Guide to voluntary sustainability frameworks for financial institutions

Summary

This article provides a helpful summary of the voluntary corporate sustainability reporting frameworks for financial institutions, and practical guidance for each one.

Voluntary sustainability frameworks for financial institutions

Corporate sustainability reporting continues to grow in importance for financial institutions and organisations of all sizes.

While there are several mandatory regulations that must now be met, there’s also a range of voluntary reporting frameworks that can deliver great benefits and advantages to organisations that participate.

To help with the technical jargon and documentation, we’ve provided a helpful, extensive guide containing everything you need to know about voluntary sustainability frameworks and reporting for financial institutions.

1. Partnership for Carbon Accounting Financials

The Partnership for Carbon Accounting Financials (PCAF) is an industry-led partnership made up of a group of industry organisations, including ABN AMRO, Amalgamated Bank, ASN Bank, Global Alliance for Banking on Values (GABV), and Triodos Bank.

Who is this for?

Any financial institution that wants to assess and disclose its financed emissions voluntarily aligned with best practices. Over 400 institutions have already disclosed or committed to disclose their financed emissions using the PCAF standard.

What’s reported?

This global standard is split into three parts:

Part A – Financed emissions

Guidance to measure and disclose emissions associated with seven asset classes:

• Listed equity and corporate bond
• Business loans and unlisted equity
• Project finance
• Commercial real estate
• Mortgages
• Motor vehicle loans
• Sovereign debt.

Part B – Facilitated emissions

Guidance for measuring and reporting emissions associated with capital markets issuances.

Part C – Insurance-associated emissions

Guidance for measuring and reporting emissions associated with insurance underwriting.

From 2024 onwards, PCAF will concentrate its efforts in the following topics as a priority for methodology development:

• Transition finance and green finance
• Fluctuations in absolute GHG inventory, resulting from changes to the financial attribution metrics, such as EVIC, over time
• Additional insurance products and securitised and structured products.

What are the benefits?

The PCAF builds on the recommendation of the GHG protocol, while providing additional detailed information on important aspects such as:

• Targeted metrics that financial institutions should report against
• Methodology for calculating emissions for different asset classes
• Points of control regarding the financial and environmental data that organisations should retrieve.

Calculating and disclosing financed emissions also enables financial institutions to:

• Assess climate-related transition risks in line with TCFD/ISSB and exposure to emission-intensive portfolios and industries
• Set science-based targets using the SDA methodology
• Add information to their CDP disclosure, potentially improving scoring.

2. Partnership for Biodiversity Accounting Financials

The Partnership for Biodiversity Accounting Financials (PBAF) is an independent foundation aiming to develop a PBAF Standard, enabling financial institutions to assess and disclose their impact and dependencies on the biodiversity of any loans and investments.

The PBAF standard currently covers sovereign bonds, listed equity, corporate bonds, project finance, mortgages, investments in green energy, motor vehicle loans, and indirect investments.

Who is this for?

Any financial institution that wishes to partner with the organisation can work with the PBAF.

What’s involved?

The PBAF Standard provides a framework for companies to assess and report their impact on Biodiversity. This is based on four steps:

1. Scoping
   Identifying key biodiversity-related risks and opportunities relevant to the organisation. This includes identifying ecosystems and species that are most affected by the company’s activities.
2. Impact assessment
   Quantifying the impact of the organisation’s activities on biodiversity, and assessing the extent, magnitude, likelihood, and duration of the impact.
3. Dependency assessment:
   Assessing the company’s dependence on biodiversity and ecosystem services, and identifying goods and services that are relied on for the organisation’s operations.
4. Mitigation and management
   Developing strategies to mitigate the organisation’s negative impact on biodiversity while also seeking ways to enhance positive contributions to ecosystem services.

What are the benefits?

This can serve as an introduction to biodiversity impact and dependency assessment in the financial sector. It’s beneficial because it facilitates participation in the development of these assessment principles, as well as engagement with relevant experts.

Participants will receive regular updates about other initiatives relevant to biodiversity accounting in the financial sector, like the EU Taxonomy.

3. SBTi FI

The SBTi released guidance specifically for the finance sector in 2022, enabling financial institutions to set SBTs and have them validated by SBTi.

This enables the alignment of investment activities to the goals of the Paris Climate Agreement.

Who is this for?

Any financial institution aiming to reduce emissions in line with a 1.5C warming scenario.

To be classed as a financial institution, the SBTi looks at whether 5% or more of an organisation’s revenue or assets come from business relating to the arrangement and execution of financial and monetary transactions, including deposits, loans, investments, and currency exchange.

What’s reported?

The SBTi has three methods that link financial institution portfolios with climate stabilisation pathways. Each of these can be used for one or more asset class:

1. Sectoral decarbonisation approach
   This involves setting emissions-based physical intensity targets for real estate and mortgage-related investments/loans. It also applies to power generation, cement, pulp and paper, transport, iron and steel, and buildings sectors within corporate instruments.
2. SBTi Portfolio Coverage Approach
   This is an engagement target to encourage a portion of investees to set SBTi-approved targets.
3. The Temperature Rating Approach
   This is used to determine the current temperature rating of portfolios and take actions to align them to long-term temperature goals via engagement with portfolio companies. Organisations are also required to set targets for their own operations in line with at least a below-2C pathway

What are the benefits?

This is beneficial as it aids the decarbonisation of investment activities, helps align investments and lending to the goals of the Paris Agreement, and helps encourage investees to set targets.

4. ICMA Green Bonds Principles

The Green Bond Principles are guidelines that enable issuers to finance sustainable projects. These guidelines promote transparency, disclosure, and reporting within the green bond market.

Who is this for?

This is available to any issuers of green bonds, including banks or other corporates.

What’s involved?

Under the recommendations of the principles, issuers should implement a green bond framework that aligns to four components:

1. Use of proceeds
   Proceeds of a green bond should finance green projects. The Green Bond Principles define the categories of projects that can be labelled as green.
2. Process for project evaluation and selection
   Issuers should disclose the sustainability credentials of projects to their investors. For example, how the project is determined to be sustainable, and the targets associated with the bond.
3. Management of proceeds
   There should be full transparency from the issuers as to how proceeds are managed.
4. Reporting
   There must be reports on how proceeds are allocated to green projects. This can be within the issuer’s annual report.

What are the benefits?

This helps as it outlines the key components of investors’ strategies for achieving sustainability commitments, and ensures investments are aligned with sustainability goals.

5. EU Green Bond Standard

The EU Green Bond Standard (EUGB) intends to ensure there’s adequate transparency in line with market best practice for the issuance of green bonds across the EU. Its application will begin in October 2024

Who is this for?

This regulation can be applied voluntarily to any and all issuers of green bonds within the EU who can subsequently label their bonds ‘European Green Bonds’. If issuers of green bonds aren’t fully aligned with the EU taxonomy, they may still opt in to a number of the regulation’s disclosure requirements.

What’s involved?

Anyone issuing a green bond using this standard will be required to disclose how the bond’s proceeds will be used, and also show how investments support the transition plans of the organisation. That means that within this new requirement, the EUGB standard requires businesses to partake in a green transition.

What are the benefits?

This EUGB standard provides the following benefits:

• Creating more consistency and comparability in the green bond market
• Allowing issuers to demonstrate they’re funding legitimate green projects aligned with the EU taxonomy
• Improving access to certified gold-standard green bonds for prospective investors.

6. UNEP FI PRB

The UN Environment Programme (UNEP) FI helps financial institutions and banks develop practical approaches to setting and implementing targets in GHG emissions, financing nature, sustainable consumption and production, and economic inclusion to address inequality.

The solutions developed aim to establish industry norms, providing a roadmap for the finance sector to address global challenges and set strategies on a sustainable pathway.

The UNEP Principles for Responsible Banking (UNEP PRB) are a unique framework for ensuring that signatory banks’ strategy and practices align with the Sustainable Development Goals and the Paris Climate Agreement.

Who is this for?

Signatories are asked to commit to embedding six principles across all banking areas at the strategic, portfolio, and transactional levels. Signatory banks must report by latest 18 months after signing the principles and annually thereafter.

What’s involved?

The UNEP PRB is made up of six principles. Participating banks must:  

1. Alignment
   Align business strategy with individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement, and relevant national and regional frameworks.
2. Impact and target setting
   Continuously increase positive impacts while reducing the negative impacts on and managing the risks to people and the environment that result from their activities, products, and services.
3. Clients and customers
   Work responsibly with clients and customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.
4. Stakeholders
   Proactively and responsibly consult, engage, and partner with relevant stakeholders to achieve society’s goals.
5. Governance and culture
   Implement these principles through effective governance and a culture of responsible banking.
6. Transparency and accountability
   Periodically review individual and collective implementation of these principles and maintain transparency and accountability for positive and negative impacts and contributions to society’s goals.

Implementation

Organisations are guided through implementing their commitment in a three-step process:

• Impact analysis – Identifying the most significant impacts of products and services on the societies, economies, and environment that the bank operates in
• Target setting – Setting and achieving measurable targets in a bank’s areas of most significant impact
• Reporting – Publicly report on progress on implementing the principles, and being transparent about impacts and contributions.

What are the benefits?

The framework prioritises governance at the board or CEO level, ensuring a high-level commitment to the goal of achieving net-zero portfolio emissions. It also highlights the responsibility for the implementation of the commitment and strategy, fostering accountability among decision-makers.

7. UNEP FI PSI

The UNEP FI Principles for Sustainable Insurance (PSI) serves as a structure for the insurance industry to address environmental, social, and governance risks and opportunities.

Who is this for?

Participants are exclusively insurance companies or providers. They become signatories by completing the PSI signatory company application form and preparing a letter signed by their CEO or equivalent confirming the organisation’s approval of the PSI principles. This must be submitted to the UNEP.

Additionally, organisations in the sector that are not insurance companies, like insurance associations, can become supporting institutions by following the same process.

What’s reported?

Participating organisations must report on progress in implementing the UNEP FI PSI principles annually, and these reports must be made publicly available on the UNEP FSI website.

The reports must cover the following principles:

• Embedding ESG issues relevant to the insurance business in decision-making.
• Working together with clients and business partners to raise awareness of ESG issues, manage risk, and develop solutions.
• Working together with governments, regulators, and other key stakeholders to promote widespread action across society on ESG issues.
• Demonstrating accountability and transparency by regularly disclosing progress in implementing these principles.

What are the benefits?

Participating in this voluntary regulation provides organisations with access to UN events and engagement with stakeholders and governments on ESG issues and risk management. It also provides access to UNEP FI research, networks, and capacity-building services.

8. Net-Zero Investment Framework

The Net Zero Investment Framework offers a unified set of suggested actions, metrics, and methodologies for investors to optimise their efforts towards attaining global net-zero emissions by 2050.

Its main goal is to help investors reduce carbon footprints in investment portfolios and enhance investments in climate solutions, aligning with a future of net-zero emissions at 1.5°C.

Who is this for?

This is the most implemented net-zero methodology for investors and across all financial institutions within the Glasgow Financial Alliance for Net-Zero (GFANZ).

What’s involved?

Organisations must aim to comply with the following:

• Thoroughness
  Alignment must be grounded in solid evidence and data, adhering to the best available science in line with the temperature goals set by the Paris Agreement.
• Feasibility
  The methods and approaches should be realistic for a diverse range of investors to implement. They should also build upon existing work and be compatible with the current processes or requirements of investors.
• Accessibility
  Definitions, methodologies, and strategies should be clear and easily applicable, using publicly available information and assessments wherever feasible.
• Responsibility
  Definitions, methodologies, and strategies should enable clients, beneficiaries, and other stakeholders to evaluate whether investors and assets are aligned with the Paris Agreement’s objectives.

What are the benefits?

Benefits that can be gained through the Net-Zero Investment Framework include:

• Reducing emissions in the real economy, fostering collective action among investors to combat climate change.
• Promoting robust disclosure practices and advocating for annual disclosure aligned with TCFD recommendations to provide stakeholders with climate-related financial risk information.
• Emphasising governance at the board or CEO level, ensuring commitment to achieving net-zero portfolio emissions, and fostering accountability for strategy implementation.
• Encouraging integrating climate objectives into mandates for asset managers, ensuring climate considerations guide decision-making throughout the investment lifecycle.
• Outlining principles for achieving net-zero commitments, ensuring strategies represent efforts to reduce emissions and align investments with sustainability goals.
• Providing guidance on setting and reporting targets, including science-based scenarios, ensuring systematic target-setting and clear communication of the methodologies used.
• Incorporating climate metrics into strategic asset allocation processes, allowing investors to identify and address constraints to achieving greater alignment, and helping long-term portfolio resilience

9. UN PRI

The UN Principles for Responsible Investment (PRI) is a network of investors working to promote sustainable investment by incorporating environmental, social, and governance factors into investment decision-making.

This is done by encouraging all actors within the investment ecosystem to sign up and report on a set of six investment principles developed to support the incorporation of ESG issues into investment practice.

Who is this for?

Organisations are able to become signatories if they sit within one of three categories:

• Asset owners
• Investment managers
• Service providers or professional services partners.

What’s reported?

Participating organisations must report on their responsible investment activities

annually. The reporting framework provided by the UN PRI covers 12 modules with CORE indicators, which are mandatory to report, public, and assessed, and PLUS indicators, which are voluntary reporting, public or private, and not assessed.

The six UN PRI principles are:

1. Incorporating ESG issues into investment analysis and decision-making processes
2. Incorporating ESG issues into ownership policies and practices
3. Seeking appropriate disclosure on ESG issues by the entities being invested in
4. Promoting acceptance and implementation of these principles within the investment industry
5. Working together to enhance effectiveness in implementing these principles
6. Reporting on activities and progress towards implementing the principles.

What are the benefits?

Participating with the UN PRI is beneficial as it offers access to resources for reporting and assessing an organisation’s ESG activities. This will also result in invitations to relevant events and workshops. Participation will also help to boost brand reputation and image.

10. The Green Loan Principles

The Green Loan Principles (GLPs) are a set of voluntary guidelines issued by the Loan Market Association to aid the development of a market-standard approach to green lending.

Who is this for?

The GLPs can be applied by any market participants, with the guidelines supporting the integrity of the green loan market by clarifying when and how a loan can be categorised as “green.”

What’s involved?

The GLPs require specific methodologies to be applied to a green loan. Similarly to the Green Bond Principles, the GLPs are based on four components:

1. Use of proceeds
2. Process for Project Evaluation and Selection
3. Management of Proceeds
4. Reporting.

What are the benefits?

The GLPs can provide clarity on the instance at which a loan can be classified as “green”.

They also promote the financing of sustainable activities and projects, while improving the transparency of the use of proceeds.

Sustainability reporting guides

This guide to voluntary sustainability reporting frameworks for financial institutions is part of a wider series, where we’ve detailed all the voluntary and mandatory reporting requirements for sustainability and carbon reduction across various sectors.

You can find more guidance in the other articles in this series here as we publish them:

• Mandatory sustainability frameworks
• Mandatory sustainability frameworks for financial institutions
• Mandatory energy and emissions sustainability frameworks
• Voluntary sustainability frameworks
• Voluntary energy and emissions sustainability frameworks

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