Risk & Economy » Climate change » What finance teams should know about SBTi’s new guidance

What finance teams should know about SBTi's new guidance

The global shift towards a low-carbon economy has prompted a significant transformation within the financial sector.

In response to this, the Science Based Targets initiative (SBTi) has recently unveiled a suite of revisions and new resources to enable financial institutions (FIs) to set ambitious near-term emission reduction targets. These changes aim to align the criteria with the SBTi Corporate Net-Zero Standard, enhance clarity and usability, and introduce new criteria for addressing FIs’ fossil fuel-related activities.

“FINT Criteria V2 will come into full effect as of 30 November 2024. All FIs that submit targets before this date can choose to be assessed against either FINT Criteria V2 or the Criteria and Recommendations for Financial Institutions Version 1.1.2,” the SBTi says. 

The financial sector’s role in addressing climate change has become increasingly prominent in recent years. FIs are recognising the extent of climate risks and their influence on the global economy, prompting them to urgently review their investment, lending, and insurance activities to avoid catastrophic climate change and fund a climate-secure, net-zero future.

More than 100 financial institutions worldwide have already used SBTi criteria to set Paris-aligned near-term science-based emissions reduction targets across their operations and portfolios. Additionally, over 200 banks, asset managers, private equity firms, asset owners, insurance companies, and other FIs have committed to set their own science-based targets in the near future.

Key Changes in SBTi’s Financial Institutions’ Near-Term Criteria (FINT Criteria V2)

The SBTi’s updated Financial Institutions’ Near-Term Criteria (FINT Criteria V2), set to take effect on 30 November 2024, introduce several significant changes that corporate finance teams should be aware of:

  • Increased Ambition Levels: One of the primary changes in FINT Criteria V2 is the increase in minimum scope 1 and 2 target ambition from well-below 2°C to 1.5°C alignment. This heightened level of ambition aligns with the SBTi Corporate Net-Zero Standard and reflects the urgency to limit global temperature rise to 1.5°C, as outlined in the Paris Agreement.
  • Shorter Timeframe for Emissions Reduction Targets: FINT Criteria V2 reduces the scope 1 and 2 target timeframe from 5-15 years to 5-10 years. This shorter timeframe is designed to drive more immediate action and accountability in achieving near-term emissions reductions.
  • Enhanced Coverage Requirements: The updated criteria introduce a 67% coverage floor requirement, in addition to more detailed coverage requirements for various asset classes and business activities. This ensures that FIs’ targets cover a significant portion of their portfolios, fostering greater transparency and accountability.
  • Fossil Fuel Finance Criteria: FINT Criteria V2 includes new criteria to address FIs’ activities in the fossil fuel sector. This includes requirements for FIs to disclose, halt, transition, and phase out their fossil fuel-related financing, aligning with the Paris Agreement’s goal of limiting global temperature increase to 1.5°C.
  • Recalculation and Updating of Targets: The updated criteria mandate that FIs must recalculate their targets every five years to ensure they remain valid and aligned with the latest science and industry best practices. This ongoing review process helps FIs adapt to changing market conditions and technological advancements.

Implications for Corporate Finance Teams

The changes introduced in FINT Criteria V2 have significant implications for corporate finance teams, as they will face increased pressure from investors, lenders, and insurers to set, disclose, and deliver on credible emissions reduction targets.

To meet these evolving expectations, corporate finance teams will need to collaborate closely with their sustainability counterparts. This collaboration will be crucial in aligning corporate climate transition plans, emissions, and other sustainability strategies with those of the financial partners used to access capital markets.

Accurate and comprehensive tracking of corporate greenhouse gas emissions will also be essential for FIs to set and validate their science-based targets. This presents an opportunity for finance and sustainability teams to enhance their knowledge-sharing and streamline their emissions data management processes.

CFOs should engage with their sustainability colleagues to ensure that sustainability is more seamlessly integrated into their financial strategy. This alignment will help FIs and their corporate clients navigate the new FINT Criteria V2 requirements and maintain access to capital, lending, and insurance services.

Navigating the Fossil Fuel Finance Criteria

The introduction of criteria related to financial institutions’ (FIs) fossil fuel-related activities is one of the most significant changes in FINT Criteria V2. Corporate finance teams must understand these new requirements and develop strategies to address them effectively. FIs will be required to disclose their current exposure to the fossil fuel sector, including the types of financing activities, the companies and projects they support, and the associated emissions.

The criteria mandate that FIs must halt the provision of new financing for fossil fuel expansion projects and companies that do not have credible transition plans aligned with the Paris Agreement. Furthermore, FIs will need to develop and implement plans to transition their existing fossil fuel-related portfolios towards more sustainable, low-carbon alternatives. This may involve engaging with clients, providing transition financing, and actively supporting their decarbonization efforts.

Over time, FIs will be expected to phase out their financing of the fossil fuel sector entirely, in line with the Paris Agreement’s goal of limiting global temperature rise to 1.5°C. This transition will require significant effort and collaboration between FIs, their clients, and other stakeholders to ensure a smooth and effective shift towards a more sustainable future.

Aligning with the SBTi Corporate Net-Zero Standard

The updates to FINT Criteria V2 are closely aligned with the SBTi Corporate Net-Zero Standard, which sets the framework for companies to develop both near-term and long-term science-based targets to achieve net-zero emissions. As corporate finance teams work to align their sustainability strategies with the SBTi’s guidance, they must ensure that their near-term emissions reduction targets and long-term net-zero commitments are mutually reinforcing. This will require a comprehensive review of their climate action plans, investment decisions, and financial partnerships.

To effectively implement their net-zero strategies, corporations will need to collaborate closely with their financial partners, including banks, asset managers, and insurance providers. This collaboration will help ensure that the flow of capital, credit, and risk management services supports the achievement of corporate net-zero goals. By working together, corporations and the financial sector can drive the transition to a low-carbon economy and contribute to the global effort to mitigate climate change.

The Evolving Role of the Financial Sector in Climate Action

The SBTi’s updates to the financial sector guidance underscore the growing importance of the financial industry’s role in driving the transition to a low-carbon economy. As corporate finance teams navigate these changes, they must recognize the strategic significance of their partnerships with FIs and the need for a holistic, collaborative approach to sustainability.

By setting science-based emissions reduction targets, FIs can better understand and manage their exposure to climate-related risks, such as stranded assets, transition risks, and physical risks. This, in turn, can improve their resilience and long-term financial performance. Moreover, FIs that align their financing activities with the Paris Agreement’s temperature goals can play a pivotal role in channelling capital towards low-carbon, climate-resilient investments and projects. This will be crucial in driving the development and adoption of sustainable technologies and infrastructure.

The SBTi’s updated criteria for the financial sector promote greater transparency and accountability, both within FIs and across their corporate clients. This increased scrutiny can encourage more robust sustainability practices and drive continuous improvement in emissions reduction efforts. As the global community works towards a more sustainable future, the collaboration between corporations and the financial sector will be essential in achieving the ambitious climate goals set forth by the Paris Agreement.

Developing a Financial Institutions Net-Zero Standard

The SBTi is currently working on developing a Financial Institutions Net-Zero (FINZ) Standard alongside the updates to the FINT Criteria. This new framework will require FIs to set both near-term and long-term targets that are consistent with achieving net-zero emissions across their portfolios by 2050.

The FINZ Standard will build upon the FINT Criteria, ensuring that FIs’ near-term emissions reduction targets are aligned with their long-term net-zero commitments. This integration will help FIs develop a comprehensive and coherent climate strategy that balances short-term actions with long-term goals. A key focus of the FINZ Standard will be on addressing scope 3 emissions, which account for the majority of FIs’ carbon footprints. This will require FIs to work closely with their corporate clients to gather accurate data, set joint targets, and collaborate on emissions reduction initiatives.

The development of the FINZ Standard reflects the SBTi’s broader vision of transforming the financial system to support the transition to a low-carbon, climate-resilient economy. By setting robust net-zero targets, FIs can lead by example and drive systemic change across the industries they serve. As the FINZ Standard takes shape, corporate finance teams should stay informed of its progress and implications, as it will likely have a significant impact on their relationships with FIs and their overall sustainability strategies.

Was this article helpful?

Comments are closed.

Subscribe to get your daily business insights