Companies looking to reduce greenhouse gas (GHG) emissions in line with international efforts to keep global warming below 1.5°C consider science-based targets (SBTs) as business-critical. More than 850 companies have committed to setting SBTs under the Science Based Targets Initiative (SBTi) and over 380 companies have approved SBTs.
SBTi aims for science-based target setting to become standard business practice by 2020, and there is certainly a compelling business case attached to SBTs. They provide an evidence-based foundation for targeted action on emission reductions that maximizes return on investment. Companies should view undertaking a commitment to set an SBT as a hugely beneficial exercise, helping identify best opportunities to deliver continuous improvements on energy efficiency and renewables in areas that may otherwise be overlooked.
This is a new area of focus for companies. There are many challenges involved in not only setting such targets, but ensuring they get approved. Setting an SBT demands significant time and effort – it almost certainly requires capital finance. SBTs can drain company resources if not approached in the right way. Companies also face reputational risks to consider if they set an SBT but fail to meet it.
What is a science-based target?
Put simply, SBTs specify how much and how quickly companies need to reduce GHG emissions in order to avoid a 1.5°C global temperature increase, compared to pre-industrial levels. By allocating a fair share of the required global emissions limit to an individual company, SBTs provide a clear pathway for a company to achieve future business growth while remaining below the 1.5°C limit. Because SBTs are aligned with the objectives of the Paris Climate Agreement, they act as a mechanism for companies to deliver consistent and meaningful emission reductions year-on-year.
Why set science-based targets?
The Intergovernmental Panel on Climate Change (IPCC) bases SBTs on latest climate science data, which defines carbon limits and the consequences of excessive emissions. As such, these targets are considered highly credible. As SBTs are designed to limit global warming to 1.5°C, they enable companies to future-proof operations by preventing the worst impacts of climate change such as extreme weather, economic volatility and supply chain disruption – unlike conventional carbon targets which may fall short of the level of reductions required for climate mitigation. In time, SBTs should allow a company to accurately assess its decarbonization progress based on economic productivity, carbon intensity or a combination of both.
What is the business case?
Emission reduction targets are a clear driver for financial performance; they encourage operational efficiencies, reductions in raw material inputs and lower energy consumption. Because SBTs are so ambitious they act as a transformative lever for change, helping to spur innovation in low-carbon products, technologies and services. This is essential as companies look to de-link economic growth and productivity from increased emissions.
Committing to SBTs not only helps safeguard future profitability, but provides companies with a long-term competitive advantage in their markets. For example, evidence shows that companies demonstrating leadership on climate action are more profitable. A CDP study of 500 S&P industry leaders found that organizations actively managing and planning for climate change secure an 18 percent higher return on equity or investment versus non-committed peers.
Importantly, SBTs can improve access to capital as targets give investors greater visibility and assurance of what a company is trying to achieve. Investors and financial institutions continue to demand more disclosure on sustainability reporting and assess carbon risks in portfolios. As companies with approved SBTs are required to report their emissions annually, they benefit from greater transparency and the enhanced reputation it brings.
SBTs also enable companies to prepare for future climate regulation and policy so they better respond to changes in laws or jurisdictions. This includes carbon pricing mechanisms such as taxes or emissions trading schemes. Forty countries and more than 20 cities, states and regions already use carbon pricing mechanisms, and 13 percent of annual global GHG emissions are now covered by pricing schemes. The World Resources Institute estimates that almost a quarter of global GHG emissions will soon be regulated by government carbon pricing. Companies opting-in to climate mitigation strategies ahead of future regulatory requirements have opportunities for differentiation. They can prescribe their own implementation steps and mitigate risk against future carbon constraints.
The popularity of SBTs has exceeded all expectations, with an average of two companies joining the SBTi each week. As their uptake increases, setting an SBT will become more of an expectation of companies looking to set the standard for global climate leadership.
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