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In 9fin’s latest ESG Educational, we provide readers with an overview of the Science-Based Targets initiative (SBTi).

The educational begins with a description of the SBTi and the process of setting a target through the SBTi. We then investigate the robustness of the SBTi target validation process and discuss what the future holds for the initiative.

The Science-Based Targets initiative (SBTi) is a collaboration between some of the leading organisations tasked with tackling climate change. These are the Carbon Disclosure Project, the UN Global Compact, the World Resources Institute and the World Wide Fund for Nature. The SBTi verifies the robustness of a company’s greenhouse gas (GHG) emissions reduction targets to ensure that they are aligned with the latest climate science (outlined by the Intergovernmental Panel on Climate Change (IPCC)). Specifically, the latest climate science dictates that global warming must be limited to 1.5°C above pre-industrial levels.

We often find that GHG emission targets that are not verified by an independent body lack credibility, are not aligned with a decarbonisation pathway or rely on poor accounting methodologies (as demonstrated in a previous ESG Educational). Evaluating the robustness of GHG reduction targets can be a difficult task without detailed knowledge of climate science and GHG emissions accounting methodologies. Therefore, as financial regulators crack down on greenwashing, ESG-minded investors are increasingly demanding the SBTi’s ‘seal of approval’ before investing.

This increase in demand has fuelled the SBTi’s expansion and to date, the organisation has verified the targets of almost 2200 companies, while roughly 4,400 companies have made commitments to submit net zero targets at the time of publishing.

Source: Science based targets initiative annual progress report, 2021, pg.11

How do corporates gain SBTi validation for their GHG reduction targets?

Note: the SBTi criteria and methodology discussed below is different for financial institutions and certain industries, such as the forest, land and agricultural (FLAG) industry, see more details here (pg.42).

Corporates looking to gain validation for GHG emissions reduction targets must first register online with the SBTi and sign a commitment letter to set a target within the next 24 months. They will then be labelled as ‘committed’ on the SBTi target dashboard. If a company already has a GHG emission reduction target, it can commit and submit its targets for approval straight away.

Corporates that fail to commit to setting a target within the 24 month timeframe will be labelled as ‘removed’ on the SBTi dashboard. Alternatively, they can apply for an extension, but will be labelled as ‘extended’ on the target dashboard.

Currently, the SBTi offers validation for the following two types of targets:

Near-term (5-10 years) GHG emissions reduction target

Net zero target (for no later than 2050) which includes a near-term and long-term (10 years+) GHG emissions reduction target

Note: Before the SBTi Net-Zero Standard was released, the SBTi only offered validation for near-term and long-term targets. For this reason, it is possible that a company may have a near-term and long-term verified SBTi target, but not a net zero verified target. At 9fin we track whether an organisation has a near-term, long-term and/or net zero SBTi-verified target as separate data points.

Companies may choose from the following target boundaries when setting near-term and long-term targets:

A single target that covers total scope 1, 2 and 3 emissions

Separate targets for scope 1, 2 and 3 emissions

Separate targets for scope 1, 2 and 3 emissions, and more granular targets for specific scope 1 and 3 categories

Carbon offsets cannot be used to achieve near-term and long-term targets as these should cover all emissions that can be feasibly eliminated. However, carbon offsets can be used to neutralise any remaining unavoidable emissions so that a company can become net zero.

How robust is the SBTi target validation process?

Under the most recent criteria, all near-term and long-term targets set after July 2022 must cover at least 95% of scope 1 and 2 emissions. Targets do not need to cover scope 3 emissions if scope 3 emissions make up less than 40% of total emissions. When scope 3 emissions are included in the target, scope 3 emissions must only cover 67% of scope 3 emissions

The target coverage required by the SBTi is a significant limitation of its criteria, as a large proportion of a company’s GHG emissions will be unaccounted for. For example, a company whose scope 3 emissions make up just under 40% of total emissions would only have to set a target that covers 95% of scope 1 and 2 emissions. Such a target would only cover around half of the company’s total emissions

When formulating near-term and long-term targets, companies can choose between the following methods:

Absolute Contraction Approach (ACA) (applies to scope 1, 2 and 3) — Companies set a target to reduce absolute emissions by a minimum of 4.2% annually regardless of absolute emissions at the time of setting the target

Sectoral Decarbonisation Approach (SDA) (applies to scope 1, 2 and 3) — Companies adopt an industry-specific intensity target. Under this approach, companies must choose a physical intensity target (a target that is unrelated to the company’s financials). For example, Klockner Pentaplast has set a scope 3 target to reduce emissions from purchased goods and services, processing of sold products, and end-of-life treatments by 20.4% per tonne of raw materials procured, by 2029, from a 2019 base year

GHG Emissions per Value Added (GEVA) Approach (applies to scope 3 only) — Companies set a target to reduce GHG emissions/value-added, where value-added reflects the financial performance of the company. For example, as part of a wider near-term target, Apotea commits to reduce scope 3 GHG emissions from purchased goods and services and use of sold products by 35.3% per SEK value added by 2025 from a 2019 base year

Supplier or Customer Engagement Approach (applies to scope 3 only) — Companies commit to having their suppliers or customers to set SBTi-verified targets. For example, as part of a wider near-term target, Fisher & Paykel Healthcare Corporation Limited commits that 87% of suppliers by spend covering purchased goods and services and the use of sold products will have SBTi targets by 2024

Procurement of Renewable Energy Approach (applies to scope 2 only) — Companies can set targets to increase renewable energy procurement. At a minimum, companies must target 80% renewable electricity procurement by 2025 and 100% by 2030

Companies are able to enjoy a great deal of flexibility when setting targets. The near-term targets of Ignitis Group (IG) exemplify this:

The combination of 4 near-term targets not only cover different emission scopes, but different categories within these scopes. This enhances granularity, however, it does make it more difficult for stakeholders and investors to compare targets with other corporations. For example, industry peer Schneider Electric targets:

In this case, it would be difficult to compare the targets of the two companies

In April 2021, an academic article published in the Environmental Research Letters journal found that the ACA method (SBTi’s most popular target setting approach) is not aligned with climate science. This is because the latest climate science encourages different rates of decarbonisation across different industries, however, the ACA method encourages one rate across all industries (4.2% annually). This, therefore, creates “emissions imbalances” as, in certain sectors, companies with SBTi-verified targets have set targets to decarbonise more or less rapidly than the science dictates. The majority of SBTi targets are set under the ACA method meaning many SBTi targets may not be science-based

Scientists have complained that the SBTi assessment process is “critically flawed” and creates an “ample opportunity for companies to submit flawed data” as the SBTi does not check the accuracy of the underlying emissions data used in the formulation of submitted targets. This has allowed a number of companies to provide erroneous data so that they conform with the SBTi’s minimum criteria. For example, CVS Health has set a long-term target to reduce scope 3 emissions from purchased goods and services, business travel, and downstream transportation 90% by 2050 from a 2019 base year. A closer look at CVS’ 2019 scope 3 GHG emissions (pg.34) shows that they were 70-80% higher in 2019 than 2018 and 2020 without explanation. This potentially weakens the ambition of the company’s target and calls into question the robustness of the SBTi’s target validation process. Under SBTi rules, companies must aim for at least a 90% reduction in total emissions for long-term targets. CVS Health’s choice of base year will allow the company to more easily achieve this required reduction in GHG emissions

Source: CVS Health 2020 Corporate Social Responsibility Report Appendix, pg.34

Statistics released in the 2021 SBTi progress report show that many companies are not adhering to the SBTi rules. At the end of 2021, only 72% of companies with SBTi-verified targets publicly reported progress towards their targets (87% in 2020)

Unlike other standards groups, such as the Global Reporting Initiative (GRI), the SBTi both sets the standards and assesses a company’s compliance with those standards. Typically, the organisation charges companies $9,500 and above to have their targets assessed and some critics have highlighted that this may create a conflict of interest. Ralph Thurm, former chief operating officer at the GRI highlighted this, explaining that “you can’t be judge and jury”

The organisation lacks sufficient resources to accurately verify targets. At the time of publishing, roughly 6500 companies have SBTi-verified targets or are committed to setting an SBTi target. Despite this, there are just 15 members on the SBTi target validation team and the waiting list for validation is more than three months long. Such a significant lack of resources is a key concern and may explain the failure of the SBTi to accurately assess the targets of companies such as CVS Health

Once a target has been validated, companies must report progress towards their target(s) on an annual basis and, if they fail to remain on track to meet their target(s), according to SBTi rules, they must provide an explanation for this. A consistent failure to remain on track to achieve a target does not have consequences. This means that, currently, a company can have an SBTi-verified target, but never make progress in achieving that target.

Fortunately, the SBTi are currently in the process of creating a framework that will enable the assessment of the progress corporates are making towards their targets. The SBTi plans to reveal the framework at COP28 (November 2023), however, it is unclear at what point the framework will be implemented.

Despite a number of shortcomings, there is evidence that the organisation is having a significant positive impact. The SBTi’s 2021 Annual Progress Report showed that the total committed annual GHG emissions reductions across all approved science-based targets was 53 million tonnes, equivalent to taking 11 million cars off the road each year.

In response to its criticism, the SBTi announced that it welcomes scrutiny, arguing that it allows the organisation to create stronger methods for assessing and validating corporate climate targets. In an effort to improve its methodology, the SBTi introduced guidance and criteria specific to Financial Institutions, FLAG (Forest, Land and Agriculture) companies and the cement industry and it is in the process of creating a new methodology for companies in the oil and gas sector.

This year, the Carbon Trust announced plans to offer net zero target assessment and validation through their Route to Net Zero standard which, unlike the SBTi Net-Zero Standard, is the only certification that assesses and validates a company’s targets as well as assessing a company’s progress towards becoming net zero. The Carbon Trust will provide three tiers of certification: Taking Action, Advancing and Leading.

The standard, therefore, builds on the SBTi standards, given that it will help stakeholders to better understand a company’s progress in achieving a target. This will likely complement and further increase demand for SBTi validation given companies must have SBTi-verified targets to be classified as ‘advancing’ or ‘leading’.

So far, 10 companies have signed up to the Route to Net-Zero Standard including PwC, Virgin Media, O2 and Sainsbury’s. However, no companies have yet received any of the three tiers of certification.

At COP27 (November 2022), the International Organisation for Standardisation (ISO) released Net Zero Guidelines which provide a clear framework for corporates and governments on how to plan and achieve net zero. The Net Zero Guidelines do not currently form part of the ISO standards, meaning that independent third-parties cannot assess a company’s alignment with the guidelines. It is possible that this may change in the future and that the guidelines may be used to create an ISO Net Zero standard. This would be beneficial for investors as independent third-party verification would reduce the potential for conflicts of interest.

Aside from assessing a company’s climate targets, the most important way for investors and stakeholders to assess a company’s commitment to climate change is to assess performance against these targets. Stakeholders could check to see if a company is covered by the Transition Pathway Initiative (TPI), which tracks a company’s progress in achieving its GHG emissions targets as well as its alignment with the 1.5C pathway. As of October 2022, the TPI only provided data on 565 corporations worldwide, although HY issuers such as Hapag Lloyd were tracked.

In the future, it is possible that investors will be able to easily track the progress of the largest European companies. At COP 27, Mike Bloomberg and Emmanuel Macron reaffirmed plans to create a Net-Zero Data Public Utility portal which will gather data on climate commitments and standardise and validate climate data for more than 50,000 corporates. Although the portal will be useful tool for investors, the portal will only have data for 1000 corporates by November 2023 and it is unclear at what point the portal will have data for 50,000 corporates.

At 9fin, we are aware of the challenges in assessing a company’s GHG emissions reduction targets and their progress towards achieving these targets. For this reason, part of our ESG QuickTake analysis includes an assessment of a company’s targets and overall emissions performance so that investors can better understand a company’s commitment to combating climate change.

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