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The Science Based Target initiative (SBTi) is a nonprofit voluntary organization established in 2015 whose objective is to help create emissions-reduction plans and targets for private-sector companies that align with the goals of the 2015 Paris Climate Agreement. SBTi data is a widely used tool to assess the progress of companies on reducing their emissions that in turn is used by both institutional investors and asset managers to assess portfolio-, sector-, and company-level commitments and progress. The growth of climate targets over time for listed companies has steadily increased, although it has plateaued in recent years.
Guidance on how companies commit and set targets can be found on SBTi’s website; the key steps involve registration, an optional letter establishing a company’s intent to set a science-based target, and submitting targets developed using SBTi’s framework to the organization for approval.
Once the commitment letter has been submitted, companies have two years to deliver the targets for approval. Once the target has been approved, it can be communicated to stakeholders, with annual updates on the progress made. Data on company commitments and target-setting is publicly available on SBTi’s website.
Targets can be short term (e.g., reduce current emissions by x% in 5-10 years), or long term (reaching net-zero by 2050). There are two approaches to setting targets:
- Absolute contraction approach: This is the most popular and entails reducing absolute emissions by x% and/or reducing emission intensity by x%.
- Sectoral decarbonization approach: For a limited number of sectors, SBTi has developed detailed guidance on target setting, but there are notable sectors, like oil and gas, where the guidance is still being developed.
This example showcases a large U.S.-based health care equipment firm:
The firm has an SBTi-approved long-term target to reach net-zero greenhouse gas emissions across the value chain by 2050 by reducing Scope 1, 2, and 3 emissions by 90%. The same firm also has an approved short-term target to reduce absolute Scope 1 and 2 GHG emissions 42% by 2030, and Scope 3 GHG emissions from purchased goods and services, upstream transportation and distribution, business travel, and use of sold products 25% by 2030. The percentage reduction is based on 2022 emissions.
Scope 1 refers to direct emissions owned and controlled by the reporting entity; Scope 2 refers to indirect emissions from purchased electricity, energy, etc., from a utility; Scope 3 reflects indirect emissions that occur in the value chain.
SBTi Data Considerations
While SBTi has seen increasing adoption by companies, it is not without issues.
- Gaps in adoption: SBTi private sector adoption has significant gaps in coverage by company capitalization and geography. Larger capitalization firms and European firms have higher adoption rates.
- Lack of Sector-Level Guidance: As mentioned earlier, SBTi has not developed sector-level guidance for every sector. Notable is the Energy sector, which accounts for the largest proportion of total greenhouse gas emissions, particularly Scope 3 emissions.
- Use of Offsets in Achieving the Targets: In early 2024, SBTi’s board changed its guidance and allowed companies to use offsets to meet their emissions targets. A carbon offset is a reduction in, or removal of, carbon dioxide or other greenhouse gas emissions from the atmosphere to compensate for emissions made elsewhere. Historically, companies could not buy environmental credits (offsets) and claim reductions in emissions without reducing their operational emissions. Critics argue that carbon-offset markets suffer from green-washing and overstate the impact on emissions reduction. After sustained pressure, SBTi withdrew the new guidance, and announced the setting of new guidance on carbon offsets later.
- Not a regulatory body: SBTi is a voluntary organization. While it charges for SBTi’s validation services, it is dependent on other nonprofits and philanthropic entities for its funding. This can lead to a conflict of interest between its target-setting objectives and the interests of corporate donors that are seeking SBTi’s target validation.
At present, there is a lack of required climate risk disclosure regulation globally, and SBTi helps fill a regulatory void, but as a nonprofit, the organization has resource constraints with respect to areas such as staffing.
How Can Institutional Investors Use SBTi Emissions Target Data?
For institutional investors interested in setting GHG emissions-reduction targets, SBTi target-setting allows asset owners and investment managers to assess their portfolio companies in their journey toward GHG reduction. According to a study published by MSCI (“Assessing Science-Based Corporate Climate Target-Setting”), companies with SBTi commitments were found to be more transparent in target-setting practices and initiatives than those without. Major conclusions of this study were:
- SBTi standards serve as a useful indicator for investors looking to assess the likelihood that corporate climate targets will be met.
- The target-validation process under these SBTi standards could help address growing concerns of green-washing.
- On average, companies that had committed to SBTi standards were more likely to have disclosed value chain emissions and other emissions target-level data.
- Companies with SBTi commitments also appeared to have made further progress on integrating emissions-reduction technologies into their product portfolios and in accelerating the use of renewable energy in their operations.
- The study further concluded that “rigorous third-party validation processes (like those under SBTi) offer scope to enhance the transparency of corporate decarbonization strategies and to improve the likelihood that the companies can achieve such climate targets.”
There are many ways to look at SBTi’s data, be it from a portfolio lens, sector lens, or company lens. A few use cases are highlighted below:
- Assessment tool for evaluating asset managers’ climate solutions or transition strategies versus benchmark and peers
- Tracking portfolio decarbonization with a real-world emissions-reductions focus as opposed to a divestment focus
- Helping financial institution clients with a portfolio coverage approach to reduce their Scope 3 emissions
Using SBTi Data to Evaluate a Portfolio
This chart provides a snapshot of how SBTi data can provide a lens into a portfolio’s emphasis on reducing emissions.
A U.S. large cap value manager is plotted to see its percent and weighted average rankings against the Callan Large Cap Value Peer Group of managers and the S&P 500 index. The following observations can be drawn from this chart.
- The S&P 500 Index has higher levels of SBTi approvals than commitments on both a percent and weighted-average basis. This is attributable to the index being more concentrated in larger cap and technology names that already have targets vetted by SBTi.
- The value manager has a lower percentage of SBTi-approved companies (both on an absolute and weighted-average basis) than the index because certain value sectors that the manager invests in, such as Energy and Financials, do not yet have full guidance on target setting, particularly as related to Scope 3 emissions.
This chart only provides a top-level view in the context of emissions target-setting. In conjunction with metrics such as environmental scores and carbon footprinting, SBTi data can provide a more holistic view of a portfolio’s climate transition journey. While there is a great deal of regulatory flux with respect to corporations’ embrace of emissions-reduction targets, SBTi provides a reasonable framework for interested parties, albeit with data limitations.
Disclosures
The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to any affiliate firms, or post on internal websites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.
