Responsible Banking: What do UNEP FI’s principles mean for banks?

The UNEP FI’s Principles for Responsible Banking (PRB) aim to mobilize private finance towards the United Nation’s Sustainable Development Goals (SDGs) and the Paris Climate Agreement (PCA) goals to address the nature, climate and pollution crises. The UNEP FI’s implementation framework prescribes explicit accountabilities for signatory banks, requiring them to set, publish and pursuit ambitious targets. This emphasis on transparency underscores the commitment of signatory banks to showcase their progress in fulfilling their obligations.

Prior to the PRB’s introduction four years ago, numerous banks had already embarked on initiatives addressing climate change, financial inclusion, and financial health, albeit in isolated silos. However, the PRB has provided a cohesive framework for the industry, facilitating a more structured approach and fostering collective goals, thereby aligning individual efforts harmoniously. While the PRB range from a commitment to transparency to serving all stakeholders responsibly, the key aim is to help society achieve a sustainable future in a structured and systemic way. Signatory banks are required to commit to fully implement the PRB within four years, with initial reporting starting from 18 months after signing. The PRB comprise six requirements which can be summarized as follows:

First, banks should align their business strategy with clients’ needs and the wider society’s goals, as per the SDGs and the PCA, as well as any national and regional frameworks.

Second, they should continuously increase their positive impacts, while reducing and managing the risks to people and environment resulting from their activities, products and services by setting and publishing targets.

Third, they should work responsibly with clients to encourage sustainable practices and to create shared prosperity for current and future generations.

Fourth, they should proactively consult, engage and partner with relevant stakeholders to achieve society’s goals. They are expected to engage at the collective level with all stakeholders including policy-makers, suppliers, civil society and non-governmental organisations. More precisely, they are expected to take into account the Organisation for Economic Co-operation and Development’s (OECD) Principles for Transparency and Integrity in Lobbying.

Fifth, they should adopt effective governance and a culture of responsible banking. This means that they should integrate sustainability into their day to day cultures, as well as setting clear roles and responsibilities.

Sixth, they are required to periodically review implementation of the PRB. This means that they should submit a self-assessment report within 18 month after joining and should also submit collective sustainability reports every two years. Targets and the reporting should be public through the reporting and self assessment template.

To give banks a head start, the UNEP FI has published specific guidance documents on alignment and target setting for climate change, financial health (resilience) and inclusion, biodiversity and resource efficiency and circular economy, providing points to act on by devising their own action plans and setting their strategic focus areas. Signatory banks are explicitly required to assess their current misalignment with the PRB as a first step, and then to determine where they can make the highest impact on people and environment. To set targets after the alignment stage, they need to set a baseline which is the self assessment of the current status in terms of portfolio composition, current impact and level of engagement with clients. This means signatory banks should quantify their targets and progress such as greenhouse gas (GHG) emissions in portfolios and the percentage of the portfolio which is in line with the SDG. Targets are expected not only to be aligned with the PRB requirements but also to encompass the activities financed by the bank, rather than focusing on the bank’s internal, operational activities.

In addition, signatory banks are expected to be transparent about their positive and negative impacts, aiming to reduce their negative impacts and increasing positive impacts. More specifically, the PRB require them to determine at least two targets for at least two impacts. This means that they should proactively identify the areas in which it has its most significant positive and negative impact through an impact analysis, where the bank’s core business areas, products, services across the main geographies that the bank operates in have been taken into account. In identifying the areas of most significant impact, they should focus on the scale and salience of the social, economic and environmental impacts resulting from their activities and provision of products and services.

After setting targets, signatory banks are required to implement and monitor progress using key performance indicators (KPIs), which should consist of engagement targets, financial targets (in terms of percentages of portfolio to sustainable activities — percentage of gross income per business line or sector, percentage of loans to economic activities) and impact targets, both positive and negative. This requires them to set milestones, use the relevant KPIs to monitor their progress and to take remedial action, if needed. For instance, they can change their portfolio allocation and loan policies, where needed, or they can focus on gender gap, setting an internal target and also may decide to work with clients that have equal gender representation on their boards.,

It should be noted that the UNEP FI guidelines are more prescriptive with respect to target setting particularly regarding climate change. For instance, signatory banks are required to set three climate targets consisting of a minimum target, 2030 or sooner target, and long-term target of 2050, which should be publicly disclosed. For GHG emissions, long-term and intermediate targets should be science-based decarbonization scenarios published by a reliable source such as Intergovernmental Panel on Climate Change. Regarding transition to net zero economy (NZE) by 2050, UNEP FI’s Collective Commitment to Climate Action sets sector specific targets that banks should take into account.

In particular, signatory banks within UNEP FI’s
Net-Zero Banking Alliance
 (NZBA) make a firm committment to aligning their lending and investment portfolios with NZE goal by 2050. They set intermediary targets for priority sectors such as agriculture, cement, coal, iron & steel, oil & gas, transport, where they can have the most significant impact in a transparent and publicly accountable way. The focus is on the emission profile of portfolios. In particular, signatory banks should note that their targets are expected to be credible, robust, impactful and ambitious with respect to banks’ GHG profiles. These should cover Scope 1 (direct emissions), Scope 2 (indirect emissions) and Scope 3 (financed emissions), whichever is more significant and where data exists. Scope 3 currently captures oil, gas and mining. After 2024 it will capture transportation, construction, buildings, materials and industrial activities, and after 2026 it will capture all sectors.

Furthermore, signatory banks are expected to finance their clients’ sustainable economic activities with appropriate instruments. To do this they need to identify clients that are major GHG emitters, carbon intensive businesses, under serviced segments and vulnerable customers. To meet their targets, they can issue sustainability-linked bonds and performance-based bonds, such as green bonds (for housing insulation, renewable energy projects, lower carbon transportation, plastic pollution) and transition bonds, to finance sustainable activities. They can also offer preferential interest rates, pricing, terms and conditions. 

Particularly in terms of climate change, window for action is smaller and more ambitious actions are needed compared to other SDG goals. This requires banks to adjust its business model in short and long term and develop realistic strategies based on robust and science-based targets and action plans. While banks have their own direct GHG emissions, these are likely to be low compared to its overall climate impact. Banks’ climate impact comes predominantly from what they finance, facilitate or invest in. By setting and achieving ambitious, robust, and science-based targets, banks can make a difference in transitioning to a net zero economy. They can support transition not only through their lending and financing decisions but also by facilitating their clients’ transition.

As discussed above, Principle 2 of the PRB focuses on impact analysis and target setting. This requires signatory banks to undertake an objective and systematic analysis of their core business activities to identify the impacts associated with the products, services, industries, sectors, and technologies that banks provide lending and investments to. The impact analysis helps signatory banks understand the impacts that are associated with their business activities. It guides signatory banks on which areas of impact they should address through setting targets. It also informs decision-making, allowing banks to have a clear picture of the impacts that are associated with the sectors, industries and technologies they lend to and invest in.Thereby, it enables signatoru banks to make more informed decisions that support greener and more inclusive economies, and drive alignment of the bank’s portfolios with society’s goals and priorities.

To carry out an in-depth impact analysis, signatory banks are explicitiy required to:

1- Assess in which areas they have significant positive and negative impacts on society, the environment and the economy. This refers to their core business areas (products and services they provide depending on their business model — consumer banking, business banking, corporate banking, investment banking) —and their operations (such as use of energy). The focus is on the economic activities they facilitate.

2- Identify where they can realize the greatest positive impacts and reduce significant negative impacts

UNEP FI requres banks’ own impact analyses to cover the following key areas:

1- The scale of banks’ activities with regards to specific industries, technologies and geographies: While it is important for banks to understand the impacts associated with their operations and to responding to them, it is expected that the more significant impacts will be associated with the activities for which banks’ provide financial products and services. This includes how much financing banks are providing to specific sectors and economic activities, its market share in relation to services it provides, and the countries they operate in. After obtaining information on these, environmental, social and economic impacts of sectors and economic activities it provides products and services to should be measured.

2- The context, i.e. the most relevant challenges and priorities related to sustainable development in the countries/regions in which banks operate: Banks are expected to identify the social, environmental and economic impacts that are associated with the sectors and economic activities they provides products and services to in order to see if their products and services are making a positive or negative contribution to these challenges and priorities related to sustainable development. The identified impacts may have an effect, whether positive or negative, on critical national or regional challenges and objectives.·

3-The scale and intensity/salience of the social, economic and environmental impacts identified: These refer to the extent or strength of an impact area. Once the impact areas that are associated with the sectors and economic activities banks provide products and services to have been identified, they will need to gain a deeper understanding of the scale of the identified impact areas, and which of them are the most salient or intense. For example, while both gas and coal have an impact on greenhouse gas emissions, the impact of coal is significantly higher than that of gas.

Where a bank identifies impact areas that (i) are on a large scale, (ii) are salient or intense, and (iii) have an effect on critical national or regional challenges and objectives, these impact areas will be its areas of most significant impact. For instance, if a bank is a major financier of agriculture, which can use a large amount of water, access to or availability of water could be a significant area of impact, which the bank should focus on. In this case, it would be expected to drive a significant improvement in impact through working with its clients and customers, for instance through more efficient irrigation practices, switching to less water-intensive crops, and relocating production to more water-abundant regions.

Portfolio Impact Analysis Tool for Banks
uses 22 Impact Areas across the economic, environmental and social pillars of sustainable development to identify how sectors and industry activities impact sustainable development. Major impact areas include climate, water, soil, biodiversity and resource efficiency. UNEP FI requres signatory banks to determine how they are performing in the most significant impact areas, using both quantitative and qualitative data, and identify targets in those areas where their performances are weak. This will help in setting a baseline and prioritizing in the target setting phase.

Impact analysis should involve ranking impact areas, namely climate, water, soil, biodiversity, resource efficiency, in a portfolio based on number of key sectors they are associated with and the proportion of finance provided to key sectors. Sectors that have the most intense association with impact areas would be the bank’s key sectors. For instance, electricity generation from coal (a sector) has an intense effect on climate change (an impact area) through the release of greenhouse gas emissions.

After impact analysis, the next step is target setting & implementation, which involves setting a minimum of two targets that address at least two areas of most significant impact. This stage requires signatory banks to set and publish a minimum of two targets that address at least two of the banks’ most significant (potential) positive and negative impacts. Banks can revise their targets and establish additional targets at their own pace but they should be implementing a minimum of two targets at any given time, after the four-year implementation period. UNEP FI requres targets to clearly drive alignment with and greater contribution to appropriate SDG, the goals of the Paris Agreement, and other relevant international, national or regional frameworks.

UNEP FI’s key expectations with respect to target setting can by summarized as follows:

1- Targets should be specific, measurable (quantitative or qualitative), achievable, relevant and time-bound (“SMART”).

2- Negative impacts which may result from the implementation of the targets should be identified and actions should be taken to mitigate them.

There are also certain important points with respect to target setting that signatory banks should take into account at all times. These can be summarized as follows:

1- Targets should be ambitious and align with the Paris Agreement with respect to temperature goals and transition towards a net-zero economy by 2050. Long-term net-zero claims are only credible if they are accompanied by near-term targets to ensure accountability. Reaching the end state before 2050 is a necessary, but not sufficient criterion for being considered net-zero. So banks should set at a minimum an intermediate 2030 target or sooner, in addition to the ultimate 2050 target. This ambition should be reflected in the choice of scenario as well.

2- Signatories to the NZBA and the CCCA should set their first round of targets within 18 months. Within the following 18 months they should set targets for all or substantial majority of the carbon-intensive sectors.

3- Targets should consist of a series of intermediate targets set every five years after the first interim target. Targets should be reviewed and updated at least every five years as science progresses (for instance, as per IPCC assessment reports), as bank’s portfolio mix changes and/or if there are any material methodological advancements. To meet these targets, bank should prepare and disclose planned actions.

4- Targets should apply to banks’ lending and investment activities, focusing on their clients’ Scope 1, Scope 2 and Scope 3 emissions. Coverage of Scopes should increase between each review period.

5- Banks should measure financed and facilitated emissions by applying chosen tools and methodologies. PCAF provides financial institution-specific guidance on how to measure emissions. For banks, most attributable GHG emissions come from the sum of their clients’ Scope 1, 2 and, if possible, Scope 3 emissions, rather than their own operations. Banks should particularly focus on the Scope 3 Category 15 emissions.

6- Banks’ financed emissions calculations will help to establish the baseline, prioritize sectors and track progress over time. To measure financed emissions, the banks should collect client data such as emissions or production data which should be less than two years old relative to the year the data are used for. A commonly used source of self-reported data for large clients is the Carbon Disclosure Project (CDP). Banks can use estimated or proxy data where there are data gaps to help prioritize the sectors it will address first. For instance it can use regional or national sector averages to estimate the emissions profile of a given client and/or the portfolio associated to this sector.

7- Although it is not the priority in target setting, it is also expected that the bank set targets for carbon neutrality in their own operations, such as energy efficiency in their buildings.

8- Banks should aim to use client-specific estimates or data instead of relying on proxies, where possible, to improve its ability to track its clients’ progress. Recognizing data limitations, bank should plan measures to improve data quality over time to better reflect the impact of financing and engagement decisions, for example by including GHG-specific data in the financing and investment process.

9- While targets should focus on achieving an impact in the real economy, it is also important to consider other environmental and social factors.

On the other hand, target setting involves various non- sequential stages that signatory banks may run iteratively and in parallel. These stages can be summarized as follows:

1- Familiarization with the concepts, frameworks, and regulations that may affect bank’s business, based on the latest climate science: This stage involves developing a good understanding of the terminology used, knowing how to apply international and national frameworks, embedding climate mitigation in the bank’s business, gaining a good understanding of the regulatory and policy environment of the bank’s activities, having a sufficiently good overview of the range of tools and methodologies in the market, assessing the applicability of tools and methodologies for the bank’s balance sheet)

2- Measurement and disclosure of financed emissions to understand portfolio and the extent of its impacts on climate: This stage involves measuring financed and facilitated emissions by applying chosen tools and methodologies, identifying data sources for GHG-emissions and continuing to improve collection of relevant climate data, as well as annually disclosing financed emissions.

3- Setting robust, science-based targets for mid- to long-term strategic direction for financing decisions and the integration of climate impact in all aspects of business: This stage involves identifying material sectors, determining the baseline, identifying appropriate climate scenario(s) to use, calculating the degree of alignment, formulating intermediate sector targets, focusing on achieving a real-world impact and not causing harm.

4- Meeting those targets and having a positive impact: This stage involves engaging the whole bank and setting up appropriate governance structures, making financing decisions in all relevant areas of the business to meet the targets, engaging with clients to support their transition, engaging with policymakers to support regulatory development, developing clear positions on areas such as carbon intensive sectors, offsets and facilitated emissions, establishing measures to track and report on progress against targets, revising targets as needed, but at least every five years, to adjust to an evolving scientific understanding and a changing policy environment.

UNEP FI expects signatory banks to particularly note that:

1- Target setting should be based on widely accepted, science-based decarbonization scenarios (IPCC and IEA scenarios) to set long-term and intermediate targets aligned with the temperature targets of Paris Agreement. These scenarios should be low- to no-overshoot, which means that the target temperature should not be exceeded for extended periods of time, and they should not rely excessively on negative emissions technologies, carbon credits or carbon capture and storage which is as yet unproven at large scale.

2- When setting targets to align with a particular temperature outcome, signatory banks should be aiming for the sum of their financed emissions to align with a scenario consistent with their target temperature outcome. The most commonly aligned with scenarios are from the International Energy Agency (IEA), the International Panel on Climate Change (IPCC) scenario community and the Network for Greening the Financial System (NGFS), but there could also be other scenarios better suited for different regions.

3- Targets should be set in absolute emissions and emissions intensity (sector-specific emissions intensity). Sector level targets should be set for carbon intensive sectors, prioritizing the based on GHG emissions, GHG intensities and/or financial exposure in the portfolios. In particular, all clients with more than 5% of revenues coming directly from thermal, coal mining and electricity generating activities should be included in the scope of targets.

4- In target setting, signatory banks should prioritise the sectors which are the most carbon-intensive (either in absolute or in intensity terms). Sector level targets should be set for such carbon intensive sectors and prioritised (in the first 18 months). Within 36 months all of the remaining carbon-intensive sectors should be considered in target setting. In this process bank-specific considerations (geography, sectors, policy landscape, local economies) may also play a role.

5- Signatory banks should annually measure and report emissions profile of their lending portfolios and investment activities in absolute emissions and emissions intensity for significant majority of Scope 3 emissions for the set list of carbon intensive sectors. Carbon-intensive sectors to focus on are Agriculture, Aluminium, Cement, Coal, Commercial and Residential Real Estate, Iron and Steel, Oil and Gas, Power generation, and Transport. Bank should set targets at a sector level, based on open-source decarbonisation scenarios which outline a trajectory which must be followed over a certain period, typically until 2050.

The relevant scenarios mentioned above are often based on carbon intensities (for instance, tCO2 e/MWh) or on technological productions (for instance, barrels of oil). Banks can also calculate an “implied temperature rise” for its portfolio or portfolio coverage (i.e., what percentage of its portfolio clients have climate targets). Currently, setting emissions-based targets (either absolute or intensity) is preferred.

Once banks have measured their financed emissions they have their baseline, i.e. the starting point for targets. UNEP FI requres this to be no more than two years before the year in which bank is setting the targets (exceptions can be made for anomalous years). It expects banks to disclose scope and boundary of asset classes and sectors, asset class and sector coverage of emissions, and measurement methods and metrics used at portfolio, asset class or sector level. Financed emissions (Scope 3) profile and activities should be disclosed annually for absolute emissions, portfolio-wide emissions intensity (emissions per dollar lent or invested) and sector-specific emissions intensity (emissions per metric such as kWh, tonne, m2).

Once banks have calculated the baseline data, they can project the difference between how its portfolio will evolve and how it is “meant” to evolve if it were aligned with a certain climate scenario. The larger the gap (delta), the more “misaligned” the portfolio. Calculating the degree of alignment (delta) provides bank with a relative indication of the amount of effort needed to align its portfolio with the chosen climate scenario.

UNEP FI expects banks’ intermediate sector targets to be based on the banks’ analysis of where they wish to see their portfolios in the shorter term (by 2030 or sooner) to be in line with bank’s target temperature outcome in the longer term. In this process, it is essential to engage business areas and to align with bank’s leadership.

Banks may set two types of targets:

1- An absolute target: This is a target that aims to reduce absolute GHG emissions by a set amount. Common metrics are MtCO2 or MtCO2e. This ensures that bank’s financed emissions cannot rise.

2- An intensity target: This is a normalized metric that sets emissions targets relative to an output. For example tCO2 e/MWh for power generation, kgCO2 e/m2 for real estate or, less preferably, an economic intensity metric such as kgCO2 e/ dollar client revenue. It allows setting emissions reduction targets while accounting for economic growth or increased market share.

An intermediate sector target may be set on an absolute or intensity basis but it is important to disclose both to provide the complete picture.

There are also two ways in which the targets can be formulated:

1- A convergence approach: In this approach the speed of change is affected by the starting point (i.e. less carbon intensive clients have a lower rate of decrease to achieve because their starting point is ‘better’)

2- A contraction approach: In this approach every actor/portfolio in the market is assumed to decrease their emissions at the same rate (e.g. 2%/year).

Following target setting, implementation stage involves:

1- Setting milestones and defining actions to meet the set targets.

2- Establishing the means to measure and monitor progress.

3- Putting in place a governance and oversight structure responsible for monitoring target implementation and, if required, remedial action.

In this stage, UNEP FI requres signatory banks to publish a high level transition plan within 12 months of setting targets providing an overview of categories of actions that they plan to take to meet the targets and a timeline. Actions include (but are not limited to) Client engagement, Exclusion policies, Divestment, Capacity building, Developing new tools and products, Assessment of portfolio alignment, Assessment of portfolio exposure/risks, Developing policies, Public policy positions and advocacy for government/regulatory action, and Strategy to grow customer base. UNEP FI requres signatory banks to disclose the targets publicly and report annually on progress. Targets and key metrics should be published in mainstream annual financial filings. Disclosure of banks’ emissions profile in its annual reporting is essential for transparency and accountability. In the event a bank is not yet be able to disclose its full portfolio due to data and methodology limitations it should explain any omissions.

UNEP FI requres signatory banks to develop and disclose KPIs to track progress against their targets. These options may include credit policies, limits, client engagement, divestment, and sector policies such as fossil fuel reduction plans, though this list is not exhaustive. Bank should develop a transition plan and make this public to build confidence in its approach to align its portfolio. KPIs could, for example, include % emissions reduction, % carbon intensity reduction, % of clients engaged, % of clients with public transition plans or tracking of finance directed to green projects or climate solutions.

Metrics to track the progress toward net-zero include GHG emissions metrics, portfolio alignment metrics, and portfolio contribution metrics

Emissions-based metrics track bank’s financed emissions:

1- Absolute portfolio emissions (tCO2e): Total amount of CO2-equivalent emissions that is attributed bank’s operational and financing activities. Tracks the absolute amount of GHG emissions in a portfolio.

2- Portfolio-wide intensity, e.g., Weighted average carbon intensity (tCO2e/revenue): Absolute emissions per monetary unit, such as the volume of financing (e.g., dollar invested or loaned), or underlying company revenue. Demonstrates the GHG efficiency per dollar invested.

3- Sector-based physical intensity (e.g., tCO2e/MWh): Measures the efficiency of a portfolio (or parts of a portfolio) in terms of absolute emissions per unit of a common production output (e.g., ton of cement produced, mega-watt hour of power produced. Methods built on sector decarbonization approaches (SDAs) use a convergence approach so that all companies aim to achieve the benchmark intensity.

Alignment-based metrics track banks’ level of net-zero alignment of portfolio companies:

1- Engagement: Engagement activities are pursued by banks with the goal of increasing the portion of portfolio companies that are aligned with relevant net-zero pathways.

2- Binary Target Measurement: Represents the percentage of investments or companies in a portfolio with declared net-zero or Paris-alignment targets.

3- Implied Temperature Rise: Translates an assessment of company alignment into a temperature score that describes the most likely global warming outcome if the global economy were to exhibit the same level of ambition as the counterparty in question.

Contribution-based metrics track bank’s contribution of financing to economy-wide net-zero:

1- Internal Carbon Price: A shadow price on carbon at the company level is an assumed cost of carbon emissions that is incorporated in calculations to illustrate the economic implications of carbon emissions on business decisions.

2- Green Metrics (e.g., Taxonomy or revenue share): Several green metrics exist that classify companies based on taxonomies of economic activity, e.g., EU Taxonomy for Sustainable Activities, Climate Bonds Taxonomy, or on share of revenue from green activities.

3- Capacity-based: Assess the technologies and asset-level distribution needed for Paris Alignment. The Paris Agreement Capital Transition Assessment approach is well-established and widely used for this purpose.

As per the Science Based Targets initiative (SBTi) recommendations, UNEP FI requres signatory banks to  transparently address the role of fossil fuels in its financing activities. They should annually disclose fossil-fuel related financing activities, including investments (public equity, private equity, corporate bonds), direct project financing, arranged financing (i.e., securities underwriting), and lending. They are also expected to engage with fossil-fuel companies to adopt net-zero targets and action plans, and end financing of any new fossil fuel exploration and production during a transition period. They should divest if companies are unable or unwilling to transition in line with net-zero pathways, ending all financial support (excluding decarbonization or transition to zero carbon alternatives) to existing coal assets by 2030 and to existing oil and gas assets by 2040.

Banks can choose to phase out coal financing by 2030 or decide to reduce its exposure to high-emitting sectors. A review of climate criteria before issuing a loan can help the bank decide whether to finance a client or not. The maturation of loans is another key point at which carbon reductions in the portfolio can be achieved through transition to the financing of less carbon-intensive clients, technologies or activities. Banks are expected to distinguish between financed emissions and ‘real economy emissions’ and dissociate the two when developing financing decisions to meet targets, noting that an impact in the real economy is the most important outcome. In addition, UNEP FI requres signatory banks to work with clients to ensure they are working towards the same goal by making them aware of the implications of scientific developments, explaining emerging policies and establishing deadlines. Their degree of engagement with the transition to a net-zero economy can be a good indicator of their quality of management and their own risk management capabilities.

In practice, banks could link the interest rate of a product to carbon performance, ask for transition strategies, request specific GHG-related data, or determine a point in time by when data should be made available from the company or a robust transition strategy needs to be in place. In the case of resource efficiency and circular economy, for instance, UNEP FI proposes a progressive approach to target setting. It requres signatory banks to perform self-assessment to find out if they are a Beginner (Tier 3), Intermediate (Tier 2) or Advanced (Tier 1) bank. This assessment determines priority areas in the portfolio to focus on.

Tier 3 banks should set targets only on a portion of portfolio covering key sectors. Their client engagement should include sending data requests to clients to understand alignment of their economic activities with the objective. They should focus on the most impactful sectors then as they progress, they should set targets for the entire portfolio.

Tier 2 banks should expand the scope of the portfolio for which it sets targets. Their client engagement target will include improving clients’ understanding of the objective.

Tier 1 banks should set targets for their entire portfolio and all sectors. Their client engagement target will include providing technical assistance in development and funding of activities substantially contributing to the objective.

UNEP FI requres signatory banks to determine relevant policies and frameworks (international, national and regional: SDG and Paris Agreement, EU Taxonomy and sector specific and general frameworks) based on their operations and business model. They should consider both mandatory and non-mandatory frameworks. This will give them clarity on policies and frameworks with which to align, which should guide them in establishing a baseline, setting targets, implementing an action plan and defining KPIs. Banks are expected to set targets (interim and sub-targets) with long-term time horizon such as 10 years (to set direction) and to define interim targets such as 1,2,5 years (to check on a periodic basis if the bank is on track) — taking into account and aligning them with any available policy or framework.

UNEP FI requres signatory banks to set SMART targets in three categories:

1- Engagement targets: identify and target key clients

2- Financial targets: target volume or percentage of financial flows directed to activities substantially contributing to the objective

3- Impact targets: a target related to increase of positive impact and/or decrease of negative impact of the financed activities. Tier 1 banks should set actual impact targets. Tier 2 and Tier 3 banks should set targets to report impact and gain experience in defining choosing and using impact targets.

Establishing a Baseline is a starting point against which to set targets and measure progress. It shows the current status of the portfolio and current performance. It helps to bring internal and external stakeholders into the target setting process.

To determine the baseline, banks should answer these questions:

1- What percent of portfolio (activities, clients, projects) contribute substantially to transition?

2- What is my current level of engagement?

3- What is the impact of my portfolio directed to activities, clients, projects that contribute substantially to transition?

To have a clear baseline of activities in the existing portfolios and the current level of client engagement, banks should screen their portfolios to establish:

1- Proportion of financial flows substantially contributing to the objective

2- Number or percentage of clients engaging with

3- The impact of their portfolio (for Tier 1 banks only)

UNEP FI requres signatory banks in all Tiers to use indicators for financial flows directed to (qualitative indicators for activities, clients, projects) which are aligned with the objective (In EU, banks should use EU Taxonomy TSC specific to the objective), as well as indicators for level of engagement. Tier 1 banks are expected to screen entire portfolio (new and existing) using core impact indicators. Tier 1 and 2 banks should use impact indicators (depending on client, project and activity). Tier 2 and Tier 3 should screen only new portfolios and focus on portfolios that has the most significant impact. Here it is important to report on how decision was made about what to screen (loans, investments, clients) and what percentage to screen. They should use relevant and feasible indicators. Engagement indicators should be quantitative (number of clients or proportion of portfolio they are engaging with and from which they are collecting data).

Tier 3 banks should screen at least 2 relevant key sectors. On the other hand, Tier 1 banks will already be collecting data on existing clients, loans, investments. Others should collect data only on new clients, loans, investments. UNEP FI requres signatory banks to identify any data gaps and to involve relationship managers and client facing. A good starting point would be to prepare a data template and share with clients.

KPIs include engagement indicators, financial indicators and impact indicators:

1-Client engagement indicators are used to assess engagement with key clients. To assess level of engagement, banks should discuss their transition plans (if Tier 1 bank) and accompany/consult them (if Tier 2 or 3 bank). For client engagement screening, qualitative and quantitative analysis of clients in key sectors to identify clients to engage with. Also, quantitative analysis of clients already engaging with in terms of numbers of percentages.

2-Financial indicators consist of volume or percentage of financial flows directed to activities substantially contributing to the objective. To asses financial flows banks should choose a categorization system before beginning — EU Taxonomy TSC specific to the objective should be used in EU when ready). Assessment is dependent on the Bank’s Tier. All Tiers should start with assessment of financial flows directed to (activities, clients, projects) which are aligned with the objective. For financial flows screening, portfolio should be split (at client, activity or project levels) into a) financial instruments with a specified use, b) those without a specified use.

3-Impact indicators are required to assess the impact of the portfolios (For Tier 1 banks core set of impact indicators are required to consolidate their impact assessment). Assessing impact of activities identified applies only to Tier 1 and Tier 2 banks. For impact screening, (For Tier 1 and Tier 2 only), baseline for each of the impact indicators should be calculated using data gathered in data gathering stage.

Finally, to achieve their targets, banks should work with their clients to ensure that their activities support more sustainable outcomes. They have to support clients in carbon intensive sectors to decarbonize and align with the goals of the PCA  and the latest science. UNEP FI also requres signatory banks to ensure that the governance structures within their organization, and their culture, support the achievement of its sustainability targets and strategies.