SBTi - carbon credit -Reuter commentary

Why the SBTi’s proposal to include carbon credits is on the right side of climate history 

Maria Mendiluce & Mandy Rambharos 

April 24, 2024 

 Industry Insight from Ethical Corporation Magazine, a part of Thomson Reuters.

 The recent statement from the board of the Science Based Targets initiative (SBTi) that it will consider recognizing environmental attribute certificates, including carbon credits, for abatement purposes in tackling value chain emissions, marks a significant milestone in the global battle against climate change. 

 This is a bold step that will help accelerate corporate climate action around the world. 

 The world faces a stark reality: thousands of companies have now made commitments to cut their emissions in half by 2030 and reach net zero by 2050. Yet the money hasn’t followed. While the number of companies committed to SBTi targets increased by more than 500% from 2018 to 2023, annual corporate climate finance increased only 5% during this same period, from $183 billion, opens new tab to $192 billion. 

 This disconnect is further reflected by the fact that fewer than half of S&P 500 companies reporting to CDP are on track to meet their stated climate targets. And according to research by Accenture, just 18% of companies are on track to reach net zero by 2050. 

Meanwhile, 2023 was the hottest year to date, with temperatures shattering global records. The scientific evidence is telling us that something in the current system is not working. The delta between corporate climate ambition and action is compromising progress at a time when we can least afford it. 

While global climate investment totaled over $1 trillion in 2023, more than $5 trillion will be needed annually by 2030 if we are to reach net zero by 2050, according to the IMF. 

Of this, roughly $2 trillion annually is needed for emerging and developing countries to enable the deployment of clean technologies and foster a just and equitable transition that promotes socio-economic development. 

 This climate finance gap cannot be filled without drastic increases in private capital, which some estimates suggest will need to account for at least  $2.61 trillion per year. 

We consistently hear from companies about the immense value they place on SBTi and their earnest desire to fulfill their commitments. 

However, they also express concerns about the existing rules and ongoing uncertainty regarding what “counts” towards their targets, hindering their ability to invest and take meaningful action today. 

One of the most significant challenges lies in how companies estimate emissions, set targets and demonstrate progress towards Scope 3 emissions. These emissions, from suppliers and the use of products, are on average 11 times higher than a company’s direct emissions and are the most critical factor in determining whether a company reaches its target.

However, more than 94% of companies currently use generic spend-based emission factors to estimate their Scope 3 emissions. In practice, this makes it nearly impossible for the current system to effectively measure and reward companies for the direct impact of their investments to reduce value-chain emissions. 

In a time when action is paramount, entrenching ourselves in a system that fails to recognize immediate action makes little sense. We need mechanisms that incentivize action and reward progress in real time.

Potential reforms to SBTi’s guidance to companies could expand the arsenal of science-based tools available, particularly in accelerating progress on Scope 3 emissions. 

It's not a carte blanche for companies to use any instrument at their disposal, but a strategic – and limited – addition to their climate toolkit.

Take for example sustainable aviation fuels – a critical yet nascent innovation that must scale rapidly to support the phase-out the use of fossil fuels globally. It is a high-integrity – and expensive – solution, currently costing companies upwards of $600 per tonne. 

While an increasing number of companies are willing to invest, they have made it clear they need assurance that these investments will contribute to their existing commitments to deploy capital at scale. Currently this assurance does not exist within SBTi, meaning companies are withholding their investments and the movement to phase out fossil fuels is being slowed. 

Crucially, this isn't a race to the bottom. While debates may arise around whether this shift accelerates decarbonization efforts, the system will be equipped with guardrails to ensure this change leads to additional climate action, and that companies adhere to the mitigation hierarchy by first prioritizing direct actions they can take to avoid and reduce emissions. 

In fact, the announcement should foster a race to the top by providing avenues for recognizing high-quality, innovative mitigation efforts that have the potential to transform whole systems and industries. 

SBTi has committed to publish, by July 2024, a draft analysis of how different tools – for example, sustainable aviation fuel, zero-emissions freight or carbon credits - can be used responsibly, with the right guardrails and limits. 

This clarity and confidence is essential for companies eager to deploy their investments, and to build momentum in the global movement to phase out fossil fuels. 

As Devon Lake, head of net zero strategy at Meta reflected in a recent webinar: “Here’s the reality of corporate decarbonization; to make the type of investments we need to make in order to reach net zero by 2030, we need clarity right now on how to measure and take credit for these investments.” 

The potential evolution of SBTi signifies a pivotal moment in the fight against climate change. By providing companies with the tools they need to navigate complex landscapes and drive meaningful change, SBTi can chart a course towards a more sustainable future. 

María Mendiluce is CEO of the We Mean Business Coalition, which brings together seven leading non-profit organizations in sustainability. She has 25 years of experience in corporate climate action and sits on the executive board of the Science Based Targets initiative. María took an active role in the founding of the Mission Possible Partnership, a multi-sector decarbonization initiative, and co-founded the SME Climate Hub, an SME-focused net-zero initiative. 

 Mandy Rambharos is Vice President, Global Climate Cooperation, ad leads EDF's work to promote more ambitious and effective global climate action under the Paris Agreement by directing multilateral engagement, including at the U.N., G20 and G7. She also leads EDF’s strategy to promote well-designed carbon pricing and markets that support the transformation toward a low-emissions future, while improving the well-being of marginalized communities. 

SOURCE: https://www.reuters.com/sustainability/sustainable-finance-reporting/comment-why-sbtis-proposal-include-carbon-credits-is-right-side-climate-history-2024-04-24/