October 30, 2020

Tackling Financed Emissions: Introducing Science-Based Targets for Financial Institutions

Below is an excerpt from ISS ESG’s thought leadership paper “Tackling Financed Emissions: Introducing Science-Based Targets for Financial Institutions.” The full paper is available for download from the Institutional Shareholder Services (ISS) online library.

Disclosing a clear and measurable target for emissions reductions serves to hold companies accountable to their commitments. In the current climate, the corporate world is increasingly held responsible for its impacts on the environment, illustrated by the emergence of greenhouse gas (GHG) regulations in many countries. There is therefore a growing expectation that companies have strategies in place to reduce these impacts. Target-setting is an important aspect of such strategies.

The Greenhouse Gas Protocol, a multi-stakeholder initiative convened by the World Resources Institute, has established a Corporate Accounting and Reporting Standard for measuring and disclosing GHG emissions. The standard provides a uniform basis for target-setting and serves as the framework for establishing and reporting on a science-based target.

Under the standard, emissions are categorized into three “scopes.” Scope 1 refers to those emissions generated by direct operations, or those over which a company has direct control, while Scope 2 emissions include indirect emissions from purchased electricity and heat. Scope 3 emissions are those indirect emissions produced in the corporate value chain and arise from sources outside the company’s operational control. For the finance sector, it is these Scope 3 emissions that are most significant, as they include emissions resulting from the investment, lending, and insurance activities, which make up most of the sector’s carbon footprint.

A science-based target is one that aligns with the goals of the Paris Agreement – namely, to limit global warming to well below 2°C above pre-industrial levels, and ideally to limit warming to 1.5°C. These targets are validated by the Science-Based Targets Initiative (SBTi), which takes responsibility for defining and advocating for best practice in science-based target setting in line with the latest climate science. Currently, there are more than a thousand companies worldwide that have set or committed to setting a science-based target.

By Emily Faithfull, Lukas Lohrer, Karoline Wagner; ISS ESG

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