Use of Intensity Metrics for SDA approach for Financial Institutions

I have a question on setting intensity metrics using the Sector Based Decabonization approach for Financial Institutions, based on the document “Financial Sector Science Based Targets Guidance Pilot Version”:

Page 151 (appendix D, the Sector Based Decarbonization Approach for Public Bonds and Equities), under the “Method Output” section, the guideline requires that the target output must be related to an emissions intensity relative to a production activity (i.e. tonnes of CO2 per MWH).

Does this therefore preclude using revenue or invested dollars as the intensity metric (i.e. reduce CO2 emissions in the power sector from bond portfolio by 25% per invested dollar by 2025 from a 2019 base year)?

If so, am I correct to assume that current and future production output of all investee companies would be required in order to use the SDA approach for a public bond or equity portfolio? Or is it possible to use an economic intensity metric for target setting?

Hello @akallin,

Welcome to the forum and thanks for posting. Economic intensity targets are not accepted within the SBTi finance framework. As explained on page 50 of the FI guidance in section “Background and Brief Literature Review”:

“This level of influence in the real economy is difficult to achieve with the other three approaches.
Absolute-based targets could be achieved by shifting or lowering the exposure to certain sectors within
the portfolio without having a clear impact in the real economy. An economic-based approach is
sensitive to economic fluctuations in gross profits of portfolio companies (e.g., target achievements can be influenced if the actual gross profit of the portfolio companies deviates strongly from the global GDP projections).”

We explain further on page 51 that "for the first phase of this project, the SBTi supports three methods for financial institutions: the Sectoral Decarbonization Approach (SDA), the SBT Portfolio Coverage Approach, and the Temperature Rating Approach. "

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Thank you so much for the reply, this is very clear.

I do have one follow up question: are there any suggested methodologies for estimating production values for investee companies, when such disclosures are not made available? There does not seem to be any written guidance on this topic in either SBT for FI or in PCAF.

Some thoughts we had for addressing this issue were 1) use a ratio of production / revenue at the portfolio level and apply that ratio to the revenue of the investee companies that do not have production values, 2) determine some sort of sector average production / revenue and apply that ratio to the investee company revenue, 3) omit these companies from the target setting exercise. Are any of these approaches acceptable?

Thanks again.

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