Portfolio Coverage applied on Corporate Loans

Methods
1

Context: Bank X is defining a target over de asset Corporate Loans. The base year is 2022, where there are 100 clients with a total stock of $100 (example), where none have validated SBTs. This means an annual growth rate of 5,6% to get to 2040 with 100% coverage.

Question: How does Portfolio Coverage is implemented over Corporate Loans? The standard says “financial institutions commit to engaging with their borrowers and/or investees to set their own science-based targets, which shall be validated by the SBTi” and “targets must be fulfilled within a maximum of five years from the date the FI’s target is submitted to the SBTi for validation”.

This means that the target of the Bank is that: within 5 years (2027) at least the clients representing 5,6% of the stock of the base year inventory must have validated SBTs?
And then that in 2028 (5 years later than 2023) at least the clients representing 11,2% (5,6% x 2) of the stock of 2023 inventory must have validated SBTs? And so on.

Thanks in advance,

2

Hi Francisca,

Thanks for posting. As an example, a financial institution starting with 0% SBT coverage in its base year of 2022 would need to increase coverage by 5.6% per year ((100% – 0%) / (2040 – 2022)) and reach at least 27.8 percent (0% + [(2027 – 2022) x 5.6%]) coverage by 2027 and 33.3% (0% + [(2028 – 2022) x 5.6%]) coverage by 2028. For the purposes of target setting, tracking, and reporting, FIs should use a selected metric consistently and calculate the SBTi percentage coverage of the portfolio as of the selected reporting day of each year.

3

Thank you HowardS,

From your response, I understand that by 2027, the FI should reach a 27.8% coverage. I have some further questions regardin this:

  1. Which companies should be considered when calculating this percentage? Is it the companies that were initially financed during 2022 (base year)? Or is it the companies that are being financed in 2027 (5 years after base year)?
  2. How does this target work for Corporate Loans? The issue here is that corporate loans have a much shorter life than that of investments or bonds, and so companies financed by the FI in 2027 can be completely different than those that were financed during 2022. How can the FI engage with its 2027 clients to get them to have a validated SBT, if they weren’t previous clients?
  3. What does this 27.8% coverage mean? Does it mean that 27.8% of the companies financed by the FI should have a validated SBT? Or should they just have a committed SBT?
  4. How is this percentage calculated? Is it based on stock? Or is it by number of companies financed? Or is it by total enterprise value of the companies financed by the FI?

Thanks in advance,

4

Hi Francisca,

After targets are validated, SBTi requires an annual disclosure of progress against all validated targets. For example, the % SBT coverage would be calculated based on the FI’s portfolio companies that have validated SBTs (not commitments) as of the selected reporting day of each year (rather than those that were initially financed during the base year, if different). The weighting approaches that are available for the calculation are listed in Appendix E of the FI Guidance.

Regarding corporate loans, they are often rolled over from my experience so I would expect some continuity in clients year over year while engagement can be done for new clients before onboarding them. And if the target is 27.8%, then the FI has flexibility in determining which clients to first focus on before progressively increasing from there.