Many companies are intrigued about setting science-based targets, yet are unsure about what this means in practice. So, we spoke to South Pole's Charles Henderson to learn more.
The number of companies basing their sustainability goals in climate science has grown dramatically in the past year — with Iron Mountain and Target among the latest players to set science-based targets (SBTs) that have been approved by the Science Based Targets initiative (SBTi), which assesses and validates corporate climate goals.
As Charles Henderson, Head of Corporate Climate Risks and Opportunities at carbon finance consultancy South Pole, points out, many companies are intrigued about setting a SBT, yet also unsure about what this means in practice and how it works. So, we picked his brain to learn more.
How does setting science-based targets work in practice?
Charles Henderson: In a nutshell: the process of SBT-setting requires an understanding of what is (and is not) included, having a clear business case and resource plan; and, often, applying for an official endorsement of the targets set.
The first step is to understand the difference from other sustainability targets. SBTs are not like traditional corporate goals — they are based on the most recent climate science and so aligned with an external trajectory. This is in contrast to most other sustainability targets, which are usually set according to business drivers. This is what makes SBTs so robust and impactful, but also challenging to meet and manage.
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You should have a clear idea of your company’s business case for setting an SBT before committing. This will depend on investor and stakeholder demands, competitor benchmarking, and your company’s strategic positioning. It should be set only when the investment and resource implications of the required carbon pathways are understood. Only then should you seek alignment from key stakeholders in your company.
Once there is buy-in from the C-Suite and other stakeholders, a decision should be made about external endorsement. The first “official” step is signing a commitment letter to the SBTi. Once signed, you will have up to 24 months to develop and submit your targets for official validation.
Whilst many high-profile companies have committed to SBTi endorsement, others have set targets that aren't validated. But this in itself is already a big accomplishment — having companies shift the way they set targets to better align with climate science.
However, external validation by the SBTi can make a lot of sense due to its communication and reputational gains, which help build trust with stakeholders. But achieving validation can also be a challenge: Submission comes with a cost and there is a risk that your targets may not pass validation. That is one reason why many companies choose to get support from an external advisor — to ensure targets are ambitious and achievable, but that they pass validation criteria.
And then the real challenge begins, which is defining ways for how to achieve your targets.
Once a company has set its SBT, how can it be achieved?
CH: There is no “one solution fits all,” since the best approach to implementing an SBT also depends on the company and the industry it operates in. It’s different for a restaurant chain, that should foremost look at their suppliers; than for an IT firm, that most likely worries more about energy consumption. It’s about understanding your CO2 impact first and identifying key “emission hotspots” before starting to design targets and acting on implementation:
Start with your Scope 1 and 2: Most companies start by looking at their scope 1 and 2 emissions, specifically at their energy consumption. It is comparatively easy to get the necessary data and saving energy is not only good for the planet but also for the bottom line. Switching to renewable energies has become much easier and more worthwhile over the last 10 years. From using RECs to onsite generation, there is a multitude of possibilities, and companies can also get external help to find the solution that fits them best.
Tackle Scope 3 emissions with a robust plan: It is incredibly difficult to get comprehensive emissions data that delivers actionable supplier insights, allowing you to measure the impact of your supply chain activities. We also hear that companies struggle to account for improvements in their scope 3 inventory for purchased goods, which they would need in order to demonstrate progress against science-based targets. South Pole’s team of supply chain experts works on the ground every day to implement sustainability action in agricultural supply chains. We know how challenging it can be to start the dialogue between a company and their suppliers around these topics
Project management 101: Achieving the SBTs also requires dedicated resources to ensure good project management. A company’s data must be consistently reviewed and documented. Many companies would rather choose to work with a trustworthy partner on this who has experience in working with sustainable supply chains.
Which companies can be considered as leaders on SBTs and why?
CH: At first, big international companies with large carbon footprints approached the SBTi. Nowadays, setting these targets is becoming mainstream practice for companies of all sizes and sectors: To date, over 500 companies have either set or agreed to set them. Interestingly, many of these are leading food or beverage companies, as an article in Global Policy Journal points out, counting big brands such as Mars, Nestlé, Unilever, General Mills, Kellogg’s, Danone, McDonald‘s and PepsiCo.
The speed at which these consumer goods companies have committed to science-based targets is a trend to follow: Despite the fact that the majority of their emissions are in their supply chains, where it is most difficult to achieve reductions, tackling them makes a lot of (business) sense. When the agricultural produce that they rely on is under real threat due to climate change, setting ambitious strategies to reduce and mitigate the effects achieves multiple objectives.
Stakeholder demands are another key reason. Consumers are becoming more conscious of the production process and the environmental impact of food and beverages. Six years ago, Oxfam launched a campaign that targeted the top ten global food and beverage manufacturers and pushed them to consider the indirect emissions from their supply chains (Scope 3 emissions). Over the course of the campaign, the NGO also suggested the use of science-based targets to do so and this pressure seems to have paid off.
The SBTi has announced major updates for this year. How should corporates adapt to these changes?
CH: Companies can now set and evaluate targets that align with a 1.5°C warming trajectory as of mid-October. This was a necessary update after the latest IPCC report reduced the maximum safe threshold from 2.0ºC, and outlined the urgent action we all need to take to avoid the disastrous effects of climate change.
So, what does this update mean in practice?
More ambition: The most relevant change that companies should be aware of is how the increased level of ambition works in practice. At a minimum, Scope 1 and Scope 2 targets need to now be consistent with the level of decarbonization that is necessary to keep global temperature to a median warming of 1.6-1.7°C, and pursue more ambitious efforts towards a 1.5°C trajectory.
Target recalculation: While not yet obliged to do so, companies with approved targets can also use this tightening of the threshold as an opportunity to review their targets and align with the new criteria. To ensure consistency with the most recent climate science and best practices, targets must be reviewed — and if necessary, recalculated and revalidated at least every five years. Companies that have set SBTs before or during 2020 will have a mandatory review of targets in 2025.
This update means that companies must be prepared to invest more time in setting and achieving their targets, and to truly accelerate their ambition. On the upside, communication to stakeholders becomes more meaningful as all targets will be more closely aligned with the latest climate science — and this shows true thought leadership and commitment.
South Pole is hosting a webinar on 21st of May to walk companies through this update and what it means in more detail. Click here for more information.
There seems to be a very strong case for SBTs. Why haven’t all companies set SBTs yet? What’s holding them back?
CH: In our experience, there could be three different reasons:
Convincing business case. The SBTi argues that the business case for SBTs consists of four key assumptions: that setting an SBT will (a) increase regulatory resilience, (b) boost investor confidence, (c) drive innovation and (d) improve profitability and competitiveness. But these assumptions could be challenged by critical voices in a company, depending on how it is set up. The strength of the argument for regulatory resilience depends on the pressure a company is feeling. If a given country is, for instance, unlikely to ever introduce carbon pricing, there is less incentive for companies based there to set SBTs. While investor pressure has increased over the past few years, in many cases it is still not strong enough. And when it comes to innovation, profitability and competitiveness, the market still needs more data and case studies as proof points. In short: at this stage, only those companies are likely to set SBTs that either feel regulatory or investor pressure or that are real thought-leaders and innovation catalysts. But that’s ok — the ones who act will be the businesses who will pioneer the SBT space and build the case for others to follow.
Difficulty of setting targets and uncertainties about the process. The process of setting the right target can be complex and involved. Even in big companies with highly trained CSR units, it can be helpful to get external support to break down all the available information.
In the past, companies might have also feared that setting SBTs could ultimately backfire if targets were not deemed ambitious enough. It’s understandable that companies would rather set their own targets, which they can control, than setting an SBT and being reproached for not doing enough. But the SBTi is actually working to keep up with the latest climate science, as the recent update shows. Against this backdrop, now is actually a great time to start thinking about setting an SBT.
How do you see corporate SBT-setting developing over the next 5 years?
CH: We expect the SBT trend to accelerate substantially, especially given the growing grass-roots movements and overall momentum for climate action across the globe.
Since officially launching in June 2015,
550+ companies have formally committed to set science-based targets;
200+ companies have approved targets; and
around 4 companies are joining the Call to Action every week.
Big developments we foresee:
Supply chain data can make or break the success of following through with SBTs: Science-based targets have led to a big change in the way companies manage their supply chain emissions. The expectation has shifted from understanding and disclosing to driving action and impact. For this, companies need accounting mechanisms that capture the impact of their supply chain engagement activities. This means that instead of solely making assumptions based on estimates and averages, companies have to engage with suppliers in order to capture data from specific activities within their value chain, activities that they can influence. Based on this information, companies can develop effective supply chain strategies and supplier roadmaps to achieving their ambitious emission-reduction targets. There are many levers that a company can adopt to reduce their supply chain emissions, including product design, preferential sourcing, supplier engagement and even direct intervention upstream on key raw materials, through established mechanisms such as insetting. But all of these levers hinge on good supply chain data.
In the regulatory space, the TCFD recommendations will continue to drive action: Pressure to disclose against the Task Force on Climate-related Financial Disclosures‘ recommendations will increase significantly over the next five years. The TCFD set up recommendations around consistent climate-related financial risk disclosures by companies in order to provide information to investors, lenders, insurers and other stakeholders in 2017, and the initiative is gaining momentum fast. Setting SBTs is one of the measures already listed within TCFD recommendations on Metrics and Targets.
Manage supply chain risks: Now, SBTs can play a decisive role when it comes to how corporations manage their climate-related supply chain risks. For example: If extreme weather events are more likely to hit a company’s supply chain, making sure that suppliers take not only actions to mitigate but also adapt to climate change becomes an integral part of ensuring a company’s future. Setting SBTs allows you to understand your supply chain in great detail, and to make plans for securing continuity and reducing supply chain disruptions.
SMEs will be a force to be reckoned with: While we expect big corporates to lead the way, the combined innovation and ultimate impact of smaller companies will help make a real difference.
1 The new validation process for 1.5C alignment, launched in April, will come into effect as of mid-October 2019. This means that all submissions received by the SBTi prior to October 15th 2019 can be assessed against both the previous and the current criteria version.