Minimum portfolio coverage

1

Hi. I am supporting my client, whose major borrowers are SMEs, and have one question about minimum portfolio coverage. I would be appreciated if you could answer the question.

According to the SBTi standard, the required minimum coverage for corporate lending of SME loans is optional. As most of the financing and lending of our client goes to SMEs, approximately 96% of total lendings and financings goes to SMEs. If we set a SBT target for the rest 4% lendings and financings, does this meet the requirement of SBTi standard?

2

Hi, @HM_S,

Welcome to the community.

I theory yes, but best practice is naturally to include the SME lending as well. As it is 96% of the lenders portfolio SBTi may question how relevant the target is covering only 4% of assets and it may be better to set a target for SME or wait until the lender can set at target on SMEs.

There are always data challenges in all sectors and asset classes. Part of SBTi’s theory of change is for financial institutions to use their influence as banks, investors, etc to engage with companies to improve data availability and transparency. This is one of the main tasks for e.g. the Portfolio Coverage and Temperature Rating methods, to engage with companies to set targets, and to do that companies naturally need to collect, measure and disclose data to support these targets.

3

Hi there,

I have a a question regarding the coverage of scope 3 category 15.

According to table 5.2 in the Financial Sector Science-Based Targets Guidance, the required minimum financed emission coverage for exchange traded funds(ETF) is 100%. Since PCAF’s guide does not specify the methodogy for calculating the financed emissions for ETF, we decided to obtain the data through MSCI (Morgan Stanley Capital International).

We were not able to secure data for 7.5% of our client’s ETFs due to the following reasons:

  • no processing methodology with inverse funds(short position),
  • the funds set-up date is within 1 year,
  • the coverage of holdings held by the fund is less than 65% (using MCSI’s data), or
  • the sub-assets (excluding FOF) are within 10 holdings.

My question is, in this case, would the SBTi validate my client’s targets, even if they don’t meet the required minimum coverage standard?

4

Hi @yeunhl,

Apologies for the late reply. With portfolio coverage you can always have data for all assets as the method is binary. Either the underlying assets have an approved SBT or they have not. If you don’t know because lack of data of underlying assets, one part of the task as a financial institution is to help to improve data quality, e.g. through engaging asset mangers, product and service providers to improve, transparency, data availability and quality of underlying assets.

For FoF for instance, there are data providers (e.g. Bloomberg and Morningstar) in the market that can provide x-rays on FoF several levels deep to get information of the underlying assets.

Regarding the question of short positions, these are currently not in scope and can be excluded.

Also, remember that you don’t have to achieve the targets on day one. So, if you don’t know you have until 2040 for the last assets, in the extreme, to gather the required data and and engage with the underlying assets, if necessary.

In conclusion, all assets can be covered by portfolio coverage and temperature rating, separately or in combination. Hence, you should calculate your baseline coverage on all your assets excluding those that are explicitly out of scope, e.g. short positions.

In your case it means that you should still include the assets for which you don’t have any data (excluding short positions) and assume that these have not set an SBTi-approved SBT, as you don’t know. Over the coming years, it’ll become your task to gather more data on these assets.

After all, we want all companies to set ambitious emissions reduction targets (and achieve them). Thus, the first job is to fully understand what the landscape looks like for all companies, not just the companies, asset managers, product/service providers, etc. that have transparent ESG reporting.