We are considering using the temperature rating approach for our listed equity portfolio. If I understand the SBTi criteria correctly:
A 2027 target year for a FI would mean that the target should be set on the mid-term time frame.
This means that portfolio companies with target years of 2025 would get a 3.2 default rating, but companies with a target year of e.g. 2030 would get a non-default rating, let’s take for example 2°C
However, as our target is temperature rating based on the mid-term time frame, in our target year of 2027, this portfolio company that was previously rated 2°C would have a mid-term target rating of 3.2°C as in 2027, a target for 2030 would be considered a short-term target.
Can you confirm that the above reasoning is correct? So in 2027 this portfolio company would only count towards our target in a non-3.2°C way if it has updated targets covering the mid-term (i.e. beyond 2032)?
The Temperature Rating (TR) method uses mid-term corporate targets that for all methods other than TR and Portfolio Coverage (PC) are currently 5-15 years and will be reduced to 5-10 years next month. This means that corporates with less than 5 years left to their target should update their targets or they will get a default score, in TR.
The exception is companies using TR and PC to set their targets, as these targets can be maximum of 5 years. These targets will be treated as medium term targets in the TR method and should therefore not result in a default score. Only Financial Institutions are allowed to chose to use TR and/or PC in their target setting.
The reason for this exception is that TR and PC are engagement methods. This gives the portfolio companies time to set targets and still roughly align with the 5-15 (5-10) year timeframe for a standard medium term target. As such the TR and PC can be viewed as de facto medium term targets in the real economy, even if their target period is maximum 5 years.