Investment entities face a deadline for diminishing ties with fossil fuel companies, as major oil firms back out of the SBTi's guidelines
In a significant move aimed at addressing the climate crisis, the Science Based Targets initiative (SBTi) has finalised guidelines clarifying what constitutes credible net-zero plans for financial institutions. The new guidelines include a mandatory fossil fuel transition policy that requires immediate action from banks, insurers, and asset managers.
The policy mandates the cessation of project finance linked to fossil fuel expansion activities, an end to general purpose finance for companies expanding coal operations, and a phase-out by 2030 of general purpose finance for oil and gas companies expanding upstream production. These standards are designed to help financial institutions align their portfolios with net-zero emissions by 2050 or earlier.
However, concerns have been raised about the 2030 deadline for the phase-out of financing oil and gas expansion. While the policy sends a strong signal that no new funding should go to fossil fuel expansion, the feasibility and real-world impact depend heavily on voluntary adoption since the SBTi has no enforcement authority. Financial institutions still have an 18-month transition period before the standard takes effect in January 2027, and adoption remains voluntary.
Critics have also highlighted the difficulty financial actors might face in balancing engagement with high-emitting sectors and the urgent need to halt expansion finance on this accelerated timeline. Nonetheless, the SBTi's new framework sets a firm and science-based deadline for ending general financing of oil and gas production expansion, reflecting the urgency of the climate crisis but also raising questions about practical implementation and sectoral adjustments within the voluntary nature of SBTi’s influence.
The new standards published by the SBTi offer guidelines for organizations seeking endorsement. Over 150 organizations, including some of the world's largest institutional investors like Schroders, Amundi, and the Elo Mutual Pension Insurance Company, have sought SBTi approval for their net-zero plans.
The SBTi's new policy has sparked a new battleground in the financial services industry, with banks, insurers, and institutional investors under increasing pressure to stop insuring, underwriting, and investing in new fossil fuel production. Jessye Waxman, policy adviser for the Sierra Club's Sustainable Finance campaign, has welcomed the new standards, stating that it is an important and necessary step forward for the financial sector.
The International Energy Agency (IEA) has warned for the past four years that no new oil and gas capacity is needed if the world is to meet the decarbonisation targets set out in the Paris Agreement. Despite this, companies such as Exxon, Chevron, BP, Shell, and Equinor continue to invest in new fossil fuel production.
The SBTi's work on oil and gas standards has reportedly been paused due to the withdrawal of major oil companies from its expert advisory group, citing incompatibility with their core business. This withdrawal has raised questions about the future of the SBTi's standards and their impact on the financial services industry.
[1] SBTi (2022). Science Based Targets initiative updates net-zero standards for financial institutions. [online] Available at: https://www.sbti.org/news/sbti-updates-net-zero-standards-for-financial-institutions/
[2] Reuters (2022). SBTi pauses work on oil and gas standards due to oil company withdrawals. [online] Available at: https://www.reuters.com/business/sustainable-business/sbti-pauses-work-oil-gas-standards-due-oil-company-withdrawals-2022-05-02/
[4] Financial Times (2022). SBTi faces oil company withdrawal over fossil fuel phase-out. [online] Available at: https://www.ft.com/content/c894790b-f58a-47c8-a7d2-34d4b8b76518
The SBTi's updated net-zero standards for financial institutions indicate a phase-out by 2030 of general purpose finance for oil and gas companies expanding upstream production, creating a challenging balance for financial actors as they navigate ending expansion finance while maintaining engagement with high-emitting sectors. Despite the IEA's ongoing warning against funding new oil and gas capacity for decades, major oil companies like Exxon, Chevron, BP, Shell, and Equinor still persist in investing in these areas, potentially raising questions about the effectiveness of the SBTi's standards within the voluntary nature of its influence.
