Target aligned with ACA for approval

Previously, our team left a Q&A via mail and got your reply. Thank you very much for the reply. However, we have a further question in relation to that question.

We asked

"It is noted that only a few sectors like the following can use the SDA methods to develop SBT targets:
A. Mortgage: Residential buildings
B. Real estate: Residential and service buildings
C. Electricity generation PF: Power generation
D. Corporate equity, bonds, and loan: Aluminum, Buildings, Cement, Iron and steel, Power generation, Pulp and paper, and Transport

However, for the sectors not included above, can we use any of these sector-specific methods mentioned above? This is very critical to us, because most of the financing and lending of our client goes to SMEs, thus there are limitations using ‘SBT portfolio coverage’ or ‘Temperature rating’ methods for our client. Thus, we are to use SDA for most of the assets as much as possible, but it seems that the required minimum coverage for ‘other long-term debt’, which is 67%, cannot be covered. It will be very much if you could let us know if we can use one of the sector-specific SDA methods for the other sectors or provide other methods.

In addition, if our client cannot use ‘SBT portfolio coverage’ or ‘Temperature rating’ methods due to limitations, and can only use ‘SDA’ method, but the required minimum coverage cannot be met only with the ‘SDA’ method, and it is not possible to use any sector-specific SDA methods, then is it not possible to set SBT target for scope 3? "

And the answer from SBTi was
"In terms of your question regarding sector relevancy, if there is no sector under the “Sector Decarbonization Approach” that is relevant for the company, they are more than welcome to use our “Absolute Contraction Approach,” another valid science-based target setting method we recommend when no SDA is available for the sector, or if a company sits within many sectors.
Companies with activities across several sectors can use either the absolute contraction or the corresponding sectoral pathway available from the SBT Tool or the SDA Transport tool, as applicable.

As per our FAQ: If a company operates in more than one sector, it should identify the top sectors that cover a majority of its operations. The methods that apply to these sectors can then be used as a benchmark to determine the final target. For example, a company might operate in the aluminum sector and have power generation operations to support the aluminum production. In this case, the company could set two different targets using both the aluminum and power generation sector pathways in the Sectoral Decarbonization Approach. A company should develop an aggregated target that applies across its entire structure for external reporting and communication, although separate internal targets may be developed by region, sector, facility, or emissions category for ease of tracking and execution.
Please refer to the SBTi criteria and resources here: /

On SMEs specifically, only absolute targets are included as these are the most straightforward. This makes it easier for SMEs to set targets, by allowing them to select a predefined target option rather than have to investigate different target-setting methods and input data. For all types of targets (absolute or intensity), climate science indicates that emissions must be decoupled from growth. Even though the SDA takes into consideration the initial intensity of the company and the projected growth to calculate a target, it also requires the reduction of absolute emissions for all sectors."

Then, if we set a target for sectors(sectors cannot be covered by SDA and minimum coverage cannot be met by using SDA) using ACA, can the target get approved by SBTi?

Thanks for the question. Absolute contraction is only a valid method for companies to set targets, and we do not accept it as for financial institutions. Absolute contraction for company emissions is accepted but do we not allow absolute contraction of all portfolio financed emissions as a method. All other non-SDA sectors must be covered by temperature rating or portfolio coverage.

SMEs are still optional, and do not have to be included in the target boundary. Therefore the 67% boundary coverage for long term debt can only include non-SME lending.