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As a guide for the Science Targets Initiative (SBTi) on funded emissions As we celebrate our first anniversary, we want to share three thoughts on this very busy year of working with our insurance and banking clients to achieve their zero net profit goals.
Basic moments
1. The overall concept works: We applaud standards developers (especially PCAF and SBTi) and founders of industry practice groups (especially GFANZ) who have found a way to make financial institutions conduits for zero progress in other industries. They turn emissions into a new hard currency that needs to be accounted for.
2. There is no universal solution: While the science remains the same, the application in every organization is unique. We have seen everything from three months of top-down diagnostics to years of bottom-up work that immediately involved a wide range of internal stakeholders from various industry sectors and business units.
3. The hardest part is yet to come: While the current baseline and target reduction calculations are already perceived as hard work, the devil is and will be in the details of implementing actual reductions beyond these commitments. However, only this will bring us the desired climate impact, so we need to refocus on this operationalization.
Let’s celebrate the concept of financed emissions!
The COP26 conference ushered in a “green tipping point” as 40% of global assets under management went into zero balance. It holds insurers, borrowers and investors responsible for the emissions of its investments and customers and uses their influence on all other industries for good. In fact, this makes the financial sector a powerful new zero-revenue manager along with the public sector.
Financial institutions have three key levers they can use:
- growing with green transition champions
- potentially not reactivating clients who are not making an effort to progress
- most importantly, leverage the existing customer and investor base (i.e. don’t just play carbon chess)
Engagement requires that sectoral decarbonization plans be evaluated and recommended at the forefront, and new ways of financing them proposed. It offers insurers and banks a way to go beyond transactions to a new level of relevance and partnership with their commercial clients. It also means that there is a lot at stake for client companies and they need to develop clear transition plans, as an insurer and a bank. According to the CROs we have worked with, emissions are becoming hard currency.
Use an approach that suits your organization
Our second comment concerns the careful development of emission baselines and transition plans. Indeed, there is a wide range of approaches to launching a Zero Negative Program, from top-down, centrally organized roadmaps to bottom-up ones that immediately engage key affected teams within the organization. The first option is faster and provides a great overview and starting point, but is followed by more detailed work and stakeholder engagement. The latter includes the stakeholders needed to transition from the start. While this can help prevent the “not invented here” syndrome, there is a risk of overburdening the organization, especially when tools such as training and data infrastructure that are built in parallel are not yet fully available.
The hardest is yet to come
Even if an organization chooses a bottom-up approach, implementation will be difficult. Achieving zero emissions by 2050 or earlier requires a dramatic reduction in emissions, which requires much of the institution’s transitional energy: broad skills development initiatives, robust data infrastructure, and changes to existing processes.
For example, when an insurance company decides to stop investing in coal, this decision must be integrated into data collection, investment decision making, operational support and incentive adaptation. It is crucial not to lose momentum after the first emissions report, but to really build the tools to get it done.
We look forward to your progress and comments on this first year of financed emissions guidance and will continue to move forward with you in the coming years!
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STANDARD DISCLAIMER:
Disclaimer: This content is provided for general informational purposes and is not intended to be used as a substitute for consultation with our professional advisors.
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