What the SBTi Net-Zero Standard Draft V2.0 updates could mean for corporate climate targets

In the past, companies have been able to set combined targets for scopes 1 and 2. Since most companies have more emissions in scope 2 than scope 1 and they could reduce scope 2 significantly by using market-based mechanisms, many have not been directly required to take action on scope 1.

In this draft, SBTi takes the stance that “reducing scope 1 emissions to a level consistent with global 1.5°C pathways with little to no overshoot is the primary responsibility of a company in its transformation towards a net-zero-aligned business model” and requires companies to set independent scope 1 emissions reduction targets.

Implementing decarbonization initiatives for scope 1 will be challenging for many companies, especially those that operate in leased facilities with limited operational control. One potential solution that SBTi is currently silent on, but might explore now that the first public comment period has closed, is the use of energy and commodity certificates that convey the environmental performance of activities within a company’s scope 1.

For example, fuel certificates establish the environmental or sustainability performance of a particular fuel and allow companies to make claims related to this fuel’s performance, even if they are not physically consuming that fuel. Though SBTi has not yet officially endorsed these tools, leading companies have already started using market-based mechanisms such as Renewable Thermal Certificates (RTCs) to reduce their scope 1 emissions when direct mitigation is not viable, and thought leaders such as the Center for Resource Solutions are providing recommendations for GHG accounting when using these scope 1 market-based mechanisms.

Following the heightened focus on scope 1 emissions, SBTi is increasing the ambition of scope 2 targets by requiring companies to set two independent scope 2 targets: one based on location-based emissions, and one based either on market-based emissions or zero-carbon electricity usage.

The mandatory inclusion of the location-based targets will be challenging for companies, especially smaller companies that have little influence over their local grids. On the flip side, the move from renewable electricity targets to zero-carbon electricity will allow companies more flexibility as SBTi remains technology agnostic and accommodates for grids where nuclear electricity is available.

Addressing scope 3 emissions continues to be the biggest challenge for companies on their decarbonization journeys, given the limited traceability and lack of control they have over activities in their value chains. Acknowledging these barriers, SBTi is introducing potential changes intended to make scope 3 targets more effective and actionable for companies, including more alignment targets and allowing the use of market-based mechanisms.

Alignment targets: Companies may be familiar with supplier engagement targets under SBTi’s current guidance; SBTi is placing greater emphasis on these alignment metrics, which now include share of procurement allocated to net-zero-aligned suppliers and activities, and share of revenue derived from net-zero-aligned products and services.

Market-based mechanisms: Where traceability to a company’s specific emissions sources is not possible or persistent barriers prevent mitigation at the source, companies will be allowed to use indirect mitigation approaches. This may include approaches such as sustainable aviation fuel (SAF) using a book-and-claim system to achieve targets related to jet-fuel emissions, or other Supply Chain Reductions (SCRs) that reduce within-value-chain emissions. Many organizations are already pursuing these mechanisms today knowing that they will be necessary to decarbonize, but lack guidance on exactly how to account for their impact with respect to their climate targets. SBTi’s draft guidance acknowledges the importance of market-based mechanisms and suggests that companies pursuing them today may have a leg up in the future. SBTi is consulting on the quality criteria relevant to these measures, and is clear that direct mitigation should always be prioritized above indirect mitigation when possible.

Other proposed scope 3 changes include new emissions coverage guidelines, a requirement to set different targets for pre-defined ‘emissions-intensive activities’, a requirement to set supplier engagement targets for tier 1 suppliers, and the removal of long-term scope 3 targets.

In the past, companies would validate their targets with SBTi, then be on their own to show progress against targets, update targets, and set new targets once they reached their first near-term targets. Now, SBTi is proposing a 5-year cyclical process, aimed at aligning with CSRD, that requires companies to assess progress at the end of their target timeframe using new pre-defined formulas and to set new targets that account for previous performance.

Additionally, SBTi will be performing ‘spot checks’ at any time throughout the target cycle to confirm a company’s conformity with the standard and maintain the integrity of the assessment process.

The movement to the cyclical process will boost integrity and help ensure that company’s near-term targets are pointing them in the right direction towards their long-term net-zero targets.

Carbon credits have always had a role in the SBTi net-zero standard, with procurement of all credits being optional through Beyond Value Chain Mitigation and removal credits being required once a company reaches their net-zero target year. However, this optionality and delayed action created a lack of near-term incentive for companies to accelerate procurement of carbon removals and provide much-needed finance to scale the carbon removals market.

This draft seeks to address this issue by introducing interim removal targets between now and the target year, proposing three different options for how this may be implemented. Additionally, SBTi will provide formal recognition for companies pursuing beyond value chain mitigation measures, further encouraging companies to take responsibility for ongoing emissions during their target period.

Other notable changes include a new company categorization framework, an option to align organizational and operational boundaries with consolidated financial statements, and more robust reporting requirements including transition plans and limited assurance from third-party verifiers.

These changes all support closer alignment with CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD), and recommendations from the UN High-Level Expert Group (HLEG).