Reasons to be cheerful part 2: The Science Based Target Initiative

The Science Based Target Initiative (SBTi) is an independent entity that assesses and approves company emissions reduction targets. Assessing whether a company has a Science Based Target (SBT) or an SBTi target is a simple, accessible way of measuring the commitment of individual companies to the Paris Agreement, an international treaty on climate change, which was signed in 2016. Specific guidance must be followed to achieve external verification, thus giving legitimacy to a net zero target with this accreditation.

A key reason why SBTs are favoured is they contain an interim aim, not just a distant, “net zero by 2050” proclamation. Typically, this is a halving of emissions within a decade of the starting year, usually resulting in a decline of about 6% per year. This is important because, due to the cumulative impact of historic emissions, we have a limited time left to try and prevent the worst of climate change. Therefore, acting in the near-term matters most.

The number of companies now seeking or receiving validation is over 9,322 as of 18 October. This extraordinary demand for corporate decarbonisation standards and target validation services has prompted a major scale-up in SBTi’s operations.

The SBTi is now a UK charity, following the dissolution of the original structure owned by the Carbon Disclosure Project (CDP), the UN Global Compact, the World Resources Institute and the World Wide Fund for Nature (WWF).

Charitable status will allow it to benefit from two $18 million donations, one from the IKEA Foundation and the other from the Bezos Earth Fund. They will help fund a pipeline to create specific standards in six high-impact sectors, including apparel, automotives, and oil and gas as well as support the scale-up in demand for their services. 

SBTi has created sector-specific guidance to encourage some of the most carbon intensive areas of the global economy to set targets. This is because there are huge differences in carbon intensity between sectors: a cement company or utility business may generate Scope 1 and 2 carbon emissions (see glossary) of over 1,000 or even 2,000 tonnes per million dollars of revenue, whereas an insurance company may just produce a tonne using the equivalent measure. Therefore, targets need to be tailored to each sector to be appropriate and relevant.

Setting a future target for the proportion of portfolios invested in companies with SBTs, by a date on or before 2030, is potentially a positive and dynamic approach to measuring a portfolio’s alignment with the Paris Agreement. Given the range of companies already with verified targets, plus the long list who have committed but not yet submitted, it is likely that the widespread adoption will enable reasonable diversification for portfolios across a range of sectors.

A YouGov survey of corporate executives in SBTi-committed businesses was conducted in 2018 to assess the impacts on companies with targets. A series of benefits were highlighted by the respondents. 

Severn Trent 
The company’s carbon emissions are largely from electricity consumption. It has been investing in creating their own alternative energy capacity and are now the largest producer of renewable energy from food waste in England and Wales. In addition, they own a diverse portfolio of renewable energy production facilities including solar parks, wind turbines, and three hydro-electric turbines. According to their latest sustainability report, in total they produce enough renewable energy to power 91,000 homes and their SBTi target was approved in 2019.

RWE 
The German utility is transitioning its business model away from fossil fuels. It is now Europe’s third-largest renewables player and the second-largest offshore wind provider globally. Their SBTi target was confirmed in May 2023.

CRH
For CRH, the Irish building materials giant, there is a strong internal focus on improving and promoting energy efficiency. In 2022, they spent over $2 billion on energy.¹ In their latest annual report, they say there is a direct benefit to the company to continuously drive energy efficiency and improve energy performance.

The use of low-carbon waste and by-products from other industries along with other low-carbon raw materials is a key lever to reduce the carbon footprint of their products and costs simultaneously. In March 2023, CRH’s revised carbon reduction ambitions were validated by the SBTi equating to a 30% reduction in absolute carbon emissions by 2030 from 2021.

Given that many of their processes are highly energy intensive but nevertheless critical to economic development, this is clearly very important for them to collectively meet climate related goals.

The SBTi recently announced that they would be considering allowing a specific type of offset, known collectively as Environmental Attribute Certificates, to be put against corporate scope 3 (see glossary) targets during their planned review of their net zero standard later this year.

This is in response to feedback where the main reason given by companies for not submitting a target was excessively restrictive Scope 3 requirements. If adopted following their rigorous review process, this may pave the way for more companies to find it possible to submit SBTi targets.

1. We can inform clients of how their portfolio invested in equities, corporate bonds and most collective investments align with SBTi targets, though it is not possible to produce this for government bonds as it is a corporate commitment.
2. We measure the percentage of our rated equities and collective investments that are, or invest in, SBTi-committed companies. This will allow us to understand the degree to which our investments are addressing climate policy risks. As of December 2023, 55% of our rated companies had SBTi targets, with an average equivalent figure of 31% for our rated collective investment funds.
3. We are using SBTis as a focused means of engagement to encourage investee companies that do not currently have a validated target to change. In 2023 we identified the top 20 emitting companies in the three most carbon intensive sectors of energy, materials and utilities. We focused on those companies that either did not have an SBT, were not disclosing data to the Carbon Disclosure Project (CDP), or both. We have now received close to a full complement of responses. Our follow up meetings have involved detailed discussions of the merits of increasing disclosures and overcoming impediments to external target setting.

If you have any questions about this article, your own financial plan or investment strategy, speak to your usual Evelyn Partners contact, book an initial consultation online or call 020 7189 2400.  

1. CRH.com; Solutions for a sustainable future, 2022

Past performance is not a guide to future performance.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

The value of an investment may go down as well as up and you may get back less than you originally invested.