Unicredit - The view from UniCredit’s Sustainable Finance Advisory

Spices and seasonings of sustainability-linked financing

When perfecting a new recipe, getting the balance of ingredients right is paramount to creating something enjoyable. Similarly, the ingredients for sustainability-linked financing instruments – including the “meaningfulness” of Key Performance Indicators (KPIs) and the “ambitiousness” of Sustainable Performance Targets (SPTs) – must harmonise in order to create a convincing financial structure and to mitigate the risk of greenwashing.

At the beginning of the process, when companies and bankers screen sustainability reports for potential KPIs, the first thing they assess is greenhouse gas (GHG) emissions. This is all well and good, but the challenge arises when SPTs must be calibrated. For that, a combination of benchmarking approaches is applied, taking into consideration the borrower’s own performance, that of its peers, and reference to science. While the first two can be challenging, the latter is almost a no-brainer in most situations if the company has its emission reduction targets validated by the Science Based Targets initiative (SBTi).

The SBTi was established in 2015 to help companies set targets for emissions reductions in line with climate science and the Paris Agreement.

As of today, 3,784 companies worldwide have made a public commitment to set science-based targets aligned with the SBTi’s criteria within 24 months. Almost 50% (1,804) of these have finalised the process and had their targets approved by the initiative.

In the sustainable finance field, a validation by SBTi is considered the gold standard and market participants commonly accept GHG reduction targets approved by SBTi as ambitious without

 scrutinising them to the usual extent.

UniCredit’s Sustainable Finance Advisory has advocated the SBTi’s approach in countless situations, but we have also encountered circumstances where companies have been unable to comply with its strict requirements. In an attempt to provide for the necessary level of flexibility, we are currently exploring an alternative route to validating ambitious target setting with some of our clients. It remains to be seen whether this route will lead to the desired results, but we are quite confident that the ingredients we have collected will be easily digestible

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