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Why Sectoral Target-Setting Finance Frameworks Are Key to Industrial Decarbonization

Here’s how sector finance frameworks enable banks to move from targets to action.

Setting climate targets to reduce financed emissions is now the norm for most of the banking sector. And, for the over 40 founding signatories to the Net-Zero Banking Alliance, April marks the deadline to publish a full suite of decarbonization targets that cover priority sectors including agriculture, aluminum, cement, coal, real estate, steel, oil and gas, power generation, and transport.  

Many large banks are now eager to shift focus from target-setting to measuring and deploying transition finance. But — while mobilizing capital for the transition is necessary — laying the right foundation through target-setting is still critical if banks are to not only reduce financed emissions but also finance emissions reductions.  

The Pegasus Guidelines, which launched on April 4, show how banks can leverage robust methodologies to set individual targets based on their own internal strategies. The Guidelines are a first-of-its-kind reporting methodology that supports banks to assess and disclose the emissions intensity and alignment of their aviation lending portfolios against a 1.5°C pathway. By equipping banks with a methodology, roadmap, and solutions to access high-quality data, the Guidelines enable lenders to set and make progress against informed climate targets for the sector and better support their clients’ decarbonization efforts.  

Aviation, like other hard-to-abate industries, is complex, and its transition even more so. If banks are to understand what challenges clients face, how clients measure up to each other and the market, and the best tools to support their transition, over-simplified assumptions for measuring emissions and setting targets won’t do. 

When setting climate targets, banks need to make choices about scoping, emissions measurement, and roadmap selection. These choices will have a large impact on a bank’s ability to implement its targets for real economy impact. Finance needs tools that enable a nuanced understanding of a sector: its processes, market structure and value chain, and — of course — what needs to change and how to reach net zero.  

For the past several years, RMI has worked with finance, industry, and other standard-setters across the aviation, aluminum, shipping, and steel sectors to create sector-specific measurement and disclosure frameworks that do just this: focus on the market realities of each sector to enable a fair and more nuanced assessment of varied types of clients and to help banks identify the critical levers needed to support sectoral decarbonization.

Sectoral frameworks create a level playing field for industry

RMI’s sectoral frameworks are tailored to respond to the specific needs of each sector. For example, the Pegasus Guidelines allow banks to examine their airline lending portfolios and differentiate traffic between passenger (including belly cargo) and dedicated cargo, which have different baseline emissions intensities and face different trajectories and constraints in their transition. The Guidelines also incorporate lifecycle emissions accounting, ensuring that sustainable aviation fuel — the sector’s primary decarbonization lever — can be accounted for through negative upstream emissions. And, since many aircraft are leased, the framework is designed to include emissions regardless of whether financing is provided to an airline or a lessor.  

It can be difficult to assess the progress of clients with a wide range of starting emissions intensities resulting from significant differences in the production process between recycled and primary aluminum and further driven by differences in access to reliable, low-carbon electricity used in primary production. To assess producers on a like-for-like basis and reflect the realities of operating companies, the
Sustainable Aluminum Finance Framework assesses primary and recycled production against their respective 1.5°C pathways and tailors each client’s climate-aligned benchmark to its starting emissions intensity using the Sectoral Decarbonization Convergence Approach developed by the Science-Based Targets initiative. This approach ensures that all clients have an actionable pathway towards decarbonization while asking even lower-carbon producers to make progress. 

Exhibit 1: Variability in the emissions intensity of aluminum production | Source: International Aluminum Institute 

The carbon intensity of steelmaking varies not just by technology type but also by the share of primary versus recycled material inputs used in production. Primary steel production is significantly more carbon-intensive than secondary production since it largely uses metallurgical coal to reduce iron ore. A single benchmark for the sector could incentivize steel producers to increase the use of scrap as a decarbonization strategy but — since global scrap availability is finite — this strategy is limited as it could result in scrap being redistributed rather than in emissions reductions. The Sustainable Steel Principles
differentiate between primary and secondary steelmaking, keeping the focus to transitioning primary steel production which requires the adoption of clean end-state technologies rather than a more incremental approach that risks moving emissions between steelmakers. 

Exhibit 2: Global emissions intensity of steelmaking by technology and input mix
| Source: CRU 

The Poseidon Principles for shipping, which launched in 2019, spearheaded the sector-specific approach to emissions measurement and target setting. Under the Poseidon Principles, a vessel’s emissions intensity is compared against a decarbonization trajectory for its respective ship type and size class, acknowledging that vessels will face different constraints and opportunities to decarbonize. By linking the methodology to data available through the International Maritime Association, the Principles also paved the way for other sectoral approaches to ensure that high-quality data could be available for reporting. 

Sector-based frameworks are an essential first step for banks to meet climate goals

Ultimately, a robust target-setting framework is not only a tool to meet banks’ commitments, but a vital tool to enable the real economy to meet its climate goals. RMI’s sector-based frameworks enable standardized comparisons between clients and across portfolios and to catalyze more effective collaboration between lenders and their clients on their transition to a low-carbon future. The frameworks aim to provide decision-makers with the intelligence necessary to engage clients, steer capital, and shift from reducing financed emissions to driving emissions reductions in sectors that are critical to our way of life.