SBTs for Financial Institutions Pre-Road Testing Consultation 3 rd Expert Advisory Group Webinar February 26, 2019
Today’s Speakers Nate Aden Simon Messenger Giel Linthorst Senior Fellow Director Director France & UK World Resources Navigant 2° Investing Initiative Institute
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 • Methods instructions • Road testing • Summary of road- • Full method drafts Resources application • Method assessment reports testing feedback • List of data providers and tools Feb 26 March 5 th March 20 th March - May May-June Summer- Fall EAG webinar Road testing Road testing 8-week road Workshop to feedback application launch testing discuss road Finalize open for 2 webinar window testing methods; weeks results criteria & guidance A week to incorporate EAG A week to finalize road tester feedback selection.
Five Methods Are Being Road Tested Corporate Mortgages Debt & Equity Electricity Generation Project Finance Real Estate Investee Engagement
Road Tester Commitments and SBTi Support Expectations of road testers include: SBTi provides the following support: • Completion of road testing within 8 weeks • Launch webinar with instructions and answers to questions • Submission of target modeling results for each asset class method tested (for • Ad hoc support throughout road testing confidential SBTi assessment) process • Submission of detailed feedback on • Free access to data and tools through third- practicality and robustness of methods party data providers • Participation in road testing workshop or • Summary of road-testing results and online webinar feedback • Consideration of providing a case study/example for implementation guidance
Road-tester input will be collected via 3 online surveys Road-Tester Feedback Road Tester Applications https://www.surveygiz mo.com/s3/4809311/S cience-Based-Targets- for-Financial- Institutions- Assessment-report Stakeholder Feedback https://www.surveygizmo.com/s3/4809266/S BT-FI-Roadtesting-Application
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 Real Estate Commit to Portfolio Mortgage Asset Class Set SBTs at SBTi at Alignment Materiality Asset Class Electricity Generation Project Finance Institutional Hotspot Assessment Level Corporate Equity Level Assessment Corporate Debt Investee engagement (ACT initiative, CA100+, SBTi) Take Action Sustainable real asset (GRESB) Sector standards • Track and Disclose Progress (ISO 14097) • Update Targets and Setting New Targets as Needed
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 Decarbonization Pathway a) Current and forward-looking emissions Business activity targets have to be or production pathways by selected consistent with one of the following business activity across companies in in terms of ambition: the portfolio with a minimum time horizon of 5 years. • The Sectoral Decarbonization Approach (B2DS) b) Geography-specific information for those business activities where • The PACTA model geography- science-based targets differ specific trajectory alignment significantly across geographies (e.g. targets by asset class electric power).
PACTA Tool The tool covers three questions: Tool interface • 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/
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 of sector-level science-based targets set by the financial institution. Asset class Sector Status 2020 Approach Unit Current Target Base Target exposure year year (example Renewable On track % of 15% 20% output) power installed capacity Coal power Not on track % of 30% 25% installed capacity Electric Not on track % of 1% 3% vehicles production capacity Corporate Oil production On track Portfolio 100,000 80,000 PACTA 2018 2025 bonds production (in barrels) Gas Target production achieved Cement No exposure Shipping No exposure Aviation No exposure
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?
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