Clarifications on exclusion of certain financial products from portfolio target setting (ITR)

Methods
1

For a financial Institution (FI) who is already committed to setting Science Based Targets (SBTs) and is currently developing its operational and portfolio emissions targets for submission and validation by the initiative, we wanted to test the proposed approach for excluding certain financial instruments from target development and submission to the initiative for validation.

  1. For setting the Scope 3 portfolio targets (Scope 3 category 15: Investments), whereby an FI decides to set Science Based Targets (SBTs) on all required asset classes within listed equities and credit investments in its portfolio, the FI identifies sub-assets/financial exposures that are technically required for inclusion in targets as per SBTi’s guidance for financial sector, but where the FI has very low exposure in proportion to the overall Assets under Administration (AUA). These include:

• Private Placements loans
• Commercial real estate loans
• Local Authority loans
• Housing Association loans
• Export Credit Agency loans

In a case where the FI has low material exposure to all of these financial instruments (less than 2% of its combined Assets Under Administration across all six instruments and no more than1% of AUA in any one instrument), can the FI exclude these financial instruments from the ongoing exercise of Science Based Targets (SBTs) development and submission to SBTi for validation? It is understood that the FI might need to consider setting targets on these financial products in case there is a material increase in the exposure to these financial products in the future.

  1. If an FI also has exposure to collectives where the FI does not have direct control over with underlying holding including listed assets as a part of its investments or Assets under Administration (AUA), can we check whether the classification of collectives as a sub-asset class under the sub-asset class category ‘funds of funds’ is appropriate? As per the guidance, SBTi currently guides for ‘funds of funds’ as optional for the purpose of target setting and submission to the initiative for validation.

  2. Within the corporate loans books, in case the FI has exposure to Equity Release Mortgages (ERMs) in its investment portfolio and the FI is expected to have no control or influence over the use of proceeds from these financial instruments, can we exclude ERMs for the purpose of target setting and validation from the initiative?

Around these three points, ahead of submitting these targets for Validation, we look forward to getting your valuable response on checking whether SBTi would have any concerns about the FI developing targets along these lines.

Thank you

2

Dear wgrey,
Thanks for your questions.

  1. there is no mininmum coverage threshold for asset classes and therefore all relevant lending and investing would have to be included, regardless if it is insignificant compared to the total AUA. However, many of the sub-assets you mentioned would be considered optional for target setting e.g. all loans to state or quasi state organisations like local authorities are out of scope for target setting. Therefore the local authority, housing association, and ECA loans would not have to be covered if they are not private entities.

  2. All collectives should be included for the relevant asset classes e.g. mutual funds for listed equity. The fund of fund optionality applies in cases where there is no transparency into the underlying holdings. Therefore most collectives should be included and only in cases where you there is no look through to the fund of fund holdings should the collective be considered optional

  3. ERMs would be considered optional along with residential mortgages.

3

Thank you Eoin!

Will