General Overview
The Science Based Targets Initiative (SBTi) is an organization created in 2015 by the Carbon Disclosure Project (CDP), the United Nations, the World Resources Institutes and the World Wide Fund for Nature (WWF). It guides companies and financial institutions in setting science-based decarbonization targets aligned with the Paris Agreement to limit global warming to well below +2°C, ideally +1.5°C.
SBTi is one of the leading frameworks for setting net-zero targets. It also provides a third party certification of trajectory alignment. It initially provided a cross-sector methodology for decarbonization. To take into account the specificities of each sector, SBTI has since developed “Sectoral Decarbonization Approach” (SDA) for a certain number of sectors, including for the financial sector: the first version of SBTi for Financial Institutions was published in 2020. As of 2024, this version will be updated in the coming months to become the Financial Institutions Net Zero (FINZ) Standard.
Typology of the framework
Date of creation: 2015
Framework type: Target-setting methodology
Targets: Companies, including financial institutions
Number of users: 9,110 organizations are committed to the framework as of Aug. 2024. Among them, 271 are financial institutions, including Limited Partners (LPs) and General Partners (GPs).
AUM : not available.
Objectives of the framework
The objective of SBTi is to provide organizations with serious methodology and tools to set decarbonization targets aligned with the Paris Agreement, i.e. the international agreement to limit global warming to well below 2°C, and ideally to 1.5°C above pre-industrial levels. For organizations, it means reaching Net-Zero by 2050, i.e. reducing their carbon emissions levels to a minimum by that time.
In practice, companies and financial institutions can commit to SBTi, meaning that they commit to set Science-Based Target to reduce their carbon impact in proportions aligned with the Paris Agreement.
Once the organization is committed, it has two years to develop and disclose its decarbonization targets. Two types of targets must be defined:
The near-term target: generally set at a 5-to-10-year horizon after the publication of the targets.
The long-term target: which is to reach net zero emissions by 2050 at the latest but it can be sooner (e.g., by 2040).
Once the targets are published by the organizations, SBTi reviews them and validates - or rejects - their consistency and their ambition. Achievement of the targets must be monitored annually, and targets must be reviewed every 5 to 10 years. If an organization fails to validate its targets within two years and does not meet them, SBTi labels it as “commitment removed” on its website. As of Aug. 2024, 471 organizations have their commitment removed (i.e. ~5% of total committed organizations) , including 14 financial institutions (i.e. ~5% of committed financial institutions).
Implication for investors and their portfolios
For all organizations
By committing to SBTi, all organizations must drastically reduce their scope 1 and 2. For scope 3, the way of developing near-term and long-term targets depends on the organization’s type (company, small or medium company, financial institution). For financial institutions scope 3 targets depend on the types of assets they hold.
For Limited Partners (*)
Limited Partners (LPs) committed to SBTi must follow the process as described in the “Objectives” section of this article.
Currently, LPs must reduce their scope 1 and 2 emissions by 4.2% annually under the “1.5°C pathway”, or 2.5% annually under the “well below 2°C” pathway on a 2020 basis. For scope 3, LPs are required to set targets covering their financed emissions, which include GHG emissions associated with investment, loans, etc. Thus, LPs committing to SBTi must work with their stakeholders, in particular General Partners (GPs) to help them decarbonize their portfolio. Usually, they will ask them in turn to commit to a Net Zero framework (SBTi or another) and/or will make Net Zero commitment a selection criterion when GPs raise funds.
For General Partners (*)
The process for GPs is similar to that for LPs, including the need to set scope 3 targets for financed emissions. Thus, they will need to work with their portfolio companies to help them reach Net Zero within the timeframe allowed by SBTi. This implies different strategies along the investment period, from the due diligence phase to the investment exit.
As SBTi is the most recognized and used framework to set decarbonization targets, the best way for a GP to ensure that it will effectively decarbonize its portfolio is to support their portfolio companies in setting Science-Based Targets.
(*) Note that in the coming months, the SBTi criteria for Financial Institutions will evolve under the Financial Institution Net Zero (FINZ) Standard, which is currently under development.
Carbometrix’s Opinion
SBTi is an essential and unavoidable framework for any organization willing to effectively decarbonize and contribute to the global effort to achieve carbon neutrality by 2050. The SBTi method and tools are recognised and used worldwide. It is a strong indicator of a solid decarbonization strategy.
However, the SBTi framework is demanding. Organizations must carefully consider their commitment, as failure to meet SBTi’s standards could lead to public naming and shaming.
Thus, while SBTi is the indisputable reference framework for defining Net Zero targets for companies, its restrictive framework may not be appropriate for certain sectors or businesses. For investors, other Net Zero commitment frameworks exist and may, in some cases, be more appropriate.
But let’s wait for the FINZ Standard, which is currently at draft and consultation stage to be published to see whether more flexibility will be added for LPs and GPs in managing their portfolios’ decarbonization. SBTI FINZ is at draft and consultation stage. Carbometrix is contributing to sharing insights to promote that it is ambitious and it provides standardized and practical recommendations to ensure consistency of commitments made by FIs as well as consistency with other existing frameworks (PCAF, NZIF, …etc).