Financial institutions (FIs) are a critical player in the journey to net-zero. After all, CDP disclosure data reveals that portfolio emissions are over 700x larger than direct emissions.
That’s why we were excited to see the U.S. Treasury release its Principles for Net-Zero Financing & Investment last month. These Principles are a welcome acknowledgement of the critical role the financial sector plays in mitigating the worst effects of climate change. They are also a helpful tool at a time when corporations and FIs have been requesting clearer and more descriptive guidance from policymakers – we heard many such requests as recently as last month’s Climate Week, so it is encouraging to see the Treasury filling that need.
FIs that disclose through CDP are already abiding by the Treasury’s new Principles. Here are three reasons why.
1. Financed emissions are prioritized
The financial world understands that financed emissions hold the greatest opportunity for its collective decarbonization efforts. After all, the Treasury’s Net-Zero Principles highlight the importance of Scope 3 emissions as part of consideration of climate solutions.
It is encouraging to see that the Principles promote a harmonized set of recommendations which build on existing guidance from credible authorities on net-zero. These include the Science Based Targets Initiative (SBTi), the Glasgow Financial Alliance for Net Zero (GFANZ) and the UK government’s newly released Transition Plan Taskforce (TPT) framework – all of which CDP has worked with and mapped against.
This is good news for FIs disclosing through CDP, since CDP disclosure already integrates GFANZ net-zero transition plan guidance by requesting the same information in our climate questionnaires. The Principles explore transition finance in the same way as GFANZ, focusing on all necessary parts of the transition: solutions, transition finance, and managed phaseout of high-emitting assets. For example, the Principles encourage FIs to finance or provide advisory services that support innovation of zero- or near-zero-emissions technologies in portfolio companies. CDP and GFANZ make the same recommendation. This eases the reporting process for FIs seeking to develop transition plans using Treasury guidelines.
2. Transition planning is critical
We are glad to see the Principles emphasize the development of net-zero transition plans. The scope of recommended transition planning is set widely to include all financed and facilitated emissions, as well as all financing activities. And the Principles note that a transition plan should demonstrate an understanding of impacts to just transition, nature and biodiversity.
Targets are mentioned in the Principles as essential tools to setting long-term transition plans. The Treasury suggests the use of both Greenhouse Gas Protocol and SBTi, as well as GFANZ protocols. And it stresses setting interim targets for 2030 or sooner, five-year interval interim targets and 2050 or sooner as a goal for “end state” targets. These are aligned with the SBTi Net-Zero draft standard for financial institutions, which CDP helped shape.
CDP has been instrumental in the uptick of transition planning – we began asking companies about transition plans in 2015. In 2021, we pioneered the definition of a credible climate transition plan, laying the foundations for GFANZ and the TPT to build on. CDP's principles of a credible plan are reflective of the GFANZ FI framework and the now the TPT's framework that both determine what a credible transition plan should address.
3. Transparency will be key
The Principles clearly acknowledge the importance of transparently providing data and delineating progress along the net-zero journey (“appropriate transparency is part of a credible commitment and is necessary for external accountability” and “to improve accountability, enable system-wide assessment, and improve comparison with peers, financial institutions should consider reporting relevant information to resources that aggregate and disseminate this information”).
FIs that are already disclosing through CDP are well prepared to demonstrate that they follow these Principles, as all nine of them are covered in our climate questionnaire. CDP’s questionnaires standardize transition plan requirements and are mapped against the leading frameworks. Disclosing through CDP enables FIs to abide by the Treasury’s Principles, since our questionnaire abides by these new voluntary guidelines. That also means that FIs that use CDP’s corporate data are able to evaluate the climate transition performance of their portfolios in accordance with the Treasury’s Principles.
Creating a sustainable economy will require FIs to align their portfolios with 1.5 degrees Celsius. We are thrilled to see more national governments stepping up to provide influential FIs with best-in-class guidance around environmental impact, and we look forward to supporting them along the way in their net-zero journeys.