SBTi launches its Financial Institutions Net-Zero Standard

On 22 July, the Science Based Targets initiative (SBTi) published its first Financial Institutions Net-Zero Standard (the FI Standard), which sets out a science-based framework for banks, asset managers, insurers and other financial institutions to align their lending, investing, insurance underwriting, and capital markets activities to achieve net-zero emissions by 2050. The SBTi has also published a number of summary and briefing documents[1] that accompany the FI Standard and help guide financial institutions. Key innovations in the FI Standard include the requirement for financial institutions to segment financial activities when setting targets and the requirement to publish a policy committing to the immediate cessation of new finance for coal expansion and new project finance for oil and gas expansion.

The FI Standard focuses on increasing the share of a financial institution’s climate-aligned financial activities and reducing portfolio emissions, aligning with the net-zero trajectory of financial institutions. In-scope entities that want to submit their targets for validation by the SBTi will be required to use the FI Standard and other SBTi guidance. 

When?

The FI Standard is effective from 22 July 2025, meaning that financial institutions are now able to submit their targets for validation against the FI Standard. SBTi will provide for a transition period until at least December 2026, during which both the FI Standard and SBTi’s current Financial Institutions Near-Term Criteria will be available for target validation. From January 2027, SBTi intends that financial institutions will use the FI Standard to set new near-term and long-term targets.

Who?

Any entity that wants to submit their targets for validation by SBTi and has 5% or more of their revenue from any of the following financial activities must use the FI Standard:

• lending;
• asset owner investing;
• asset manager investing;
• insurance underwriting; and
• capital market activities.

Entities with 5% or more of their revenue from the above five financial activities in aggregate but less than 5% of their revenue from the five financial activities individually are recommended, but not required, to use this FI Standard. 

Interoperability

The FI Standard allows the use of a range of methodologies to measure progress on portfolio alignment (set out in an implementation list[2]), including methodologies published by third parties such as Moody’s, MSCI, and the World Benchmarking Alliance. 

The FI Standard is also aligned with and complements the SBTi Corporate Net-Zero Standard (the Corporate Standard) as together, the FI Standard and the Corporate Standard cover all emissions scopes and categories – the FI Standard is used for setting targets on financial activities (scope 3 emissions, specifically, financed emissions), while the Corporate Standard covers scope 1, 2 and 3 emissions. The FI Standard is also aligned to other relevant sector-specific standards and guidance[3].

Overview of the FI Standard

The FI Standard requires financial institutions to identify their in-scope financial activities and exposure to emissions-intensive sectors in order to inform the development of policies and targets. 

Financial institutions will then be required to segment their in-scope financial activities (i.e., those which represent 5% or more of total revenue) and identify the relevant sectors within each segment, with the relevant segments being:

• A: fossil fuels (coal, oil, gas)
• B: transport (air, maritime, land), industrial (steel, cement), energy (power generation), real estate (residential and commercial buildings), forest, land and agriculture
• C: other sectors (not listed in A or B)
• D: subset of activities in emissions-intensive sectors and other sectors 

The FI Standard introduces the requirement for financial institutions to publish a policy committing to the immediate cessation of new finance for coal expansion and new project finance for oil and gas expansion. It has been reported[4] that an earlier draft of the FI Standard also required immediate cessation of new general-purpose finance for oil and gas expansion; however, the final FI Standard requires institutions to cease this finance by 2030 instead to allow for engagement with relevant clients.

The FI Standard also requires financial institutions to assess and publish the deforestation exposure in their portfolios within two years after SBTi validation or by 2030, and if there is significant deforestation exposure, they should publish an engagement plan to address deforestation by their next target cycle (usually five years after SBTi validation). SBTi recommends that the engagement plan includes requirements for portfolio entities, such as asking for no-deforestation commitments, and a list of financial products or services provided that support portfolio entities to transition to deforestation-free systems.

Another key innovation of the FI Standard is the requirement to segment financial activities, which is designed to enhance transparency and accountability. Other existing frameworks and guidelines, such as the Net-Zero Banking Alliance’s climate target setting framework, allow lenders to combine their financed and facilitated emissions into a single target, whereas the FI Standard requires institutions to identify their exposure to emissions-intensive sectors by reference to each in-scope financial activity (e.g., lending, investing, insurance underwriting, capital market activities) separately, recommending that institutions set at least one near-term target for each relevant financial activity. 

Financial institutions are given the flexibility to choose the type of targets they set, which accommodates the varying levels of readiness among institutions: 

• portfolio climate alignment targets: these targets require financial institutions to increase the share of climate-aligned financial activities across their portfolios; and/or 
• sector-specific targets for emissions-intensive sectors: these targets, set at the aggregate sector level, incentivise financial institutions to focus on specific emissions-intensive sectors, ensuring alignment with 1.5°C sectoral benchmarks.

What’s next?

Overall, it remains to be seen how widely adopted the FI Standard will be, and this will only become clear once the first financial institutions begin to submit their targets to SBTi for validation. However, given several major banks exited the process of seeking SBTi validation for their climate targets after SBTi launched early drafts of the FI Standard in 2023, it will be interesting to see how speedy (or not) the uptake of the FI Standard is.

[1] https://sciencebasedtargets.org/financial-institutions

[2] https://files.sciencebasedtargets.org/production/files/FINZ-Implementation-List.pdf

[3] https://sciencebasedtargets.org/standards-and-guidance

[4] https://www.responsible-investor.com/sbti-sets-capital-market-targets-delays-oil-and-gas-financing-deadline/