A leading evaluation body for corporate climate targets has told financial institutions they must stop lending to companies that are expanding fossil fuel production if they want to be judged as aligned with limiting global warming to 1.5C.
This week, the Science Based Targets Initiative (SBTi) launched a net zero standard for banks, asset managers and insurance companies, which requires them to end financing for firms that are expanding coal projects immediately and for those expanding oil and gas projects by 2030.
SBTi, a non-governmental organisation funded by corporations and philanthropies, said that nearly 135 financial institutions on six continents have signed up to the new standard, which was four years in the making.
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Raising the bar for banks
Paul Schreiber is a senior policy analyst at Reclaim Finance and was a member of the expert group that advised SBTi on the standard. He said it sends a “welcome, clear message that no financial services should be provided to companies developing coal, oil or gas”.
Connor Chung, another member of the expert group and an analyst at the Institute for Energy Economics and Financial Analysis, told Climate Home that the standard “raises the bar on net-zero discourse for the financial sector”.
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“Many financial institutions claim to care about climate-related financial risks – yet continue to bet on the fossil fuel industry’s future success,” he said, adding that the standard helps “make clear that fossil fuel expansion is not compatible with transition-readiness”.
Both Chung and Schreiber said they had wanted the standard to say that companies should stop lending for oil and gas expansion now, rather than in 2030 as the final version stipulates.
“Five years of wiggle room”
This grace period “leaves five years of wiggle room”, Chung said. “If financial institutions really want to demonstrate seriousness, they should treat the guidelines as floors, not ceilings,” he added.
The Financial Times reported that an earlier deadline to stop the lending had been included in a draft but was pushed back with the explicit backing of SBTi’s new chief executive David Kennedy.
The published standard says that companies should “ideally” end finance to companies expanding oil and gas now but “with an absolute cut off of 2030, designed to allow financial institutions to engage with oil and gas companies”.
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The SBTi told the Financial Times it had been “stringent” in its processes by including input from the general public, financial institutions, non-profit organisations, academics and industry in trying to develop a “credible” plan for the sector.
A source with knowledge of the drafting of the standards told Climate Home that less ambitious policies had also been discussed, including allowing lending to companies expanding fossil fuels, as long as this was not “project finance” specifically for the expansion activities.
Immediate end to fossil fuel project finance
Project finance means providing money to big infrastructure projects – like a power plant or coal mine – with the lender expecting to be repaid from the revenue generated by the project.
The 2025 Banking on Climate Chaos report estimated that about 6% of fossil fuel deals are funded this way, such as JSW Steel hoping to raise project finance for a steel plant and coal plant in India.
The net zero standard says that companies should immediately stop “project finance explicitly linked to fossil fuel expansion activities”.
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As well as restricting fossil fuel finance, the standard encourages companies to increase the share of their portfolios allocated to activities considered “climate-aligned” and to commit to assess and publish their exposure to deforestation.
It was drawn up with input from representatives of large financial institutions on the expert advisory group – including ING, Bancolombia and UBS – and has already been tested by companies.
Meanwhile, a separate standard for the oil and gas sector was shelved after fossil fuel firms like Shell ended their participation, the Financial Times reported. Shell said a draft of the standard – which proposed companies should not develop new oil and gas fields – “did not reflect the industry view” and was “not realistic”.
