Market participants can expect the initiative’s proposals to offer guidance on setting targets for emissions reduction and decarbonisation.
By Paul A. Davies, Michael D. Green, and James Bee
On 12 January 2021, the Science Based Targets initiative (SBTi) published its “SBTi Climate Action in 2022” proposals (the 2022 Proposals), highlighting the areas that the organisation is seeking to work on and develop throughout 2022. The SBTi is a partnership between the CDP (formerly the Carbon Disclosure Project), the UN Global Compact, the World Resources Institute, and the World Wide Fund for Nature, which seeks to mobilise the private sector to reduce its carbon footprint by defining, promoting, and verifying best practices in corporate emissions reduction strategies in line with the goal of the Paris Agreement to limit global temperature increases to 1.5°C above pre-industrial times.
The SBTi continued to grow rapidly throughout 2021, with more and more companies setting SBTi-aligned or verified targets and stakeholders increasingly expecting corporate climate commitments and targets to be aligned with SBTi. As a result, the 2022 Proposals, by identifying the key areas which SBTi is seeking to develop this year, may considerably impact a large number of companies looking to set climate targets.
The key aspects of the 2022 Proposals are as follows:
The SBTi enables companies in almost all sectors to set and have verified SBTi-aligned targets, but sets specified guidance for companies in certain sectors to reflect the fact that energy transition and global decarbonisation will proceed at different rates among different sectors. The 2022 Proposals reflect the work that the organisation views as most pressing in progressing the sector guidance over the coming year, in particular:
- Financial Institutions – In 2021, the financial sector SBTi guidance was released and nine financial institutions set SBTi-aligned targets. The work in this key sector will continue in 2022, with the release of a Net-Zero Foundation Paper for financial institutions expected in March. The SBTi views this paper as the first step in developing a Net-Zero Standard for Financial Institutions, which will be launched ahead of COP27 in November.
- Steel and Cement – A key aim for the SBTi in 2022 is to offer sector-specific guidance, pathways, and target-setting methods in the steel and cement sectors, which are widely acknowledged to be challenging to decarbonise in the short to medium term. Public consultation processes for both sectors will be launched for key stakeholders to provide insight and feedback ahead of formal guidance documents to be released either later in 2022 or 2023.
- Forest, Land, and Agriculture (FLAG) – On 18 January, the SBTi opened a public consultation to provide feedback on its draft FLAG sector guidance and target-setting tool. Following the consultation period, the SBTi hopes to publish the final guidance — including target validation criteria, sector-specific target-setting methods, and a target-setting tool — in March 2022.
- Other Sectors – The SBTi has also indicated that it will continue work in a number of other sectors in 2022, including aviation and maritime, buildings, and chemicals. Notably, there was no mention of work in relation to guidance for the oil and gas sector in the 2022 Proposals. Oil and gas is, at present, the only industry that is not able to set SBTi-aligned targets, and SBTi had previously indicated that work in relation to oil and gas sector guidance was underway.
Scope 3 Target Setting Project
As discussed in Latham’s ESG in 2022: 10 Things to Look Out For blog post, the increasing focus on reporting greenhouse gas inventories through programs such as the SBTi has led to increasing scrutiny of the challenges and issues that can arise when companies report indirect emissions throughout their value chain (known as Scope 3 reporting). The difficulty in obtaining accurate data, the propensity for emissions to be double counted, and the discretion companies have in relation to the categories of Scope 3 emissions that are reported, often means that Scope 3 reports are an inappropriate means to compare performance between peer companies.
The SBTi recognises that the practice of Scope 3 reporting and target setting has evolved significantly since the SBTi began validating targets in 2016. It has therefore committed to undertaking a comprehensive review of its Scope 3 target-setting methods and criteria in 2022 to ensure alignment with best practices and reflect on lessons learned by companies over the past six years. The SBTi hopes that this work will be finalised by the end of the year.
Measurement, Reporting, and Verification (MRV) Framework and Protocol
The SBTi has indicated that it will launch an MRV Framework towards the end of 2022, which will seek to provide a standardised and robust mechanism to track the progress of companies that have made SBTi-aligned targets against those targets. The SBTi will appoint an expert advisory group to assist with the development of the framework throughout 2022.
As it has done in previous years, the SBTi has committed to producing a progress report on its successes and challenges from 2021, which will be published by the end of Q1 2022.
The 2022 Proposals will be of interest to a wide variety of market participants given the increasing popularity of science-based emissions reductions target setting and the SBTi’s impact in that area. In particular, companies in sectors such as steel, cement, and finance can expect progressively updated guidance on target setting throughout the year.
Latham & Watkins will continue to monitor developments in relation to the SBTi throughout 2022.