Can I please ask a practical question on setting targets using the SDA? If an FI is setting a 2030 target for e.g. a corporate loans power portfolio, the time lag in data availability means the base year used may be 2020 or 2021. This means that there is already a year ‘lost’ between base year and present state. Additionally, a key decarbonisation lever for corporate loans is client engagement to set ambitious targets. This creates an additional lag in terms of those clients developing their targets. E.g. in a very ambitious scenario, an FI may engage clients to set targets by end of 2023, which means there is a 2-3 year lag now between the base year and clients shifting to an SBTi-type pathway.
Inherently, this means that even if the entire portfolio adopts ambitious targets very shortly after the FI sets their target, the 2030 reduction required by the SDA may practically be unachievable because of the lag between base year and target adoption. This is entirely different from corporates, where decarbonisation is driven from within the organisation.
I appreciate targets are at the moment somewhat directional but there is a narrative issue to be addressed here; as even if all clients in a portfolio set SBTs, the FIs own SBT may not be met. A view on how SBTi and FIs are considering this would be greatly appreciated.
Your question mentions two different methods to setting Science-based targets, so, I will discuss one method at the time, as they are not used together within one individual target.
With regards to the SDA targets, Financial Institutions are able to manage the emissions they finance in each specific sector. The FI has control over its current and future investments, so, in order to achieve a target established using the SDA method on a specific asset class, it can steer its asset-level emissions and monitor its improvement in emission reductions. The FI can assess the current trajectory of its financed emission when considering future investments or deinvestments.
On portfolio engagement targets, all financial institutions face the challenge of achieving the desired ambition as per criteria FI-C17.2:
Target Level of Ambition: Financial institutions shall commit to having a portion of their borrowers or investees set their own approved science-based targets such that the financial institution is on a linear path to 100 percent portfolio coverage by 2040 (using a weighting approach in the SBT Finance Tool). For example, a financial institution starting with 10 percent coverage in 2020 would need to increase coverage by 4.5 percent per year (90/ (2040 – 2020) = 4.5) and reach at least 32.5 percent (10 + [5 x 4.5] = 32.5) coverage by 2025.
What other FIs are doing after setting a SBT is engaging with portfolio companies to influence them into reducing emissions and decarbonising via setting their own SBTs.