Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance PDF

148 |Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance INTRODUCTION LEARNING OBJECTIVES In this chapter, we examine how impacts and outcomes of...

148 |Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance INTRODUCTION LEARNING OBJECTIVES In this chapter, we examine how impacts and outcomes of On completion of this chapter, you will be able to: green and sustainable financing activities and decisions can be measured, monitored and reported. We outline outline how environmental and sustainability some of the frameworks and tools to help measure performance and impacts can be measured and impacts and outcomes of lending and investment reported; decisions, and to monitor the alignment of lending and describe some of the frameworks and tools commonly investment portfolios with the objectives of the Paris used to measure and report impacts, and identify key Agreement and broader sustainable goals. We examine organisations and approaches involved; the importance of ensuring independent external review explain the importance of independent, external and transparent disclosure, and introduce the new review; International Sustainability Standards Board (ISSB), which plans to consolidate existing standard-setting initiatives describe approaches to monitoring the alignment of and bring greater consistency and comparability to lending and investment portfolios with the objectives sustainability reporting. of the Paris Agreement, including PACTA and the SBTi; explain the importance and challenges of monitoring, We also consider the importance of monitoring, measuring, and reporting flows of finance to track measuring, and reporting flows of public and private progress towards achieving Article 2.1 (c) of the Paris sector investment to support climate change mitigation Agreement; and and adaptation activities. This is crucial to track progress towards the Paris Agreement’s objectives of making flows describe how advances in data availability and analysis of finance consistent with the transition to a sustainable, can support impact analysis and monitoring flows of low-carbon world. Finally, we consider advances in the finance. gathering and analysis of environmental performance and asset-level data, and how these may support impact analysis and monitoring flows of finance. 149 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.1 MONITORING, MEASURING AND REPORTING: This is the important concept of “double materiality”. IMPACTS AND OUTCOMES Organisations should report the financial impacts of climate change and other environmental and In the context of green and sustainable finance, sustainability factors on their operations and monitoring, measuring, and reporting can refer to: performance – and many already do. We briefly introduced the work of the Task Force for Climate- measuring and reporting the environmental and related Financial Disclosures (TCFD) in the previous other impacts and outcomes of green and sustainable chapter, and will explore this in more detail in Chapter 5. lending and investment decisions, and of other Organisations should also report, though, the positive financial activities; and negative impacts of their activities and operations monitoring the alignment of lending and investment on the environment and society. In terms of financial portfolios, and financing activities overall, with the institutions, this includes both direct impacts (e.g. objectives of the Paris Agreement; and greenhouse gas emissions released by offices and data tracking and reporting flows of investment to green centres) and indirect impacts (from activities financed and sustainable assets, activities, and projects with by lending, investment and other financial operations). the aim of meeting the objectives of Article 2.1 (c) of As we will see in this chapter, measuring, monitoring and the Paris Agreement and other sustainable goals. reporting these indirect impacts – referred to as “financed emissions” in terms of those relating to greenhouse gases In this section, we examine the former – the ways – is critical so that progress towards the objectives of in which the impacts and outcomes of green and the Paris Agreement and other sustainable goals can sustainable lending and investment decisions, and of be tracked at the organisation, sector, country and, other financial activities, may be monitored, measured ultimately, global levels. and reported. Developing, implementing and embedding consistent approaches to monitoring and reporting impact and outcomes at firm, project and/or asset level is key if green and sustainable finance is to become mainstream, and finance overall aligned with the objectives of the Paris Agreement (i.e. supporting climate change mitigation and adaptation) and the UN Sustainable Development Goals. Monitoring and reporting environmental and other impacts must become business-as-usual (BAU) for financial institutions and finance professionals, alongside established financial reporting mechanisms. 150 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.1.1 What are we measuring? Monitoring systems may seek to measure processes QUICK QUESTION: IN WHAT WAYS (IF ANY) ARE GREEN AND intended to lead to positive green and sustainable SUSTAINABLE INVESTMENTS AND ACTIVITIES MONITORED outcomes, and/or try to directly measure the impacts and outcomes themselves. To ensure the delivery AND REPORTED IN YOUR ORGANISATION, OR IN AN of positive environmental outcomes and to avoid ORGANISATION WITH WHICH YOU ARE FAMILIAR? greenwashing, the monitoring and measuring of impacts and outcomes, including review by suitably qualified, Write your answer here before reading on. independent third parties, is essential. i. Processes Process monitoring describes the assessment and evaluation, usually by independent third parties, of an organisation’s principles, policies, procedures and practices. In the context of green and sustainable finance, these would be those intended to shape an organisation’s decision-making to lead to positive environmental and/ or social outcomes from lending, investment or other financial activities. It is worth looking at the implementation of the Equator Principles1 (introduced briefly in Chapter 3) to illustrate and understand the advantages and disadvantages of process monitoring. The Equator Principles are a risk management framework which financial institutions, especially banks involved in project finance (large-scale lending for infrastructure and similar projects) have adopted for assessing and managing environmental and social risks in projects. They provide a scale against which financial institutions’ policies, procedures and practices can be aligned and benchmarked. In 2016, UNEP found that the impact of the Equator Principles had been mixed. Supporters argue that these are visionary principles that have helped to redefine and enhance environmental and social practices by 151 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance promoting convergence around common environmental sustainable finance, this means identifying the desired institutions on these. Remember from earlier chapters and social standards. Critics argue that, being process- environmental and sustainable outcomes before making that it is relatively straightforward for financial institutions oriented, the Principles do not set criteria on desired an investment or lending decision, and then monitoring to measure and report their direct (Scope 1 and Scope environmental and sustainable outcomes, or give and measuring these during the lifespan of the loan 2) emissions, but much more complex to measure and guidance on the conditions that would result if project or investment, and perhaps beyond. For financial report indirect, financed emissions (Scope 3) from their finance were rejected because of environmental or social institutions, this implies supplementing traditional lending and investment activities, which account for the issues. There are also concerns regarding the validity of accounting measures of financial performance with majority of financial institutions’ emissions and impacts. CO2 emissions calculations, and about the willingness measures and reporting of non-financial performance, of financial institutions to disclose data voluntarily. including a wide variety of environmental impacts In section 4.1.3, we introduce several approaches to In addition, UNEP found that organisations’ main relating to climate change mitigation and adaptation, measuring and reporting financed emissions, and motivations for adopting and using the Equator Principles such as reducing greenhouse gas emissions, supporting in section 4.1.4 broader sustainability impacts and were centred on regulatory compliance, managing project reforestation, or improving biodiversity. outcomes. We also briefly introduce some of the risks, and seeking reputational benefits rather than on approaches, standards and organisations Green and identifying and seeking to achieve positive environmental A key challenge for financial institutions and others in Sustainable Finance Professionals should be aware of. We impacts2. measuring impacts and outcomes is the availability and highlight the work of the new International Sustainability quality of relevant environmental and other performance Standards Board (ISSB), which is consolidating a number Adopting green and sustainable finance principles data, especially relating to greenhouse gas emissions, of existing sustainability reporting initiatives with the aim and practices, such as those included in the Equator without which consistent and comparable reporting is of enhancing the quality, consistency and comparability Principles, is desirable in the sense that it may reflect a impossible. In turn, this means that institutions cannot of sustainability disclosures to support better decision- changing culture and approach within an organisation. fully understand their – and others’ – exposure to making by investors and others. By themselves, however, they do not ensure that positive climate-related and other environmental risks, and the environmental and social impacts green are achieved. extent to which lending and investment decisions, and First, though, we consider how Green and Sustainable Process monitoring can confirm that appropriate portfolios overall, are aligned with the Paris Agreement Finance Professionals may approach the analysis, principles, policies, and procedures are in place, and other sustainable objectives. Impact analysis is also assessment and monitoring of impacts and outcomes, and independent assurance and verification can be required by finance sector initiatives, including the UN and the importance of external review in this. A helpful, sought to validate this. However, this does not by itself Principles for Responsible Banking and Principles for commonly used methodology for monitoring the impact necessarily lead to changes in lending and investment Responsible Investment (both introduced in the previous and outcomes of green and sustainable investments is flows consistent with achieving the objectives of the Paris chapter and examined in more detail in Chapters 6 and 9, the Assess-Monitor-Report approach, described in the Agreement and broader sustainability goals respectively). following Reading. As can be seen, this approach requires a considerable amount of thought and work at the pre- i. Impacts and Outcomes: Assess, Monitor and Report The analysis and reporting of sustainability impacts investment stage to ensure that relevant impacts and For these reasons, we need to assess, measure and and outcomes is a rapidly developing area, with many outcomes are identified, and appropriate measurement report the impacts and outcomes of financing decisions, organisations and initiatives working to measure and tools and techniques selected. especially greenhouse gas emissions (or the reduction in report greenhouse gas emissions and broader categories these) alongside the principles, policies and procedures of environmental and social sustainability impacts, that guide decision-making. In the context of green and and to provide insightful, actionable data to financial 152 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance READING: GREEN INVESTMENT GROUP ASSESS- d. Appoint external environmental and social other environmental and social measures. Specific MONITOR-REPORT APPROACH experts, where appropriate, to support due requirements will depend on the characteristics diligence. and size of the investment, the geography, and the Assess – How to assess the green impact and risks of sector. projects prior to investment as part of the due diligence e. Consider green risks - that the project may not process. deliver the forecast green and other intended a. Annual green reporting – the investee should impacts. Material green risks identified during complete an annual report detailing the forecast The process described below will enable a project’s this process should be mitigated in an action plan and/or actual performance of the project, forecast green performance to be assessed and/or included in monitoring. including all relevant source data and references against a defined set of investment criteria and f. Where the due diligence process identifies gaps required for audit purposes. The report can, if the associated risks to be considered. Project or non-alignment with policy requirements, agree required, be prepared or verified by a suitable, assessment should be conducted in a manner an action plan with investee management to close independent third party. appropriate to the geography, sector, risk and size these. of the proposed investment. Consideration should b. The investee should also report material be given to the investment’s material alignment g. Integrate green covenants into financing/loan environmental and social incidents, accidents and with any environmental, social and governance documentation; they should have legal status harms to the investor as soon as possible (with investment criteria, including specific low-carbon and recourse to enforcement measures equal to associated details of any mitigation and/or actions criteria within any policy or mandate requirement those of financial covenants. taken to address the issue). The investor should (the Green Investment Policy). h. Consider due diligence, forecast green consider these and, in consultation with investee performance and green risk assessment as part management, assess if there is a requirement for a. Establish a Green Investment Policy which makes of the investment decision-making process. remediation or mitigation action. policy requirements, investment criteria, and/or c. Independent monitoring – as part of the stated objectives against which potential projects Monitor – How to monitor the green performance of covenants agreed, the investor should retain an can be assessed for alignment publicly available. projects, including issues initially identified through the independent environmental and social expert b. Assess the potential investment management due diligence process. to conduct periodic monitoring and verification team’s capability, capacity, and commitment of green risks, action plans, forecast and actual Once investment has been provided to a project, to meet stated objectives in line with policy green performance, and ongoing compliance with the performance of the project is monitored. The requirements. wider environmental and social covenants. process described here shows how to monitor the c. Request performance data from investee green impact and green risks, including compliance d. Once the data from an investment has been management, including the project’s forecast with agreed covenants and environmental and collected and verified by an independent third renewable electricity and/ or heat generation or social project-related risks. In addition, investees party (if required), it can be aggregated for demand reduction, and project life. The forecast should provide regular operational updates/ external reporting to stakeholders. carbon savings associated with the project can reports that consistently address the progress then be considered. made towards the expected green impact and 153 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance Report – How to collect, validate and report data on Source: Macquarie/Green Investment Group “A Guide to the Green Investment Handbook: Assessing, Monitoring and Reporting Green the performance of portfolio investments for green and Impact”. Available at: https://www.greeninvestmentgroup.com/ responsible investment-related data assets/gig/who-we-are/our-impact-and-measurement/Green- Impact-Report-English.pdf [Accessed: 18 January 2023] It is critical that green impact is periodically reported to stakeholders on a transparent basis. Green impact should be reported using defined metrics such as: tonnes of carbon dioxide The Green Investment Group approach outlined equivalent (CO2e), tonnes of oil equivalent (toe), in the Reading previously is broadly similar to that tonnes of other air pollutant emissions, renewable recommended by many policymakers, regulators energy generated (GWh). Both forecast green and industry groups and adopted by many financial impact performance (as assessed at financial close institutions. It is codified in market standards and and revised periodically thereafter) and actual guidelines such as the Green Bond and Green Loan green impact performance delivered should be Principles, as well as the Climate Bonds Standard and reported to the relevant stakeholders. Wider the proposed EU Green Bond Standard (discussed in disclosure to the public can take the form of Chapters 6 and 7). All place significant emphasis on individual investment non-financial performance identifying intended green and sustainable impacts and reporting, or aggregated reporting (e.g. by sector). outcomes pre-investment, then monitoring, measuring a. The calculation of a project’s green impact is and reporting the actual impacts – both positive and produced by comparing relevant information and negative – often with the assistance and/or assurance of data derived from that project against relevant suitably qualified, independent third parties. baseline (or counterfactual) data for the assumed environmental impacts that would occur if the project did not take place. b. The methodology used to calculate a project green performance should be publicly disclosed at the institutional level. This should include disclosure of sector-specific approaches, assumptions and parameters (e.g. greenhouse gas emission factors used for fuels and electricity, and the approaches to calculating jobs created as a result of the investment). 154 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.1.2 External Review As noted previously, independent external review can be QUICK QUESTION: WHY, IN YOUR VIEW, IS INDEPENDENT recommended or required to support the monitoring, EXTERNAL REVIEW OF IMPACTS AND OUTCOMES SO measuring and reporting of environmental and other sustainability impacts at both the pre-investment and IMPORTANT? post-investment stages. In order to ensure that the Write your answer here before reading on. intended impacts are achieved (or, if not, that this is disclosed) and that other positive or negative impacts of lending and investment decisions are reported, to avoid inadvertent or deliberate greenwashing and to maintain the integrity of the growing green and sustainable finance sector, independent third-party review of impacts and outcomes is key. Green and Sustainable Finance Professionals and their organisations will need to work with a range of independent consultants, reviewers and verifiers, therefore, either as part of their investment decision- making and monitoring processes (as investors), or as potential investees preparing green and sustainable projects for investment. It is important, therefore, for Green and Sustainable Finance Professionals to understand different approaches to external review and the advantages and disadvantages of each. The term ‘external review’ is generally used as a catch- all to cover similar terms such as audit, assurance, attestation, certification, validation, verification and second- or third-party review. Although there are differences between these, which we explore on the next page, the intended outcomes are generally the same: To verify the environmental or broader sustainability impacts of investments with the aim of bringing certainty to investors 155 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance To avoiding greenwashing aligned with recognised investment and project has benchmarked its internal policies and procedures To maintaining confidence in the green and sustainable categories, such as renewable energy, biodiversity to the Equator Principles), although, as we have finance sector conservation and clean transportation (as set out, for explored previously, in green and sustainable finance example, in the Green Bond Principles, Climate Bonds the verification of impacts and outcomes is of greater To track alignment with the Paris Agreement and other Standard and the EU Taxonomy); and importance. sustainable goals and objectives supported by a realistic assessment of material green Certification External reviews may be conducted at different levels. risks, i.e. that may prevent the investment or project achieving the desired impacts. Certification refers to a process by which investments For instance, this could be at the individual investment are measured against recognised external standards or project level, the investment programme level - or the There are various types and levels of external review: and criteria, i.e., the criteria are not defined by the organisational level, encompassing an institution’s entire investor, as is the case with verification. Certification, portfolio, although this is in its infancy given the scope Second/Third Party Review and Opinion therefore, provides a greater degree of independence and complexity involved. In general, this refers to a review by a suitably qualified and a higher level of assurance than verification. One Importantly, external review occurs not only in respect expert or institution (depending on the scope and size of the best-known certification schemes in green of monitoring and measuring impact and outcomes once of the investment or project under consideration) of the finance is the Climate Bonds Standard, which seeks to a lending or investment decision has been made. As we areas set out in this section. A second party review is ensure that certified bonds meet a range of outcome- saw in the previous Reading, it is recommended that an when there is a degree of independence between the based sustainability criteria. This is to ensure that the expert, independent review of potential investments and investment/project managers and the reviewer but where investments and projects they support will achieve projects is undertaken at an early stage of the investment there may be a conflict of interest, or a perception of one. sustainable objectives consistent with the Paris decision-making process. This would usually seek to For example, this could be when the costs of the review Agreement and other environmental objectives. For ensure that investments and intended project outcomes are paid for by the organisation seeking investment. A a bond to be certified as a Climate Bond, prospective are: third-party review - for example, a review paid for by issuers must appoint an approved verifier (as illustrated the potential investor rather than the investee - is fully in the case study on the next page). The Climate Bonds supported by organisational strategy, policies and independent, and therefore provides a greater level of Standard itself is considered in more detail in Chapter 7. procedures aligned with green and sustainable finance confidence in the integrity of the review and its outcomes. principles and practices; Self-Certification Verification Self-certification, also known as a ‘first party review’, likely to contribute to environmental objectives Verification is when an investor obtains independent refers to the self-review of investments and projects by such as climate change mitigation or adaptation, as third-party assurance against designated criteria the organisation. Here there is clear scope for conflicts well as related areas such as improving biodiversity, identified in advance. This often includes reference to of interest to arise, or the perception of these. Some reforestation and/or sustainability more broadly market standards and guidance such as the Green Bond green and sustainable finance market standards and (depending on the investor’s desired outcomes); or Green Loan Principles, the Climate Bonds Standard, frameworks do allow self-certification (for example, unlikely to harm other environmental and/or social and/or standards relating to environmental performance. the Green Loan Principles), but this tends not to be objectives; Criteria may relate to the processes to be followed (for recommended. By definition, self-certification is not example, a verifier might report that an organisation a form of external review, but we include it here for completeness. 156 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.1.3 Measuring and Reporting Greenhouse Gas CASE STUDY: BECOMING A CLIMATE BONDS Technical characteristics and performance of Emissions and Environmental Performance STANDARD APPROVED VERIFIER low-carbon projects and assets in the areas We have discussed the importance of monitoring, covered by the specific criteria available under What is an Approved Verifier? measuring, externally reviewing and reporting climate the Climate Bonds Standard Under the Climate Bonds Standard and Certification change mitigation and adaptation impacts and outcomes. Provision of Assurance Services in line with We have not yet considered, though, what actually Scheme, an Approved Verifier will check a bond the International Standards on Assurance needs to be measured in terms of greenhouse gas issuer’s upcoming bond against the organisation’s Engagements ISAE 3000 emissions and reductions and broader environmental Standard and sector-based technical criteria (for example, solar energy). If the bond complies with and other sustainability outcomes. In many cases, this Verifiers are expected to use teams of professional the Standard and Criteria, the Verifier will write a requires the monitoring, measurement and reporting of staff and/or insured contractors who meet all these report to verify that the bond can be marketed to environmental metrics based on a scientific analysis of, requirements for each engagement. investors as a Climate Bonds Certified Bond and for example, CO2 and other greenhouse gas emissions. join the growing list of Certified Bonds. In addition to the 3 criteria laid out previously, Green and Sustainable Finance Professionals would be the approval of Verifiers is also based on their unlikely to be qualified to measure and report on these. This is a rapidly growing market, and more geographic coverage and areas of technical This is a further reason why obtaining independent third- companies around the world are joining to become competence: party review, verification and certification is so important. an Approved Verifier in order to help certify the Investors, customers, regulators, policymakers, and increasing number of green bonds. Geographic coverage of the approval is aligned others need to have confidence in the environmental and with the coverage provided by the Verifier’s sustainability data reported so that progress towards the Training, support and oversight of Approved insurance policies for professional indemnity / objectives of the Paris Agreement and other sustainable Verifiers are provided by the Climate Bonds professional liability. goals can be accurately tracked, and accusations of Secretariat. greenwashing avoided. The technical scope of the approval is Requirements to become an Approved Verifier determined by the Verifier’s levels of experience and expertise in the different technical sectors To become an Approved Verifier, the company covered by the Climate Bonds Standard. must demonstrate that they have competence and experience in the following three areas: Source: Climate Bonds Initiative (2020) How to become an Approved Verifier (online). Available at: https://www.climatebonds.net/ Issuance of debt instruments in the capital certification/become-a-verifier [Accessed: 18 January 2023] markets and management of funds within issuing organisations 157 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance We introduced the concept of CO2e (carbon dioxide equivalent), the most commonly used measure of QUICK QUESTION: WHAT INDICATORS ARE YOU AWARE OF greenhouse gas emissions, in Chapter 2, and explored how other greenhouse gas emissions could be reported RELATING TO ENVIRONMENTAL PERFORMANCE OR OTHER in CO2e by utilising the global warming potential (GWP) AREAS OF SUSTAINABILITY THAT ARE IN USE IN YOUR of different gases. Annual CO2e is the most widely ORGANISATION OR IN AN ORGANISATION WITH WHICH used metric for reporting greenhouse gas emissions, YOU ARE FAMILIAR? reductions in these, and/or emissions avoided. Renewable energy generation and/or substitution of Write your answer here before reading on. fossil-fuel powered energy generation, usually expressed in annual megawatt or gigawatt hours (MWh/GWh), are widely used, too. Other common metrics used in reporting environmental impacts in some key sectors are set out in the table on the next page: 158 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance COMMON ENVIRONMENTAL REPORTING METRICS Sector Commonly used reporting metrics Annual energy savings, usually expressed in annual megawatt or gigawatt hours (MWh/(GWh) or equivalents Energy Efficiency Reduction in greenhouse gas emissions, usually expressed in annual tonnes of CO2 equivalent (CO2e) Greenhouse gas emissions avoided (annual CO2e) Reduction in greenhouse gas emissions (annual CO2e) Greenhouse gas emissions avoided (annual CO2e) Clean/Renewable Energy Renewable energy generation (annual MWh/(GWh) or equivalents) Total capacity of renewable energy plants in megawatts or gigawatts (MW/GW) Capture of greenhouse gas emissions (estimated annual CO2e), for example, via reforestation Sustainable Land Use Surface area under conservation/reforestation (verified by appropriate certification scheme) Impact on biodiversity (number of species, distribution of species) Annual water savings/reductions in leakages Wastewater discharged per unit of product Water Conservation Water quality indicators (for example, chemical pollutant content, fitness for human consumption) Impact on biodiversity and aquaculture (number of species, distribution of species, contaminant concentrations) Reduction or avoidance of greenhouse gas emissions (annual CO2e and other gases emitted by vehicles, for example NO2) in comparison with existing transportation methods Clean Transport Quantity of new clean transport infrastructure/assets provided (for example, number of electric vehicles, length and capacity of new railway lines) Estimated reduction in non-clean transport use (i.e. substitution effect) 159 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance As with many other areas in green and sustainable 800 cities and over 130 regions and states disclosed their financial services)7. The PCAF Standard provides guidance finance, standardised approaches and methodologies environmental impact through the CDP. to measure and report Scope 3, financed emissions for 6 for reporting environmental impacts are developing (and asset major classes (with further guidance on green and existing approaches are converging) due to demands The CDP does not require financial institutions to sovereign bonds in development): from investors, financial institutions, regulators, measure and report their Scope 3 (financed) emissions, policymakers and others for consistent, comparable however, so disclosures from financial institutions have Listed equity and corporate bonds data to help monitor and report impacts, and to track tended to cover Scope 1 and 2 emissions only. Less Business loans and unlisted equity the alignment of financial institutions and finance overall than 20% of the financial institutions disclosing their environmental impact through CDP report their financed Project finance with the objectives of the Paris Agreement and other sustainable goals. emissions 4. In 2020, therefore, the CDP launched a Commercial real estate project to help financial institutions measure and disclose Residential mortgages Three such approaches to the reporting of greenhouse Scope 3 emissions, including guidance to support this in gas emissions and other aspects of environmental questionnaires for financial institutions. This has been Vehicle loans performance are introduced here, including the newly overtaken, however, by a collaboration between the CDP established International Sustainability Standards and the Partnership for Carbon Accounting Financials By following the guidance for each asset class, financial Board (ISSB). Approaches and initiatives focusing on a (PCAF – see below). The CDP will now encourage financial institutions can measure and report their greenhouse broader range of sustainability impacts and outcomes institutions to use the PCAF Standard for measuring and gas emissions in a consistent and comparable manner. are introduced in section 4.1.4. The ISSB is in the reporting financed emissions and then to include these in These can then be used to: process of consolidating a number of existing standard- their CDP questionnaire responses5. This harmonisation assess and report climate-related risks in line with the setting organisations and, in doing so, will bring greater and convergence of approaches will help bring greater Task Force on Climate-related Financial Disclosures’ consistency and comparability to disclosures. consistency and comparability to reporting financed (TCFD) latest implementation guidance8, and support emissions, and make disclosures more accessible to i. Carbon Disclosure Project (CDP) scenario analysis (see Chapter 5); regulators, investors and others reliant on them. The CDP is the most established environmental reporting set Science-Based Targets (see section 4.2.1); NGO. It provides a widely respected and utilised global ii. Partnership for Carbon Accounting Financials (PCAF) report to regulators and disclosure bodies (such as system of disclosures for companies, cities, and regional The PCAF is a global collaboration between financial 6 the Carbon Disclosure Project – CDP – described and national governments3. Disclosures can be made institutions (more than 260, totalling more than previously), investors and stakeholders; and in three areas: (a) climate change, (b) forests, and (c) $70 trillion of assets under management as of June inform financial institutions’ strategies, operations and water security, through questionnaires completed 2022) whose purpose is to develop and implement activities to support their, and their clients’, transitions by respondents and supported by detailed guidance a harmonised approach to measuring and reporting to low-carbon business models. and metrics to ensure consistency and comparability. greenhouse gas emissions from institutions’ lending Questionnaires are scored from A to D (with A being and investment portfolios. PCAF has published a Global the highest rating for quality and transparency of GHG Accounting and Reporting Standard for the Financial disclosure). In 2020, approximately 10,000 companies Industry, aligned with the GHG Protocol (introduced in (including nearly 300 financial institutions), more than Chapter 2, which covers emissions for all sectors, not just 160 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance iii. International Sustainability Standards Board (ISSB) In September 2020, the International Financial QUICK QUESTION: VISIT THE PCAF WEBSITE TO SEE Reporting Standards Foundation (IFRSF) issued a public WHETHER A FINANCIAL INSTITUTION YOU ARE FAMILIAR consultation setting out how the organisation might WITH HAS DISCLOSED THEIR FINANCED EMISSIONS USING build on its experience in international accounting THE PCAF STANDARD: standard-setting, its well-established processes, and its existing governance structure to develop global reporting https://carbonaccountingfinancials.com/financial-institutions-taking-action sustainability standards9. This included a proposal to establish a new International Sustainability Standards Write your answer here before reading on. Board (ISSB), alongside the existing financial reporting board, the International Accounting Standards Board (IASB). Feedback on the IFRSF’s proposals was generally positive and supportive, and the ISSB was launched in November 2021 at COP 26. The ISSB aims to develop, in the public interest, a comprehensive global baseline of high-quality climate and broader sustainability disclosure standards to meet investors’ information needs, and will: focus on information that is material to the decisions of investors, lenders and other creditors; initially focus on climate-related reporting, while also working towards meeting the information needs of investors on other ESG matters; build upon the work of the TCFD and existing sustainability standard-setting bodies; and combine a global approach to sustainability reporting while providing flexibility where required10. 161 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance Since its launch, the ISSB has taken over the work of Strategy: approaches used to address sustainability- three existing sustainability standard-setting bodies: the related and climate-related risks and opportunities and reliable system for climate, environmental Climate Disclosure Standards Board (CDSB, explored in that could affect an organisation’s business model and and other sustainability disclosures. The CDP the Reading below), and the Sustainability Accounting strategy over the short, medium and long term; provides a structured approach and detailed Standards Board (SASB) and the International Integrated Risk Management: the processes used to identify, guidance for climate disclosures, and a platform Reporting Council (IIRC), both introduced in 4.1.4. In assess and manage sustainability-related and climate- for these, whereas the CDSB provides guidance addition, the ISSB and the Global Reporting Initiative related risks; and to help organisations communicate these in their (GRI) have announced that they will seek to coordinate mainstream financial reports. their work programmes and standard-setting activities, Metrics and Targets: information used to assess, although they will remain independent. manage and monitor an organisation’s performance The CDSB Framework for reporting is designed in relation to sustainability-related and climate-related to help companies include environmental and In March 2022, the ISSB issued its first two draft risks and opportunities over time, disclosing emissions social factors in mainstream financial reports and standards, which – once finalised and approved – will in line with the Greenhouse Gas Protocol13. regulatory filings in a consistent and comparable form the foundation for its comprehensive global manner15. It builds on widely used reporting baseline for climate and broader sustainability reporting: As can be seen from the above, the ISSB is not approaches, including the CDP (in terms of introducing new, innovative climate and broader climate and environmental performance) and Exposure Draft IFRS S1 General Requirements for sustainability reporting requirements; rather, it is international accounting standards (in terms of Disclosure of Sustainability-related Financial Information consolidating, referencing and re-stating existing financial performance). Including environmental sets out the overall requirements for the disclosure approaches and standards. With support from and social factors in companies’ financial reporting of significant sustainability-related risks and international and national regulatory bodies and other should enable investors and others to understand opportunities11 key organisations (including the UN, OECD, IMF, G7, an organisation’s sustainability performance, and Exposure Draft IFRS S2 Climate-related Disclosures FSB, IOSCO and others), the ISSB’s standards are likely to compare this with its strategy and financial builds upon the recommendations of the Task Force to be increasingly adopted worldwide, bringing greater performance, as well as with the sustainability on Climate-Related Financial Disclosures (TCFD) and consistency, comparability and credibility to sustainability performance of other organisations. In addition, the incorporates industry-based disclosure requirements reporting, and a basis for global reporting. Framework supports compliance with regulatory derived from the SASB Standards12 (see 4.1.4) reporting requirements, including current and READING: CLIMATE DISCLOSURE STANDARDS emerging requirements for sustainability reporting, Building on the work of existing sustainability standard- and is aligned with the recommendations of the BOARD (CDSB) setting bodies and the TCFD, the ISSB’s draft standards TCFD. require organisations to set out their approach to: The CDSB14 is an international consortium of business and environmental NGOs developing As of 2021, 374 organisations in 32 countries used Governance: the governance processes, controls the CDSB Framework for reporting. The CDSB mainstream (i.e. financial) corporate reporting so and procedures used to monitor and manage Framework does not require (although it does that environmental and social factors are given sustainability-related and climate-related risks and not prevent) the measurement and reporting of as much emphasis as financial capital. The CDSB opportunities; works with the CDP to provide a comprehensive 162 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance Scope 3 emissions. This is because the Framework follows the accounting convention that reporting QUICK QUESTION: WHAT, IN YOUR VIEW, MIGHT BE requirements usually apply to the entity for which SOME OF THE CHALLENGES OF MONITORING AND financial statements are created, not those that apply to the supply and value chains associated with MEASURING BROADER SUSTAINABILITY IMPACTS BEYOND the entity. This is problematic for financial services, ENVIRONMENTAL PERFORMANCE? because Scope 3 (financed) emissions are the most significant source of a financial institution’s climate Write your answer here before reading on. and environmental impact. In 2022, the CDSB was consolidated into the new International Sustainability Standards Board (ISSB). The CDSB’s work and guidance will be incorporated into the ISSB’s Sustainability Standards, while the CDSB Framework and guidance on water, biodiversity and social disclosures will remain relevant for reporting organisations until they are superseded by the ISSB’s new Standards. Source: CDSB (2022) CDSB Framework for reporting environmental and social information. Available at: https://www.cdsb.net/sites/ default/files/cdsb_framework_2022.pdf [Accessed: 18 January 2023] 163 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.1.4 Measuring and Reporting Broader Sustainability In a similar vein, the Impact Investing Institute has activities, while remaining independent17. Over time, Impacts published recommendations for broader sustainability this consolidation, convergence and harmonisation of reporting, proposing that this should: sustainability reporting should bring greater consistency When measuring greenhouse gas emissions, and and comparability and improve the credibility and usage reductions in these, capturing accurate emissions data include both positive and negative environmental, social and economic outcomes, intended and of sustainability reporting. and other indicators at the individual asset or investment level can be difficult, though at least the metrics unintended, that are material to an organisation’s i. Sustainability Accounting Standards Board (SASB): themselves are generally quantitative, well-understood, ability to create long-term enterprise value, reported in the organisation’s main financial statements; The SASB is an independent, non-profit organisation credible, and mostly comparable. When seeking to that sets standards to guide the companies’ disclosure assess broader sustainability impacts, however, the include both positive and negative environmental, of financially material sustainability information to challenge can be even greater. This is because qualitative social and economic outcomes, intended and their investors18. The SASB has published a set of 77 judgements relating to broader aspects of sustainability, unintended, that are material to sustainable sectoral standards, with each providing guidance on especially social sustainability impacts – both positive and development, even if they are not yet material for the the environmental, social, and governance (ESG) issues negative - may have to be made alongside monitoring and organisation; most relevant to financial performance in each of these measuring metrics relating to quantifiable performance. be subject to assurance that renders all sustainability industry sectors19. Seven standards have been published Some impacts may be quantifiable (e.g. the number of reporting reliable - assurance for sustainability for the financial services sector: jobs lost in a region due to the closure of a coal-fired information in an annual report should be just as power station), whilst others may be much harder to robust as that for financial reporting.; and Asset Management & Custody Activities quantify (e.g. an improvement in relations with local be accessible, not only to investors but also to a wider Commercial Banks communities through their involvement as stakeholders in the development and installation of local wind set of users16. Consumer Finance turbines). Insurance There are several approaches and initiatives which aim As we saw above in relation to measuring and reporting to measure, report and compare broader sustainability Investment Banking & Brokerage greenhouse gas emissions and other environmental (often referred to as “ESG”) impacts – which include Mortgage Finance factors, wherever possible it is important that: not only climate change and environmental impacts, but also wider impacts, particularly social impacts, Security & Commodity Exchanges desired outcomes and impacts are identified at the which are harder to quantify and measure. Five of these pre-investment stage (and, ideally, examined by are introduced next. Two of them - the Sustainability The standards for other industry sectors, though, are suitably qualified, independent experts); Accounting Standards Board (SASB) and the International equally relevant to financial services firms and finance Integrated Reporting Council (IIRC) - have been professionals, as they set out standardised sustainability there is regular, ongoing monitoring and reporting (in this case, ESG) metrics that investors and others can through the life of a loan or investment; consolidated by the new International Sustainability Standards Board (ISSB) introduced previously, which will, use to compare and contrast sustainability performance the measurement and monitoring of impact and where possible, build on existing standards, frameworks, between organisations. By using the standards, investors outcomes are verified, ideally by independent review; guidance and expertise rather than develop its own. and others can better identify the risks and opportunities As noted previously, the Global Reporting Initiative arising from environmental, social, and governance impacts and outcomes – both positive and negative - (GRI) and ISSB have announced that they will seek to issues. are publicly reported coordinate their work programmes and standard-setting 164 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance As noted on the previous page, the SASB will be support integrated thinking, decision-making and all organisations. The Universal Standards provide an consolidated by the new International Sustainability actions that focus on the creation of value over the overall framework for the Standards. The GRI Sector Standards Board (ISSB) with the intention of adopting short, medium and long term22. Standards aim to improve the quality, completeness, and the SASB’s sectoral standards as the basis for the consistency of reporting by organisations in sectors with ISSB’s industry specific requirements as these are The Framework does not prescribe specific metrics the highest sustainability impacts. These new, sectoral developed. As this will take some time, the ISSB and SASB for impact, as other approaches to sustainability standards aim to cover some 40 sectors in total, with recommend that report preparers and users of the SASB reporting described in this section do. Rather, it adopts standards for oil, gas, coal, agriculture, aquaculture, and standards should continue to use these20. a principles-based approach that recognises the wide fishing already published, and the standard for mining in variety of metrics that may be relevant to different development. ii. International Integrated Reporting Council (IIRC): organisations and sectors. This can make comparability between organisations and sectors difficult, however. The GRI Topic Standards (more than 30 in total) contain The International Integrated Reporting Council (IIRC) is disclosures for providing information on environmental, a global coalition of regulators, investors, companies, In a similar manner to the SASB, the IIRC will be economic and social factors that are relevant and standard setters, the accounting profession, academia, consolidated by the new International Sustainability material to each topic, for example: and NGOs. The aim of integrated reporting is to explain Standards Board (ISSB). The intention is for the to investors and others how an organisation creates, Framework to provide a conceptual basis for connectivity Environmental: GRI 304 (Biodiversity), GRI 305 preserves or erodes value in the widest sense of that between the IFRS’ financial reporting and sustainability (Emissions) term. This is a holistic approach that takes reporting standards. As this will take some time, the ISSB and IIRC Economic: GRI 203 Indirect Economic Impacts, GRI 207 beyond financial matters to consider a wide range of recommend that report preparers and users should (Tax) environmental, economic and social factors21. continue to use the Framework 23. Social: GRI 402 (Labor/Management Relations, GRI 405 The IIRC published its revised International iii. Global Reporting Initiative (GRI)/ Global Sustainability (Diversity and Equal Opportunity)25 Framework in January 2021, which aims to: Standards Board (GSSB) Organisations can use the GRI Standards to prepare their improve the quality of information available to enable The GRI, via its Global Sustainability Standards Board sustainability reports in accordance with the Standards. a more efficient and productive allocation of capital; (GSSB), publishes standards for sustainability reporting Alternatively, they may choose to use selected Standards, promote a more cohesive and efficient approach to with the aim of creating a ‘common language’ for or parts of the Standards, to report information for corporate reporting that draws on different reporting organisations – large or small, private or public – to specific users or purposes, such as reporting on their strands and communicates the full range of factors report on their sustainability impacts in a consistent impacts on child labour or indigenous peoples. that materially affect the ability of an organization to and credible way. This enhances transparency and accountability, supports reporting to regulators As noted previously, the GRI and ISSB have announced create value over time; that they will seek to coordinate their work programmes and others, and improves comparability between enhance accountability and stewardship for the broad organisations24. and standard-setting activities, although they will remain base of capitals (financial, manufactured, intellectual, independent. human, social and relationship, and natural) and Three GRI standards: GRI 101 (Foundation), GRI 102 promote understanding of the interdependencies (General Disclosures) and GRI 103 (Material Topics), among them; and are described by the GRI as “universal” and apply to 165 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance iv. Impact Reporting and Investment Standards (IRIS) The ILG identifies six broad impact themes, set out with their ideal and basic metrics in the table below: Developed by the Global Impact Investment Network ILG SUSTAINABLE INVESTMENT FRAMEWORK (GIIN), the Impact Reporting and Investment Standards (IRIS)26 provide a ‘catalogue’ of standardised social and Theme Commonly used reporting metrics Basic Measure environmental metrics developed for use primarily Total revenue from goods and services from by impact investors. The IRIS+ Core Metrics provide a Total revenue from products and services addressing the clothing, communications, education, energy, framework for producing consistent and comparable basic needs of low-income groups, adjusted by PPP- weighted Basic needs finance, food, healthcare, housing, sanitation, data, in the form of KPIs, for assessing the environmental International Poverty Line transport and water and broader sustainability impacts of investments27. Unit: US$ Unit: US$ The IRIS approach includes a thematic taxonomy Total tax contribution (comprising taxes on profits, people, which sets out generally accepted impact categories production, property and environment but not sales) by country, Total tax contribution Wellbeing across 16 areas, and is aligned with the UN Sustainable adjusted by national corruption and spending effectiveness Unit: US$ Development Goals. One of the thematic areas addresses Unit: US$ financial services, and financial inclusion in particular, Total number of open-ended employment contracts, excluding though other areas (e.g. climate, employment and energy) jobs below 60 per cent median wage (living wage) and jobs in Total number of employees based on full- are also directly impacted by the decisions and activities poor working conditions (health & safety, discrimination, rights of time equivalent (FTE) workers Decent work of financial institutions, and so may be relevant, as well. association), adjusted by national employment rate Unit: number of FTEs v. Investment Leaders Group (ILG): Sustainable Unit: number of jobs Investment Framework Hard commodities: Virgin material content of end products (adjusted by scarcity) plus waste lost to the environment (adjusted The ILG is a global network of pension funds, insurers by toxicity) Total net waste (total waste arising – total Resource and asset managers committed to advancing responsible waste recycled) security Soft commodities: Non-sustainably certified content of end investment, supported by the Cambridge Institute for products plus waste not specifically returned to nature Unit: metric tonnes (t) Sustainability Leadership (CISL)28. The ILG’s approach Unit: metric tonnes (t) to measuring sustainability impacts, based on the UN Sustainable Development Goals, proposes both Fresh water use (surface water plus Healthy Area of land utilised by an asset in degraded form groundwater plus municipal water) quantitative metrics that it believes are relatively ecosystems Unit: hectares (ha) straightforward and realistic to assess (referred to as Unit: cubic metres (m3) “basic” metrics or measures), and “ideal” metrics or Total greenhouse gas (GHG) emissions (Scope Alignment to future warming scenario based on consumption of measures that would assess absolute performance, Climate 1 and 2) global carbon budget but are challenging to measure at present. As we Stability Unit: tonnes (t) carbon dioxide equivalent discussed above, the ILG notes that, for the most part, Unit: degrees Celsius (oC) (CO2e) environmental impacts are currently more quantifiable than broader sustainability impacts. Source: Cambridge Institute for Sustainability Leadership (2019) In search of impact: Measuring the full value of capital. Update: Sustainable Investment Framework. Available at: www.cisl.cam.ac.uk/resources/sustainable-finance-publications/in-search-impact-measuring-full-value- capital-update [Accessed: 18 January 2023] 166 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance The existence of many different approaches to, and organisations involved in, developing standards and guidance for reporting climate, environmental and QUICK QUESTION: WHAT ARE THE MOST RECENT broader sustainability impacts and outcomes (including those introduced previously) should not be surprising, DEVELOPMENTS IN THE CONVERGENCES OF given the breadth of the area as a whole and the fact that SUSTAINABILITY REPORTING? VISIT THE ISSB WEBSITE TO many of the approaches have their origins in an NGO or FIND OUT. similar organisation focusing on a specific area where a gap was identified. The lack of standardisation, however, https://www.ifrs.org/groups/international-sustainability-standards-board/ makes consistency and comparability difficult. Write your answer here before reading on. For these reasons, therefore, the consolidation being undertaken by the new International Sustainability Standards Board (ISSB), encompassing the CDSB, SASB and IIRC introduced previously, is an important step towards enhancing the credibility and useability of sustainability reporting. The ISSB’s standards are likely to be increasingly adopted worldwide due to demand from investors and others and as required by regulators in some jurisdictions, although it is unlikely they will become mandatory at the global level (the IFRS’ financial reporting standards are not). Green and Sustainable Finance Professionals and financial institutions should adopt the ISSB’s standards wherever possible, though, and should seek to encourage the further harmonisation and consolidation of standards where this can improve the consistency, comparability and credibility of sustainability reporting. Green and Sustainable Finance Professionals should also follow developments from the ISSB and other organisations to keep their knowledge of sustainability reporting up to date. 167 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.2 MONITORING THE ALIGNMENT OF LENDING This is a requirement for financial institutions that are In this section, therefore, we introduce two key initiatives AND INVESTMENT PORTFOLIOS WITH THE PARIS members of the Glasgow Financial Alliance for Net to track portfolio alignment with the objectives of the AGREEMENT Zero (GFANZ - see Chapter 3) and its constituent Net Paris Agreement: Zero Alliances. GFANZ members, and other financial As we set out previously, in the context of green and institutions that have made similar commitments, must The Science-Based Targets Initiative (SBTi) sustainable finance, monitoring, measuring and reporting achieve net zero greenhouse gas emissions by mid- The Paris Agreement Capital Transition Assessment (PACTA) can refer to: century (2050 in the case of GFANZ members) across the entirety of their activities, operations and lending Most Green and Sustainable Finance Professionals, measuring and reporting the environmental and unless they work directly with the SBTi or PACTA, only and investment portfolios. GFANZ members must adopt other impacts and outcomes of green and sustainable need to understand the key principles underlying these science-based targets, which we introduce next, including lending and investment decisions, and other financial approaches – and to follow developments – rather than the target of achieving 50% reductions in emissions from activities; be able to apply them in detail. pre-industrial levels by 2030. monitoring the alignment of lending and investment portfolios, and financing activities overall, with the More generally, though, consistent and comparable objectives of the Paris Agreement; and tracking and measurement and reporting of lending and portfolio reporting flows of investment to green and sustainable alignment with the objectives of the Paris Agreement assets, activities, and projects with the aim of meeting enables policymakers and others to track progress the objectives of Article 2.1 (c) of the Paris Agreement in climate change mitigation activities and to take and other sustainable goals. action, where necessary, to accelerate mitigation and/ or adaptation and resilience measures. For financial In Section 4.1 we introduced several approaches and institutions and finance professionals, understanding initiatives seeking to bring consistency and comparability the current and forecast future alignment of lending to the measurement and reporting of environmental and investment portfolios helps assess climate and and other sustainability impacts of financial institutions’ environmental risks and opportunities and conduct lending and investment decisions - particularly financed scenario analysis to meet regulatory requirements and (Scope 3) greenhouse gas emissions. To achieve global, support strategic business and investment decision- national, sectoral and institutional net zero targets and making. ambitions, however, it is not sufficient only to analyse and report those financing decisions related to sustainability. We need to understand and measure the alignment (or lack of alignment) of financial institutions’ overall lending and investment portfolios with the objectives of the Paris Agreement, specifically the objective of keeping global warming to well below 2oC above pre-industrial levels. 168 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance 4.2.1 Science-Based Targets (SBTi) The Science-Based Targets Initiative (SBTi) is a QUICK QUESTION: HAS YOUR FINANCIAL INSTITUTION, OR partnership between the CDP (introduced previously), AN INSTITUTION YOU ARE FAMILIAR WITH, ADOPTED AND the United Nations Global Compact, the World Resources Institute, and the World Wide Fund for Nature. The SBTi APPLIED THE SCIENCE-BASED TARGETS AND/OR PACTA? IF develops “science-based targets” to show organisations SO, CAN YOU FIND DETAILS OF THEIR RELEVANT REPORTS? by how much and how quickly they need to reduce their emissions to achieve the objectives of the Paris Write your answer here before reading on. Agreement, setting out decarbonisation pathways for key, high emissions sectors. As of June 2021, more than 1,000 companies, including nearly 60 financial institutions, had set emissions reductions targets through the SBTi29. The Science-Based Targets provide clearly defined pathways – quantitative targets - organisations can follow to reduce their greenhouse gas emissions. Targets are considered ‘science-based’ if they are in line with what climate science deems necessary to meet the objectives of the Paris Agreement (limiting global warming to well below 2°C, or as close to 1.5°C as possible, above pre- industrial levels). In 2018, the SBTi launched a project to develop science- based targets for the financial services sector, recognising the influence of financial institutions’ lending and investment decisions over the decarbonisation pathways of other sectors and organisations. In April 2022, the SBTi’s initial guidance on science-based target-setting for the financial services sector was published. It includes the SBTi’s definition of net zero for financial institutions, and sets the bar high in that such institutions must (a) align all lending, investment and other financing activities with pathways that limit global warming to 1.5oC above pre- industrial levels, and (b) neutralise any residual emissions by financing carbon removal activities. The SBTi’s guidance also states that financial institutions cannot 169 | Principles and Practice of Green and Sustainable Finance Unit 4: Measuring and Reporting Impacts, Alignment and Flows of Green and Sustainable Finance use carbon credits (i.e. offsetting) to align with the 1.5o The SBTi’s guidance for the financial services sector also 4.2.2 Paris Agreement Capital Transition Assessment target, although they may be used to support residual sets out a proposed approach for financial institutions in (PACTA) emissions30. terms of lending and investment to the fossil fuel sector. Developed by the 2o Investing Initiative (2o), an The approach is based on the disclosure of current independent, non-profit organisation with a mission to The SBTi sets out four “Guiding Principles” to help financing activities, engagement with clients on net align financial markets with the Paris Agreement goals, financial institutions achieve net zero as defined zero targets and plans, and no further financing of new PACTA enables investors to measure the alignment of previously: exploration and production and the end of all financial portfolios with climate scenarios33. It also helps investors support to coal by 2030 and oil and gas by 2040. This will implement the recommendations of the TCFD, especially Completeness – fi