Posted by Tim Crozier-Cole

The SBTI’s Net Zero Standard – pre-launch consultation– implications for corporates

The Science-Based Targets Initiative (SBTI) are close to launching the first science-based global standard for corporate net zero targets. Last week (20th September) saw the issue of the pre-launch consultation, with the final standard criteria due to be published by 28th October 2021. Companies will be able have their net zero targets validated under the new standard from early 2022.

This article summarises the main points and implications for companies interested in SBTI’s Net Zero designation.

1. Companies can’t claim to be net zero until their long-term SBT is achieved.

This means that most companies will need to achieve 90% reductions in scope 1, 2 and 3 emissions before neutralising residual emissions to claim net zero. Put another way, most companies will only be able to use offsets for maximum of 10% of their base year emissions to claim net zero.

This is at odds with many companies’ current interpretation that net zero can be claimed by neutralising emissions once they achieve, or are on track to achieve, their current (near term) SBTs which typically envisage far lower reductions – typically between 25-50% depending on timeframes and ambition levels. Achieving 90% reductions is clearly a lot more difficult, possibly requiring the wholesale transformation of supply chains over which individual companies have little leverage.

We therefore expect careful rewording of some companies’ existing net zero commitments. They will somehow need to talk of being in transition to net zero with compensation of residual emissions, which is a lot less snappy than a simple ‘net zero by 20XX’ headline.

We predict some confusion over net zero terminology as stakeholders find it hard to comprehend differing types of climate-related claims and targets. Sustainability professionals may have tricky conversations explaining to their clients/bosses that their current net zero target no longer constitutes net zero, and that there is another leg in the ‘race to zero’ before it can be declared. Others may regret or think twice about pulling forward net zero targets well in advance of the Paris Agreement.

Nonetheless, the provision of a clear net zero definition will be a major step forward. It will provide kudos for those companies that adopt the standard and help distinguish them from those with less challenging carbon neutral-related claims and targets.

2. Existing SBTs set 5-15 years in the future are now called near term-SBTs.

The net zero standard effectively builds on the existing SBT framework used to date. There are two important updates for near-term targets (the new term for “science-based targets”), both of which are designed to support the Paris ambition of halving global emissions by 2030:

  • The maximum near-term target timeframe will be reduced to 10 years, although the SBTI is considering a 15-year timeframe for sectors where short term emission reductions are limited by long asset lifetimes.
  • Minimum ambition will increase from WB2 °C to 1.5°C for scope 1 and scope 2 (an average 4.2% per year absolute emission reduction) and well below 2°C for scope 3 (2.5% per year reduction).

3. Long-term SBT to cover 95% of scope 3 emissions.

Under the current SBT criteria companies are required to include scope 3 emissions where they exceed 40% of their total footprint. Scope 3 targets must cover at least two thirds of their scope 3 emissions. These criteria are retained for the near-term targets described in point 2 above. For long-term targets however, the two thirds coverage is increased to 95%, to bring targets in line with the GHG Protocol for accounting of scope 1, 2 and 3 emissions.

As we noted in our article about the SBTi draft guidance earlier in the year, the two thirds scope 3 coverage under the near-term targets provides flexibility in avoiding emission categories that are difficult to assess, difficult to abate or immaterial against the wider footprint. It varies from company to company, but this often includes categories such as use of sold products, end of life treatment of sold products, waste, business travel, employee commuting and investments. It also allows companies to avoid the ‘lumpier’ emissions sources – those that can jump around from year to year such as capital investment that pose a challenge for target setting.

The 95% coverage of these is likely to bring some previously excluded Scope 3 categories back into scope. This may present a challenge to companies wishing to make a net zero commitment on an accelerated timeline.

4. The options for physical and economic intensity contraction targets are retained for near-term targets only.

There was a possibility that these options would be removed altogether and intensity targets would only be available as physical intensity convergence targets for specific sectors. They have been removed for long term targets but are retained for near-term targets.

We may have to wait until the net zero target setting excel tool is available in the new year to see exactly how the raised ambition level for scope 3 (2°C to well-below 2°C) will translate into minimum required scope 3 physical intensity contraction, but the document issued states it to be a 5.1% linear annual reduction. This is a big step up from the 2% linear annual reduction under the 2°C ambition level and will be a particular challenge for companies that expect significant organic growth.

5. The precise rules for neutralisation and compensation are still work in progress.

The pre-launch criteria document provides high-level definitions of these terms and sets out the basis for determining the maximum permissible residual emissions for neutralisation to claim net zero (10% for most companies).

The principle that neutralisation should be based on the ‘durable’ or ‘permanent’ storage of carbon was established by the SBTIs Foundations for net zero target setting paper in 2020, and further reinforced by the Oxford Principles for offsetting and the UNFCC’s Race for Zero Lexicon document.

These science-based definitions expose just how far short the current voluntary offset market falls in providing products of this nature. The fundamental problem is the current absence of solutions for durable carbon capture and storage at scale – offsets are just a contractual mechanism. If the removal projects themselves don’t exist, offsets can’t help.

The SBTI is right to take its time in working this out and hence placing more emphasis on the reductions part of the Standard in the short term. In so doing, it recasts offsetting as less of a numbers game to claim net zero and more of means for companies to support climate action outside of their value chains during the transition to net zero. Hopefully this will disincentivise the race to the bottom buying of the cheapest offsets possible e.g. credits associated with already-viable renewable energy projects, which make up a large proportion of credits in circulation.

6. The SBTI is simultaneously raising the ambition of the existing SBT criteria.

The SBTI announced in July 2021 that it was to raise the ambition level to 1.5°C for all targets validated after 15th July 2022. The full updated criteria will be published at the end of 2021. It seems likely that the criteria will fall in line with the near- and long-term reduction target criteria developed for the net zero standard.

Concluding thoughts:

  • The SBTI are to be commended for staying true to the ‘Science Based’ part of their name. Many similar initiatives bow to stakeholder / customer pressure to make their criteria achievable today. This standard remains faithful to reduction levels driven by the objective to limit global warming to 1.5 degrees. The predictions of climate science are hardening that above this level catastrophic disruption to ecosystems is inevitable. This means that critical pieces of the decarbonisation puzzle need to be solved before most companies will be able to meet the standard, such as permanent carbon storage at scale and the successful decarbonisation of hard-to-abate primary industries such as mining, agriculture, steel and cement.

  • The step up in ambition for scope 3 in both the near-term ambition level from 2°C to well below 2°C and the scope of long-term targets (from 68% to 95%) are significant changes, that will require faster and deeper decarbonisation of supply chains. There is a risk that the accounting effort will divert attention from reducing scope 1 and 2 emissions over which they have most control.

  • The standard simply cross-references the RE100 Campaign recommendations for renewable electricity (Scope 2). The standard does nothing to close the long-standing problem in some markets, such as the UK, of greenwashed electricity tariffs (neatly summarised here for the UK and now subject to a UK government call for evidence).

  • SBTI requires companies to review their SBTs against the latest criteria every 5 years. Companies that set their SBTs a few years ago may find that the first 5-year update implies a significant jump in ambition, irrespective of whether they decide to adopt a validated net zero target.

  • The SBTI’s pre-launch consultation runs until 6th October 2021. The consultation questions are seeking feedback on the key areas: the overall add-value of the NZ Standard, feasibility and key challenges, and questions on the ease of use and clarity of the documentation. It is not consulting on the standard criteria, which was covered by the previous consultation in Q1 2021.

For support in understanding the SBTI’s draft requirements, the SBT process more widely or any other queries on the journey to net zero please contact Tim Crozier-Cole, Head of ‘Aim for Zero’ Corporates.