The growing recognition of the systemic economic risks from climate change has resulted in a call to action to reduce global greenhouse gas (GHG) emissions. This will require a coordinated effort by governments and companies in setting emissions reduction targets that limit global temperature increases to levels consistent with scientific assessments. This piece provides an overview of the fundamentals of science-based targets (SBTs) and key considerations for companies.
Climate Goals and Timelines
The Paris Agreement calls for countries to limit the increase in global average temperature to well below 2 degrees above pre-industrial levels and to pursue efforts to limit the increase to 1.5 degrees by the end of the century. This goal was developed based on the scientific assessments of the International Panel on Climate Change (IPCC).
In 2019, the IPCC updated its research guidance, indicating that a more aggressive approach was required to meet the 1.5 degree climate goal. The updated guidance called for a 50% reduction in global GHG emissions by 2030 and “net-zero emissions by 2050”. It is important to understand that net-zero does not necessarily mean zero absolute GHG emissions. Net-zero emissions can be achieved by using carbon removal mechanisms (e.g., green infrastructure, carbon capture utilization, and storage (CCUS), carbon offsets) to reduce and offset remaining GHG emissions.
To date, 19 countries (plus the European Union) have revised their national targets to incorporate net-zero goals, and many more are considering them. While all national net-zero commitments call for an absolute reduction in GHG emissions, the scope, sectoral coverage, and target years vary widely. There is also little consensus on the extent to which carbon removal mechanisms should be used to meet net-zero targets.
Understanding GHG Emissions
Scope 1 (Direct GHG Emissions): GHG emissions that occur from sources that are owned or controlled by the company (e.g., emissions from the manufacturing or processing of chemicals and materials, transportation of materials, products, and waste, generation of electricity, heat, or steam, etc.).
Scope 2 (Indirect GHG Emissions): GHG emissions from the generation of purchased electricity consumed by the company.
Scope 3 (Other Indirect GHG Emissions): GHG emissions that are a consequence of the activities of the company but occur from sources that are not owned or controlled by the company (e.g., outsourced activities, employee business travel, the use of sold products and services, etc.).
Absolute GHG Emissions: The total (or absolute) quantity of GHG emissions released to the atmosphere.
Intensity-based GHG Emissions: The GHG impact per unit of physical activity or unit of economic output (e.g., tonnes of CO2 emissions per dollar of revenue, tonnes of CO2 emissions per ounce of gold produced).
Source: The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition)
Setting Science-Based Targets
A GHG emissions reduction target is science-based if it is in line with the scale of reductions required to limit global temperature increases to below 2 degrees above pre-industrial levels.
While methods and approaches to setting SBTs are still evolving, all involve the following fundamental components:
- SBTs are expressed as reductions in GHG emissions intensity, absolute reductions, or both. In cases where they are expressed as GHG emissions intensity, there must also be a trend of absolute reduction to meet national targets.
- SBTs are typically set for a period of 5-15 years, providing interim measures of progress toward the endpoint – whether that endpoint is 2030, 2050, 2100, or something in between.
- SBTs typically derive from climate scenario analyses, which explore alternative pathways to achieve companies’ future climate goals. Climate scenario analyses are complex and include assumptions about energy demand/supply and mix, policy, technology, economic growth, and social elements. Different scenarios have different endpoints, timeframes, and pathways. Even scenarios with the same endpoint may exhibit very different pathways. Scenarios need to be carefully selected for “best fit” for the sector, region, and company. For more on scenario analysis, see Qualitative Scenario Analysis: Getting Started.
- SBTs must align to a scenario that includes a 1.5 or 2 degree endpoint. The IEA’s Sustainable Development Scenario (SDS) and the IPCC RCP2.6 Scenario are two examples of scenarios commonly used in scenario analysis that align to the Paris 1.5 degree climate goal. In its 2020 World Energy Outlook, the IEA also introduced the Net Zero Emissions by 2050 case to supplement the SDS analysis.
Table 1 outlines some of the current benefits and challenges of setting SBTs.
Table 1: Benefits and Challenges of Setting SBTs
- Provide companies with a quantitative measure of GHG reductions that can be incorporated into strategic planning and business decision-making.
- Supports best-practice for investor-focused ESG reporting and disclosure standards and addresses the TCFD recommendations for scenario analysis and target setting.
- Demonstrates a concrete commitment to the Paris Agreement and addressing climate change.
- Can improve company scores for the CDP Climate Change Questionnaire and third-party ESG ratings (e.g., MSCI, Sustainalytics).
- Reputational benefits of climate leadership to external and internal stakeholders, including attraction and retention of younger talent.
- Level of effort and complexity in data collection. There is also a lack of availability of scaled down data.
- Lack of consistency between companies in reporting of GHG emissions. Not all companies report according to the GHG Protocol, scope and boundaries differ, and data collection relating to Scope 3 emissions (if included) is challenging.
- Certified SBTs are required to consider Scope 3 emissions across the entire value chain and target that covers at least two-thirds of total Scope 3 emissions. For more on certified SBTs, see the Science Based Targets Initiative text box below.
- Underlying assumptions used in climate scenarios may not accurately reflect national or regional conditions.
- Frequent updates of climate and energy scenarios means that companies will need to update SBTs at least every five years, requiring company resources.
A growing number of companies are making net-zero commitments. However, developing a plan to achieve net-zero is a significant undertaking. Quite apart from key decisions around scope and timelines, a commitment to net-zero will involve major business considerations relating to allocation of resources, return on investment, and possible evolution of the business model depending on the sector.
The Science Based Targets Initiative
The SBTI is a not-for-profit organization established with a mission of promoting corporate climate action by supporting the expansion of science-based target setting so that it becomes standard business practice. Companies can join the SBTI’s Call to Action through the following steps:
- Commit to set a SBT using the SBTI methodology;
- Develop a target;
- Submit the target for validation by the SBTI; and
- Announce the target.
While over 900 companies have committed to the SBTI only 380 have been certified to date. However, momentum for the SBTI methodology is building particularly as countries seek to establish pathways to achieve net-zero by 2050. Investors value that external validation is required, which enhances the credibility of companies’ targets. The World Business Council for Sustainable Development has indicated its support for the SBTI, and the SBTI Call to Action is a commitment of the U.S.-based corporate We Mean Business coalition.
There are increasing expectations for companies, particularly those operating in carbon-intensive industries, to set and meet GHG emissions reduction targets. Developing ambitious, achievable, and meaningful GHG emissions reduction targets can lend credibility to a company’s overall approach to climate change. Companies should consider the following when exploring whether to set SBTs:
- Does the company operate in an industry that is under significant pressure to reduce GHG emissions given the industry’s contribution to national GHG emissions?
- How many peers (in Canada and globally) have set GHG emissions reduction targets, including SBTs? How many peers have committed to the SBTI?
- What GHG emissions data does the company currently have and what additional data would the company need to collect to inform the process of setting SBTs?
- Does the company have any experience with climate scenario analysis? If so, is the company considering climate scenarios that reflect 1.5 or 2 degree climate goals?
- Does the company wish to seek validation of its SBTs via the SBTI?
The answers to these questions can help a company gauge the relative importance of setting SBTs and understand how difficult it might be to develop a target. In addition, companies should carefully consider the benefits and challenges of setting SBTs outlined in Table 1 to determine whether setting an SBT is aligned with corporate and ESG strategy.
ESG Global Advisors bridges the gap between companies and investors on environmental, social and governance (ESG) factors. A multi-disciplinary team with significant investor and corporate experience, we are uniquely positioned to offer expert advice to companies and investors on material ESG factors that drive long-term value, including climate change.
ESG Global Advisors’ Work on Climate Change
We offer the following services related to climate change:
- Climate change materiality assessment
- Climate change strategy development
- Climate change scenario analysis
- Climate change governance assessment
- GHG inventory and verification
- Strategic analysis of GHG emissions profile
- Support with identifying climate-related metrics and setting climate-related targets
- Support with Task Force on Climate-related Financial Disclosures (TCFD) reporting
- Support with CDP reporting (Climate Change, Water, and Forests questionnaires)
Contact us to learn more about our ESG and climate change advisory services.