Written by Pooja Bokhiria

On 21 April 2021, the UN Environment Programme Finance Initiative (UNEP FI) published guidelines for climate target setting for banks to support limiting global temperature increases, a key objective of the Paris Agreement.

The following principles will apply to banks’ lending and investment activities and, where significant, to their clients’ emissions on a “comply-or-explain” basis:

• setting and publicly disclosing long-term and intermediate targets;
• establishing an emissions baseline and annually measuring and reporting the emissions profile of lending portfolios and investment activities;
• using widely accepted science-based decarbonisation scenarios to set both long-term and intermediate targets; and
• regularly reviewing targets to ensure consistency with current climate science.

The aim of the guidelines is to facilitate the transition towards a net-zero economy by 2050. Banks will therefore be expected to set 2030 (or earlier) and 2050 targets in addition to intermediary targets every five years after the initial intermediary target. The guidelines will be reviewed every three years while targets are to be reviewed at a minimum of every five years.

Signatories to the Net-Zero Banking Alliance and those signing the UNEP FI’s Collective Commitment to Climate Action after 21 April 2021 will apply the guidelines immediately and set their first round of targets within 18 months. Those institutions who signed the CCCA prior to 21 April 2021 have three years from their date of joining to apply the guidelines and to set their first round of targets.  

Targets shall be set based on absolute emissions and/or sector-specific emissions intensity and banks will be required to disclose which scenario their climate targets are based upon, although IPCC scenarios are strongly recommended. In line with the emphasis on transparency, the guidelines also require banks to publish a high level transition plan within 12 months of setting the targets. This plan will include milestones or a planned order of implementation along with categories of actions, such as client engagement, divestment and strategy to grow customer base.

The guidelines, as clarifying expectations on banks and providing a clear and consistent roadmap as to target setting, are to be warmly welcomed. It will also be helpful for borrowers to be alive to these requirements in order that meaningful conversations regarding a borrower’s own net zero targets and/or challenges can take place as early as possible in the banking relationship.

The UNEP FI’s full guidelines are available here : UNEP FI Guidelines.