Developing a Framework for Financial Institutions to Set Science-based Targets 2 nd Expert Advisory Group Webinar Dec 5 th 2018 In collaboration with An initiative by
Agenda Introduction 5 min Project Updates and Schedule 10 min Methods Discussion: Real Estate and Mortgage 15 min Q&A 10 min Project Finance 10 min Q&A 10 min Corporate Debt & Listed Equity 10 min Q&A 10 min Plan for Method Road Testing 5 min Next Steps and Close 5 min 2
Speakers Giel Nate Aden Jakob Linthorst Thomä Senior Fellow World Director Director Resources 2 ° Investing Navigant Institute Initiative 3
36 publicly-committed financial institutions SBTi & Related Updates • Annual target update validation criteria in January • Newly Released Scope 3 Compendium: https://sciencebasedtargets.org/wp- content/uploads/2018/12/SBT_Value_Chain_Report -1.pdf 4
Schedule for next few months April 2019 Road-testing Oct – Dec 2018 Jan 2018 workshops Summarize Asset class methods Methods and development guidance drafts feedback Dec 5 th 2018 Jan – March 2019 Dec 2019 Finalize 2nd EAG call Road testing and methods & public consultation guidance; begin to validate financial institution SBTs 5
Within the range of methods, few are focused on Paris alignment Method Developer Notes Link 1 Navigant/Ecofys SDA-based approach for mortgages and real estate 2 2 Degrees Investing Initiative SEI metrics-based approach for listed equity and corporate debt The TPI tool enables the assessment of companies’ carbon management quality and carbon performance, within a selected sector. Some sectors have carbon 3 Transition Pathways Initiative intensity alignment info with 2d/b2d http://www.lse.ac.uk/GranthamInstitute/tpi/ Listed Equity, Corporate Debt (Loans and Bonds), Real 4 EcoAct Estate, Mortgages. https://eco-act.com/ 5 Platform Carbon Accounting Financials (PCAF) http://carbonaccountingfinancials.com/ Carbon Tracker Initiative 2° C Scenario Analysis Focus on companies’ exposure to carbon transition risk; https://www.carbontracker.org/carbon-tracker-bloomberg- 6 Tool available to Bloomberg Terminal subscribers app/ The Climetrics rating measures the climate risks and opportunities of a fund against all other funds in its sample. The higher a fund’s rating, the better its performance on climate-related risks and opportunities. Climetrics mostly measures climate-related risks known 7 Climetrics Fund Rating Methodology as transition risks (to low-carbon economy). https://www.climetrics-rating.org/methodology https://www.banktrack.org/show/pages/banks_and_financed_ 8 Banktrack emissions 9 Carbon Delta https://www.carbon-delta.com/ Taxonomy of economic activities & investment strategy https://ec.europa.eu/info/publications/sustainable-finance- 10 European Commission Tech Expert Group benchmarks technical-expert-group_en 6
Broad SBTi approaches: Absolute Contraction & Supplier Engagement Company target examples: Current SBTi criteria regarding scope 3 absolute contraction and supplier engagement targets: *C16 - Level of ambition for scope 3 emissions reductions targets: Emission reduction targets (covering the entire value chain or individual scope 3 categories) are considered ambitious if they fulfill any of the following: • Absolute: Absolute emission reduction targets that are consistent with the level of decarbonization required to keep global temperature increase below 2°C compared to pre-industrial temperatures. Integrated mining and resources producer Hindustan Zinc Limited commits to reduce absolute Scopes 1 and 2 GHG emissions 14% by 2026 from a 2016 base- year. Hindustan Zinc Limited also commits to reduce absolute Scope 3 GHG emissions 20% by 2026 from a 2016 base-year. *C16.1 – Supplier engagement targets : Company targets to drive the adoption of science-based emission reduction targets by their suppliers are considered acceptable when the following conditions are met: • Formulation: Companies shall provide information to the SBTi on what percentage of emissions from relevant upstream categories is covered by the engagement target or, if that information is not Japanese multinational chemical company Sumitomo Chemical commits to reduce available, what percentage of annual procurement spend is covered by the target.3 absolute scope 1 and 2 GHG emissions 30 % by 2030 and 57% by 2050 from a 2013 • Boundary: Companies may set supplier engagement targets around any relevant upstream base-year. Sumitomo Chemical also commits that 90% of its suppliers by product categories. weight will institute science-based GHG reduction targets by 2024. • Timeframe: Companies’ supplier engagement targets must be fulfilled within a maximum of 5 years from the date the company’s target is submitted to the SBTi for an official validation. • Level of ambition: The company’s suppliers shall set science -based emission reduction targets. 7
Asset-class method 1: Real Estate A financial institution can align its Real Estate portfolio with the Paris Agreement and set an emissions reduction target by: Two Approaches: 1. Convergence: emissions intensity of real estate 2. Absolute contraction : absolute emissions of real portfolio of financial institutions converges to estate portfolio reduce by same percentage as the same emissions intensity as global pathway in global pathway in the target year 2050 8
Questions for EAG Feedback • Is the draft method feasible and actionable? • Can you suggest alternative methods for this asset class? 9
Asset-class method 2: Mortgages A financial institution can align its Mortgage portfolio with the Paris Agreement and set an emissions reduction target by: Two Approaches: 1. Convergence: emissions intensity of mortgage 2. Absolute contraction : absolute emissions of portfolio of financial institutions converges to mortgage portfolio reduce by same percentage as the same emissions intensity as global pathway in global pathway in the target year (i.e. -21% in 2030 2050 (i.e. 11 kg CO2/m2 for 2DS) compared to 2017 for 2DS) 10
Questions for EAG Feedback • Is the draft method feasible and actionable? • Can you suggest alternative methods for this asset class? 11
Asset-class method 3: Project Finance A financial institution can align its Power generation projects in the portfolio with the Paris Agreement and set an emissions reduction target by: Two Approaches: 2. Absolute contraction : absolute emissions of 1. Convergence: emissions intensity of power power generation projects in the portfolio reduce by generation projects in the portfolio of a financial same percentage as the global pathway in the target institution converges to same emissions year (i.e. -40% in 2030 compared to 2017 for 2DS) intensity as global pathway in 2050 (i.e. 0,04 kg CO2/kWh) 12
Questions for EAG Feedback • Is the draft method feasible and actionable? • Can you suggest alternative methods for this asset class? 13
Asset-class methods 4 & 5: Corporate Debt & Listed Equity 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 SDA or PACTA approach exists. For a target to qualify, it has to be set for a minimum number of business activities , as defined in the Criteria and Recommendations document. 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). IN PLAIN ENGLISH: FINANCIAL INSTITUTIONS SET TARGETS AT ‘SECTOR LEVEL’ IN THEIR PORTFOLIO USING EITHER THE PACTA OR SDA APPROACH, WITH THE NEED TO SET TARGETS FOR A MINIMUM NUMBER OF SECTORS. 14
Asset-class methods 4 & 5: Corporate Debt & Listed Equity SDA Approach ➢ Based on emissions intensity related to sectoral ‘activity’ ➢ No approach for fossil fuels & no consideration of absolute volumes. Note: SDA has been subsequently updated to eliminate value-added 15 activity indicators.
Asset-class methods 4 & 5: Corporate Debt & Listed Equity PACTA Approach ➢ Based on ‘technology / fuel’ - mix logic. ➢ Applies SDA for cement and steel. Doesn’t cover paper & pulp, other industrials 16
Asset-class methods 4 & 5: Corporate Debt & Listed Equity Key technical issues: ➢ Allocation rules: No constraint between portfolio weight or balance sheet approach for determining allocation rules, although balance sheet approach has to use either book value- based or equity ownership-based denominator. ➢ Data requirements: Data sources are not predefined, but should satisfy minimum number of criteria (be expressed in units consistent with SDA or PACTA approach, minimum coverage, geographic granularity where relevant, etc.) ➢ Portfolio target: There is no ‘single’ indicator at portfolio level. ➢ Scope: The scope is the ‘portfolio’ which the financial institution is targeting. So if the financial institution is targeting impact through divestment, the SBT has to be achieved for ‘divested’ companies. If the impact is targeted through ‘engagement’, the scope is the own portfolio ➢ Actions: SBT are recognized if they are associated with a set of actions designed to reduce GHG emissions in the real economy . Targets without actions do not qualify. 17
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