The World of Sustainable Finance: The Dilemma of Science-Based Targets in Banking

The global financial sector is currently grappling with the implications of the Science-based Targets initiative (SBTi), which aims to establish a net-zero target-setting standard for banks and other financial institutions. While this initiative represents a significant step towards aligning lending and investment portfolios with the Paris Agreement, it has encountered difficulties in addressing the specific needs of transition banking in emerging markets.

In 2023, four major banks discreetly withdrew their commitment to seek SBTi approval for their emissions-reduction targets. Societe Generale, HSBC, Standard Chartered, and ABN Amro shifted their focus to the Net-Zero Banking Alliance (NZBA), an industry-led standard devised by banks for banks. This shift has prompted inquiries into the autonomy and adaptability of third-party supervisors in sustainable finance.

The initial announcement by SBTi, enabling financial institutions to align with the Paris Agreement, received broad support from the banking sector. However, the mandate to submit targets across all sectors within a two-year timeframe was deemed overly rigorous by some banks, leading to apprehensions about the timing and criteria of the initiative, and questioning its suitability for their specific requirements.

The challenge also encompasses the cessation of financial flows to the coal, oil, and gas value chains. Banks have underlined the necessity for flexibility in transition pathways, particularly in engaging with high-emitting sectors in emerging markets. The varying perspectives on what constitutes a credible transition and the practical implications of moving away from fossil fuel financing further underscore the industry’s struggles.

The delays in finalising SBTi’s standards have resulted in feedback and consultations from industry stakeholders, with over 200 responses analysed to update the near-term criteria and recommendations. However, the relaxed stance on fossil fuel financing has been met with criticism from financial sector watchdogs, raising concerns about the credibility and legitimacy of the SBTi.

At the heart of this dilemma lies the need for a balanced approach that aligns with environmental goals while addressing the practicalities and challenges faced by financial institutions. The industry’s transition towards sustainable finance necessitates adaptable, practical, and credible standards to ensure effective implementation and meaningful impact.

The ongoing discussions and debates surrounding the SBTi reflect the complexities and nuances of sustainable finance, as stakeholders navigate the delicate balance between environmental responsibilities and financial realities. As the financial sector continues to grapple with the challenges of transitioning towards net-zero targets, the need for a collaborative and adaptable approach to sustainable finance becomes increasingly apparent.