FINANCIAL SECTOR SCIENCE-BASED TARGETS GUIDANCE PILOT VERSION 1.1 APRIL 2021 Table of Contents Table of Contents ...............................................................................................................................1 Acknowledgments .............................................................................................................................3 Executive Summary ............................................................................................................................6 Glossary........................................................................................................................................... 10 1. Introduction ............................................................................................................................. 16 1.1 Purpose of this Document ................................................................................................................ 16 1.2 The SBTi’s Financial Sector Project Audience ................................................................................... 19 1.3 The SBTi’s Financial Sector Project Context ...................................................................................... 19 1.4 What Are Science-Based Targets (SBTs)? ......................................................................................... 20 1.5 How is the Financial Sector Addressing Climate? ............................................................................. 22 2. Business Case for Financial Institutions to Set Science-Based Targets ......................................... 25 3. SBTi Target Validation Criteria and Recommendations for Financial Institutions ......................... 26 3.1 GHG Emissions Inventory and Target Boundary ............................................................................... 27 3.2 Scope 1 and 2 Target Time Frame..................................................................................................... 29 3.3 Scope 1 and 2 Target Ambition ......................................................................................................... 29 3.4 Scope 2 .............................................................................................................................................. 30 3.5 Scope 3 – Portfolio Target Setting Requirements ............................................................................. 31 3.6 Reporting........................................................................................................................................... 34 3.7 Recalculation and Target Validity ..................................................................................................... 35 4. How to Set Science-Based Targets ................................................................................................. 37 4.1 Compiling a GHG Inventory............................................................................................................... 37 4.2 Measuring Financed Emissions to Facilitate Target Setting ............................................................. 40 4.3 How to Set a SBT for Scope 1 and 2 Emissions ................................................................................. 44 5. Approaches to Setting Scope 3 Portfolio Targets ........................................................................... 49 5.1 Background and Brief Literature Review .......................................................................................... 49 5.2 Overview of Available Asset Class–Specific Methods, Broader Methods, and Existing Gaps .......... 50 5.3 Defining the Boundary of Portfolio Targets ...................................................................................... 53 5.4 Description of Methods to Set Portfolio Targets .............................................................................. 58 5.5 Approaches to Setting Targets on the Rest of the Scope 3 Categories ............................................ 92 5.6 Coal Phaseout and Fossil Fuel Disclosure ......................................................................................... 93 6. How to Communicate Science-Based Targets and Tracking Progress .............................................. 96 6.1 Tracking and Reporting Target Progress ........................................................................................... 99 6.2 Target Recalculation and Validity ................................................................................................... 100 7. How to Achieve SBTs .............................................................................................................. 102 7.1 Integration of Climate Change in Governance and Decision-Making ............................................. 102 7.2 Engaging Key Stakeholders: Companies, Service Providers, and Policymakers ............................. 103 7.3 Public Disclosure of Climate Actions ............................................................................................... 107 8. SBTi Call to Action Process: Commit, Develop Target, Validate, Announce, Disclose ................. 109 Step 1: Commit to Set a Science-based Target ..................................................................................... 109 Step 2: Develop a Target ....................................................................................................................... 110 Step 3: Submit the Targets for a Validation .......................................................................................... 111 Step 4: Announce the Targets ............................................................................................................... 112 Step 5: Target Disclosure ...................................................................................................................... 112 9. Discussion and Areas for Further Research .............................................................................. 113 Appendices .................................................................................................................................... 115 A. SDA for Residential Mortgage ....................................................................................................... 115 B. SDA for Commercial Real Estate ................................................................................................... 125 C. SDA Electricity Generation Project Finance .................................................................................. 135 D. SDA for Corporate Debt and Equity .............................................................................................. 144 E. Temperature Rating Method ........................................................................................................ 151 F. SBTi Finance Temperature Rating and Portfolio Coverage Tool ................................................... 156 References ..................................................................................................................................... 169 Financial Sector Science-Based Targets Guidance Pilot Version 2 Acknowledgments PRIMARY AUTHORS Chendan Yan, World Resources Institute Nate Aden, World Resources Institute Cynthia Cummis, World Resources Institute Eoin White, CDP Worldwide Jan Vandermosten, World Wildlife Fund Donald Linderyd, World Wildlife Fund Chris Weber, World Wildlife Fund TECHNICAL PARTNERS Giel Linthorst, Guidehouse Angélica Afanador, Guidehouse EXPERT ADVISORY GROUP The following individuals provided expert feedback and direction on guidance development. They did so in a personal capacity, and their views did not necessarily represent the views of their employers.1 Anna Viefhues, AMF Pension Stuart Palmer, Australian Ethical Investment Jochen Krippner, Barclays Jean-Yves Wilmotte, Carbone 4 Tim Stumhofer, ClimateWorks Foundation Ian Monroe, Etho Capital and Stanford University Kaitlin Crouch, ING Bank Maximilian Horster, ISS ESG Dr. Nicole Röttmer, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Marcus Lun, RBC Global Asset Management John Gelston, Standard Chartered Greg Liddell, Suncorp Group Jes Andrews, United Nations Environment Programme, Finance Initiative Neil Patel, Voya Financial Philip Tapsall, Westpac Eric Christensen, WSP 1 This list does not represent all Expert Advisory Group (EAG) members who have contributed to the framework development. More members may be added to the list. Financial Sector Science-Based Targets Guidance Pilot Version 3 METHOD ROAD TESTERS The following organizations provided valuable feedback on the robustness and practicality of the draft science-based target setting methods through the method road-testing process led by Science Based Targets initiative (SBTi) in 2019. ABN AMRO Bank ACTIAM AMF Pension ASN Bank ASR Nederland NV Bank Australia Bankinter BNP Paribas ING Itaú Unibanco La Banque Postale and La Banque Postale Asset Management Morgan Stanley Netherlands Development Finance Company (FMO) Nordea Life and Pension Skandia Sompo Holdings, Inc. Swedbank AB YES BANK, Ltd. TEMPERATURE RATING AND SBT PORTFOLIO COVERAGE TOOL The SBTi tool development process included many partners and beta testers. We would like to particularly thank: Christian Schmidli; representatives from Allianz; Bloomberg; ISS ESG; MSCI; Ortec Finance; OS-Climate; Trucost; Storebrand; and Urgentum for their participation. We would also like to thank all beta testers who provided valuable feedback on the tool development