Defining the Net-Zero Future for Business

December 1, 2021

In October 2021, The Science Based Target Initiative (SBTi) published its long-awaited Corporate Net-Zero Standard, aiming to provide guidance and tools that companies need to set science-based net-zero targets. To help build a bold, but practically feasible framework, our experts at Schneider Electric participated in the various rounds of public consultations, communicating the challenges we hear first-hand from our clients developing net-zero plans. Let’s explore some of the most important elements of the new net-zero standard and how this will impact corporate climate targets.


Contributed by: Elena Cernov,
Sustainability Consultant, Schneider Electric Energy & Sustainability Services

 

Why is a net-zero standard needed?

In the 2018 IPCC special report on “Global Warming of 1.5C”, climate change scientists mentioned the importance of reaching a net-zero emissions state to limit global temperature rise to at least 1.5oC. Since then, the IPCC has reinforced its stance on the importance of reaching net-zero emissions with an assessment report released in 2021 that was described as a ‘code red for climate action’. Hear our climate experts discuss the implications of this report for businesses and climate goals.

This code red from the world’s top climate scientists has reverberated throughout the business community. Already more than 600 companies have committed to reaching net-zero in the scope of their engagements with the Science Based Target initiative (SBTi) and its Business Ambition for 1.5C campaign.

Although organizations have been committing to reach net-zero in the long term, there was a clear discrepancy on how they understood and interpreted the state of net-zero. Net-zero has often been conflated with carbon neutrality or criticized and labeled as greenwashing.

This lack of a standardized approach allowed for a multiplicity of targets claiming to be net-zero but differing widely on various dimensions, such as:

  • Scope of the emissions reductions – targets addressing CO2 emissions only; all greenhouse gases; inclusion of biogenic emissions, etc.
  • Boundary of activities covered – operations only; including the company’s value chain; avoided emissions, etc.
  • Strategy for emissions reduction – absolute reduction of emissions; negative emissions; avoided emissions; sustainable finance; use of offsets; carbon storage and capture; nature-based solutions, etc. 
  • Timeline – focus on near-term action or only on long-term action.

A final, but critical element left undefined was the level of deep decarbonization achieved through emissions abatement required before starting to neutralize the residual emissions. Therefore, there was an urgent need to develop a net-zero standard to not only make the different pledges comparable but also hold companies accountable for the use of the net-zero promise.

Why SBTi?

The Science Based Targets Initiative is not the only institution that took on the task to define a net-zero standard, and it will most likely not be the only global standard used to approve net-zero targets. However, the SBTi is a widely recognized leader in the space and is the best reference available today for how a net-zero state will take shape in the business community.

The SBTi is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). The main goal of SBTi is to show companies how much and how quickly they must reduce their greenhouse gas (GHG) emissions to prevent the worst effects of climate change, by providing science-based guidance and tools for target setting.

SBTi secured its place as a credible and transparent framework for setting targets by using a set of robust tools based on climate science, verifying the data and target-setting ambition, and requiring companies to report on their progress on an annual basis.

What are the key details of the SBTi Net-Zero Standard?

The new Net-Zero Standard defines the key requirements for a company to be able to claim that they have achieved a state of net-zero emissions. The key criteria for setting and reaching a net-zero target according to the SBTi’s Corporate Net-Zero Standard are:

  • The target is set on all 3 scopes – in addition to deep decarbonization in a company’s own operations, net-zero targets must also account for supply chain emissions (Scope 3, as defined by GHG Protocol).
  • The total level absolute emissions reduction – a company must reduce emissions by 90-95% across its supply chain by the target year compared to the base year. Further sectoral guidance and absolute emissions reduction targets are to be provided soon.
  • The boundary of the emissions reduction target – Long-term net-zero SBTs for Scope 1 and 2 must cover at least 95% of emissions and Scope 3 targets must cover 90% of emissions (compared to 67% for a near-term SBT).
  • Timelines – The targets must be set both for near-term (5-10 years) and long-term (no later than 2050) timescales.
  • Eligible pathways – Both absolute and intensity targets are acceptable as net-zero targets. In the case of a net-zero physical or economic intensity target, it is expected that a company will reach a 97% reduction by 2050 at the latest. 
  • Guidance on biofuels – A new recommendation regarding biofuel certification says that companies using or producing biofuels for transport should support their bioenergy GHG accounting with recognized biofuel certifications. 
  • Required ambition – For long-term scope 3 targets, the ambitions are increased to 1.5oC compared to the well-below 2oC trajectory that is allowed for the near-term targets.

How will the Net-Zero Standard affect companies that already have SBTs?

The new Net-Zero Standard will significantly affect the carbon strategies of companies planning to follow the new criteria. The main points of impact are:

SCOPE 3

The biggest difference between the existing science-based target setting framework and the new Net-Zero Standard is the scope of deep decarbonization, which now represents a minimum of 90% of total value chain emissions by 2050. This means that companies that excluded up to 33% of their Scope 3 emissions in their near-term target setting will have to decrease the amount of excluded emissions to no more than 10% when setting subsequent targets.

Inventory building and tracking for Scope 3 is one of the most challenging parts of setting value chain emissions targets. Increasing its scope will have a significant impact on data collection and carbon strategy management for many companies. Moreover, moving from a scope of 67% of value chain emissions (Scope 3) to 90% might require companies to include the inventory categories that may have been previously excluded.

TARGET TYPE AND YEAR

Supplier and customer engagement targets are not allowed under the new Net-Zero Standard. Companies that have such targets will have to develop absolute or intensity reduction targets for the long-term target.

In the previous version of the SBTi criteria, the minimum ambition for Scope 3 physical intensity targets was a 2% linear annual reduction with no increase in absolute emissions. The ambition has been updated to a 7% compound reduction to align with the well-below 2oC scenarios, which translates into an absolute reduction of 97% by 2050.

Near-term science-based targets are target year-dependent, while long-term science-based targets are target year-independent. This means that the rate of a company’s near-term emissions reduction target will be informed by how close the target year is, but the long-term reduction target will not depend on the target year. All companies are required to reduce their emissions by 90% by 2050 or sooner regardless of the moment in time when they decide to set net-zero targets.

When companies reach their near-term target date, they must calculate new near-term science-based targets to serve as milestones on the path towards reaching their long-term science-based target. Companies will have to engage regularly with the SBTi in order to define and validate each of the interim targets.

FEASIBILITY OF EXISTING NET-ZERO TARGETS

The SBTi is aware that some companies committed to a net-zero target before the Net-Zero Standard was made public. They encourage companies to self-assess their readiness and maturity to perform in line with the science-based net-zero definition and increase action accordingly. In certain circumstances, companies with existing targets may need to move their target year further into the future in order to guarantee success, as long as it is not beyond 2050.

The extra effort that will be required of companies to achieve an SBTi-compliant net-zero target will depend largely on the level of ambition that had been set previously. The higher the ambition, the easier it will be for the company to adjust to the new requirements.

What are the steps to setting and getting a net-zero target validated?

  1. Choose a base year. Companies that have already set near-term science-based targets must use the same base year for their long-term science-based target. Companies are not allowed to set net-zero targets without near-term and long-term targets.
  2. Choose a target year. Because the ambition of long-term science-based targets is target year-independent, companies should begin by choosing an eligible target year that is not later than 2050.
  3. Get on the books with SBTi. In order to get a net-zero target validated by the SBTi, a company will have to book a validation timeslot via the SBTi online booking system. The reservation system is currently on a waiting list, as SBTi will start validating net-zero submissions in January 2022.
  4. Complete the net-zero submission form. After booking a timeslot, companies will have to fill in the net-zero submission form which, according to the SBTi, will be published at the end of 2021. When completed submissions forms are received by SBTi, the team will reach out with the next steps including contracting and payment to begin validation. The net-zero validation service will cost $9,500 USD.

More details on the process and submission form should be available at the end of 2021 or the beginning of 2022. Companies that partner with an experienced advisor will gain the benefit of streamlining the process, making sure targets are likely to be approved by SBTi, and ensuring that no steps or deadlines are missed.

Grey areas - what still needs to be defined?

Though the Corporate Net-Zero Standard and additional documentation provided by SBTi covers a wide range of topics and elements of a company’s net-zero trajectory, it still leaves some open questions that are to be addressed in the upcoming months and years.

  • Supplier engagement - Further guidance is in development on Scope 3 target-setting methods and approaches to enable a net-zero value chain. The SBTi plans to provide more support to companies through a specific follow-on project, as well as through a Supplier Engagement Toolkit which will be released in late 2021.
  • Reductions beyond the value chain - The new Net-Zero Standard includes a clause on the “Beyond value chain mitigation” recommendation. This includes activities that avoid or reduce greenhouse gas emissions and those that remove and store greenhouse gases from the atmosphere. The SBTi is exploring models to incentivize this in a credible and robust way.
  • FLAG (Forest, Land, and Agriculture) – FLAG target setting will eventually become a requirement for companies with significant land sector emissions after the GHG Protocol Land Sector and Removals Guidance is published. Although FLAG target-setting guidance has not been finalized, the SBTi expects that companies that work with timber, pulp and paper, wood, food production from agricultural and/or animal sources, food and beverages, food services, food retailing or companies with significant FLAG-related emissions (especially in the Scope 3 category of Purchased Goods and Services) will be required to set a FLAG-specific target, separate from its target(s) for non-FLAG emissions. It is important to note that FLAG science-based targets are to be set separately from science-based targets that cover emissions from energy and industrial processes. Consequently, mitigation of FLAG emissions cannot be used to meet non-FLAG targets.
  • Target follow-up and accountability – The SBTi will develop a measurement, reporting, and verification (MRV) framework to ensure transparency and accountability around the progress and achievement of science-based emission reduction and net-zero targets.
  • Continued sector-specific guidance – The SBTi is still developing sector-specific net-zero pathways for energy supply, transport, industry (including cement and steel), buildings, and others with significant FLAG emissions. These guidance documents will be available on the SBTi website once released. 
  • Insetting – The Net-Zero Standard acknowledges the importance of insetting, also referred to as supply chain interventions. As this issue has not been fully addressed in the GHG Protocol process, the SBTi recommends a conservative approach at this time. Further work is ongoing to standardize the definition of insetting/supply chain interventions and establish clear accounting methodologies. Until there is greater clarity, the SBTi will assess insetting on a case-by-case basis during the target validation process.

The new Net-Zero Standard provides a robust description of what a net-zero state for a company should look like. It raises the bar on the ambition of GHG reduction goals to deliver the required reductions needed to limit temperature rise to the 1.5oC threshold. Although some questions are still unanswered, the Standard will definitely play an important role in defining corporate decarbonization in this decade.  

Join the leading group of businesses taking on the net-zero challenge. Explore our interactive guide to Basic, Better, and Best frameworks to understand what it will take to get your organization on the path to net-zero.

 

Resources:

1. https://sciencebasedtargets.org/net-zero#background-resources

2. https://sciencebasedtargets.org/resources/files/SBTi-Net-Zero-Standard-Event-slides.pdf

3. https://sciencebasedtargets.org/resources/files/Net-Zero-Standard.pdf

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