The dust is beginning to settle on the Science-based Targets initiative’s (SBTi) new net zero standard for finance.
Launched in July, the final 80-page version is the result of two public consultations and a pilot with 33 financial institutions.It sets out the rules for any financial institution that wants the NGO to vouch for the credibility of its near-term decarbonisation targets.
Among the raft of updates is a new category for investments into climate solutions, and clarified expectations around engagement, disclosure and the use of transition finance.
Investors will also now have to assess and disclose their exposure to deforestation by 2030, along with an engagement plan if that exposure is material.
Fossil fuels
“But the main shock to stakeholders was the fossil fuel update,” says Sarah Ben-Moussa, legal resident at advisory and software provider Greenly.
The standard bans project finance or insurance for new oil and gas expansion activities, where the use of proceeds is clear.
Originally, this ban also applied to general purpose financing being offered to oil and gas companies that were involved in expansion projects. But, following the consultations, investors now have until 2030 to cease such activities, on the premise that they can have a meaningful impact on decarbonisation through their engagement with those firms over the next five years.
SBTi’s chief technical officer, Alberto Carrillo Pineda, told IPE the approach “promotes greater long-term impact on real-world emissions by encouraging companies to support others in their transition rather than requiring immediate divestment”.
But one senior climate expert at a large asset owner described SBTi’s decision to loosen the fossil fuel rules as “difficult”, adding that the 2030 deadline is “not in line with science, but will mean a divestment from the sector for financials”.
It’s generally accepted that the ideal way for society to achieve net zero involves remaining consistently below 1.5°C of warming.
To achieve that goal would require a more abrupt end to fossil fuels than SBTi’s 2030 deadline would allow.
“So it is both not ambitious enough for science, and [still] really hard for financial actors,” said the climate expert, who asked not to be named.
But there are multiple ways to reach the main goal of the Paris Agreement – which is to keep warming well below 2°C – and SBTi insists its approach is “wholly consistent with science” and with the International Energy Agency’s climate scenarios.
Whatever the science says, Ben-Moussa believes the requirement to ditch fossil fuels will be tricky for many investors.
“It really depends on what your portfolio looks like to begin with, but for many financial institutions, investing in, primarily, oil and gas, that’s going to be a big ask without a transition plan in place,” she says.
A shift from CO2 to $ as a metric
While the fossil fuel criteria have taken up most of the debate about the new standard, there is another change that could have serious implications for investors seeking to align their targets with SBTi.
It’s currently common practice for decarbonisation targets to apply only to portfolios with a significant level of financed emissions – usually corporate bonds and equities.
But under the Financial Institutions Net-Zero Standard, it’s not the materiality of the emissions that makes a portfolio eligible, it’s its financial materiality: anything that generates more than 5% of an investor’s total revenues must be covered by the decarbonisation target.
This includes oft-ignored activities such as sovereign bonds, derivatives, and the capital markets activities of banks.
“That’s very hard,” says Pablo Carvajal, director of climate change and sustainable finance for EY’s London office.
“It means reassessing the boundaries for what is covered in your targets.”
It’s part of a bigger shift within the SBTi standard towards measuring climate progress in dollars, not tonnes of carbon.
“Investors generally talk about how aligned the emissions of their portfolios are with net zero, not how aligned their financial flows are to climate-aligned assets,” notes Carvajal.
But SBTi now gives investors the choice between the two approaches: reducing the emissions intensity of the portfolio until it converges with a credible transition pathway, or demonstrating an increase in allocation to assets that support the transition.
For the latter, investors must first sort their investments into pre-defined categories, including ‘in transition’, ‘climate solutions’, ‘net-zero aligned’ and ‘not aligned’.
Each category comes with a requirement to increase the proportion over set timeframes.
Adoption of the standard
Some large investors have shown their support SBTI’s new standard.
AkademikerPension’s chief investment officer, Anders Schelde, told IPE the fund had “worked systematically to reduce its climate footprint in line with our climate goals and our commitments to the SBTi”.
“Although the targets have not yet been formally validated, we have finalised our ambitions and will be engaging in dialogue with SBTi in the coming period regarding formal approval,” he noted.
Varma, another asset owner that has come out in support of SBTi in the past, told IPE it was currently in the process of finalising its 2026-2030 sustainability programme.
“As part of this work, we are reviewing our climate targets, including our approach to the SBTi standard,” a spokesperson said, adding that it will be ready to provide more details by the end of the year.
While formal adoption of the standard is likely to be scant among large asset owners, Carvajal says the standard is still valuable.
“Target-setting methodologies have not been implemented consistently by financial institutions,” he explains, adding that – even among leading investors – the underlying climate scenarios are being used “in very different ways”.
SBTi’s update could offer some more universal guidance.
“I would advise investors to see the new standard as a useful reference for what they should be doing,” he suggests. “Not as a fixed mandate.”
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