Bradley Davidson, ESG lead at RBS International, discusses the importance of science-based targets (SBTs) and how alternative investment funds (AIFs) can leverage them on the pathway to transition.

What are SBTs and what does the Science Based Targets initiative (SBTi) do?

The principles of science-based targets are simple. The ask is that private market participants set out a decarbonisation pathway, aligned with the goals of the Paris Agreement, to limit global warming to less than two degrees above pre-industrial levels and targeting less than 1.5 degrees.

They provide a framework for businesses to set science-based targets and benchmark the pace of greenhouse gas emissions reduction which can be used to support decision-making, ensuring that investments are aligned with business commitments but also society’s ambitions.

The Science Based Targets initiative is a partnership between leading global climate organisations, including the UN Global Compact, Carbon Disclosure Project and WWF. It recognises that businesses need a common framework to decarbonise. The guidance provided aims to mobilise the private sector and ensure that targets are grounded in climate science.

How are AIFs currently adopting SBTs?

Over the last 12 months, we've seen a number of alternative investment funds, in particular private equity funds, either committing or having validated scientific targets. In a study we did recently, 80% of the 125 AIFs surveyed told us that SBTs were a priority today, with just over 50% categorising them as “very important”. However, 70% of the AIFs surveyed felt that net zero targets were more focused on corporates.

The private equity guidance from the SBTi begins to address the call for greater support across the industry. I firmly believe collaboration between AIFs and framework developers is needed to ensure we're moving in one direction towards decarbonisation.

What are the benefits of implementing SBTs for AIFs?

The main benefit is the cost of capital. On both sides of debt and equity, we believe cost of capital may increase for those not adopting the targets or who can't evidence their progress to net zero. There is a real financial cost, but the benefit here is for those that have already adopted and are leading the way.

Three quarters (76%) of our survey respondents highlighted investor pressure as a driver to setting SBTs. Funds know that their investor relationships are crucial to success, so taking the action to set SBTs is really a clear indicator to investors. It shows funds fully understand the intricacies of climate change, and how it will impact business and asset values.

What are the challenges that AIFs are facing when adopting SBTs? And how can these be overcome?

The main challenge is going to be data and measurement as there are gaps in terms of measuring carbon metrics across asset classes. In private equity, small and medium enterprises don't have the capability to report on carbon emissions, particularly with economic uncertainty, so we need to bridge the gaps as an industry.

The second challenge is the lack of in-house expertise. When we look at our research, 58% of respondents plan to seek external support for their SBTs but I would encourage funds to invest in their own organisational capabilities. Even if you go down the route of using consultants, having a clear internal view about where you want to go and bringing your understanding of the business in relation to SBTs is important.

How can RBS International support AIFs to implement SBTs?

We want to engage with our customers to understand where they are on their journey to implement SBTs and identify customers’ unique challenges. Investing our time in customers upfront will yield benefits in the future as we align our propositions with customers’ specific needs.

In addition to one-on-one conversations, we've started to bring together our customers, to widen the discussion across the industry in regard to SBTs. We want to let our customers know that they don't have to tackle climate-related challenges in isolation and the response has been encouraging as common ground is found across our customer base. No one entity can tackle the climate emergency on their own so we must lead by example and encourage action across the industry. We don't want to find ourselves with solutions that don't allow for comparison, and therefore reduce the efficiency of the market.

Engagement is supplemented by a strong sustainable finance programme, where we’re using our own balance sheet to incentivise customers to take action. We've worked with customers to provide financial rewards when setting SBTs within a certain period, through structures like sustainability-linked loans.

What is your top piece of advice to AIFs looking to adopt SBTs?

Start now. The climate emergency is here and we need to be taking action today to successfully transition to a truly sustainable economy. There will be challenges along the way, but the opportunities are even greater.

For those yet to think about how they will tackle SBTs or those in the planning stage, break it down and take incremental steps. In our recent report, we provide an action plan to implementation which does just this. It doesn't feel quite so large a challenge when you take this approach.

RBS International Institutional Banking services include banking, fund finance, liquidity and risk management, and depositary services (through separate legal entities). It offers these services to institutional customers located in the jurisdictions where it operates which include Jersey, Guernsey, the UK, Luxembourg, Gibraltar, and the Isle of Man.