Boundaries of fossil fuel related industries investment and lending for financial institution

Methods
1

This is Rebecca from Taiwan. As we are helping our FI clients to develop SBT, there are some questions in regards to the scope of target setting and disclosure requirement we would like to clarify with SBTi.

In accordance to the ”Financial-Sector Science based targets guidance_202202” document:

P.34:
FI-R11– Disclosure of Fossil Fuel Investments and Lending:
Financial institutions with approved SBTs, should annually disclose the annual investments (public equity, private equity, corporate bonds),
direct project financing and lending to fossil fuel (oil, gas, and thermal coal) projects and companies* in U.S. dollar amount (or other currencies)

P.55 (Table 5.2 Required, Optional, and Out-of-Scope Activities and Applicable Methods):
For long-term corporate loans, other than electricity generation and real estate, minimum target coverage thresholds for Fossil fuel companies is 95% of base year corporate lending (loan value).

Could you kindly help me confirm the following information:

  1. For target setting, we assume that the SME loans to fossil fuel companies is optional for FIs’ SBT as SME loans is listed separately in Table 5.2. Could you please confirm that the required activities for fossil fuel investment and lending activities are - Investments: Public equity and bonds / Loan: Long-term corporate loans (excluding project finance and SME loans) ?

  2. Based on the previous question, if so, could you please explain the reason of setting different boundaries for investment and lending activities for the fossil fuel industry?

  3. Also, it seems the disclosure boundaries for fossil fuel lending is different from the boundaries of target setting. FIs’ should disclose lending (including loans to SME, non-SME and also project finance ) annually, which is larger than the scope for target setting. Would you please clarify if our understanding is correct? If so, it may increase the efforts for FIs’ to follow the Fossil Fuel disclosure requirement as the they need to collect additional information other lending activities (non-SME and project finance). Does SBTi have any recommendation on this?

We would highly appreciate your sharing & assistance.

2

Hi Rebecca,

All fossil-fuel related activities should be disclosed and targets must be set on all of them as well. Per the SBTi FAQs for SMEs, the definition of SMEs does not include financial institutions or fossil fuel companies. This stems in part from the sector’s contribution to climate change.

Thanks,
Howard

3

Dear Howard,

I have been looking into the same topic as Rebecca but have an additional question. As I understand it now, the target setting requirement for fossil fuel companies come in to play when an investee company receives a certain threshold revenue from the listed fossil fuel activities (>5% for coal, 30% for oil and gas).

Say, an FI provides (private) equity, but also a loan to a Private Equity fund. This fund provides a loan to another FI, heavily exposed to coal plants for example. Indirectly, the >5% threshold may be passed, but following this logic, there is virtually no limit to the amount of research that should be done to find out ‘fossil fuel companies’.

Can you perhaps give guidance how to approach the required revenue research, in case an FI has many other FIs (banks and funds) as clients?

Many thanks for your consideration,

Arend Lakke

4

Hi Arend, FI-C17.4 of the pilot test version 2.0 of the Near-Term Criteria and Recommendations for FIs proposes that FIs may define coal and oil & gas companies using the GCEL and GOGEL, which should hopefully be an easier check to perform than a revenue threshold (which can also be used).

5

Dear Howard,

Same topic as Arend and Rebecca. I’m using GCEL and GOGEL to make a list of coal and oil and gas companies. But I’m afraid of GOGEL and GCEL would have some challenges on constantly updating in the future.

Can you suggest any alternative approach to define coal and oil & gas companies that are sufficient with SBT’s near-term target setting requirements?

Highly appreciate your sharing & assistance.
Sarah.

6

Hello Sarah, we appreciate your concerns and are considering the points you, Arend, and Rebecca brought up in our updates to FINT Criteria V2. More information on this optionality will be provided in the future release of the criteria.