SBTi updates climate target requirements for the financial sector

The Science Based Targets Initiative (SBTi) today unveiled a series of changes and resources to help financial institutions set ambitious short-term emissions reduction targets, including the introduction of new criteria for phasing out fossil fuel financing.

Changes to the SBTi criteria, due to come into force on November 30, 2024, include increased minimum emissions reduction requirements for financial institutions seeking to achieve targets approved by the standards body.

Under the new criteria, financial firms with approved targets must adjust their operational and energy emissions from a path corresponding to “well below” 2°C warming to a path corresponding to 1.5°C warming. According to SBTi, they must also achieve Scope 1 and Scope 2 emission reduction targets within five to 10 years, compared to the previously envisaged period of five to 15 years.

The nonprofit group also added further detailed guidance on what climate targets greenhouse gas finance companies should include, including clarifying that targets must include at least 67 percent of emissions financed under Scope 3.

Financial institutions looking to ensure SBTi is validated against their climate goals have also been drawn to new fossil fuel financing criteria outlining how companies can disclose, withhold, transition and phase out “fossil fuel activities.”

SBTi’s fossil fuel financing targets method, set out in last year’s consultation paper, is included in the list of methods available to financial institutions required by SBTi to set targets for their fossil fuel financing activities.

The four-step process begins with financial institutions annually disclosing the climate impact of the financial services they provide in the coal, oil and gas sectors and the actions they are taking to reduce or eliminate those emissions.

This method then requires financial institutions to publicly commit to immediately cessation of financial flows into the carbon value chain, except for funding decommissioning activities. Institutions must also publicly declare financial flows for all unrestricted activities related to the oil and gas value chain at the project level, and new financial flows to companies are related to the expansion of oil and gas production or production capacity.

The method then requires investors to begin the process of working with the fossil fuel companies they work with to align with 1.5°C climate targets, including by encouraging coal, oil and gas companies to set ambitious short-term targets science-based climate change.

Finally, it calls on companies to set a deadline for phasing out all financial activities linked to “disengaged” companies and projects.

SBTi said the overall goal of the updated criteria was to align requirements for financial institutions with those it set out for businesses in its Corporate Net Zero standard, while increasing the “transparency, enforceability and usefulness” of existing rules, streamlining coverage requirements, and formally including a new method for fossil fuel financing targets in its standards.

Financial institutions that submit targets for approval to SBTi before November 30 have the option to be assessed under the old or new criteria, SBTi said. However, all financial institutions with SBTi-approved climate targets will be required to update their targets based on the new criteria within five years from the date of their last validation.

The new guidance for the financial sector comes amid intense scrutiny of SBTi’s corporate Net Zero standard, which is expected to present proposed amendments in July that could open up greater opportunities for companies to use carbon credits to offset Scope 3 emissions.

Any such changes to the Corporate Net Zero Standard are likely to be highly controversial, however, as the not-for-profit organization has had to face a major internal dispute between stakeholders in favor of giving companies more freedom to use carbon credits and those who have warned that it could is to open the way to more corporate “eco shaming.”

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