Financial Institutions Net-Zero Jargon Buster

Clean energy exposure is defined as the amount or proportion of money invested, lent, or underwritten to in-scope activities in the clean energy sector. This includes the generation, storage, transmission, and distribution infrastructure of solar, wind, hydropower, nuclear, geothermal, and bioenergy from biowaste. Hydrogen produced from renewable energy sources also fits into this category if it is used as a replacement of fossil fuel in industrial processes. 

The Financial Institutions Net-Zero Standard requires users to calculate their clean energy exposure and compare it to their fossil fuel exposure in the base year. The ratio of the financial institution’s clean energy–to–fossil fuel financial exposure is to be provided to the SBTi with the target submission, but is not required to be published. 

The Financial Institutions Net-Zero Standard defines three categories of climate alignment that counterparties (defined below) can fall into: 

• In transition: A counterparty is considered ‘in transition’ if it is on a science-based pathway towards net-zero. The Standard outlines benchmarks for different asset types in Table 4.2. The Implementation List details which methodologies financial institutions can use to determine if counterparties, such as clients or portfolio companies, meet the relevant benchmarks.
• Climate solution: An asset or activity that contributes to the reduction of greenhouse gas emissions and has a low emissions intensity. Climate solutions are compatible with the global ambition to limit warming to 1.5°C, and are intended to accelerate the transition towards a net-zero carbon economy. The SBTi considers an asset or activity to be a ‘climate solution’ if at least 90% of its revenue is aligned with eligible categories of taxonomies outlined in the Implementation List.
• Net-zero state: A counterparty has reached net-zero emissions when activities do not result in further accumulation of greenhouse gases in the atmosphere, with any residual emissions neutralized.

This term is used to describe the entities, projects, and assets that are a part of a financial transaction, such as the clients of a bank, the portfolio companies of an investor, or the project or asset financed or insured by a financial institution.

This is the amount of in-scope financial activities provided to entities that are linked to the loss of natural forest due to any of the following, stemming from any critical deforestation-linked commodities, as specified in Annex A of the Standard: 

1. Conversion to agriculture or other non-forest land use
2. Conversion to a tree plantation
3. Severe and sustained degradation

The Standard requires financial institutions to assess and disclose deforestation exposure by 2030. If an institution has significant deforestation exposure, it must develop an engagement plan to address it. Financial institutions will need to provide their definition of ‘significant exposure’ and may, for example, use the ‘high deforestation exposure’ and/or ‘high financial materiality’ thresholds in the Forest IQ methodology.

Financial activities are the transactions and agreements that a financial institution engages in with its portfolio of clients or investments. The Financial Institutions Net-Zero Standard covers actors that provide five categories of financial activities:

• Lending (LND): Entities that provide loans, such as retail or commercial banks, as well as non-bank lenders.
• Asset Owner Investing (AOI): Entities that own investments, such as asset owners, re/insurance companies (asset side), banks (direct investing activities), pension funds, family offices, etc.
• Asset Manager Investing (AMI): Entities that manage investments on behalf of clients, such as asset managers, wealth managers, and private equity firms.
• Insurance Underwriting (INS): Entities that provide insurance underwriting services, such as primary insurers, reinsurers, or captives (i.e., all entities that have a license to be a risk carrier).
• Capital Market Activities (CMA): Entities such as investment banks that facilitate the primary issuance of capital market instruments.

Entities that generate 5% or more of their revenue from any of these activities shall use the Financial Institutions Net-Zero Standard to set net-zero targets for those activities. 

Defined as the amount or proportion of money invested, lent, or underwritten to in-scope activities in the coal as well as the oil and gas value chains. This includes:

• Companies listed in the Global Coal Exit List (GCEL) and/or companies and projects with 10% or more of revenues from the coal value chain. The coal value chain must at least include exploration, extraction, and the development or expansion of mines for all thermal coal grades and unabated coal-fired power plants; and
• Companies listed in the Global Oil & Gas Exit List (including National Oil Companies, i.e. those fully or majority-owned by a national government) and/or companies and projects with 10% or more of revenues from the oil and gas value chain (inclusive of National Oil Companies). The oil and gas value chain must at least include the exploration, extraction (including coalbed methane), and the development or expansion of fields, and any liquefied natural gas infrastructure. 

Table 2 in the Financial Institutions Net-Zero Standard details additional fossil fuel activities that financial institutions are recommended to include in their fossil fuel exposure calculations. 

Users are required to calculate their clean energy exposure and compare it to their fossil fuel exposure.

The fossil fuel transition policy is a requirement in the Financial Institutions Net-Zero Standard to end or phase out the financing of a broad range of fossil fuel activities. The policy states that a financial institution must commit to the cessation of three categories of fossil fuel expansion: 

1. New financial activities provided to projects and companies involved in new coal expansion activities: Defined as new coal mines, extensions or expansions of existing coal mines, and new unabated coal-fired power plants that would require a final investment decision after the financial institution's fossil fuel transition policy publication date.
2. New project finance or insurance linked to new oil and gas expansion activities: Defined as new upstream oil and gas projects (i.e., exploration, extraction, and the development or expansion of oil and gas fields) and new liquefied natural gas infrastructure that would require a final investment decision after the financial institution's fossil fuel transition policy publication date.
3. New general-purpose finance or insurance for companies involved in new oil and gas expansion activities: Defined as new upstream oil and gas projects and new liquid natural gas infrastructure that would require a final investment decision after 2030.

An approach that uses technology share metrics, and requires meeting a sector benchmark value in the desired target year (independent of the portfolio starting point). 

For example, an automotive sector portfolio index alignment target might look like:

[Financial institution] commits to reach the 1.5°C benchmark technology share of 100% new zero-emissions vehicles from the automotive sector within its applicable portfolio by 2040 from a 2023 base year.

The Portfolio Intensity Convergence (PIC) method produces an emissions intensity pathway between the base year to the target year, representing the portfolio’s reduction curve needed to reach the net-zero benchmark by 2050. This method is similar to the SBTi’s Sectoral Decarbonization Approach (SDA), but removes the market share factor from the calculation, ensuring that the method generates a more appropriate portfolio-level pathway that requires less input data. Financial institutions that wish to use the SDA may do so if the output intensities are at least as ambitious as the corresponding PIC tool outputs.

Electricity generation capacity that results in zero or near-zero operational emissions (less than 0.001 ton CO2 equivalent per megawatt-hour). Zero-emissions generation capacity is used as a metric when setting portfolio index alignment targets for the power generation sector.