PCAF's financed emissions measurement is the indispensable foundation for science-based target setting. Without knowing the baseline, an institution cannot set a credible target. This lesson explains the Science Based Targets initiative (SBTi) framework for financial institutions, how it uses financed emissions data, and the connection to broader net-zero commitments (NZBA, NZAOA).
What Are Science-Based Targets?
Science-based targets (SBTs) are emissions reduction goals that align with the level of decarbonisation needed to limit global warming to 1.5°C above pre-industrial levels. They are "science-based" because they are derived from climate scenarios validated by organisations such as the IPCC rather than from voluntary business ambitions.
The Science Based Targets initiative (SBTi) is the body that validates and approves company-level science-based targets. Its Financial Institutions (FI) Guidance provides the framework specifically for banks, asset managers, and other financial institutions.
SBTi targets are set at the institution level, not at the transaction or deal level. The target applies to the entire financed emissions portfolio and requires the institution to reduce its portfolio's absolute or intensity-based emissions over time. PCAF measurement is the baseline; SBTi provides the targets.
The SBTi Financial Institutions Framework
The SBTi FI framework offers financial institutions several target-setting approaches:
1. Portfolio Coverage Approach
The financial institution commits that a specified percentage of its portfolio (by outstanding amount) will consist of borrowers or investees with their own validated SBTs by a target year. For example: "By 2030, 70% of our corporate lending portfolio will cover companies with SBTi-approved emissions reduction targets."
This approach does not require the institution to directly measure portfolio-level financed emissions for target progress tracking. However, it does require tracking which borrowers have approved SBTs and engaging others to adopt them.
2. Sectoral Decarbonisation Approach (SDA)
The SDA aligns a financial institution's sector-specific emission intensity with climate scenarios. For each emission-intensive sector in the portfolio (power, steel, cement, transport, etc.), the institution sets an intensity target (e.g., tCO2e per MWh of electricity generated) that follows the sector's decarbonisation pathway.
SDA targets require:
- Measuring financed emissions per sector, broken down by physical production metric
- Accessing sector-level decarbonisation scenarios (from the IEA, IPCC, or Mission Possible Partnership)
- Tracking year-on-year intensity performance for each covered sector
SDA target example: Power sector
A bank with significant exposure to power utilities uses the SDA for its power generation portfolio. The IEA Net Zero by 2050 scenario implies that grid emission intensity must fall from 450 gCO2e/kWh today to 60 gCO2e/kWh by 2035.
The bank's current financed power portfolio intensity: 500 gCO2e/kWh SDA-derived target for 2030: 210 gCO2e/kWh (interpolated from the NZE pathway) SDA-derived target for 2035: 60 gCO2e/kWh
To meet this target, the bank must either shift its lending toward lower-carbon power assets (renewables, nuclear) or engage its fossil-fuel-dependent utilities to accelerate their own decarbonisation plans.
3. Temperature Rating Approach
The temperature rating approach assigns a "temperature score" to each investee company based on the alignment between the company's own emission reduction targets and a 1.5°C or 2°C scenario. The financial institution then calculates the portfolio-weighted average temperature score across all holdings.
A portfolio with a weighted average temperature score of 2.5°C is insufficiently aligned with the Paris Agreement. The institution's target is to reduce this score toward 1.5°C by engaging with high-temperature-score companies and redirecting capital toward lower-temperature-score ones.
Absolute Emissions Targets
SBTi also supports absolute emissions reduction targets for financial institutions. These require the portfolio's total absolute financed emissions to decline by a specified percentage over a defined time horizon (e.g., "reduce absolute financed emissions by 50% by 2030 relative to a 2020 base year"). Absolute targets are the most direct but also the most demanding, as they require the institution to manage both portfolio composition and the actual emissions of its borrowers and investees.
Net-Zero Commitments: NZBA and NZAOA
Two voluntary alliances use PCAF-aligned financed emissions as the foundation for their commitments:
Net-Zero Banking Alliance (NZBA): Launched in 2021 under the UN Environment Programme Finance Initiative, NZBA members (over 140 banks) commit to:
- Aligning their lending and investment portfolios with net-zero emissions by 2050
- Setting intermediate targets for the most emission-intensive sectors within 18 months of joining
- Reporting annually on progress using PCAF-aligned financed emissions data
Net-Zero Asset Owner Alliance (NZAOA): Similarly structured for institutional investors (pension funds, insurers), committing to net-zero investment portfolios by 2050 with five-year interim decarbonisation targets.
A critical but often underestimated tool in portfolio decarbonisation is shareholder and lender engagement with high-emission companies. Rather than simply divesting from carbon-intensive sectors (which transfers the assets to other owners without reducing real-world emissions), engagement aims to accelerate the transition within the company.
PCAF's financed emissions data enables targeted engagement by:
- Identifying which specific borrowers or investees contribute most to the portfolio's financed emissions
- Estimating the decarbonisation impact of different engagement scenarios
- Tracking whether the borrower's actual emissions are declining over time
The SBTi portfolio coverage approach is explicitly designed to drive this engagement by requiring institutions to push their portfolio companies to adopt their own science-based targets.
How PCAF Data Feeds SBTi Targets
The relationship between PCAF measurement and SBTi target setting is iterative:
- Measure: Calculate financed emissions using PCAF (sets the baseline)
- Analyse: Understand portfolio composition by sector, intensity, and temperature alignment
- Target: Set SBTi-aligned targets using the portfolio coverage, SDA, or temperature rating approach
- Track: Measure financed emissions annually using PCAF (tracks progress against target)
- Engage: Use financed emissions data to prioritise engagement with high-emission borrowers and investees
- Report: Disclose progress in the annual financed emissions report using PCAF format
This cycle, repeated annually, transforms financed emissions from a reporting metric into an active portfolio management tool.
SBTi targets without PCAF measurement are like a diet without a scale. You may have a target (lose 10 kg), but without regular, standardised measurement, you cannot know whether you are on track or which interventions are working. PCAF provides the standardised scale; SBTi provides the goal.
Key Takeaways
- 1SBTi offers three target-setting approaches for financial institutions: portfolio coverage, sectoral decarbonisation (SDA), and temperature rating
- 2The SDA aligns sector-specific emission intensity with climate scenarios - it requires financed emissions broken down by physical production metrics per sector
- 3NZBA members (140+ banks) commit to net-zero portfolios by 2050 with intermediate sector targets within 18 months of joining, using PCAF data
- 4Engagement with high-emission borrowers to adopt their own science-based targets is often more impactful for real-world emissions than divestment
- 5The PCAF-SBTi cycle is iterative: measure (baseline), analyse, target, track (annual PCAF measurement), engage, and report