Setting climate targets correctly – the potential of science-based targets (SBTs) in the context of CSRD

published on 11 November 2024 | reading time approx. 3 minutes

Update: The European Commission's Omnibus Initiative is expected to postpone the sustainability reporting obligation by two years and reduce the mandatory scope of application to companies or groups with more than 1,000 employees. We will keep you regularly informed about all the latest ESG news via ESG News.

Many companies are currently working on setting up a holistic climate protection strategy. In our three-part series, we would like to show how companies can develop scientifically sound and realistic targets as part of this strategy and how they fit in with the reporting standards of the CSRD (Corporate Sustainability Reporting Directive).

As one of the first disclosure points in the E1 environmental standard of the ESRS (European Sustainability Reporting Standard), the “transition plan for climate protection” not only sets out clear requirements for the creation of a climate strategy, but also examines the extent to which the company's targets contribute to limiting global warming to 1.5 °C and are therefore compatible with the Paris Climate Agreement. This raises the question of how companies can define both ambitious and achievable climate protection targets. Science-based targets (SBTs) offer a possible answer as well as concrete tools for implementation.

The process of achieving targets fundamentally includes other topics, such as financing and change processes, but these are not covered here.

What are SBTs?

SBTs are science-based targets that are consistent with the level of decarbonization required by the CSRD (Corporate Sustainability Reporting Directive) to limit the global temperature increase to below 1.5°C or below 2°C compared to pre-industrial levels. The Science-Based Targets Initiative (SBTi) aims to support companies in defining such emission reduction targets by providing standards and methods. The initiative is the result of a collaboration between the Carbon Disclosure Project (CDP), the United Nations Global Compact (UNGC), the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF).

The SBTi provides a clear framework and technical support to encourage the development of ambitious reduction targets based on the latest scientific evidence. A team of experts provides independent assessment and validation of the targets. In this way, the SBTi helps to ensure that companies can achieve net zero emissions by 2050 at the latest. The SBTi thus represents a globally unique, independent benchmark for companies' more ambitious climate protection efforts.

What are the benefits of SBTs?

SBTs help companies set clear, measurable and achievable targets to reduce greenhouse gas emissions. Companies that go through the specified target validation process receive comprehensive feedback to align with future sustainable growth.

By operating more sustainably and communicating their commitment to climate protection, companies can gain a competitive advantage. SBTs can also create new incentives for innovation and strengthen long-term corporate ESG strategy, sustainability and resilience. Transparent and ambitious climate targets according to SBTs strengthen the trust of investors and customers. Greater efficiency and optimized use of resources allow climate change-related risks to be managed more effectively, thereby strengthening the company's resilience.

More and more companies around the world are joining the initiative. 2023 saw a new record number of companies with validated targets: 4205 companies in a total of 76 countries. Compared to the previous year (with 2080 companies), this represents an increase of 102%. 2,125 of these companies set targets for the first time in 2023. Progress in adopting SBTs has been particularly strong in developed economies, led by Japan, the UK and the US.

Who can use SBTs?

The SBTi aims to support companies from all sectors and of all sizes that want to make a meaningful contribution to combating climate change in the implementation of SBTs. The central instrument is the cross-industry Corporate Net-Zero Standard. The SBTi also develops sector-specific standards, methods and tools to meet the specific requirements and challenges of individual sectors. Individual guidelines with corresponding adaptations already exist specifically for the forestry, agriculture and farming sector (also known as FLAG), the construction sector and for financial institutions, which either apply instead of the Corporate Net-Zero Standard or significantly supplement it. Further specific standards, particularly for the energy sector, are currently in the development phase.

Small and medium-sized enterprises (SMEs) also have the option of setting targets in accordance with the Corporate Net-Zero Standard. Alternatively, SMEs can also use the specially simplified SME route. The targets for Scope 3 emissions in particular pose a challenge due to a lack of resources and expertise, which is why some simplifications have been provided for this.

Conclusion

The requirements of the CSRD increase the pressure on companies to concretize their efforts in the area of climate protection in a clear strategy. An important step here is the definition of measurable and ambitious targets. Science-based targets offer companies an effective tool for developing these goals. They demonstrate a high level of ambition to their stakeholders and underline that they take their climate targets seriously.

In the second part of our series, we show the importance of medium and long-term targets and the corresponding criteria for target setting.

Rödl & Partner provides comprehensive support to companies in all steps of developing a CSRD-compliant climate strategy. Please contact us if you have any questions!