgCO2/m2)RegionSubsector2016a202520302035204020452050WORLDResidentialbuildings26.3016.9211.717.694.602.260.81Source:IEAETP2017.TableA3.GrossFloorAreaAssumeafinancialinstitutionhasaglobalmortgageportfolioofresidentialbuildings.Basedonannualenergyconsumption,buildingcertificatesandotherdatathescope1+2emissionsofthesebuildingsareassessed.Theemissionintensityoftheportfoliois37kgCO2/m2forthetotalfloorareaof0.95millionm2in2017.Theprojectedportfoliogrowthratetoward2030is2%annually(CAGR),whichislowerthanthesectoralgrowthrate.BasedontheIEAETPB2DS,theglobaldecarbonizationpathwayforresidentialbuildingshasapproximately:•25kgCO2/m2at193,862millionm22017•12kgCO2/m2at257,077millionm22030•0.81kgCO2/m2at339,220millionm22050Tosetanintensitytargetfor2030convergingtothe2050sectoralemissionslevel:Intensitytarget=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖–𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖–𝑆𝐼2050,𝑖)+𝑆𝐼2050,𝑖=(37−0.81)×(12–0.81)(25–0.81)+0.81=17.55kgCO2/m2Sincethisportfoliostartedwithanemissionintensityhigherthanthesectorlevelin2017,thisapproachallowstheportfoliotostayatanintensityhigherthanthesectoralpathwaytoreduceitsemissionsatafasterpace,convergingtothesectorallevelby2050.Takingtheannualgrowthprojectionsof2percenttoward2030,themortgageportfoliowillcorrespondtoatotalfloorareaof1.2millionm2in2030.Theemissionsintensitytargetscanbetranslatedintoanabsoluteemissionstargetof21.6ktonCO2in2030.FinancialSectorScience-BasedTargetsGuidance125(Million,m2)RegionSubsector2016a202520302035204020452050WORLDResidentialbuildings189,288230,454257,077275,529295,306316,502339,220Note:a.The2016datapointsareestimatedbasedonthe2014and2025datapointsprovidedbyIEA,assuminglinearinterpolationbetweentheyears.Source:IEAETP2017.B.SDAforCommercialRealEstatePreparedbytechnicalpartneroftheSBTifinancialsectorproject,Guidehouse,Inc.GielLinthorst:giel.linthorst@guidehouse.comAngélicaAfanador:angelica.afanador@guidehouse.comguidehouse.comMarch2021SummaryTableB1.SummaryoftheSectoralCarbonizationApproachforCommercialRealEstateCategoryFrameworkScopeTargetaudienceThetargetaudienceforthistargetsettingframeworkarefinancialinstitutionswithportfoliosofrealestateinvestment.AssetclassRealestateloansandinvestments(includingREITs).SectorsTargetsaresetatportfolioemissionsforserviceandresidentialbuildings.Foratargettoqualify,ithastobesetforaminimumshareoftherealestateportfolioemissions,asdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.MechanicsInputs–dataAnnualemissionsdatacanbesourcedandestimatedfromdirectdisclosureofbuildings’energy-relatedemissionsorenergyperformance;orpublicdatabaseonbuildingsemissions,energyperformanceandenergyconsumptionoftenants.Whenusingbuildings’andtenants’energyperformancedata,emissionsfactorsarerequiredtoconvertenergy(i.e.,forheatandelectricity)useintoemissions.FinancialSectorScience-BasedTargetsGuidance126Inputs–pathwaysScience-basedtargetsarebasedonaglobalsectoraldecarbonizationpathwayinlinewithkeepingglobalwarmingwell-below2°C.Targetssetusingregionalpathwayswillbeassessedagainstglobalpathways.Targetssetusingregionalpathwayscanbeacceptediftheyareequallyormoreambitiousthantargetssetusingglobalpathways.AttributionapproachEmissionsassociatedwithrealestateloansandinvestmentsshouldbeattributedproportionallytothefinancialinstitutionsbasedontheratiobetweentheoutstandingamountversusthetotalpropertyvalueattimeoforigination.aWhenCREisfullyfinancedbyanassetowner,100%ofthebuilding’semissionsareattributedtotheassetowner.WhenCREisjointlyfinancedbyagroupofassetowners,theattributionisbasedontheshareinvestedbyeachassetowner.aOutputsTheoutputwillbeanemissionintensitytarget(pergrossfloorarea)attheportfoliolevel.Example:FinancialInstitutionAcommitstoreduceitsrealestateportfolioGHGemissionsintensitywith___%perm2by2030froma2017baseyear.PortfolioweightingTargetsarenotweightedwithinportfolioswithtargetsonotherassetclasses.Note:aPCAF2020.Source:Guidehouse2020.ScopeThismethodologycoversscience-basedtargetsfortheportfoliosoffinancialinstitutionsconsistingofrealestateloansandinvestments.Realestateloansandinvestmentsaredefinedastheallocationofcapitaltofinancethepurchaseofapropertywithacommercialpurpose,includingrealestateinvestmenttrust(REIT),etc.Bothresidentialandservicebuildingsunderrealestateloansandinvestmentsareincludedinthismethodology.Residentialbuildingsrefertoprivatedwellingssuchasapartmentsandhouses,whereasservicebuildingsincludepropertiesrelatedtotrade,finance,retail,publicadministration,health,foodandlodging,education,andcommercialservices(IEA2013).Thismethodologypresentsasector-basedapproachtosetascience-basedtargetforscope3,category15(investment)emissionsforfinancialinstitutions.Whenaccountingforthefinancedemissionsofrealestateloanandinvestmentportfolio,theseemissionsarebasedontheenergy-relatedemissionsofthebuildings,andtheenergyconsumptionsofthetenants(oftenaccountedunderscope3):FinancialSectorScience-BasedTargetsGuidance127•Directemissionsfromon-sitefuelcombustionforspaceheating,waterheating,cookingpurposesinthefullbuilding;and•Indirectemissionsfrompurchasedenergy(electricity,steam,heat,andcooling)forspaceheating,waterheating,spacecooling,lighting,cooking,appliances,andmiscellaneousequipment.Theseindirectemissionsincludeenergyusebytenants.Theembodiedemissionsofthebuildings’materialsarenotcurrentlyincludedduetohighdatauncertainty.Therefore,thismethodisnotapplicabletoconstructionorrehabilitationofproperties.Itisrecognized,though,thatasnewbuildingsbecomemoreenergyefficient,theseemissionscouldbecomeasizableportionofbuildings’life-cycleemissions(e.g.,emissionsfrommaterialsandconstructioncouldrangefrom35to51percentdependingonthebuildingtype)(RICS2017).Whenrobustapproachesanddatatomeasurebuildings’embodiedemissionsaredeveloped,thetargetsettingforrealestatecouldexpanditscoveragetoincludetheseemissions.Forsettingtargetsonacommercialrealestateportfolio,theScienceBasedTargetsinitiativeendorsestheSectoralDecarbonizationApproach(SDA).TheSDAwasdevelopedbyCDP,WRI,andWWF,togetherwithtechnicalpartnerGuidehouse.IntheSDA,emissionsreductiontargetsareassessedbasedonsectoralemissionsreductionpathways,usingtheabsoluteemissionsandactivitydataprojectionfromInternationalEnergyAgency’s(IEA)EnergyTechnologyPerspectives(ETP).MechanicsDatainputThefirststepofthescience-basedtargetsettingprocessisdefiningthebaseyearemissionsintensity(kgCO2/m2)ofthecommercialrealestateportfolioforwhichatargetwillbeset.A2020reportbythePartnershipforCarbonAccountingFinancials(PCAF)detailedthecarbonaccountingmethodologyforvariousassetclasses,includingcommercialrealestate.Whendirectdisclosureofbuildings’energy-relatedemissionsandtenants’energy-relatedemissionsarenotavailable,emissionsshouldbecalculatedbasedon(average)asset-levelandaveragetenantsenergyuseandemissionfactors(PCAF2020).Inprinciple,settingscience-basedtargetsforrealestateportfoliosrequiresthefollowingdatapoints:•Datatoestimatebuildings’directenergy-relatedemissions(i.e.,energyperformancecertificatesorlabeling,oraverage/estimatedbuildingenergyconsumptionlinkedtoon-sitefuelcombustion);•Datatoestimatebuildings’indirectenergy-relatedemissions(i.e.,energyperformancecertificatesorlabeling,oraverage/estimatedenergyconsumptionlinkedtopurchasedelectricity,steam,heatandcooling,includingtheenergyconsumptionofthetenants);•Outstandingloanorinvestmentamountofproperties;•Propertyvaluesatthetimeofinvestment;FinancialSectorScience-BasedTargetsGuidance128•Buildingtype(i.e.,residentialorservice);•Floorarea72ofcurrentproperties;and•Portfoliogrowthrateintargetyear(optional).Whenthereisnodisclosureofbuilding’senergy-relatedemissionsby,forinstance,thetenantorpropertymanager,therearetwoapproachestoestimatetheseemissionsforestablishingthebaseline:•Basedonbuildings’energyperformance(asset-leveldata).Annualenergyconsumptionofbuildingsandtenantscanbesourcedfromenergybillscollectedfromtenantswhenfinancialinstitutionshaveimplementedsuchdatacollectionsystems.Alternatively,annualenergyconsumptioncanbeestimatedbasedonenergyperformancecertificatesorlabeling,amandatorydisclosurethatisinplaceinsomecountries.Floorareadatacanbefoundaspartofthelegaldocumentandpropertyregistrationoftherealestate.•Publicdatabaseonaveragebuildings’energyperformance.Therearealsosomesourcesavailabletoestimatetheenergyconsumptioninthecaseoflimiteddataavailability.Averagebuildingenergyefficiencyintheregionisavailableinpubliclyavailabledatabasessuchas(i)theGlobalServicesRealEstateSustainabilityBenchmark(GRESB)(globalservicebuildings,butsubscriptionisrequired),(ii)EUBuildingsDatabase(serviceandresidentialbuildingsinEurope),(iii)EIAResidentialEnergyConsumptionSurvey2015(residentialbuildingsintheUnitedStates),and(iv)EIACommercialBuildingsEnergyConsumptionSurvey2012(servicebuildingsintheUnitedStates).Usingregionalaveragesrequiresfewerresourcesoncollectingdatabutdoesnotreflectperformancespecifictotheportfoliosnorimprovementovertime.Measuringfinancedemissionsofthecommercialrealestateportfoliotosetthebaselineshouldrelyonasset-leveldataasmuchaspossible,fillinginanydatagapswithregionalproxies.Whiledataavailabilityvariesacrossregions,financialinstitutionscanassessthespecificityandaccuracyofavailabledatausingadatahierarchy(see,forexample,FigureB1)andexplorewaystoimprovedataqualityovertime.Forexample,onemayfocusonmovingfromsectoraveragedatatobuilding-specificenergy-usedatabyrefiningtheduediligenceorloanapplicationprocessincountrieswiththemostrealestateexposure.AnysignificantchangestotheportfolioemissionsshouldresultinrecalculationofthetargetbaselineasdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.72Floorareaherereferstothetotalbuildingarea(grossfloorarea)asdefinedinIEA’sEnergyTechnologyPerspectives2017(IEA2017).Financialinstitutionscouldpossiblyapplyadifferentdefinitionoffloorareaaslongasitisconsistentwiththescenariosusedtoderivethedecarbonizationpathway(s).FinancialSectorScience-BasedTargetsGuidance129FigureB1.GenericDataQualityScorecardforPortfolioEmissions73Sources:PCAF2019b,2019c,andPCAF2020.Totranslatetheemissionintensitytargetsintoanabsolutetarget,financialinstitutionshavetoprojecttheannualpercentageoftheactivitygrowthoftheirportfolio(CompoundAnnualGrowthRate[CAGR])towardthetargetyear(i.e.,preferablymeasuredinm2,kWh,tonneofproducts).Financialinstitutionscanprojectthisinthreeways:1.Byusingtheactivitygrowthprojectionintheclimatescenario(defaultgrowthprojection).Forinstance,forresidentialbuildings,thisis2.16percentannuallyinm2grossfloorareafrom2020toward2030,andforservicebuildingsthisis2.15percentannuallyinm2grossfloorareafrom2020toward2030(seeTableB2andTableB3);2.Byusingthegrowthoftheirportfoliooverthepast5–10years;and3.Byusingthegrowthprojectionsofthespecificbusinessdepartmentsandextrapolatingthistowardthetargetyears,ifthisgrowthprojectionistooshortterm.DecarbonizationpathwayByapplyingtheSDA,thefinalemissiontargets(expressedinemissionsintensityperm2orinabsoluteemissionsfortherealestateportfolio)havetobeconsistentwithkeepingglobalwarmingwell-below2°C.TheapplicationoftheSDAusestheIEAETP2017Beyond2°CScenario(B2DS).TheIEAmodelsthebuildingsectorintosubsectors(residentialandservicesbuildings)basedonsectoralgrowthandtechnologydevelopmenttrajectory.TheemissionsandfloorareaprojectionsfromtheB2DSwillserveasthebasistoderivetherelevanttargetsforrealestate.FigureB2illustratestheB2DSemissionsintensitypathwaysforresidentialandservicebuildings.73Foracommercialrealestatespecificscorecard,refertothePCAF’sGlobalGHGAccountingandReportingStandard(PCAF,2020)FinancialSectorScience-BasedTargetsGuidance130Currently,thereisno1.5°Cscenarioavailable,specificforresidentialbuildings.IftheIEAoranotherscientificbodypublishesa1.5°Cscenarioforthissector,theScienceBasedTargetsinitiativewillconsiderincorporatingitinthefuture.Theemissionstrajectoryofacommercialrealestateportfolioshallcontinuouslydeclinefromthebaseyeartowardthetargetlevel,eveniftheemissionsarebelowthepathwaybenchmark.Thecalculationmethodforportfolioemissionintensitypathwaywillbefurtherexplainedintheinstructionsforimplementationbelow.NotethatIEAonlyprovidesthedataofETPpathwaysinafive-yearinterval;thus,financialinstitutionsmayderivethepathwaydatathroughinterpolationifthetargetyearfallsinbetweenthesefive-yearintervals.AlsoseeTableB2andTableB3forthedataoftheglobalETPB2DSpathways.Inaddition,buildingemissionsoftenvaryacrossregionsduetodifferencesinemissionstrajectory,climaticzone,existingbuildingperformanceandstock,urbanplanninganddevelopment,etc.Therefore,financialinstitutionsmayuseregionalemissionpathwaystoassesstheirtargets.Targetsmodeledusingregionalemissionpathwayswillbeassessedagainstglobalpathways.FigureB2.GlobalDecarbonizationPathwayforBuildingsNote:B2DS=Beyond2°CScenario.Source:IEA2017.AttributionapproachThismethodologyattributesemissionsassociatedwithcommercialrealestateloanandinvestmentsproportionallybasedontheratiobetweentheoutstandingloanorinvestmentamountversusthetotalpropertyvalueatthetimeofloanorinvestmentorigination.Whenthecommercialrealestateinvestmentisfullyfinancedbyanassetowner,100%ofthebuilding’semissionsareattributedtotheassetowner.Whentheinvestmentisjointlyfinancedbyagroupofassetowners,theattributionisbasedontheshareinvestedbyeachassetowner.ThisapproachisconsistentwiththeGHGaccountingmethodforrealestate0102030405060708020152020202520302035204020452050GHGIntensity(kgCO2/m2)B2DSServicebuildingsB2DSResidentialbuildingsFinancialSectorScience-BasedTargetsGuidance131developedbythePartnershipforCarbonAccountingFinancials(PCAF2019b,2019c,andPCAF2020).ToalignwiththeIEAdecarbonizationpathwayforthebuildingsector,thismethodologyrequiresusingthesameattributiontothegrossfloorareaofthebuildingsintherealestateportfolioinordertoderivetheemissionsintensity(e.g.,tCO2/m2).OutputsTheoutputwillbeanemissionsintensitytarget(perm2floorarea)atthecommercialrealestateportfoliolevel,splitbetweenresidentialandservicebuildingsifrelevanttothefinancialinstitutions.Financialinstitutionscandecidetotranslatethisemissionsintensitytargetperm2floorareaintoanabsolutetargetbytakingintoaccountthegrowthprojectioninm2floorareaoftheirrealestateportfoliotowardthetargetyear.Asampletargetoutputcouldbe,FinancialInstitutionAcommitstoreduceitsrealestateportfolioGHGemissionswith___%perm2by2030froma2017baseyear.PortfolioWeightingTargetsarenotweightedwithintheportfoliowithtargetsonotherassetclasses.InstructionsforImplementationCalculatingthebaseyearabsoluteemissionsThefirststepistocalculatetheannualGHGemissionsofthecommercialrealestateportfoliointhebaseyear.Specifically,thisinvolvesthefollowingsteps:1.Collectingorestimatingtheannualenergyconsumptionofbuildings(includingtheenergyconsumptionofthetenants)forwhichthefinancialinstitutionseekstosetatarget,ifrelevant,splitbetweenresidentialandservicebuildingsintheportfolio;2.Calculatingthebaseyearscope1and2emissionsandscope3tenant’senergy-relatedemissionsperbuildingusingfuel-andenergy-specificemissionsfactors,suchasthoseprovidedbytheIEAornationalenergyagencies;3.Attributingtheannualscope1,2andscope3tenant’senergy-relatedemissionsperbuildingbasedontheratiobetweentheoutstandingamountversusthetotalpropertyvalueattimeoforigination;and4.Summingupallscope1,2andscope3tenant’senergy-relatedemissionsperbuildingtoderivethetotalannualabsoluteemissionsofbuildingsintherealestateportfolio.Baseyearabsoluteemissionsshouldbeassessedatafixedpointintimeinlinewiththefinancialreportingcycle.FinancialSectorScience-BasedTargetsGuidance132CalculatingthebaseyearemissionsintensityTranslatingtheemissionsinthebaseyearintoanemissionsintensityatportfoliolevelinvolvesthefollowingsteps:1.Collectingofthegrossfloorareaofbuildings(inm2)forwhichthefinancialinstitutionseekstosetatarget,ifrelevantsplitbetweenresidentialandservicebuildingsintheportfolio;2.Attributingthegrossfloorareaperbuilding(inm2)basedontheratiobetweentheoutstandingamountversusthetotalpropertyvalueattimeoforigination;3.Summinguptheattributedgrossfloorareaperbuildingtoderivetotalgrossfloorareaatportfoliolevel;and4.Dividingthetotalannualabsoluteemissionsatportfoliolevelbythetotalgrossfloorareaatportfoliolevel.Definingthescience-basedtargetScience-basedtargetsonrealestateinvestmentsshallbesetattherealestateportfoliolevel,inalignmentwiththeglobaldecarbonizationpathwayforresidentialand/orservicebuildings.BasedontheSDAapproach,thecurrentemissionsintensityofarealestateportfolioshallconvergetothesamelevelasthesectoraldecarbonizationpathwayby2050.Theemissionintensitytargetisdefinedasadecreaseinemissionsperfloorarea(tCO2/m2).Theminimumlevelofemissionintensitydecreaseisderivedfromtheglobaldecarbonizationpathwayfortheresidentialandservicebuildings.Atarget-settingtoolisavailableformodelingSDArealestatetargets.Thetoolpresentstwooptionsforprojectingtargetyearoutputinsquaremeter:-Fixedmarketshare,whichassumesthattheportfoliogrowsatthesamerateasthesector.ThisoptionissuitableforFIswhohavedifficultiesprojectingtheirportfoliogrowth.-Targetyearoutput.ThisoptionenablesFIstoinputtheirownprojectedoutputinthetargetyearinsquaremeter.Specifically,thefollowingformulaisusedtocalculatetheemissionintensitytargetforacommercialrealestateportfoliowhen1)theFIselectedthe“Fixedmarketshare”optionor2)theFIselectsthe“Targetyearoutput”optionandtheprojectedgrowthoftherealestateportfolio(measuredingrowthoffloorarea)towardsthetargetyearislowerorequaltothesectoralgrowthaspredictedbytheIEA:Where:•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperfloorarea,•𝑖thesubsectorforbuildings(i.e.residentialorservice),𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑟𝑒𝑎𝑙𝑒𝑠𝑡𝑎𝑡𝑒=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖−𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖−𝑆𝐼2050,𝑖)+𝑆𝐼2050,𝑖FinancialSectorScience-BasedTargetsGuidance133•𝑏thebaseyear,and•𝑡thetargetyear.ForportfoliosgrowingataratelowerthanthesectorgrowthaspredictedbytheIEA,themarketsharefactorincludedintheoriginalSDAformulapublishedintheoriginalNatureClimateChangePublication(Krabbeetal.2015)isremovedtopreventresultsthatwouldleadtoincreaseinemissionsintensityintheaccompanyingtargetsettingtool.WhentheFIselectsthe“Targetyearoutput”optionandprojectsagrowth(measuredingrowthoffloorarea)that’shigherthanthesectoralgrowth,thefollowingformulaapplies.ThisformulaisthesameastheoriginalSDAformulapublishedinNatureClimateChange(Krabbeetal.2015):𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑟𝑒𝑎𝑙𝑒𝑠𝑡𝑎𝑡𝑒=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖−𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖−𝑆𝐼2050,𝑖)×𝑃𝐴𝑏,𝑖/𝑆𝐴𝑏,𝑖(𝑃𝐴𝑡,𝑖/𝑆𝐴𝑡,𝑖)+𝑆𝐼2050,𝑖Where•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperfloorarea,•𝑆𝐴and𝑃𝐴thesectoralandportfoliototalfloorarea,•𝑖thesubsectorforbuildings(i.e.residentialorservice),•𝑏thebaseyear,and•𝑡thetargetyear.Portfoliosgrowingataratehigherthanthesectorrateissubjecttoastricterintensityreductionpathwaytodiscountthegrowthinmarketshare.Thisapproachallowsfinancialinstitutionstoconvergetheiremissionsintensityfortherealestateportfoliotothesectoralpathwayin2050,takingintoaccountitsbase-yearperformancerelativetosectorintensityin2050,andthedecarbonizationlevelofthesectorintargetyear.BoxB1belowshowsanexamplecalculationofanintensitytarget.BoxB1.ExampleonSettinganIntensityTargetforaRealEstatePortfolioFinancialSectorScience-BasedTargetsGuidance134Note:CAGR=CompoundAnnualGrowthRate.Source:Guidehouse2020.IEAETP2017B2DSpathways–realestateThefollowingtablesprovidetheglobalemissionsintensitiesandtheglobalgrossfloorareapathwaysbasedontheIEAETP2017data.Assumeafinancialinstitutionhasaglobalcommercialrealestateportfolioofvariousservicebuildings.Basedonenergyconsumption,buildingcertificates,orotherdata,theemissionsofthesebuildingsareassessed.Takingtheattributionfactorperbuildingintoaccount,theemissionintensityoftheportfoliois117kgCO2/m2forthetotalfloorareaof2.4millionm2in2017.Theprojectedannualportfoliogrowthratetoward2030is2percent(CAGR),whichislowerthanthesectoralgrowthrate.BasedontheIEAETPB2DS,theglobaldecarbonizationpathwayforservicebuildingshasthefollowingapproximateemissions:•71kgCO2/m2at47,404millionm2,in2017•27kgCO2/m2at62,760millionm22030•1kgCO2/m2at81,039millionm22050Tosetanintensitytargetfor2030convergingtothe2050sectorlevel:Intensitytarget=𝑃𝐼𝑏,𝑖−𝑆𝐼2050,𝑖×𝑆𝐼𝑡,𝑖–𝑆𝐼2050,𝑖(𝑆𝐼𝑏,𝑖–𝑆𝐼2050,𝑖)+𝑆𝐼2050,𝑖=(117−1)×(27–1)(71–1)+1=44kgCO2/m2Sincethisportfoliostartedwithanemissionintensityhigherthanthesectorlevelin2017,thisapproachallowstheportfoliotostayatanintensityhigherthanthesectoralpathwaytoreduceitsemissionsatafasterpace,convergingtothesectorallevelby2050.Takingtheannualgrowthprojectionsof2percenttoward2030,thecommercialrealestateportfoliowillcorrespondtoatotalfloorareaof3.1millionm2in2030.Theemissionsintensitytargetscanbetranslatedintoanabsoluteemissionstargetof136.6ktonCO2in2030.FinancialSectorScience-BasedTargetsGuidance135TableB2.EmissionIntensity(kgCO2/m2)RegionSubsector2016a202520302035204020452050WORLDServicebuildings75.6442.5626.9717.339.714.211.00WORLDResidentialbuildings26.3016.9211.717.694.602.260.81Source:IEAETP2017.TableB3.GrossFloorArea(Million,m2)RegionSubsector2016a202520302035204020452050WORLDServicebuildings46,29256,29662,76066,90171,31676,02281,039WORLDResidentialbuildings189,288230,454257,077275,529295,306316,502339,220Note:aThe2016datapointsareestimatedbasedonthe2014and2025datapointsprovidedbyIEA,assuminglinearinterpolationbetweentheyears.Source:IEAETP2017.C.SDAElectricityGenerationProjectFinancePreparedbytechnicalpartneroftheSBTifinancialsectorproject,Guidehouse,Inc.GielLinthorst:giel.linthorst@guidehouse.comAngélicaAfanador:angelica.afanador@guidehouse.comguidehouse.comNovember2020SummaryTableC1.SummaryoftheSectoralDecarbonizationApproachforElectricityGenerationProjectFinanceCategoryFrameworkScopeTargetaudienceThetargetaudienceforthistarget-settingframeworkarefinancialinstitutionswithprojectfinanceportfoliosinthepowersector.AssetclassProjectfinanceforelectricitygeneration.SectorsTargetsaresetatportfolioemissionsforprojectfinanceforthepowersector.Foratargettoqualify,ithastobesetforaminimumshareoftheFinancialSectorScience-BasedTargetsGuidance136financedemissionsfromportfolioofelectricitygenerationprojectfinance,asdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.MechanicsInputs–dataAnnualemissionsdatacanbesourcedandestimatedfromdirectdisclosureofprojects’GHGemissionsorfueluse;orpublicdatabaseonaverageemissionsfactorsforpowergeneration.Inputs–pathwaysScience-basedtargetsarederivedfromaglobalsectoraldecarbonizationpathwayinlinewithkeepingglobalwarmingwell-below2°C.Targetssetusingregionalpathwayswillbeassessedagainstglobalpathways.Targetssetusingregionalpathwayscanbeacceptediftheyareequallyormoreambitiousthantargetssetusingglobalpathways.AttributionapproachThefinancialinstitutionaccountsforaportionoftheannualemissionsofthefinancedprojectdeterminedbytheratiobetweentheinstitution’soutstandingamount(numerator)andthetotalequityanddebtofthefinancedproject(denominator).aOutputsTheoutputwillbeanemissionintensitytarget(gCO2/kWh)attheportfoliolevel.Example:FinancialInstitutionAcommitstoreduceitselectricitygenerationprojectfinanceportfolioGHGemissionswith___%perkWhby2030froma2017baseyear.PortfolioweightingTargetsarenotweightedwithinportfolioswithtargetsonotherassetclasses.Note:aPCAF2020.Source:Guidehouse2020.ScopeThismethodologycoversscience-basedtargetsforthefinancialportfoliosoffinancialinstitutionsconsistingofprojectfinanceforelectricitygeneration.Projectfinanceisdefinedasequityorloan(includingmezzaninedebt)withknownuseofproceedsthataredesignatedforaclearlydefinedactivityorsetofactivities,thatis,theconstructionandoperationsofaprojecttogenerateelectricity.Thescopeofthemethodologycoversprojectscontributingtoelectricitygenerationfromfuelssuchasoil,coal,naturalgas,nuclear,biomassandwaste,hydro,geothermal,wind,solarphotovoltaics(PV)andconcentratesolarpower(CSP),ocean,hydrogen,andother(IEA2017).Treatmentofinvestmentsleadingtonegativeemissionsfromthepowersector,suchasbioenergywithcarboncaptureandstorage(BECCS)andcarboncaptureandstorage(CCS)arecurrentlyoutofscope.ThistopicwillberevisitedoncetheGHGProtocolremovalguidanceisdevelopedandaspartoftheSBTi’snet-zerotargetdiscussion.FinancialSectorScience-BasedTargetsGuidance137Projectfinanceforothertypesofprojectsarecurrentlyoutofscopeinthismethodologyandwillbeconsideredinthefuture.Thismethodologydetailshowtoalignemissionsoftheunderlyingprojectsinthepowersectorwithalow-carbontransitionpathwaytowardwell-below2°Cortoward1.5°C.Itappliesthedecarbonizationpathwayofpowergenerationtotheportfolioofunderlyingprojectsandisapplicabletopathwaysfromanytransitionscenariosavailableinthemarket.74Theemissionssubjecttotargetsettingarescope1and2emissionsfromtheunderlyingprojects:•Scope1:Directemissionsfromon-sitefuelcombustionforelectricitygeneration;and•Scope2:Indirectemissionsfromproject’sownuseofpurchasedsteam,heat,andelectricityforelectricitygeneration,ifany.NotethatScope3emissions(suchasembodiedcarboninmaterialsandemissionsfromwaste)arenotincludedinthismethodologyduetohighdatauncertainty.Whenrobustapproachesanddatatomeasurescope3emissionsoftheseprojectsarewelldeveloped,thetargetsettingforelectricitygenerationportfolioscouldexpanditscoveragetoincludescope3emissions.Publishedwell-below2°Calignmentmethodologiesforprojectfinancearecurrentlyspreadacrossresearchondifferentprojecttypes.Someexistingworkfocusesonthenecessarycapacityforcertaintechnologiesandtherequiredamountofinvestmentpersectorsforthealignment.Forsettingtargetsonanelectricitygenerationprojectfinanceportfolio,theScienceBasedTargetsinitiativeendorsestheSectoralDecarbonizationApproach(SDA).TheSDAwasdevelopedbyCDP,WRI,andWWF,togetherwithtechnicalpartnerGuidehouse.IntheSDA,emissionsreductiontargetsareassessedbasedonsectoralemissionsreductionpathways,usingtheabsoluteemissionsandactivitydataprojectionfromInternationalEnergyAgency’s(IEA)EnergyTechnologyPerspectives(ETP).IntheSDAadecarbonizationpathwayforthepowersectorisincluded(IEA2017).InJune2020,theScienceBasedTargetsinitiative,withtechnicalsupportfromGuidehouse,publishedaquickstartguideforelectricutilitiestoset1.5°C-alignedscience-basedtargetsusingtheSDA(SBTi2020e).MechanicsDatainputThefirststepofthescience-basedtargetsettingprocessisdefiningthebaselineemissionsoftheportfolioofelectricitygenerationprojectsforwhichatargetwillbeset.PCAF’sGlobalGHGAccountingand74Forexample,theEnergyTechnologyPerspectives(ETP)andWorldEnergyOutlook(WEO)bytheInternationalEnergyAgency(IEA),InternationalRenewableEnergyAgency(IRENA)Remap,GreenpeaceAdvancedEnergy[R]evolution,etc.(TCFD2017).FinancialSectorScience-BasedTargetsGuidance138ReportingStandardprovidesGHGaccountingmethodsforvariousassetclasses,includingprojectfinance.AccordingtotheStandard,project’semissionsshouldbecalculatedbasedonasset-levelenergyuseandemissionfactors.Theseemissionsareattributedtothefinancialinstitutionbytheratiobetweentheinstitution’soutstandingamount(numerator)andthetotalequityanddebtofthefinancedproject(denominator)(PCAF2020).Inprinciple,settingscience-basedtargetsforelectricitygenerationprojectfinanceportfoliosrequiresthefollowingdatapoints:•Scope1emissionsfromelectricitygenerationprojects;•Scope2emissionsfromelectricitygenerationprojects;•Outstandingloanorinvestmentperproject;•Totalprojectsizeperproject(equity,debt,andmezzanine);•(Estimated)annualelectricityproductionperproject(kWh);and•(Estimated)futureelectricityproductionofportfolio(kWh)orportfoliogrowthtarget(percentage)towardthetargetyear(optional).Therearetwoapproachestosourcingdatatomeasureemissions:•Disclosureofprojects’energyuseorGHGemissions.Fueltype,annualelectricitygeneration(e.g.,MWh),annualGHGemissions,installedcapacity(e.g.,MW)oroperatinghoursofelectricitygenerationprojectsareoftenincludedinprojectdescriptions.Actualannualfueluseandemissiondataofeachprojectaremostaccurateandeffectivetoreflectanyimprovementovertime.•Publicdatabaseonaverageemissionsfactorsforpowergeneration.SourcessuchasIEA,nationalenergyagencies,orutilitiesoftenprovideaverageemissionfactorsforelectricitygenerationbyregionsorfueltype.Financialinstitutionscouldusetheseproxiestoestimatetheemissionsforpowergenerationprojectsiftheyhavetheannualoutput(e.g.,MWh)ofprojectsbyfueltypeorregion.Usingregionalaveragesrequiresfewerresourcesoncollectingdatabutdoesnotreflectperformancespecifictotheportfoliosnorimprovementovertime.Science-basedtargetanalysisforelectricitygenerationprojectsshouldrelyonasset-leveldataasmuchaspossibleandfillinanydatagapswithregionalproxies.Whiledataavailabilityvariesacrossregions,financialinstitutionscouldassessthespecificityandaccuracyoftheavailabledatausingadatahierarchy(see,forexample,FigureC1andexplorewaystoimprovedataqualityovertime.Forexample,onemayfocusonmovingfromsectoraveragedatatoregion-orproject-specificenergyusedatabyrefiningtheduediligenceorloanapplicationprocessincountrieswiththemostprojectfinanceexposure.AnysignificantchangestotheportfolioemissionsshouldresultinrecalculationoftargetbaselineasdefinedintheSBTiTargetValidationCriteriaforfinancialinstitutions.FinancialSectorScience-BasedTargetsGuidance139FigureC1.GenericDataQualityScorecardforPortfolioEmissions75Sources:PCAF2019b,2019c,andPCAF2020.Totranslatetheemissionsintensitytargetsintoanabsolutetarget,financialinstitutionshavetoprojecttheannualpercentageoftheactivitygrowthoftheirportfolio(CompoundAnnualGrowthRate[CAGR])towardthetargetyear(i.e.,preferablymeasuredinm2,kWh,tonneofproducts).Financialinstitutionscanprojectthisinthreeways:1.Byusingtheactivitygrowthprojectionintheclimatescenario(defaultgrowthprojection).Forinstance,forelectricitygenerationprojects,thisis1.69percentinkWhfrom2020toward2030(seeTableC2);2.Byusingthegrowthoftheirportfoliooverthepast5–10years;and3.Byusingthegrowthprojectionsofthespecificbusinessdepartmentsandextrapolatingthistowardthetargetyears,ifthisgrowthprojectionistooshortterm.DecarbonizationpathwayByapplyingtheSDA,thefinalemissiontargets,expressedinemissionsintensity(gCO2/kWh),havetobeconsistentwithkeepingglobalwarmingwell-below2°C.TheSDAforthepowersectordetailshowtoalignemissionsofinvestmentsinelectricitygenerationprojectswithadecarbonizationpathwaytowardwell-below2°CandusestheIEAETPBeyond2°CScenario(B2DS).TheIEAmodelsthepowersectorbasedonsectoralgrowthandtechnologydevelopmenttrajectories.TheemissionsandelectricitygrowthprojectionsfromtheB2DSwillserveasthebasistoderivetherelevanttargetsforelectricitygenerationprojectfinance.FigureC2illustratestheemissionsintensitypathwaysforthepowersectorintheB2DS.75Foraprojectfinancespecificscorecard,refertothePCAF’sGlobalGHGAccountingandReportingStandard(PCAF,2020)FinancialSectorScience-BasedTargetsGuidance140Theemissionsintensitytrajectoryofaprojectportfoliointhepowersectorshallcontinuouslydeclinefromthebaseyeartowardthetargetlevel,eveniftheemissionsarebelowthepathwaybenchmark.Thecalculationmethodwillbefurtherexplainedintheinstructionsforimplementation.NotethatIEAonlyprovidespathwaysinafive-yearinterval,financialinstitutionsmayderivethepathwaydatathroughinterpolationifthetargetyearfallsinbetweenthesefive-yearintervals.AlsoseeTableC2forthedataontheglobalB2DSpathway.FigureC2.GlobalDecarbonizationEmissionPathwayforthePowerSectorSource:IEA2017.AttributionapproachAttributionofprojects’emissionstoafinancialportfolioisbasedontheratioofoutstandingloanorinvestmentoverthetotalprojectsizeonanannualbasis(e.g.,2018projectemissionsx2018year-endoutstandingloan/project’stotalsize[equity+debt])(PCAF2019b,2019c,andPCAF2020).ThisapproachisconsistentwiththeGHGaccountingmethodforprojectfinancedevelopedbythePartnershipforCarbonAccountingFinancials(PCAF2020).Toalignwithadecarbonizationpathway,thismethodologyrequiresusingthetotalelectricityoutput(e.g.,kWh)toderivetheemissionsintensityofelectricitygenerationprojects(i.e.,gCO2/kWh).OutputsTheoutputwillbeanemissionsintensitytarget(ingCO2/kWh)attheportfoliolevelofallelectricitygenerationprojects.FinancialinstitutionscandecidetotranslatethisemissionsintensitytargetperkWh-10001002003004005006007002014202420342044GHGIntensity(gCO2/kWh)B2DSpowergenerationFinancialSectorScience-BasedTargetsGuidance141intoanabsolutetargetbytakingthegrowthprojectioninkWhofFIs’electricitygenerationprojectportfoliotowardthetargetyearintoaccount.Asampletargetoutputcouldbe,FinancialInstitutionAcommitstoreducetheGHGemissionsofitselectricitygenerationprojectfinanceportfoliowith___%perkWhby2030froma2017baseyear.PortfolioweightingTargetsarenotweightedwithintheportfoliowithtargetsonotherassetclasses.InstructionsforImplementationToassessthescience-basedtargetsforelectricitygenerationprojectfinance,financialinstitutionscanusetheSDAinthegeneralScience-basedTargetSettingTool(Version1.1)thatisavailableontheScienceBasedTargetswebsite.Nexttothisresource,alsothequickstartguideforelectricutilitiestoset1.5°C-alignedscience-basedtargetsusingtheSDA(SBTi2020e)isavaluableresource,includingtheupdatedSDATooltosettargetsinlinewith1.5°C.Asinputintothistool,baseyearfinancedemissionsandbaseyearoutputshouldbecalculatedfollowingtheinstructionsbelow.CalculatingthebaseyearfinancedemissionsThefirststepistocalculatetheannualfinancedGHGemissionsoftheportfolioofelectricitygenerationprojectsinthebaseyear.Specifically,thisinvolvesthefollowingsteps:1.Collectingorestimatingthefuelandenergyuseofeachelectricitygenerationprojectintheportfolioforwhichthefinancialinstitutionseekstosetatarget.2.Calculatingthebaseyearscope1and2emissionsperprojectusingfuel-andenergy-specificemissionsfactors,suchasthoseprovidedbytheIEAornationalenergyagencies.3.Attributingtheannualscope1and2emissionsperprojectbasedontheratiobetweentheinstitution’soutstandingamount(numerator)andthetotalequityanddebtofthefinancedproject(denominator).Theresultisfinancedemissionsofthefinancialinstitution’sprojectfinanceportfolio.4.Summingupallscope1and2financedemissionsperprojecttoderivethetotalannualscope1and2financedemissionsatportfoliolevel.Baseyearfinancedemissionsofallelectricitygenerationprojectfinanceintheportfolioshouldbeassessedatafixedpointintimeinlinewiththefinancialreportingcycle.CalculatingthebaseyearoutputFinancialSectorScience-BasedTargetsGuidance142Nexttoemissions,baseyearoutputshouldalsobeprovidedasinputintheScience-basedTargetSettingTool.Calculatingthebaseyearoutputshouldinvolvethefollowingsteps:1.Collectingorestimatingtheannualelectricitygenerated(inkWh)oftheportfolioofelectricitygenerationprojectsforwhichthefinancialinstitutionseekstosetatarget;2.Attributingtheannualelectricitygenerated(inkWh)basedontheratiobetweentheoutstandingamountversusthetotalprojectsize(equity+debt);and3.Summinguptheattributedannualelectricitygenerated(inkWh)perprojecttoderivetotalannualelectricitygenerated(inkWh)attheportfoliolevel.Definingthescience-basedtargetScience-basedtargetsshallbesetattheelectricitygenerationprojectportfoliolevel,inalignmentwiththedecarbonizationpathwayforpowergeneration.BasedontheSDAapproach,thebaseyearemissionsintensityofanelectricitygenerationprojectfinanceportfolioshallconvergetothesamelevelasthepowerdecarbonizationpathwayby2050.Theemissionintensitytargetisdefinedasadecreaseinemissionsperelectricityproduction(gCO2/kWh).Theminimumlevelofemissionintensitydecreaseisderivedfromtheglobaldecarbonizationpathwayforthepowersector.Thefollowingformulaisusedtocalculatetheemissionintensitytargetforanelectricitygenerationprojectfinanceportfoliowhentheprojectedgrowthoftheprojectfinanceportfolio(measuredinkWh)towardsthetargetyearislowerorequaltothesectoralgrowthaspredictedbytheIEA(TableC2),:76𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑝𝑜𝑤𝑒𝑟𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑖𝑜𝑛=(𝑃𝐼𝑏−𝑆𝐼2050)×(𝑆𝐼𝑡−𝑆𝐼2050)(𝑆𝐼𝑏−𝑆𝐼2050)+𝑆𝐼2050Where:•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperkWh;•𝑏thebaseyear;and•𝑡thetargetyear.Whentheprojectedgrowthoftheprojectfinanceportfolio(measuredinkWh)towardsthetargetyearishigherthanthesectoralgrowth,thefollowingformulaapplies:𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑡𝑎𝑟𝑔𝑒𝑡𝑝𝑜𝑤𝑒𝑟𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑖𝑜𝑛=(𝑃𝐼𝑏−𝑆𝐼2050)×(𝑆𝐼𝑡−𝑆𝐼2050)(𝑆𝐼𝑏−𝑆𝐼2050)×(𝑃𝐴𝑏/𝑆𝐴𝑏)(𝑃𝐴𝑡/𝑆𝐴𝑡)+𝑆𝐼2050Where•𝑆𝐼and𝑃𝐼arethesectoralandportfolioemissionsperkWh,76AfterthepublicationoftheSDAinNatureClimateChange,theSBTisimplifiedtheformulabyremovingthecorrectionfactorforchangesinmarketsharetopreventapotentialincreaseofemissionsintensitywhengrowthisprojectedlowerassectoralgrowth.ThisadjustmentisdocumentedinBox4intheFoundationsofSBTsettingpaper.FinancialSectorScience-BasedTargetsGuidance143•𝑆𝐴and𝑃𝐴thesectoralandportfoliototalkWh,•𝑏thebaseyear,and•𝑡thetargetyear.Thisapproachallowsfinancialinstitutionstoconvergetheiremissionsintensityfortheirelectricitygenerationprojectportfoliotothesectoralpathwayin2050,takingintoaccountitsbaseyearperformancerelativetosectorintensityin2050,andthedecarbonizationlevelofthesectorinthetargetyear.77BoxC1.ExampleonSettinganIntensityTargetforanElectricityGenerationProjectFinancePortfolioNote:CAGR=CompoundAnnualGrowthRate.Source:Guidehouse2020.GlobalB2DSpathway–projectfinance77SeetheSDAmethodologypaperforfurtherdetails(SBTi2015).Assumeafinancialinstitutionhasaprojectfinanceportfolioofvariouselectricitygenerationprojects.Basedonelectricityoutputandfueltype,theemissionsoftheseprojectsareassessed.Theemissionintensityoftheportfoliois600gCO2/kWhforthetotalelectricityproductionof15TWhin2017.Theannualprojectedportfoliogrowthratefor2030is1percent(CAGR),whichislowerthanthesectoralgrowthrate.BasedontheIEAETPB2DS,theglobaldecarbonizationpathwayforpowergenerationhasapproximately:•497gCO2/kWhat25,062TWhin2017•229gCO2/kWhat30,959TWhin2030•-8gCO2/kWhat44,321TWhin2050Tosetanintensitytargetfor2030convergingtothe2050sectoralemissionslevel:Intensitytarget=(𝑃𝐼𝑏−𝑆𝐼2050)×(𝑆𝐼𝑡–𝑆𝐼2050)(𝑆𝐼𝑏–𝑆𝐼2050)+𝑆𝐼2050=(600−[−8])×(229–[−8])(497–[−8])+[−8]=277gCO2/kWhSincethisportfoliostartedwithanemissionintensityhigherthanthesectorlevelin2017,thisapproachallowstheportfoliotostayatanintensityhigherthanthesectoralpathwaytoreduceitsemissionsatafasterpace,convergingtothesectorallevelby2050.FinancialSectorScience-BasedTargetsGuidance144HerearetheglobalactivityandemissionsintensitiespathwaybasedontheIEAETP2017data:TableC2.GlobalElectricityProductionandEmissionIntensityPowergeneration2014202520302035204020452050Production(TWh)23,81928,37730,95933,82537,01540,48144,321Emissionintensity(gCO2/kWh)572.02330.18228.79140.6971.9120.35-8.02Source:IEAETP2017.D.SDAforCorporateDebtandEquityPreparedbytechnicalpartneroftheSBTifinancialsectorproject,Guidehouse,Inc.GielLinthorst:giel.linthorst@guidehouse.comAngélicaAfanador:angelica.afanador@guidehouse.comguidehouse.comMarch2021SummaryTableD1.1SummaryoftheSectoralDecarbonizationApproachforCorporateDebtandEquityCategoryFrameworkScopeTargetaudienceThetargetaudienceforthistargetsettingframeworkarefinancialinstitutionswithportfoliosoffinancialassetsissuedbycompanies.AssetclassesCorporatedebt,listedequityandbonds,andprivateequityanddebt.SectorsTargetsaresetatindividualsectorlevelwithintheportfolio,forwhichspecificSectoralDecarbonizationApproaches(SDA)areavailable(i.e.,electricity,ironandsteel,cement,aluminum,pulpandpaper,transport,andservicebuildings).MechanicsInputs–companydataTheSDArequiresphysicalactivityandemissionsdatapersector.ActivityandGHGemissionsdatacanbesourcedfromdirectemissiondisclosuresbyissuers/clients;and/orbusinessintelligencedatabases(e.g.,asset-leveldata).Inputs–scenariosGlobaldecarbonizationpathwaysofthesectorsforwhichtargetswillbeset,i.e.,theIEAETP2017B2DSscenariosarethebasisoftheSDA.FinancialSectorScience-BasedTargetsGuidance145AllocationapproachesAsabasicattributionprinciple,thefinancialinstitutionaccountsforaportionoftheannualemissionsofthefinancedcompanydeterminedbytheratiobetweentheinstitution’soutstandingamount(numerator)andthevalueofthefinancedcompany(denominator).asfollows:a.•ForlistedcompaniestheattributionistheratioofoutstandingamountversustheEnterpriseValueIncludingCash(EVIC78).•Forprivatecompaniestheattributionistheratioofoutstandingamountversusthetotalbalancesheet(i.e.,equity+debt).OutputsTheoutputwillbeanemissionintensitytargetattheportfoliolevel.Example:FinancialInstitutionAcommitstoreduceCO2eemissionsfromthesteelsectorinitsequityportfoliowith___%pertonneofsteelby2030froma2017baseyear.Note:aPCAF2020.Source:Guidehouse2020.ScopeThismethodologycoversscience-basedtargetsforthefinancialportfoliosconsistingofcorporatedebt,listedequityandbonds,andprivateequityanddebt.Themethodologypresentsasector-basedapproachtosetascience-basedtargetforthescope3,category15(investments)emissionsforfinancialinstitutions.Whenaccountingfortheemissionsofaportfoliooflistedequity,privateequity,corporatebonds,andcorporateloans,theseemissionsarebasedonthescope1and2emissionsoftheassetsineachsectorcovered.•Scope1:Directemissionsfromsources(i.e.,on-sitefuelcombustion)ownedorcontrolledbythecompany(i.e.,investeeorborrower).•Scope2:Indirectemissionsfrompurchasedenergy(electricity,steam,heat,andcooling)bythecompany(i.e.,investeeorborrower).•Scope3,whererelevant:FIsshallrefertorelevantSBTisector-specificguidanceforinclusionofportfoliocompanies’scope3emissionsintargets.Forinstance,thescope3‘useofsoldproducts’78EVICisdefinedas:Thesumofthemarketcapitalizationofordinarysharesatfiscalyear-end,themarketcapitalizationofpreferredsharesatfiscalyear-end,andthebookvaluesoftotaldebtandminorities’interests.Nodeductionsofcashorcashequivalentsaremadetoavoidthepossibilityofnegativeenterprisevalues.FinancialSectorScience-BasedTargetsGuidance146emissionsofautomanufacturersshallbeincludedinFIs’targets(seeTable3-1oftheSBTmanual).79Sectortargetsaresetatindividualsectorlevelwithintheportfolio,forwhichspecificSectoralDecarbonizationApproaches(SDA)areavailable.ItisexpectedthattherewillbeportionsoftheportfoliothatarenotcoveredbytheSDA.MechanicsDataInputToassessthescience-basedtargetsforaportfolioofcorporateinstruments,financialinstitutionscanusetheSDAinthegeneralScience-basedTargetSettingToolVersion1.1),orthespecificSDATransportToolthatisavailableontheScienceBasedTargetswebsite.Inaddition,thequickstartguideforelectricutilitiestoset1.5°C-alignedscience-basedtargetsusingtheSDA(SBTi2020e)isavaluableresourcesforcorporateinstrumentstoelectricutilities.Asinputintothesetools,baseyearemissionsandbaseyearactivity/outputshouldbecalculatedfollowingtheinstructionsbelow.Thefirststepoftheprocessisdefiningthebaseyearemissionsoftheportfolioforwhichatargetwillbeset.PCAF’sGlobalGHGAccountingandReportingStandarddetailstheemissionsaccountingmethodsforvariousassetclasses,includinglistedequityandcorporatebonds,andbusinessloansandunlistedequity(PCAF2020).Inprinciple,settingscience-basedtargetfortheseassetclassesrequiresthefollowingdatapoints:•Company’sdisclosedannualscope1and2emissions,andscope3emissionswhererelevant(e.g.,companysustainabilityreportorverifiedthird-partydataproviders);alternatively,companyphysicalactivitydatathatservestoestimatescope1and2emissions,andscope3emissionswhererelevant,inthebaseyear;•Annualactivityoroutputdatapercompanyinthebaseyear(e.g.,MWh,buildinggrossfloorarea,tonne-kmtransported,passenger-kmtraveled,tonneofproduct,etc.);•Outstandingamount(equityand/ordebt)percompany;•Enterprisevalueincludingcash(EVIC)orbalancesheettotalpercompany;and79TheGlobalGHGAccountingandReportingStandardforthefinancialindustryprovidesmethodsformeasuringemissionsassociatedwiththeseassetclasses.Itincludesscope1and2emissionsforallsectorsandthephase-inofscope3emissionsforbusinessloansandlistedequityandcorporatebonds,inlinewiththerecommendationfortheEUBenchmarkbytheEUTechnicalExpertGroup(TEG)onsustainablefinancesectorlist.Inpracticethismeansagradualphase-inofscope3emissionsoflendersandinvesteesoverfiveyears.Startingwiththemostcarbon-intensivesectors(oil,gas,andmining)from2021.FinancialSectorScience-BasedTargetsGuidance147•Portfoliogrowthratepersectorintargetyear.Whendirectdisclosureofscope1and2emissions(andscope3emissionswhererelevant)isnotavailable,emissionscanbecalculatedviatwoapproaches(PCAF2020):▪Approach1:Physicalactivity-basedemissions:Primaryphysicalactivitydataoftheinvesteeorborrower(e.g.,MWhofnaturalgasconsumedortonneofsteelproduced)areconvertedtoemissions,usingverifiedemissionfactorsexpressedperphysicalactivity(e.g.,tCO2e/MWhortCO2e/tofsteel),issuedorapprovedbyacredibleindependentbody.▪Approach2:Economicactivity-basedemissions:Economicactivitydataoftheinvesteeorborrower(e.g.,EURofturnoverorEURofasset)areconvertedtoemissions,usingofficialstatisticaldataand/oracknowledgedenvironmentallyextendedinput-output(EEIO)tablesprovidingregion-/sector-specificaverageemissionfactorsexpressedpereconomicactivity(e.g.,tCO2e/EURofrevenueortCO2e/EURofasset).80Itisimportanttonote,thatfromadataqualityperspective,approach2ispreferredwhenemissionsdisclosureisnotavailabletothefinancialinstitution.Whiledataavailabilityvariesacrossregions,financialinstitutionscanassessthespecificityandaccuracyoftheavailabledatausingadatahierarchy(seeFigureD1asanexample)andexplorewaystoimprovedataqualityovertime.80Samplingtestsbasedonactualdataoncompanylevel,whichisextrapolatedtoportfoliolevel,canhelptesttheaccuracyofcalculationsbasedonthisdatafromstatisticsand/orEEIOtables.Thismayalsobeusedtorefinethedataforspecificsectorsorregions,ifthereportingfinancialinstitutionhasastrongpresenceinandspecificknowledgeoftherespectivesectorand/orregion.Nationalagenciesandregionaldataprovidersorstatisticalofficesinindividualregionsmayassistreportingfinancialinstitutionsandinvesteecompaniesinvariousregionsinfindingregionalandmorerelevantfinancialand/oremissionsdatainformation.FinancialSectorScience-BasedTargetsGuidance148FigureD1.GenericDataQualityScorecardforPortfolioEmissions81Sources:PCAF2019b,2019c,andPCAF2020.DecarbonizationPathwayByapplyingtheSDA,thefinalemissionstargetsexpressedinemissionsintensity(e.g.,CO2perkWh,tonneofproduct,etc.)shallbeconsistentwithkeepingglobalwarmingwell-below2°Cataminimum.TheSDAusestheB2DSscenariosdevelopedbytheIEA(2017),whicharecompatiblewiththeRepresentativeConcentrationPathway(RCP)2.6scenariofromIPCCFifthAssessmentReport(AR5).82TheSDAassumesglobalconvergenceofkeysectors’emissionsintensityby2050.Forexample,theemissionsintensityofsteelproductioninChina,theUnitedStates,andBrazilisassumedtoreachthesamelevelin2050,regardlessofitscurrentdiversity.83RegionalpathwayshavenotbeenincorporatedintotheSDAmethod.Currently,theSDAprovidessector-specificpathwaysforthefollowinghomogenousandenergy-intensivesectors:84●Powergeneration●Ironandsteel81Forcorporatedebtandequityspecificscorecards,refertothePCAF’sGlobalGHGAccountingandReportingStandard(PCAF,2020)82TheB2DSscenariosareemissionsscenariosmodeledbyIEA.Basedonthisscenariodata,sectoralemissionsintensitypathwaysarederived.83Forspecificvaluesandbackground,seeKrabbeetal.2015.84TheSDAsectorsaredrawnfromtheInternationalEnergyAgency(IEA).AnappendixoftheSDAuserguidancemapstheIEAsectorsagainstcommonindustrialclassificationsystems:http://sciencebasedtargets.org/wp-content/uploads/2015/05/Sectoral-Decarbonization-Approach-Report.pdf.FinancialSectorScience-BasedTargetsGuidance149●Cement●Aluminum●Pulpandpaper●Services/Commercialbuildings●PassengerandfreighttransportTheIEAmodelsthesesectorsbasedonsectoralgrowthandtechnologydevelopmenttrajectories.TheemissionsandsectoractivitygrowthprojectionsfromtheB2DSwillserveasthebasistoderivetherelevanttargetsforeachsectorundertheselectedassetclass.FigureD2illustratestheemissionintensitypathwaysforthepowersectorintheB2DS.Inthisexample,theemissionsintensitytrajectoryofthepowerutilitiesintheportfolioshallcontinuouslydeclinefromthebaseyeartowardthetargetlevel,eveniftheemissionsarebelowthepathwaybenchmark.NotethatIEAonlyprovidespathwaysinafive-yearinterval,financialinstitutionsmayderivethepathwaydatathroughinterpolationifthetargetyearfallsinbetweenthesefive-yearintervals.FigureD2.GlobalDecarbonizationEmissionPathwayforthePowerSectorSource:IEA2017.AttributionapproachSettingtheemissionsbaselinerequirestheallocationofcompanies’(i.e.,investeesorborrowers)emissionsandactivitydatatothefinancialinstitutions.InlinewithGHGProtocolandthePartnershipfor-10001002003004005006007002014202420342044GHGIntensity(gCO2/kWh)B2DSpowergenerationFinancialSectorScience-BasedTargetsGuidance150CarbonAccountingFinancials(PCAF),emissionsshouldbeallocatedtofinancialinstitutionsbasedontheirproportionalshareofinvestmentintheinvestee.85Forlistedcompanies,theattributioniscalculatedbytheratioofoutstandinginvestmentversustheEnterpriseValueIncludingCash(EVIC).•Outstandinginvestment(numerator):Theactualoutstandinginvestment(iflistedequityorbonds)orloanamount(ifcorporateloan).•Companyvalue(denominator):TheEnterpriseValueIncludingCash(EVIC)oftherespectivecompany.Incaseelementsoftheenterprisevaluearenotavailable,forexample,duetodataissues,thetotalbalancesheetvalueexpressedasthesumoftotalcompanyequityanddebtisused.Forprivatecompanies,theattributionistheratioofoutstandinginvestmentoroutstandingloanversusthetotalbalancesheet(equity+debt):•Outstandinginvestment(numerator):Theactualoutstandinginvestment(ifprivateequity)orloanamount(ifcorporateloan).•Companyvalue(denominator):Thetotalbalancesheetvalueexpressedasthesumoftotalcompanyequityanddebt.TheGlobalGHGAccountingandReportingStandardforthefinancialindustry(PCAF2020)alignsthedefinitionofEVICwiththedefinitionprovidedbythefollowing:1.TheTechnicalExpertGrouponsustainablefinancesetupbytheEuropeanCommission(EUTEG)inits“HandbookofClimateTransitionBenchmarks,Paris-alignedBenchmarkandBenchmarks’ESGDisclosure”(December2019)(Hoepneretal.2019).2.The(draft)“SupplementingRegulation(EU)2016/1011oftheEuropeanParliamentandoftheCouncilasregardsminimumstandardsforEUClimateTransitionBenchmarksandEUParis-alignedBenchmarks,”whichhasdefinedthattheEVICshouldbeusedtodeterminetheGHGintensitiesforthebenchmarks.Afterapplyingtheattributionfactortobothabsoluteemissions,thesameattributionfactorshouldbeappliedtocalculatethetotalactivityoroutputoftheportfoliocompaniesinaspecificsector.ThesetotalactivityoroutputdataareneededasinputintotheSBTitoolstocalculatetheemissionsintensityinthebaseyear(i.e.,theratioofabsoluteemissionstoactivitydata,forexample,tonneCO2e/kWh,tonneCO2e/tonneofsteel,etc.).85Thisdiffersfromaportfolioweightapproachthatworksbyapplyingtheportfolioweightofeachinvestmenttotheemissionsintensityoftheunderlyingcompany.Forexample,if10percentofthetotalequityportfolioinassetsundermanagement(AUM)isinvestedinCompanyA,theemissionsintensityoftheportfolioiscalculatedbyapplyingthe10percenttotheemissionsintensityofCompanyA,etc.,andsummingupallallocatedemissionintensitiesofthecompaniesintheportfolio.Thisapproachisoftenusedfor(ESG-)benchmarkingoffunds.However,thisapproachdeviatesfromaccountingprinciplesintheGHGProtocolandthePartnershipforCarbonAccountingFinancials(PCAF).FinancialSectorScience-BasedTargetsGuidance151MethodoutputTheoutputwillbeapercentagereductioninemissionsintensityrelativetoaspecificactivityorproductionoutputofthecompaniesintheportfolio(e.g.,tonneCO2eperMWh,pertonneofsteel,etc.).Sampletargetoutputscouldbe,asfollows:•FinancialInstitutionAcommitstoreduceCO2eemissionsfromthepowersectorinitsloanportfoliowith30percentperkWhby2025froma2019baseyear.•FinancialInstitutionBcommitstoreduceCO2eemissionsfromthesteelsectorinitsequityportfoliowith20percentpertonneofsteelby2025froma2019baseyear.E.TemperatureRatingMethodThismethodisanopen-sourceframeworktoenablethetranslationofcorporateGHGemissionsreductiontargetsintotemperaturescoresatatarget,company,andaportfoliolevel.Themethodcanbeusedtogeneratetemperaturescoresforindividualtargetstotranslatetargetambitiontoacommonintuitivemetric.Themethodprovidesaprotocoltoenabletheaggregationoftarget-levelscorestogenerateatemperatureratingforacompanybasedontheambitionofitsGHGemissionsreductiontargets.Finally,themethoddefinesaseriesofweightingoptionsthatcanenablefinancialinstitutionsandotherstoproduceportfolio-leveltemperatureratings.CodevelopedbyCDPandWWF,incollaborationwiththeSBTi,themethodologyis,asfollows:•Transparent,•Public/Opensource,and•Science-based.Themethodology:•Enablesassessmentofcorporateemissionsreductiontargets;•Enablescomparisonofrelativeambitionofcorporateemissions–reductiontargets;•Providesaframeworkforbuildingengagementstrategies;and•Helpswithstrategicsecurityselectionandallocationdecisions.Thetargetprotocolrepresentsthefirststepoftheprocess,whichistoconvertindividualtargetsofvariousformatsintotemperaturescores.Thisisachievedbygeneratingsimpleregressionmodelsforestimatedwarmingin2100fromclimatescenarioswithshort-,medium-,andlong-termtrendsinmetricslikeabsoluteemissionsoremissionsintensities.RegressionmodelsaregeneratedbasedonFinancialSectorScience-BasedTargetsGuidance152scenariosintheIPCCspecialreporton1.5°Cscenariodatabase(CDPandWWF2020).Inadditiontodefiningmethodsfordisclosedtargets,thisstepoutlinesthemethodologyusedtodefineadefaultscoretobeappliedtoallcompaniesthatdonotdiscloseanyemissionsreductiontargetspublicly.Sincemanycompanieshavemultipleclimatetargets,coveringdifferentscopesandtimeframes,aprotocolisthenusedtoaggregatealltargetdataintoscoresatacompanylevel.Thisprotocoldefinestheminimumqualitycriteriafordeterminingtheacceptabilityofatargettobescoredandthestepsrequiredtoidentifyandaggregatemultipletargetstoproduceanoverallcompanyscore.Thefinalstepisusedtoweightcompanyscoreswhenassessinganindexorportfolioofcompanies,suchasinthecontextoffinancialportfolios.Sevenpotentialoptionsforaggregatingindividualcompanytemperaturescoresattheindex/portfolioarecurrentlyavailable.Theseincludethefollowing:●Option1:Weightedaveragetemperaturescore(WATS);●Option2:Totalemissionsweightedtemperaturescore(TETS);●Option3:Marketownedemissionsweightedtemperaturescore(MOTS);●Option4:Enterpriseownedemissionsweightedtemperaturescore(EOTS);●Option5:EV+Cashemissionsweightedtemperaturescore(ECOTS);●Option6:TotalAssetsemissionsweightedtemperaturescore(AOTS);and●Option7:Revenueownedemissionsweightedtemperaturescore(ROTS).TableE1belowprovidesadescriptionandformulaforcalculatingtheportfoliotemperaturescoresusingeachoftheseoptions.TableE1.PortfolioWeightingOptionsOptionMethodTemperatureScoreFormula(whereTS=Companytemperaturescore)Weightedaveragetemperaturescore(WATS)Temperaturescoresareallocatedbasedonportfolioweights.Forinstance,ifacompanyisallocated10%oftheoverallinvestedvalue,itisweightedat10%.∑(𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑤𝑒𝑖𝑔ℎ𝑡𝑖×𝑇𝑆𝑖)𝑖𝑛FinancialSectorScience-BasedTargetsGuidance153Totalemissionsweightedtemperaturescore(TETS)TemperaturescoresareallocatedbasedonhistoricalemissionweightsusingtotalcompanyGHGemissions.∑(𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠×𝑇𝑆𝑖)𝑖𝑛Marketownedemissionsweightedtemperaturescore(MOTS)Temperaturescoresareallocatedbasedonanequityownershipapproach.∑((𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑖𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑚𝑎𝑟𝑘𝑒𝑡𝑐𝑎𝑝×𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜𝑚𝑎𝑟𝑘𝑒𝑡𝑣𝑎𝑙𝑢𝑒𝑜𝑤𝑛𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠)×𝑇𝑆𝑖)𝑖𝑛EnterpriseOwnedemissionsweightedtemperaturescore(EOTS)Temperaturescoresareallocatedbasedonanenterpriseownershipapproach∑((𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑖𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒𝑣𝑎𝑙𝑢𝑒×𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑇𝑜𝑡𝑎𝑙𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒𝑜𝑤𝑛𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠)×𝑇𝑆𝑖)𝑖𝑛Enterprisevalue+cashemissionsweightedtemperaturescore(ECOTS)Temperaturescoresareallocatedbasedonanenterprisevalue(EV)pluscashandequivalentsownershipapproach.∑((𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑖𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝐸𝑉+𝐶𝑎𝑠ℎ×𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑇𝑜𝑡𝑎𝑙𝐸𝑉+𝐶𝑎𝑠ℎ𝑜𝑤𝑛𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠)×𝑇𝑆𝑖)𝑖𝑛Totalassetsemissionsweightedtemperaturescore(AOTS)Temperaturescoresareallocatedbasedonatotalassetsownershipapproach.∑((𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑖𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠×𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠𝑜𝑤𝑛𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠)×𝑇𝑆𝑖)𝑖𝑛FinancialSectorScience-BasedTargetsGuidance154Revenueownedemissionsweightedtemperaturescore(ROTS)Temperaturescoresareallocatedbasedontheshareofrevenue.∑((𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑖𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑅𝑒𝑣𝑒𝑛𝑢𝑒×𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑇𝑜𝑡𝑎𝑙𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑜𝑤𝑛𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠)×𝑇𝑆𝑖)𝑖𝑛Sources:TemperatureRatingMethodology,CDPWorldwideandWWFInternational2020.FigureE1presentsanoverviewofhowthethreeprotocolsfittogethertoformthetemperatureratingmethodology.FinancialSectorScience-BasedTargetsGuidance155FigureE1.TemperatureRatingMethodologyOverviewSources:TemperatureRatingMethodology,CDPWorldwideandWWFInternational2020Thefullmethodologycanbefoundhere.TargettypeandtimeframecriteriaNotargetsRegressionmodelsforeachtargettypeTranslationofambitiontotemperaturerangesforeachtargettypeProtocolforselecting/interpretingcorporatetargetsDefaultMethodologyforallnondisclosingcompaniesandscopeswithnotargetsTargetsAggregationmethodstocombinemultipletargetscoresintocompanylevelscoresWeightingmethodforindex/portfolioaggregationTemperaturescorespertargettypeTemperaturescoresperportfolioIPCCSpecialReport1.5°CDPCorporateTargetsDataSetTemperaturescorespercompanyIndexconstituentsCDPGHGemissionsdatasetIndexconstituentsareweightedbytotalGHGemissions(scope1+2+3)TargettypeandtimeframecriteriaNotargetsRegressionmodelsforeachtargettypeTranslationofambitiontotemperaturerangesforeachtargettypeProtocolforselecting/interpretingcorporatetargetsDefaultMethodologyforallnon-disclosingcompaniesandscopeswithnotargetsTargetsAggregationmethodstocombinemultipletargetscoresintocompanylevelscoresWeightingmethodforindex/portfolioaggregationStep1:TemperaturescoreattargetlevelStep2:TemperaturescoreatcompanylevelStep3:TemperaturescoreatportfoliolevelTemperaturescorespertargettypeTemperaturescoresperindex/portfolioIPCCSpecialReport1.5°CDPCorporateTargetsDataSetTempscorespercompanyIndexconstituentsCDPGHGemissionsdatasetIndexconstituentsareweightedbytotalGHGemissions(Scope1+2+3)FinancialSectorScience-BasedTargetsGuidance156F.SBTiFinanceTemperatureRatingandPortfolioCoverageToolBasedontheTemperatureRatingmethod,developedbyCDPandWWF,thistoolhelpscompaniesandfinancialinstitutionstoassessthetemperaturealignmentofcurrentemissionsreductiontargets,commitments,andinvestmentandlendingportfolios.TheycanforinstanceusethisinformationtodeveloptheirownGHGemissionsreductiontargetsforofficialvalidationbytheSBTi,developengagementstrategies,andhelpwithstrategicsecurityselectionandallocationdecisions.Thischapterprovidesanontechnicalintroductionandoverviewofwhatthetoolisfor,thetypesofoutputsitdelivers,whatdataarerequired,howitworks,andwhereyoucanfindmoreinformationanddocumentationtostartusingthetool.WhyhastheSBTiBuiltthisTool?TherehasbeenagrowinginterestinmethodstomeasurethealignmentofcompaniesandinvestmentportfolioswiththeParisAgreement.ThesuccessoftheScienceBasedTargetsinitiativehasseenarapidgrowthinthenumberofcompanieswithemissionsreductiontargetsapprovedbytheSBTi,andtherefore,agrowingnumberofcompaniesclaimingalignmenttothelong-termtemperaturegoalssetoutintheParisAgreement.TheSBTihasdevelopedacodebasetofunctionasacalculatorforthePortfolioCoverageandTemperatureRatingmethods.Thistoolisfedwiththenecessarydatatogeneratetemperaturescoresatthecompanyandportfoliolevel,inadditiontoprovidinganalyticsontargetsettingandcompanyemissionsreductionambitions.Italsogivesusersaccesstowhat-ifanalysis,toaidtheirdecision-makingprocess.Thecodereflectsthelogicalstepsthatareoutlinedinthepubliclyavailabletemperatureratingmethodology,developedbyCDPandWWF.Thetoolwascreatedtoenablethewidespreadimplementationofthemethodbydataprovidersandfinancialinstitutions,toworkwithanydatasourceandinmostITenvironments.Foreachmethod,thetoolprovidesthefollowingoutputs:•Portfoliocoverage:GeneratethepercentageoftheportfoliocurrentlycoveredbySBTi-approvedtargets;and•Temperaturerating:Generatethecurrenttemperaturescoreoftheportfolio(inadditiontotheindividualtemperaturescoresoftheportfoliocompanies).Italsoenablesthegenerationofaseriesofwhat-ifscenariostoshowcasehowthistemperaturescorecouldbereduced.WhyhaveWeBuilttheSBTiFinanceToolinthisWay?Tohelpfinancialinstitutionsfightclimatechange,theSBTiwantsthetooltobeaccessible,useful,andwidelyusedbyfinanceprofessionalsandotherusers.Ifitiseasytoaccess,notseenasacompliancetoolonlyusedonceayear,butatooltosupporttheinvestmentprocess,itwillmorelikelybeutilizedwidely.Therefore,whentheSBTistartedthedevelopmentprocess,wesetupalistofrequirementsforthetool.Someofthehigh-levelrequirementswere,asfollows:•Distribution—mostinvestmentprofessionalsshouldhaveeasyaccesstothetool;•Transparent—withfulloutputaudittrailandopenmethodology;FinancialSectorScience-BasedTargetsGuidance157•Dataagnostic—tobeusedwithanydataprovideroraninstitution’sowndatalake;•Anyinfrastructure—tobeintegratedwithserviceproviders’orhomegrowndecisionsupportsolutions;•Workflowtool—tobeintegratedininvestmentprofessionals’dailyworkflow;•Datasecurity—tomakesurefinancialportfoliodataarenotcompromised;•Scale—tobeabletousethetoolatscaleformanyportfoliosandaggregatedonfinancialinstitutionlevel;and•Continueddevelopment—ensureenhancementofthemethodandtoolforfuturerequirements.Giventheserequirements,theSBTideterminedanopen-sourcePython-basedsolutiontobemostappropriate.Suchatoolcanbeintegratedintoexistingsolutions,inmanycasesmakinguseofthesamesecureinfrastructureasinhouseorcommercialapplications.Asthetoolpullsdatafromexistingintegrationofdataprovidersand/orinternaldatalakes,thereisnoneedtogooutsidethisinfrastructuretoaccessordelivernecessarydata.Hence,nodatathatarenotalreadywithintheinstitution’sdomainneedtoenterorexittheinstitutiontousethetool.Theapproachbringsthemodeltothedata,ratherthantheotherwayaround.SBTiFinancelaunchedarequestforproposal(RfP)forbuildingthecodebasetoturnthemethodologyintoacalculationengineinearly2020.TheselectedSBTiFinanceTooldevelopmentprojectpartnersareOrtecFinanceandtheOS-Climate.Tomakesurewebuiltatoolthatfromtheoutsetcouldworkinasmanydifferentenvironmentsandforasmanydifferentusersaspossible,wereachedouttousersanddataandserviceprovidersandinvitedthemtoworkwithusinourprojectteam.Thisgavebothusersanddataproviderstheopportunitytoinfluencethedevelopmentprocessandtoprepareanddeveloptheirownsolutions,data,andprocessestoworkwiththetool.Thishasbeenveryhelpfulingettingtheirperspectives,tomakesurethetoolworkwithasmanydataproviders’dataaspossible,andthatitfitswithmanyusers’existingworkflow.Astrongconfirmationofthevarioustoolusecasesisthefactthatanumberofdata/serviceprovidershavedevelopedorareintheprocessofdevelopingvarioussolutionsbasedonthetoolandthemethodology,tooffertheirclients.ThiscollaborationalsogivestheSBTiFinanceToolawiderreachthanwhattheSBTicouldhaveachievedotherwise,andthetoolshouldbeavailablenativelyintheirexistinginfrastructureforasignificantproportionofthefinancialinstitutionsglobally.Thisintegrationshouldalsoensurethatthetoolcanbeusedatscale,tohelplargeandsmallfinancialinstitutionsaliketoquicklyanalyzealltheirportfolios’andconstituents’temperaturescores.Theopen-sourcenatureofthecodebasemeansthatanyuser,dataorserviceprovidercanusethecodetobuildtheirownapplicationsaroundtheSBTiFinanceTool.Italsomeansthatitisavailableforalluserstointegrateintotheirowninfrastructure,withoutanylicensingcost.ThisshouldalsoensurethatthecodecontinuestobedevelopedbothbytheSBTi,dataandserviceproviders,andtheopensourcecommunity.Thetoolalsoprovidesfulltransparencywithregardtohowthetoolandmethodologyfittogetherthroughtheopen-sourcenatureofboththecodebaseandthemethodology.Wehavealsoprovidedeasytousefunctionalitytoextracteverysingledatapointgeneratedbythetool,toprovideafullaudittrail,andtransparencyintohowthetemperaturescoreiscalculated.DuringSummer2020weranapublicbeta-testingphase,opentoanyorganizationorindividual.Thebeta-testingphaseincludedmorethan110registeredbetatesters.UsersprovidedfeedbackontheFinancialSectorScience-BasedTargetsGuidance158tool’sfunctionality,documentationrequirements,performance,andusability.Thisfeedbackhasbeenincorporatedinthefinalreleaseversion.Altogether,ourconversationswithusersanddataprovidersandthefeedbackfrom110betatestersindicatesthatthedevelopmentprocessandthestructureoftheSBTiFinanceToolhasthepotentialtobecomeanintegratedexperienceandthatitcouldbecomeasnaturalforaportfoliomanageroranalyststouseastheirdiscountedcashflowmodelorattributionreport.Inturn,thisshouldensurethatportfolioandcompanytemperaturescoresstaytop-of-mindforfinanceprofessionalsandthatthisultimatelyleadstomoreefficientengagementprocessesandGHGemissionsreductionsintherealeconomy.WhatCanYouUsetheSBTiFinanceToolFor?TheSBTiFinanceTemperatureRatingandPortfolioCoverageToolenablesanalysisofcompanies,sectors,countries,investmentstrategies,andportfoliostounderstandhowtheycontributetoclimatechange.Youcan,forexample:•Measureyourportfolio'scurrenttemperaturescore;•Identifythebiggestcontributorsonanindividualcompany,country,andsectorbasis;•Usethetoolasanaidforstrategicallocationandsecuritiesselectiondecisions;•Analyzewhateffectchangesinyourportfoliomighthaveontheportfoliotemperaturescore;•Modelimpactofengagementonyourtemperaturescore;thatis,howyourscorecanimproveifyouareabletoconvinceaninvesteecompanytosetorimproveGHGemissionsreductiontargets;•Identifywhichcompanyengagementswouldhavethebiggestimpactonyourportfolio'stemperaturescore;•Planengagementstrategiesbasedonyourmodeling;•Fulfillregulatoryreportingcriteria,forexample,Article173inFranceandtheEUDisclosureregulation,regardingcurrentportfolioalignmentwiththeParisAgreement;and•Helpyoutocreateanactionplanforreachingyouremissionsreductiontarget.Giventhesepossibleinsights,asconfirmedbyourbeta-testingsurvey,thetoolisrelevantforawiderangeofstakeholders,forinstance:▪Portfoliomanagers—tosupportstrategicallocationdecisionsandinputintoESGdiscussionswithcorporatemanagement;▪Financialanalysts—tousethetemperaturescoreasaninputintothecostofcapitalforvaluationmodeling;▪ESGanalysts—toplanandexecutecorporateengagementstrategies;▪Riskmanagers—forinputintoclimate-relatedriskmodels;▪Complianceofficers—forEUDisclosureRegulationandArticle173reporting;▪Dataandserviceproviders—toprovidecompanytemperaturescoresandportfolioanalyticsfortheirusers;▪Chiefinvestmentofficers(CIOs)—tohelptounderstandtheportfolios’ESGposition;and▪Nongovernmentalorganizations(NGOs)—forfurtherresearchtoenhanceclimate-relatedmethodologies.FinancialSectorScience-BasedTargetsGuidance159WhatOutputsDoestheToolGenerates?Thetemperaturescorecanbecalculatedforalltimeframes(short-,medium-,long-term)andscope(scope1,2,3)combinationscoveredbytheSBTimethodology.TableF1providesanoverviewofthesixtemperatureratingsthatcanbegenerated.TableF1.SixCategoriesforEachCompanyBasedonGHGEmissionScopeCoverageandTargetTimeFrameSource:Authors.Thetemperaturescorecalculationisavailableforthefollowinglevels:▪Portfoliotemperaturescore:Theaggregatedscoreoverallcompaniesintheportfolio;▪Groupedtemperaturescore:Usingthe“groupby”option,theusercangettheaggregatedtemperaturescorepercategoryinachosenfield(e.g.,perregionorpersector);and▪Companytemperaturescore:Thetemperaturescoreofanindividualcompany.FigureF1belowprovidesillustrativeoutputsforgroupedtemperaturescoresbyregionandsector.Theseinsightshelpinformusecasessuchasmoretargetedengagementstrategies,aidingsecuritiesselectiondecisions,etc.FinancialSectorScience-BasedTargetsGuidance160FigureF1.IllustrativeOutputoftheTemperatureScoreonPortfolioLevel,GroupedbyRegionandSectorSource:Authors.FigureF2providesavisualizationoftheoutputswhenlookingatthetemperaturescorepercompany.Thislevelofgranularityofthetoolenablesuserstozoominonindividualscores,forexample,forinformingengagementand/ormonitoringtemperaturescoreprogressofinvestees.FigureF2.IllustrativeVisualizationoftheTemperatureScoreOutputsperCompanySource:Authors.FinancialSectorScience-BasedTargetsGuidance161Fortheportfoliotemperaturescoreandthegroupedtemperaturescore,additionalmoregranularinformationisreportedaboutthecompositionofthescore:▪Contributions:Theleveltowhicheachcompanycontributestothetotaltemperaturescorebasedonthechosenaggregationmethod.Thisvalueissplitupintocompanytemperaturescoreandrelativecontribution(e.g.,theweightoftheinvestmentinthecompanyrelativetothetotalportfoliowhenusingtheWATSaggregationmethod).▪Thepercentageofthescorethatisbasedontargetsvs.thepercentagebasedonthedefaultscore.▪Forthegroupedtemperaturescores:Thepercentageeachgroupcontributestotheportfoliotemperaturescore.Forexample:howmucheachregionorsectorcontributestothetotalscore.TableF2,takenfromaJupyterNotebookimplementationofthetool(see,http://getting-started.sbti-tool.org/forexecutingyourownrungsoftheJupyterNotebook)highlightsthecompanieswiththehighestcontributiontotheportfoliotemperaturescoreandatthesametimedisplaysownershipandportfolioweighttogivetheuseranindicationofwhereanengagementmaybemoresuccessful,purelyfromaquantitativeperspective.TableF2.IllustrativeOutputTableoftheTemperatureScoreandContributionAnalysisonCompanyLevelSource:Authors.FigureF3depictssimilaranalysisinamorevisualformat.Whatcanbeseeninthefigureistherelativecontributionstothesectortemperaturescores.FinancialSectorScience-BasedTargetsGuidance162FigureF3.IllustrativeVisualizationoftheTemperatureScoreOutputsandContributionResultsGroupedperSectorSource:Authors.Forthecompanytemperaturescores,youcanletthetoolgenerateallunderlyingdata,whichprovidesfulltransparencyandgivestheuserthefullaudittrailforhowthefinaltemperaturescorehasbeencalculated.Thisdataoutputprovides:▪Portfoliodata;▪Financialdata;▪GHGemissions;▪Usedtargetandallitsparameters;and▪Valuesusedduringcalculationsuchasthelinearannualreduction(LAR),mappedregressionscenario,andparametersfortheformulatocalculatethetemperaturescore.FinancialSectorScience-BasedTargetsGuidance163Youcanalsoanonymizetheoutputdata,whichremovesallnamesandidentifiers.Thisisparticularlyusefulforsharingresultsofyourtemperaturescorewithouthavingtorevealyourholdings,forexample,forsubmittingyourtemperaturescoretotheSBTiTargetValidationTeamtogetyourownGHGemissionsreductiontargetapproved.Atthesametime,itprovidestheopportunitytoauditthescoresduringthevalidationprocess.Formoredetailedexamples,pleaseseeJupyternotebookexamplesfoundathttp://getting-started.sbti-tool.org/.WhatDataareNeededtoUsetheTool?Thetoolitselfisdataagnosticandhasnobuilt-indatabases.Thismeansthatusersneedtoimportallneededdatatoperformtheanalysisandcanuseanydatasourcewiththenecessarydataavailable.Thesedatacancomefromavarietyofsourcesbutmustbeinputtedintherequiredformats.Thedataproviderswehaveworkedwithduringthedevelopmenthavebuiltorareintheprocessofbuildingsolutionstohelpwiththisprocess.Fourtypesofdataareneededtorunthetool.ThesearedescribedintheTableF3.TableF3.OverviewofDataInputsPortfolioholdings•Companyname•ISICsectorclassification•ISINand/orFIGI,ifavailable.OthercompanyidentifiercanalsobeusedtogetherwithISINsorFIGIsandarerequiredtomatchidentifiersfromthethreedatasourcesbelow.•Marketvalueofportfoliopositionforeachcompany,usingonecommonportfoliocurrencyCorporateGHGtargetsThisreferstothedatarequiredtoanalysecorporateGHGemissionsreductiontargets,including:•Targettypes(absolute/intensity)•Baseyear•Targetyear•Scopecoverage•Boundarycoveragewithinscope•Percentageachieved•Intensityactivity(ifappliable)CorporateGHGemissionsdataScope1+2andscope3emissionsdata,reportedormodelledFinancialSectorScience-BasedTargetsGuidance164CorporatefinancialdataSevenweightingoptionarecurrentlyavailabletoaggregatecompanyscorestoproduceportfolioscores.Dependingontheoptionchosen,thefollowingdatamayberequired:a.Investedvalue(holdings)b.Marketcapitalizationc.Enterprisevalued.Cashandequivalentse.Totalassetsf.RevenueNotes:ISIC=InternationalStandardIndustrialClassification;ISIN=InternationalSecuritiesIdentificationNumber;FIGI=FiscalInstrumentGlobalIdentifier.Source:Authors.Refertothedatarequirementssectionathttp://getting-started.sbti-tool.org/forfulldocumentation.Alsorefertothefullmethodologyfortemperaturerating.WhereCanIFindtheData?CommercialdataproviderssuchasBloomberg,CDP,ISS,MSCI,TruCost,andUrgentemcanprovidesomeorallthedataneededfortheSBTiFinanceTool.ThereisalsoafreedatasetavailablewithcorporateGHGtargetsdataontheSBTi'swebsite.ThisincludesdataofallthecompaniesthathavesetemissionsreductiontargetsthathavebeenapprovedbytheSBTiandisupdatedonaweeklybasis.YoucandownloadanExcel-filewiththedatahere:https://sciencebasedtargets.org/companies-taking-action/.ItislikelythatyourportfolioincludescompaniesthatarenotinthelistofcompanieswithSBTi-approvedtargets,butthathavepubliclyannouncedtargets.Commercialdataproviderssuchasthoselistedabovecanprovidetargetdataforthesecompanies.OverviewofHowtheToolWorksThecalculationmethodologyconsistsoffourkeysteps(FigureF4),eachrequiringspecificdatapointsthatareinputtedatthebeginningoftheprocess.ThesedatapointsarethenusedtoconvertthecorporateGHGemissionsreductiontargetsintotemperaturescoresatthecompanyandtheportfoliolevel.FinancialSectorScience-BasedTargetsGuidance165FigureF4.DataPointsfortheFour-StepProcessSource:Authors2020.Step1:Convertingpubliclystatedtargetstotemperaturescores.Thetargetsarefirstfilteredandare—ifvalid—translatedtoaspecifictemperaturescore,basedontherelevantregressionmodel(Section1.3inthemethodology).Thesectorclassificationofthecompanyisusedtoensurethatthetargetiscorrectlymappedtotheappropriateregressionmodel;forexample,atargetforpowergenerationmustbemappedtothepowersectorpathwayandcorrespondingregressionmodel.Thisprocessenablesthetranslationoftargetambitionoveracertaintargettimeperiodintoatemperaturescore.Forexample,a30percentreductiontargetinabsoluteGHGemissionsover10yearscanbeconvertedintoatemperaturescoreof1.76°C.Itshouldbenotedthatthosecompanieswithoutavalidtargetareassignedadefaulttemperaturescore(Section1.4inthemethodology),ratherthanbeingexcludedfromtheanalysis.Step2:Aggregateacrosstargets(ifapplicable)toacompany-leveltemperaturescore.ReportedcorporateGHGemissiondataareemployedtoaggregatecompany-leveltemperaturescores.Step3:Aggregateindividualcompanytemperaturescorestoportfolio-levelscores.Alltheindividualtemperaturescorespercompanyinaportfolioarethencombinedwithportfoliofinancialdatatogeneratescoresattheportfoliolevel.Step4:Runwhat-ifanalysisviathescenariogenerator.Aftertheinitialscorecalculations,ascenariogeneratorcanbeusedtodeterminehowcertainactions,forexample,engagement,canchangetheportfoliotemperaturescoreovertime.Whenrunningthesewhat-ifscenarios,thetemperaturescoreisrecalculatedwiththeassumptionthat,basedonvariousengagements,someorallthecompaniesintheportfoliodecidedtoset(moreambitious)targets.Thefollowingwhat-ifanalysesareincludedinthetoolinTableF4:TableF4.What-IfAnalysisOptionsScenario1Inthisscenarioallcompaniesintheportfoliothatdidnotyetsetavalidtargethavebeenpersuadedtoset2.0°Ctargets.Thisissimulatedbychangingallscoresthatusedthedefaultscoretoascoreof2.0°C.Scenario2Inthisscenarioallcompaniesthatalreadysettargetsarepersuadedtoset“well-below2.0°C(WB2C)targets.Thisissimulatedbysettingallscoresofthecompaniesthathavevalidtargetstoatmost1.75°C.FinancialSectorScience-BasedTargetsGuidance166Scenario3Inthesescenariosthetop10contributorstotheportfoliotemperaturescorearepersuadedtoset2.0°Ctargets.oScenario3a:Alltop10contributorsset2.0°Ctargets.oScenario3b:Alltop10contributorssetWB2C,i.e.,1.75°Ctargets.Scenario4Inthisscenariotheusercanspecify(byadding“TRUE”intheengagementtargetscolumnintheportfoliodatafile)whichcompaniesitwantstoengagewithtoset2.0°CorWB2Ctargets.oScenario4a:Allcompaniesthataremarkedasengagementtargetsset2.0°CtargetsoScenario4b:AllcompaniesthataremarkedasengagementtargetssetWB2Ctargets.Source:Authors.HowcanIRunthetool?TheSBTiFinanceToolhasbeenbuiltasanopen-source,data-agnostictoolandworkswithinputdatafromanydataproviderandinmanydifferentITinfrastructures.Assuch,theSBTiFinanceToolfortemperatureratingandportfoliocoveragecanbeusedinseveralways,dependingonthespecificpreferencesoftheuser.Ifyouareunsurewhetherthetoolwillbeusefulforyourapplicationandworkflow,oryouwouldfirstliketorunsomeexamplestogetabetterideaofhowthetoolworksandwhattypesofoutputsitgenerates,the‘1_analysis_example’notebook(https://github.com/OFBDABV/SBTi/blob/master/examples/1_analysis_example.ipynb)offersaquickandno-codeopportunityforsuchtesting.Thenotebookcombinestextandcodetoprovideatestingenvironmentforyourresearch,togiveyouanunderstandingofhowthetoolcanhelpyouanalyzecompanies’andportfolios’temperaturescores,andtoaidyourengagementandinvestmentdecisions.Thenotebookisloadedwithexampledata,butyoucanalsouseyourowndata.Foryourfirsttest,youcansimplyrunthecodecellsonebyoneinthecurrentsequence,togetanunderstandingofhowitworks.IfyouarenotfamiliarwithNotebooks,pleaserefertothisintroduction.TechnicalStructureFigureF5providesanoverviewofthedifferentpartsofthefulltoolkitandtheirdependencies:FinancialSectorScience-BasedTargetsGuidance167FigureF5.OverviewoftheToolKitSource:Authors.Asshownabove,thePythoncodeformsthecorecodebaseoftheSBTiFinanceTool.ThePythonpackageisrecommendedifuserswouldliketointegratethetoolintheirowncodebase.Inturn,thesecondoptionisrunningthetoolviatheapplicationprogramminginterface(API)ifusers’preferenceistoincludethetoolasaMicroserviceintheirexistingITinfrastructureinthecloudoronpremise.Thedevelopmentprojectalsoincludedthecreationofasimpleuserinterface(UI),whichcanbeusedforeasieruserinteractionincombinationwiththeAPI.TheSBTitoolenablesthreemainwaysofinstallingand/orrunningthetool:▪UserscanintegratethePythonpackageintheircodebase.Formoredetailedandup-to-dateinformationonhowtorunthetoolviathePythonpackage,pleaseconsultthe“GettingStartedUsingPython”sectionathttp://getting-started.sbti-tool.org/.▪ThetoolcanbeincludedasaMicroservice(containerizedRESTAPI)inanyITinfrastructure(inthecloudoronpremise).Formoredetailedandup-to-dateinformationonhowtorunthetoolviatheAPI,pleaseconsultthe“GettingStartedUsingRESTAPI”sectionathttp://getting-started.sbti-tool.org/.Optionally,theAPIcanberunwithafrontendUI.Thissimpleuserinterfacemakestestingbynontechnicaluserseasier.Formoredetailedandup-to-dateinformationonhowtousetheUIasafrontendtotheAPI,pleaseconsultthe“GettingStartedUsingRESTAPI”sectionathttp://getting-started.sbti-tool.org/.▪Duringthedevelopmentofthistool,wehaveworkedwithseveraldataandserviceproviderstothefinancialandESGmarkets,somewhohaveorareintheprocessofimplementingthetoolandmethodologyintotheircommercialsolutions.TheseprovidersincludeBloomberg,CDP,ISS,MSCI,OrtecFinance,TruCost,andUrgentem.Makinguseoftheirsolutionscanforsomeusersbetheeasiestwaytointegratethetoolintoexistinginfrastructureandworkflow,toanalyzeportfolios’andcompanies’temperaturescores.FinancialSectorScience-BasedTargetsGuidance168Giventheopen-sourcenatureofthetool,thecommunityisencouragedtomakecontributions(referto“Contributing”sectionathttp://getting-started.sbti-tool.org/)tofurtherdevelopand/orupdatethecodebase.Contributionscanrangefromsubmittingabugreport,tosubmittinganewfeaturerequest,allthewaytofurtherenhancingthetool’sfunctionalitiesbycontributingcode.Formoreinformationonthetool,illustrativeusecases,aswellashowtoinstallandrunthetool,pleaseconsulthttp://getting-started.sbti-tool.org/.FinancialSectorScience-BasedTargetsGuidance169References2dii(2DegreesInvestingInitiative).2014.ParisAgreementCapitalTransitionAssessment.https://www.transitionmonitor.com/.AmundiAssetManagement.2020.“CDPPioneersNewTemperatureRatingofCompaniesforInvestors.”https://int.media.amundi.com/assets/pr-7-july-cdp-temperature-ratings-pdf-7016-b6afb.html?lang=en.Aden,Nate.2019.“JapanIsLeadingonBusinessClimateEngagement.WillAmbitiousPoliciesFollow?,”June28.WorldResourcesInstitute.https://www.wri.org/blog/2019/06/japan-leading-business-climate-engagement-will-ambitious-policies-follow.BAFU(BundesamtfürUmwelt).2016.“LifecycleInventoryDataintheBuildingSector.”https://www.kbob.admin.ch/kbob/de/home/publikationen/nachhaltiges-bauen/oekobilanzdaten_baubereich.html.BankJ.SafraSarasin,Ltd.2020.“AssetManagementClimatePledge.”https://www.jsafrasarasin.com/internet/com/com_index/news/j._safra_sarasin_asset_management_launches_a_climate_pledge_aiming_for_a_carbon-neutral_outcome_by_2035/com_media_relations.htm.CDPWorldwideandWWFInternational.2020.TemperatureRatingMethodology:ATemperatureRatingMethodforTargets,Corporates,andPortfolios-BetaVersion.CDPWorldwideandWWFInternational.https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/comfy/cms/files/files/000/003/741/original/Temperature_scoring_-_beta_methodology.pdf.“CommissionDelegatedRegulation(EU).”2020.EuropeanCommission.https://ec.europa.eu/transparency/regdoc/rep/3/2020/EN/C-2020-4757-F1-EN-MAIN-PART-1.PDF.CRREM(CarbonRiskRealEstateMonitor).2020.“GlobalPathways.”https://www.crrem.org/pathways/.Cummis,Cynthia,ShilpaPatel,ChrisWeber,JakobThomae,StanDupre,andRemcoFischer.“ExploringMetricstoMeasuretheClimateProgressofBanks.”2018.https://www.wri.org/publication/exploring-metrics-to-measure-the-climate-progress-of-banks.TheEconomist.n.d.“HowMuchCanFinanciersDoaboutClimateChange?”https://www.economist.com/briefing/2020/06/20/how-much-can-financiers-do-about-climate-change.Hoepner,A.G.F.,P.Masoni,B.Kramer,D.Slevin,S.Hoerter,S.Humphreys,H.ViñesFiestasetal.2019.“HandbookofClimateTransitionBenchmarks.Paris-AlignedBenchmarkandBenchmarks’ESGDisclosure.”Brussels:EuropeanCommission.IEA(InternationalEnergyAgency).2013.TransitiontoSustainableBuildings:StrategiesandOpportunitiesto2050.Paris:IEA.IEA.2016.WorldEnergyInvestment2016.Paris:IEA.FinancialSectorScience-BasedTargetsGuidance170IEA.2017.EnergyTechnologyPerspectives2017.Paris:IEA.IPCC(IntergovernmentalPanelonClimateChange).2018.GlobalWarmingof1.5°C.AnIPCCSpecialReportontheImpactsofGlobalWarmingof1.5°CabovePre-industrialLevelsandRelatedGlobalGreenhouseGasEmissionPathways,intheContextofStrengtheningtheGlobalResponsetotheThreatofClimateChange,SustainableDevelopment,andEffortstoEradicatePoverty.EditedbyV.Masson-Delmotte,P.Zhai,H.-O.Pörtner,D.Roberts,J.Skea,P.R.Shukla,A.Pirani,et.al.Raynaud,Julie,StephaneVoisin,PeterTankov,AnuschkaHilke,andAlicePauthier.2020.TheAlignmentCookbook-ATechnicalReviewofMethodologiesAssessingaPortfolio’sAlignmentwithLow-CarbonTrajectoriesorTemperatureGoal.InstitutLouisBachelier.https://www.louisbachelier.org/wp-content/uploads/2020/07/rapport-0207-mis-a-jours.pdf.Jakob,Michael,JanChristophSteckel,FrankJotzo,BenjaminK.Sovacool,LauraCornelsen,RohitChandra,OttmarEdenhofer,etal.2020.“TheFutureofCoalinaCarbon-ConstrainedClimate.”NatureClimateChange10,no.8(August2020):704–7.https://doi.org/10.1038/s41558-020-0866-1.“KLPGoesCoalFree.”2020.KLP-English.AccessedSeptember25.https://www.klp.no/en/press-room/klp-goes-coal-free.Kölbel,JulianF.,FlorianHeeb,FalkoPaetzold,andTimoBusch.2019.“CanSustainableInvestingSavetheWorld?ReviewingtheMechanismsofInvestorImpact.”SSRNScholarlyPaper.Rochester,NY:SocialScienceResearchNetwork,July20.https://papers.ssrn.com/abstract=3289544.Krabbe,Oskar,GielLinthorst,KornelisBlok,WinaCrijns-Graus,DetlefP.vanVuuren,NiklasHöhne,PedroFaria,NateAden,andAlbertoCarrilloPineda.2015.“AligningCorporateGreenhouse-GasEmissionsTargetswithClimateGoals.”NatureClimateChange5(12):1057–1060.doi:10.1038/nclimate2770.NATIXIS.2018.“ESRSectorPolicyApplicabletoOil&GasIndustry.”https://www.natixis.com/natixis/upload/docs/application/pdf/2018-11/natixis_esr_sector_policy__oil__gas.pdf.Partington,Richard.2019.“BankofEnglandBossSaysGlobalFinanceIsFunding4CTemperatureRise.”TheGuardian.https://www.theguardian.com/business/2019/oct/15/bank-of-england-boss-warns-global-finance-it-is-funding-climate-crisis?CMP=share_btn_link.PCAF(PartnershipforCarbonAccountingFinancials).2019a.ShapingtheClimateActionJourneyforFinancialInstitutions.”https://carbonaccountingfinancials.com/files/downloads/Overview-Initiatives-Shaping-Climate-Action-Journey-for-FIs.pdf.PCAF.(PartnershipforCarbonAccountingFinancials).2019b.AccountingGHGEmissionsandTakingAction:HarmonisedApproachfortheFinancialSectorintheNetherlands.https://carbonaccountingfinancials.com/files/downloads/1911-pcaf-report-nl.pdf?6253ce57ac.FinancialSectorScience-BasedTargetsGuidance171PCAF.(PartnershipforCarbonAccountingFinancials).2019c.HarmonizingandImplementingaCarbonAccountingApproachfortheFinancialSectorinNorthAmerica.https://carbonaccountingfinancials.com/files/2019-10/20191028-pcaf-report-2019.pdf.PCAF(PartnershipforCarbonAccountingFinancials).2020.“TheGlobalGHGAccountingandReportingStandardfortheFinancialIndustry.”FirstEdition.https://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf.RICS(RoyalInstitutionofCharteredSurveyors).2017.WholeLifeCarbonAssessmentfortheBuiltEnvironment.https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/building-surveying/whole-life-carbon-assessment-for-the-built-environment-1st-edition-rics.pdf.RobecoInstitutionalAssetManagementB.V.2020.“ExclusionPolicyRobeco:RobecoInstitutoinalAssetManagement.”https://www.robeco.com/docm/docu-exclusion-policy-and-list.pdf.RockyMountainInstitute,CarbonTrackerInitiative,SierraClub.2020.“HowtoRetireEarly:MakingAcceleratedCoalPhaseoutFeasibleandJust.”Basalt,CO:RockyMountainInstitute.SAST(SafraSarasinInvestmentFoundation).2019.SustainableRealEstateSwitzerland,SustainabilityReport.https://product.jsafrasarasin.com/internet/product/en/dl-fl?dl=0E9D7D47EBCEAC30.SBTi(ScienceBasedTargetsinitiative).2015.SectoralDecarbonizationApproach(SDA):AMethodforSettingCorporateEmissionReductionTargetsinLinewithClimateScience.ScienceBaseTargets.https://sciencebasedtargets.org/wp-content/uploads/2015/05/Sectoral-Decarbonization-Approach-Report.pdf.SBTi.2019a.“CompaniesTakingAction.”https://sciencebasedtargets.org/companies-taking-action/.SBTi.2019b.Science-BasedTargetSettingManual.https://sciencebasedtargets.org/wp-content/uploads/2017/04/SBTManual-Draft.pdf.SBTi.2019c.Science-BasedTargetSettingTool.https://sciencebasedtargets.org/wp-content/uploads/2018/11/SBTi-tool.xlsx.SBTi2020a.“Forest,Land,andAgriculture.”https://sciencebasedtargets.org/sector-development/forest-land-and-agriculture/.SBTi.2020b.“NetZeroScienceBasedTargets.”https://sciencebasedtargets.org/net-zero/.SBTi.2020c.“SBTforResidentialMortgageandCommercialRealEstateCalculationSheet.”SBTi.2020d.“SBTiCriteriaandRecommendationsV4.1.”https://sciencebasedtargets.org/wp-content/uploads/2019/03/SBTi-criteria.pdf.FinancialSectorScience-BasedTargetsGuidance172SBTi.2020e.“PowerSectorScienceBasedTargets.”https://sciencebasedtargets.org/sector-development/power-sector/.SBTi.2020f.“TakeActionScienceBasedTargets.”https://sciencebasedtargets.org/step-by-step-guide/.SwissParliament.2020.“TotalRevisionoftheSwissCO2-Lawafter2020.”https://www.parlament.ch/de/ratsbetrieb/suche-curia-vista/geschaeft?AffairId=20170071.WRI(WorldResourcesInstitute)andWBCSD(WorldBusinessCouncilforSustainableDevelopment).2004.TheGreenhouseGasProtocol.ACorporateAccountingandReportingStandard,2nded.Washington,DC:WRIandWBCSD.WRIandWBCSD.2011.TheGreenhouseGasProtocol.CorporateValueChain(Scope3)AccountingandReportingStandard.Washington,DC:WRIandWBCSD.http://www.ghgprotocol.org/corporate-value-chain-scope-3-accounting-and-reportingstandard.WRIandWBCSD.2013.TechnicalGuidanceforCalculatingScope3Emissions.Version1.0.Washington,DC:WRIandWBC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