SBTs for Financial Institutions Pre-Road Testing Consultation 3 rd - - PowerPoint PPT Presentation

Pre-Road Testing Consultation

3rd Expert Advisory Group Webinar February 26, 2019

SBTs for Financial Institutions

Today’s Speakers

Nate Aden

Senior Fellow World Resources Institute

Simon Messenger

Director France & UK 2° Investing Initiative

Giel Linthorst

Director Navigant

Agenda Overview of method road testing process 15 min Methods for corporate debt and equities 35 min Feedback and discussion 40 min

Project and Road-Testing Goals

• The purpose of this project is to help financial institutions set targets by

asset class for their investments and lending portfolios that align with the 2015 Paris Agreement.

• The road testing process is intended to gather feedback from the project

audience to ensure method practicality and credibility for financial institutions

• We will seek applications from a diversity of financial institutions to road

test the draft target-setting methods. Feedback from road testers will inform the final framework.

Road Testing Process

Summer- Fall Finalize methods; criteria & guidance May-June Workshop to discuss road testing results March - May 8-week road testing window March 20th Road testing launch webinar March 5th Road testing application

• pen for 2

weeks Feb 26 EAG webinar feedback A week to incorporate EAG feedback A week to finalize road tester selection.

• Road testing

application Resources

• Methods instructions
• Full method drafts
• Method assessment reports
• List of data providers and tools
• Summary of road-

testing feedback

Five Methods Are Being Road Tested

Mortgages Real Estate Electricity Generation Project Finance Corporate Debt & Equity Investee Engagement

Road Tester Commitments and SBTi Support

Expectations of road testers include:

• Completion of road testing within 8 weeks
• Submission of target modeling results for

each asset class method tested (for confidential SBTi assessment)

• Submission of detailed feedback on

practicality and robustness of methods

• Participation in road testing workshop or
• nline webinar
• Consideration of providing a case

study/example for implementation guidance SBTi provides the following support:

• Launch webinar with instructions and

answers to questions

• Ad hoc support throughout road testing

process

• Free access to data and tools through third-

party data providers

• Summary of road-testing results and

feedback

Road-tester input will be collected via 3 online surveys Road Tester Applications Road-Tester Feedback Stakeholder Feedback

https://www.surveygizmo.com/s3/4809266/S BT-FI-Roadtesting-Application

https://www.surveygiz mo.com/s3/4809311/S cience-Based-Targets- for-Financial- Institutions- Assessment-report

Method Assessment Report Questions for Road Testers

Method assessment reports will include overarching questions for all methods and asset-class-specific questions. Here are current overarching questions:

• Is the draft method practical to apply?
• Is it useful for decision making to drive institutional alignment with a Paris-aligned

climate stabilization pathway?

• Which data sources did you use for the method (e.g., primary data or secondary

data)?

• What challenges did you encounter while applying the method?
• To achieve the SBT for this asset class, what actions would you take to reduce your

asset class level emissions? Would it be useful to have additional targets related to actions to achieve the SBTs?

• Can you suggest alternative target setting methods for this asset class?
• How would SBTs on climate fit into your institutions’ larger ESG strategy?

Target Setting Process

Set SBTs at Asset Class Level Portfolio Alignment Hotspot Assessment Asset Class Materiality Assessment Commit to SBTi at Institutional Level

Real Estate Mortgage Electricity Generation Project Finance Corporate Equity Corporate Debt

Take Action

• Track and Disclose Progress

(ISO 14097)

• Update Targets and Setting

New Targets as Needed Investee engagement (ACT initiative, CA100+, SBTi) Sustainable real asset (GRESB) Sector standards

Feedback Received from Previous EAG Webinars

Key issues raised by EAG members and committed FIs:

• Existing performance versus forward target orientation
• Target scope coverage of single asset classes (vs. all relevant asset classes)
• Dynamism of portfolios and emission inventories (snapshot vs. annual average)
• Pro rata vs. majority owner allocation
• Role of divestment in portfolio alignment
• Global vs. regional approaches, especially vis-à-vis electricity generation and buildings
• Scope of methods coverage—process for setting FI targets beyond energy, buildings, and

transport

Methods for Corporate Debt and Equities

Method 1: PACTA Approach for Listed Equity, Private Equity, Corporate Bonds, and Corporate Loans

• Targets are set at individual business activity level (e.g. electricity generation,

automobile production) within the portfolio, for those business activities for which a specific sectoral decarbonization approach or PACTA approach exists.

• For a target to qualify, it has to be set for a minimum number of business

activities, as will be further defined in the criteria in the next project phase.

• Sectors where the target is already “on track” based on existing science-based

targets by companies or asset-level data do not qualify for a SBT, but equally do not count towards the threshold of minimum number of business activities (i.e. are treated as the equivalent of a sector not in scope of the SDA or PACTA approach).

PACTA Inputs and Decarbonization Pathway

Inputs a) Current and forward-looking emissions

• r production pathways by selected

business activity across companies in the portfolio with a minimum time horizon of 5 years. b) Geography-specific information for those business activities where science-based targets differ significantly across geographies (e.g. electric power).

Decarbonization Pathway

Business activity targets have to be consistent with one of the following in terms of ambition:

• The Sectoral Decarbonization

Approach (B2DS)

• The PACTA model geography-

specific trajectory alignment targets by asset class

PACTA Tool

The tool covers three questions:

• What is my current exposure to high-carbon

and low-carbon technologies across key climate-relevant sectors (~75% of global CO2 emissions) and how does this exposure compare to sector averages?

• What is the expected evolution of this

exposure over the next 5 years – based on company’s investment and production plans – and how does this evolution compare to climate scenarios that limit global warming to well-below 2°C above pre-industrial levels?

• What is the estimated future exposure to high-

carbon and low-carbon technologies and how does this exposure compare to the market and portfolio transition under a 2°C scenario?

Source: http://www.transitionmonitor.com/en/home/ Tool interface

PACTA Output

The output is one target per asset class covered by this methodology. Financial institutions can set targets for one, more of the following asset classes: Listed Equity, Private Equity, Corporate Bonds, and Corporate Loans. While the target is assessed on a “validated / not validated” basis at portfolio level, in practice the target is a function of a series

• f sector-level science-based targets set by the financial institution.

Asset class Sector Status 2020 Approach Unit Current exposure Target Base year Target year Corporate bonds Renewable power On track PACTA %

• f

installed capacity 15% 20% 2018 2025 Coal power Not on track %

• f

installed capacity 30% 25% Electric vehicles Not on track %

• f

production capacity 1% 3% Oil production On track Portfolio production (in barrels) 100,000 80,000 Gas production Target achieved Cement No exposure Shipping No exposure Aviation No exposure (example

• utput)

PACTA Examples and Deployment

ING development process Other uses and examples

• Case study 1: Listed equity – Engagement approach
• Case study 2: Listed equity – Divestment approach
• Case study 3: Corporate credit – Conditional lending

Method-Specific Questions: PACTA

Method assessment reports will include overarching questions for all methods and asset-class specific questions. Here are questions for the PACTA approach:

• Is the PACTA approach best used for screening and/or target setting?
• What level of global/geographical disaggregation is most appropriate for

corporate debt and equity targets?

• What secondary data are available for institutions that don’t have primary

data?

Method 2: Investee Engagement

The investee engagement method is a cross-asset-class method whereby financial institutions engage a minimum of 50% of their investees (in monetary or GHG emissions terms) to set their own science-based targets. The investee engagement method is a financial sector analogue to supplier engagement targets for ‘real economy’ scope 3 emissions. Financial institutions’ targets to drive the adoption of science-based emission reduction targets by their investees are considered acceptable when the following conditions are met:

• Formulation: FIs shall provide information to the SBTi on what percentage of

emissions from investee’s own emissions is covered by the investee engagement target or, if that information is not available, what percentage of asset under management is covered by the target. [continued on next slide]

Investee Engagement Method Overview

Financial institutions’ targets to drive the adoption of science-based emission reduction targets by their investees are considered acceptable when the following conditions are met (continued):

• Boundary: FIs shall set investee engagement targets on a minimum of 50% of

their investees by GHG emissions or assets under management

• Timeframe: FIs’ investee engagement targets must be fulfilled within a

maximum of 5 years from the date the FI’s target is submitted to the SBTi for an official validation.

• Level of ambition: The Fis’ investees shall set science-based emission

reduction targets on their scope 1 and 2 emissions. Investees in sectors with high scope 3 emissions are highly encouraged to set scope 3 targets that meet current SBTi criteria as well.

Investee Engagement Method Inputs and Examples

Output Examples Output is an investee engagement target to be published on the SBTi website; analogous approved supplier engagement target examples:

• Japanese multinational chemical

company Sumitomo Chemical commits that 90% of its suppliers by product weight will institute science-based GHG reduction targets by 2024.

• Multinational enterprise information

technology company Hewlett Packard Enterprise commits that its manufacturing suppliers covering 80%

• f spend will set science-based targets

by 2025. Inputs

• Scope 1 and 1 emissions per
• investee. Scope 3 emissions are
• ptional to include, OR
• Current assets under management

by investee and projected percentage increase in investment

Method Specific Questions: Investee Engagement

Method assessment reports will include overarching questions for all methods and asset-class specific questions. Here are the questions for investee engagement:

• Is the 50% investee engagement threshold appropriate? If not, what threshold

would you recommend?

• Is assets under management (AUM) a meaningful economic metric for target

setting? If not, what alternative metric would you recommend?

• Would the investee engagement method be best applied to corporate debt and

equity asset classes? How about pairing with other methods?

• Is there a minimum threshold of SBT companies for the investee engagement

method to be realistically scalable?

Method specific questions: real estate, mortgage, and electricity generation project finance (included for reference)

Method assessment reports will include overarching questions for all methods and asset-class specific questions. Here are the questions for real estate, mortgage, and electricity generation project finance: Real estate and Mortgage

• Would you consider using regional pathways and why?

Electricity generation project finance:

• Would you prefer setting target on energy output (e.g. kWh) by fuel types over emissions

across fuel types?

• Does your project include negative emissions and if so, how do you envision it being

accounted for?

Feedback and Discussion

Questions for EAG Feedback

• How do asset class methods relate to published financial institution SBTs?
• Within corporate debt and equity, should targets be more oriented toward

portfolio alignment or on-the-ground actions?

• What portion of financial institutions’ GHG emissions are covered by the

current asset-class methods?

• What data arrangements are best for financial institutions that lack primary

data?

An initiative by In collaboration with

Thank you!

Nate Aden, Senior Fellow, World Resources Institute, nate.aden@wri.org Simon Messenger, Director UK & France, 2° Investing Initiative, simon@2degrees-investing.org Giel Linthorst, Director, Navigant giel.linthorst@navigant.com