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The ESG Interview: No Substitute for Reducing Emissions

The Science Based Targets initiative’s Alberto Carrillo Pineda plans to “accelerate the domino effect of corporate climate ambition”.

“With the science behind us, we have the tools we need to build a better, greener society – if only we take bold action today.” This was the response of Alberto Carrillo Pineda, the recently appointed managing director of the Science Based Targets initiative (SBTi), to Monday’s release of the first part of the sixth climate assessment by the Intergovernmental Panel on Climate Change (IPCC).

2021 is already the year of net-zero commitments and raised ambitions. Pineda says there has been a “surge” in companies seeking to reduce their greenhouse gas (GHG) emissions using SBTi’s target-setting frameworks, technical expertise and assessment processes. The IPCC report and November’s COP26 will ensure interest in science based target setting only accelerates.

“Our aim is to accelerate the domino effect of corporate climate ambition and to mainstream corporate action that aligns with the 1.5 degree limit of the Paris Agreement,” he says.

Despite SBTi’s success since 2015 in helping firms – and more recently financial institutions – deliver emissions cuts, Pineda is clear-eyed enough to acknowledge that not enough companies are yet on net-zero paths, nor have many aspirants fully grasped the full implications of following the science.

“Momentum around net zero has grown massively,” he says, but admits some firms have tried to jump on the bandwagon without reassessing their business models, citing examples of companies seeking to ringfence certain emissions or heavily utilise offsets.

“But any company that is serious about transitioning is likely to get their targets approved. It is a good indicator of whether a company has a good enough target,” says Pineda, a co-founder of SBTi, and also Director of Science Based Targets at CDP, one of its founding bodies, alongside the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature (WWF).

Rising demand, rising expectations

SBTi is bulking up its resources and lengthening the horizon of its targets – including the introduction of a new Net-Zero Standard – in response to growing demand from companies for guidance on achieving net-zero emissions. Pineda is also keen to extend its geographic reach.

“With the very tight carbon budget we have at the global level, the reality is that everyone needs to get to net zero soon. That gives a little bit of room for a slightly slower pace for those that have contributed less to global warming so far, but not a lot. The end goal is still the same for companies in different geographies and sectors.”

Pineda says the biggest changes need to come in the sectors and geographies that will see most growth and activity in the coming decades, contrasting rates of infrastructure, construction and industrial activity in Europe with the much higher levels expected – and needed – in developing markets in Africa and southeast Asia.

“On the one hand, we need to decarbonise existing assets,” says Pineda. “On the other, we need to make sure all the new assets coming online in emerging economies are ‘net zero ready’ or aligned. It doesn’t make sense to build new assets that will either become stranded assets or need to be retrofitted very soon.” Net zero strategies need to inform capital allocation to new assets, he suggests.

Stronger signals

This year’s uptick in government-level net-zero commitments will help to further stimulate uptake of science based target setting by companies across jurisdictions. Pineda gives only a qualified welcome to pre-COP26 declarations by major economies.

“Unless these commitments are embedded in policy frameworks that inform the context in which companies operate over the next 10 years, they do not send such a strong signal,” he says.

“Across most of the world, we don’t yet have ambitious enough 2030 targets. But that would be the strongest incentive that countries could send to companies, and the best way to enable them to deliver their targets.”

Although Pineda is highly aware of the need to encourage more science based target-setting in developing markets, he knows there is much more to be done in rich countries too.

SBTi recently conducted an assessment of the stock indexes of G7 countries which showed that listed firms are still not collectively on a path to limiting climate change to two degrees. This suggests, says Pineda, that the failure of a small number of large emitters to set targets is undermining the efforts of others, often supported by SBTi.

“We still have a massive gap, even in developed countries. The largest emitters face the most difficult barriers to decarbonise. And that’s where we need the stronger actions from policymakers and investors,” he says.

Investors are certainly increasing their efforts to drive change among the most carbon-intensive firms in their portfolios. Last week, ClimateAction 100+, which already focuses its engagement activities on the biggest GHG emitters, launched a sector-specific strategy by outlining investor expectations for steel manufacturers.

‘Following the science’

At a basic level, ‘following the science’ means gaining understanding through methodological analysis of the evidence. Evidence suggests that SBTi’s methods work, even if they have not yet set the whole corporate world on a net-zero trajectory.

By setting goals verified by SBTi, firms’ emissions reduction strategies are tied closely to the carbon budget and to scientific consensus on the actions needed to minimise climate change. This makes those goals meaningful – in terms of alignment to the goals of the Paris Climate Agreement, agreed unanimously by governments attending COP21 – and supportable by investors looking to limit the climate risks in their portfolios.

A recent of analysis found that 338 companies which set science based targets, in partnership with SBTi, collectively reduced their GHG emissions by 25% over the period 2015-2019. Typically, these firms reduced Scope 1 and 2 at a linear annual rate faster than required to meet a 1.5 degree-aligned scenario. This contrasts with an increase of 3.4% in global energy and industrial emissions over the same period.

Currently, more than 1,600 firms from 60 countries and 50 sectors have started the process of having emissions reductions targets set and validated by SBTi. A total of 844 firms have set their science based targets, while 704 are pursuing emissions cuts consistent with keeping climate change to 1.5 degrees above pre-industrial levels. This represents healthy growth since the end of 2020, when more than 1,000 firms were working with SBTi, already representing 20% of global market capitalisation, just under half of which had set approved targets.

Pineda would like to see more carbon-intensive firms joining the fold, but some already have. Danish energy company Ørsted has committed to reducing its emissions by 96% by 2023 compared with 2006.

Evolving with the evidence

SBTi’s approach has had to evolve both in line with scientific evidence and investor expectations. Initially, SBTi took a flexible approach to emission reduction plans, allowing firms to set targets consistent with keeping climate change to two degrees. This reflected the aspirational nature of the ambition to keep climate change to 1.5 degrees at the time of the Paris Climate Agreement.

Only with the IPCC’s 2018 report did the rigidity of the 1.5 degree limit become clear. Importantly, says Pineda, new scenarios were developed to guide target-setting.

With the majority of firms having set targets aligned with a two-degree rise, SBTi cautiously shifted to a ‘less than two degree’ ambition, while also launching a ‘Business Ambition for 1.5°C’ campaign in February 2019, starting with 28 pilot firms.

More companies switched the focus of their strategies to the tougher target; 1.5°C-aligned targets represent 66% of all submissions to the SBTi in the first half of 2021. In July, SBTi declared 1.5°C-aligned targets would now be regarded as a minimum, as part of a new strategy aimed at further increasing corporate ambition in reducing emissions.

According to SBTi’s latest Q&As, the new strategy means firms must aim to reduce Scope 1 and 2 emissions in line with a 1.5 degree scenario, with Scope 3 emissions cuts consistent with a rise “well below 2 degrees”. Further, plans should aim to meet temperature targets in 10 years, rather than 15. The changes will be included in SBTi’s V5.0 criteria version at the end of 2021, which comes into force next July.

New era for target-setting

The new strategy is designed to ensure SBTi consistently provides businesses with the “most robust target-setting framework” for aligning with climate science. This means harmonisation of target setting frameworks, more consistent scenarios and metrics, and a “different type of work to the technical work we have done in the past” in order to send a “consistent signal to companies and financial institutions”, according to a recent press release.

The new strategy includes the adoption of new governance and operational models to strengthen SBTi’s technical authority while providing a more structured and agile project management approach. This includes a new and independent technical decision-making body, or standards board, that will be responsible for technical components of SBTi’s certification framework, to help ensure the robustness of key technical decisions, including the selection of scenarios, target setting methods and the approval of new standards and revision of existing ones. It will also be responsible for harmonising SBTi’s approach with other similar initiatives.

The establishment of a standards board – independent from SBTi’s secretariat – partly reflects a need to scale up, industrialising and professionalising processes after six years of growth. Changes made in 2019 significantly reduced timeframes for target validation, but the new strategy will also see further investment in the secretariat – in terms of senior recruitment and technology – to ensure credible and efficient target setting at scale.

Operationalising net zero

While launching the ‘Business Ambition for 1.5’ campaign, SBTi started a research exercise to better understand the practical implications of reaching net zero emissions at the corporate level. The work anticipated this year’s rush of net-zero commitments, as well as their variety. As Pineda wrote in a recent blog, “not all net-zero targets are created equal.”

A foundation paper was published last year, followed by a consultation process eliciting 400+ responses. SBTi’s new Net-Zero Standard is currently being roadtested by corporates and is due to be officially launched in the run-up to COP26. The first net-zero targets will be validated next year.

The purpose of the Net Zero Standard, says Pineda, is to provide a framework for the whole journey, guiding a company’s long-term decarbonisation strategy, compared with setting more interim targets. The new standard, he says, is likely to be of particular value to firms in capital-intensive sectors with long-life assets and 30-year investment horizons.

The process for complying with the new standard is “very similar” to and integrated with existing SBTi target setting and monitoring processes.

Pineda says there has been “an evolution” in the standard following the consultation. Some responses reflected concern about over-reliance on off-setting and unproven negative emissions technologies, on grounds that targets could be met without emissions being sufficiently reduced.

“On the other hand, organisations working on nature conservation were interested in finding a way to leverage the momentum around net zero to incentivize financial contribution from companies,” he says.

But there was clearer convergence in one key respect. “Everyone realises today that there’s no shortcut for companies that need to reduce emissions. There’s no substitute for reducing emissions, neither negative emission technologies, nor nature-based solutions.”

Bright future

As such, Pineda says, SBTi’s Net Zero Standard needs to be “very strong” on ensuring companies reduce emissions in line with science, right up to the point at which they can claim to have reached net zero.

Pineda accepts that initiatives such as the Task force to Scale up Voluntary Carbon Markets and the Voluntary Carbon Market Integrity initiative are genuinely working to define credible offsetting and high integrity interventions. He sees the SBTi’s work on developing the Net-Zero Standard as “complementary” to these efforts.

“Our focus is on ensuring that net zero targets lead to decarbonisation in line with science; other initiatives can incentivise companies to go beyond that, leveraging finance for conservation or other environmental priorities.”

Carbon offsetting is “an important part of the equation at the global level”, he says. “But it’s not going to help companies transform towards a business model that is compatible with a net-zero economy.”

The IPCC report, he says, only made the path forward more clear. “If we are to have a bright future on our planet, more companies must commit to robust decarbonisation. Investors and businesses have the power to address the climate emergency.”

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