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In 2018, WRI, WWF and CDP invited the 2° Investing Initiative (2Dii) to take part to the development of the Science-Based Target Initiative (SBTi) for Financial Institutions as methodology co-developer with the consultancy Navigant.

After 18 months of collaboration, 2Dii has decided to withdraw from the project due to the inability to agree with the partners on the fundamental principles governing the methodological development. 

2Dii being conscious of the implications of such a disagreement for financial institutions and notably PACTA users, this document is designed to consult our stakeholders on our reasoning to inform next steps.

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* 1. General Information (NB: the results will be anonymized)

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* 2. Type of organisation

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* 3. Geographical area of your organisation

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* 4. Total assets / assets under Management (if applicable)

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* 5. Is your organisation member of the SBTi advisory group?

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* 6. Do you consider to setting a science based target?

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* 7. Is your organisation member of the following 'climate actions' initiatives?

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* 8. Purpose of setting science-based targets 
SBTi specifies on their website that "targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement”. 

2Dii's conclusion #1: The validation of a ‘Science-Based’ target by the SBTi consortium communicates to the general public that the target-setter company has decided to reduce GHG emissions in the real economy by a certain amount (quantified) that is considered sufficient to meet climate targets. 

Do you agree with our conclusion?

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* 9. Stated objective of potential target setters
“The members of the Alliance commit to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C" (Net Zero Asset Owners)

Banks will align their "portfolios to reflect and finance the low-carbon, climate-resilient economy required to limit global warming to well-below 2°, striving for 1.5 degrees Celsius" (Collective Commitment to Climate Action) 

2Dii's Conclusion #2: The communication (collective pledges or individual statements) of potential adopters suggest that the objective goes beyond financial risk management: it aims to contribute to the reduction of GHG emissions in the real economy.

Do you agree with this conclusion?

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* 10. Legal Perspective
From a legal perspective, there is no ‘safe harbor’ (such as free speech in the US) for corporate commitments related to social and environmental issues. Such communications can potentially be considered as marketing claims under unfair competition laws, especially when they relate to retail investment products.

2Dii's Conclusion #3: Financial institutions’ commitments to reduce GHG emission are made publicly (i.e. not behind ’confirm your professional status’ walls), and in many cases are tied in some form to products and services such as mutual funds, life insurance contracts, or savings accounts – as evidenced by their inclusion in marketing and advertisement material.

Do you agree with our conclusion?

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* 11. Legal Perspective
In Europe, the "Unfair commercial practices directive" (UCPD) prohibits communications which contains false or deceiving information. Additionally, the EC’s guidance on UCPD (2016) specifies that “traders must present their green claims in a clear, specific, accurate and unambiguous manner, to ensure that consumers are not misled (…) must have the evidence to support their claims” and “claims should be based on robust, independent, verifiable and generally recognized evidence which takes into account the latest scientific findings and methods." Similar consumer protections exist in other jurisdictions (e.g. US) under unfair commercial practices and false advertising laws

2Dii's conclusion #4: Environmental marketing claims are regulated in many jurisdictions. They must be unambiguous and associated with scientific evidence.

Do you agree with our conclusion?

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* 12. ‘Scientific’ definition of climate impact for FIs
The latest review of academic literature (Kölbel et al, 2019) defines “investor impact as the change that investor activities achieve in company impact” though various mechanism (engagement, capital allocation, indirect impacts), as opposed to the impact of the companies in the portfolio.

2dii's conclusion #5: To achieve their targets, investors (or banks) need to influence the behavior of investee/client companies, leading to GHG emission reductions in the real economy.

Do you agree with our conclusion?

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* 13. Portfolio alignment as a proxy for impact
The latest review of academic literature (Kölbel et al, 2019) did not identify enough ex-ante evidence to assume that a change in portfolio exposure from high to low-carbon economic activities (a.k.a. ‘alignment’) automatically lead to changes in the real economy: "We were not able to find studies that relate the capital allocation decisions of sustainable investors to corporate investment activities or operational practices. Hence, direct empirical evidence for the capital allocation impact is lacking."

The technical debate between investors (Impact Management Project) led to the same conclusions: "In general, "systems change" arguments about the impact of investing in public markets tend to be speculative, depending on the possible behavior of large numbers of other investors now or in the future. Some investors and asset owners find these arguments satisfactory; others do not. " 

2Dii's conclusion #6: There is currently no scientific evidence that aligning the exposure of investment/lending portfolio with a 1.5°C pathway, whatever the metric used, (technology, carbon emissions, etc.) can serve as a proxy for measuring the related changes caused by the financial institution in the real economy.

Do you agree with this conclusion? 

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You can’t ‘scientifically’ manage an indicator that you do not measure

You can’t ‘scientifically’ manage an indicator that you do not measure

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* 14. Setting targets on alignment to manage impact

2Dii's Conclusion #7: 
The value for the alignment indicator (A on the chart) is likely to be very different from the impact indicator (D), and primarily driven by exogenous factors (policies, cost, etc.).
If a financial institution has the objective to improve its impact (D), Alignment (A) is likely to be a poor proxy.
As a result, changes in alignment (A) are inappropriate as a ‘scientific’ measurement of progress towards impact (D).

Do you agree with our conclusion?

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* 15. Principle of reality of emission reductions
In the context of the technical debate within the SBTI group, it has not been possible to find an agreement with the other organizations involved in the SBTifor financial institution project on the statement below. As a result, the SBTi consortium decided to build the target setting framework based on the ‘system change’ assumption presented in slide 19.

”The SBTiframework must prevent financial institutions from setting targets labeled as “science-based” and achieving them without providing any scientific evidence that their actions actually contributed to reducing GHG emissions in the real economy."  

Do you agree on with this principle? 

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* 16. Consistency with the GHG Protocol
Despite the scientific evidence that changes in portfolio allocation have no linear relationship with GHG emissions in the real economy, the conclusions of the SBTi consortium in terms of ensuring the need for real emissions reduction seems inconsistent - in our view - with the guidance provided in the GHG Protocol Scope 3 Guidance (see excerpt below).

"Companies are required to recalculate base year emissions when the following changes occur and have a significant impact on the inventory: structural changes in the reporting organization, such as mergers, acquisitions, divestments, outsourcing, and insourcing(…) Significant changes result not only from single large changes, but also from several small changes that are cumulatively significant. (…) Structural changes trigger recalculation because they merely transfer emissions from one company to another without any change in emissions released to the atmosphere (e.g., an acquisition or divestment only transfers existing GHG emissions from one company’s inventory to another)." 
– Corporate Value Chain Accounting & Reporting Standard (p. 104)

Do you think this rule should be applied to changes in the composition of the portfolio of financial institutions?

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* 17. Carbon footprinting and related ‘targets’ or ‘performance’ are often associated with misleading claims confusing company impact and investor impact (as defined by Kolbel), such as:

“Last year, the equity fund was directly responsible for 1,417 tonnesof CO2emissions based on this calculation. A very good value, as the comparison with the MSCI index shows that our fund has a significantly lower impact on climate”

“What does this mean for you as an investor? An investment of 100,000 euros in the fund helps avoid CO2 emissions by 400 tons, or the equivalent of 60 trips around the world with a car.”

“A 5 million Euro investment in the fund, for one year would reduce polluting emissions by 4,200 tons of CO2, which is equivalent to taking 1,900 cars off the road for a year.”

“Invest 25,000€ in this fund and you save the CO2 emissions equivalent to:
Flying 7,3000 km, Eating 830 burgers, using 7,000 times your washing machine”

Do you consider those claims to be misleading? 

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* 18. Regulatory and legal implications
The EU regulatory guidance says that “claims should be based on robust, independent, verifiable and generally recognized evidence which takes into account the latest scientific findings and methods.”

By presenting itself as independent, science-based and contributing to a potentially  generally recognized approach, the SBTiproject as currently designed is likely to level down the playing field and undermine the enforcement of existing consumer protection and unfair competition regulations.

Do you have a different interpretation of the regulatory framework?

Do you think we over-estimate this risk? 

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* 19. We have identified several projects that aims at building evidence on 'investor impact'. Are you aware of other relevant projects that can be can contribute to the development of investor impact* measurement methodologies?
*as defined in our slide deck 

Please share the name and website 

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* 20. We have identified several projects that aims at managing ‘investor impact’. We think they can be leveraged to collect ex-post evidence. Are you aware of other relevant projects?

Please share the name and website 

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* 21. Distinction between alignment goals and science-based targets

Setting ‘alignment goals’ is relevant to define the intended average trajectory for the investee/client companies. However it is not to be confused with a ‘science-based target’ that, by design, only applies to real GHG reduction (and therefore ‘investor impact’).

We recommend investors and banks communicating on intended trajectory of their portfolio to clarify the difference in their communication. 

Example of disambiguation: “There is a difference between the outcomes of portfolio climate alignment and the impact of absolute GHG emissions reduction in the real economy. Challenges such as carbon leakage present limitations to how much a bank can control in terms of climate impact, especially when applying capital allocation choices as a tool for steering”.

Do you agree with this recommendation?

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Suggested journey to science-based target setting (2-5 years)

<strong>Suggested journey to science-based target setting (2-5 years)</strong>

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* 22. Would you be interested in more practical guidance on this roadmap?

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‘Evidence on impact’ program

&lsquo;Evidence on impact&rsquo; program

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* 23. Would you be interested to join this program?

0 of 23 answered
 

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