Temperature scoring ambition by using default values

Hi all! We have a portfolio of business loans in which none of the clients have set emission reduction targets. All companies belong to non-SDA sectors, so as far as I understand we should use the portfolio coverage method with default prices for all companies. How is it possible to comply with the ambition of the method (min well bellow 2 degrees for Scope 1& 2 and min 2 degrees for Scope 1&2&3) in this case? Thanks a lot and in advance. Vasso

Hi Vasso,
Good and very relevant question.

The temperature rating and portfolio coverage methods are engagement methods. The point of them is not to measure your portfolio to find out that it is rated at 1.7C, but to identify companies that have not set targets that are ambitious enough or haven’t set no targets at all and to engage with these companies to encourage them to set targets that are then aligned with the Paris agreement. If your portfolio coverage was already at e.g. 80% SBTi-approved SBTs we would probably not have this discussion and the world wouldn’t be in a climate crisis.

So, in the case you mention your portfolio would right now measure at 3.2C (default TR for companies without a valid target) and 0% for temperature rating (TR) and portfolio coverage (PC) respectively. This is not a problem, but actually the whole point of this exercise, to get companies to set targets, so that your forward looking rating of your portfolio is Paris-aligned.

For PC that means that your portfolio needs to include 100% companies with SBTi-approved SBTs by 2040. To get there, in the next five years your target is to have at least 26.3% of your portfolio that has set SBTs approved by the SBTi. This is an increase of around 5.26%/year [(100-0)/(2040-2019)]. Multiply this annual increase in PC by the number of years for your SBT (5) to get to approximately 26.3% by 2026. This is the minimum level for your PC target. If you follow this path, your portfolio would have 100% companies with SBTi-approved SBTs by 2040.

For TR, if you set a target of 1.5C to by 2040, it means that you need to reduce the temperature in your portfolio by around 0.09C/year [(3.2-1.5)/(2040-2019)], taking you to an SBT of 2.75C [3.2-(5x0.09)] in 5 years, by 2026. This is the minimum level for your TR target to reach 1.5C by 2040.

To help you design your engagement strategy and focus on the companies where you are likely to have the greatest impact, we have developed some “what-if-scenario” examples for the SBTi Finance Tool, that would help you identify companies, given “ownership” and size in your portfolio, where you can have relatively higher success rate in your engagement efforts. Having said that, we would naturally advise you to work together with other investors and lenders in your efforts in initiatives such as Climate Action 100+.

Best,
Donald

Thank you so much for the feedback Donald! I really appreciate your help!

Best regards

Vasso