Setting Science-Based Targets: SBTi Methodology

slug: setting-science-based-targets-sbti-methodology

zero requirements.

• Methodological Rigor: SBTi requires companies to set targets based on the latest climate science, ensuring that emission reductions are sufficient to limit global warming to 1.5°C above pre-industrial levels.
• Scope 3 Centrality: For most organisations, Value Chain (Scope 3) emissions represent over 70% of their footprint; SBTi mandates aggressive Scope 3 targets if these emissions exceed 40% of the total inventory.
• Net-Zero Standard: The Corporate Net-Zero Standard requires at least 90% absolute emissions reduction across all scopes by 2050, with only the final 10% addressed through permanent carbon removals.
• Regulatory Convergence: Alignment with SBTi provides a robust foundation for compliance with ESRS E1 (Climate Change) and IFRS S2, reducing the risk of litigation and greenwashing accusations.
• Strategic Resilience: Beyond compliance, science-based targets drive operational efficiency, foster innovation in low-carbon product lines, and lower the cost of capital by de-risking the business against future carbon pricing.

Why It Matters

The transition from "intent-based" reporting to "performance-based" reporting marks a pivotal shift in the ESG landscape. Investors and lenders are increasingly scrutinising the validity of corporate climate claims. Without a science-based foundation, corporate targets are often dismissed as marketing rhetoric, exposing firms to significant reputational and legal risks.

The SBTi framework provides a common language for decarbonisation. By using a standardised methodology, stakeholders can compare the climate performance of a multinational bank with that of a global manufacturer. This comparability is essential for the efficient allocation of capital in a low-carbon economy. Furthermore, as the IAASB (International Auditing and Assurance Standards Board) finalises ISSA 5000, the assurance of climate data will require the level of traceability and methodological soundness that only a framework like SBTi provides.

For the C-suite, setting a science-based target is a strategic defensive measure. It anticipates the inevitable tightening of carbon regulations and the expansion of carbon pricing mechanisms. By committing to a 1.5°C pathway today, organisations avoid the "cliff-edge" transition risks associated with delayed action, ensuring a smoother transition of assets and operations.

The Standard / Framework in Detail

The SBTi methodology is built upon the Greenhouse Gas (GHG) Protocol, but it adds a layer of prescriptive requirements regarding the pace and depth of reductions. The framework is divided into two primary components: Near-Term Targets and the Corporate Net-Zero Standard.

Near-Term Targets (5-10 Years)

Near-term targets are the immediate milestones that companies must reach to stay on track for the 2050 net-zero goal. These targets typically cover a period of 5 to 10 years from the date of submission.

1. Scope 1 and 2: Must align with a 1.5°C pathway. This generally requires a minimum annual linear reduction of 4.2%.
2. Scope 3: If Scope 3 emissions are 40% or more of total emissions, a Scope 3 target is mandatory. These can be aligned with "well-below 2°C" (2.5% annual reduction) or 1.5°C pathways.
3. Boundary: Near-term targets must cover at least 95% of Scope 1 and 2 emissions and at least 67% of Scope 3 emissions.

The Corporate Net-Zero Standard

Launched in late 2021, the Net-Zero Standard is the world’s first framework for corporate net-zero target setting. It addresses the "net" in net-zero by strictly limiting the role of carbon offsets.

• Abatement First: Companies must achieve deep decarbonisation of 90-95% before claiming net-zero.
• Neutralisation: The remaining 5-10% of "residual emissions" must be neutralised through permanent carbon removal and storage (e.g., Direct Air Capture or high-durability nature-based solutions).
• Beyond Value Chain Mitigation (BVCM): While not a substitute for internal reductions, SBTi encourages companies to invest in climate mitigation outside their value chains during the transition.

Comparison of Target Types

Key takeaway

"The Science Based Targets initiative has effectively ended the era of 'carbon neutrality' claims based solely on cheap avoidance offsets. True leadership now requires absolute deep decarbonisation across the entire value chain."

Practical Applications

Implementing SBTi methodology requires a cross-functional approach involving finance, procurement, operations, and sustainability teams. The process is not merely a reporting exercise; it is a fundamental redesign of how a company creates value.

1. Baseline Development and Data Quality

The foundation of any target is a high-quality GHG inventory. Companies must move beyond spend-based estimates for Scope 3 and engage suppliers to obtain primary data. This is particularly critical for categories like "Purchased Goods and Services" and "Use of Sold Products."

2. Sector-Specific Decarbonisation Pathways (SDA)

SBTi provides Sectoral Decarbonisation Approaches (SDA) for high-impact industries such as steel, cement, power generation, and aviation. The SDA allows companies to set targets based on physical intensity (e.g., tonnes of CO2 per tonne of steel) rather than absolute emissions, provided the intensity targets result in absolute reductions consistent with 1.5°C.

3. Financial Planning and CAPEX Alignment

Setting a target without a funded transition plan is a significant risk. Finance teams must integrate carbon prices into internal shadow pricing models and align Capital Expenditure (CAPEX) with decarbonisation goals. For example, a manufacturing firm might prioritise the electrification of thermal processes or the procurement of renewable energy through long-term Power Purchase Agreements (PPAs).

4. Supplier Engagement Programs

Since Scope 3 often dominates the footprint, companies are increasingly using "Supplier Engagement Targets." Instead of committing to a specific reduction percentage, the company commits that a certain percentage of its suppliers (by spend or emissions) will set their own science-based targets within a specific timeframe.

Industry Examples

Example 1: Global Consumer Goods (FMCG) - Unilever

Unilever was one of the early adopters of the SBTi Net-Zero Standard. Their approach is notable for its focus on the "Use of Sold Products" (Scope 3, Category 11). By reformulating laundry detergents to work at lower temperatures and concentrated formats, they directly reduce the energy required by consumers.

• Lesson: Decarbonisation often requires product innovation and changing consumer behaviour, not just operational efficiency.

Example 2: Heavy Industry (Cement) - Holcim

Holcim was the first global building materials company to have its 2050 net-zero targets validated by SBTi. Given the inherent process emissions in clinker production, Holcim’s strategy focuses on Carbon Capture and Storage (CCS) and the development of low-carbon "green" cement.

• Lesson: For hard-to-abate sectors, the 90% reduction requirement necessitates massive investment in nascent technologies and circular economy principles (e.g., using construction demolition waste as raw material).

Example 3: Financial Services - Standard Chartered

Financial institutions face unique challenges under the SBTi Financial Sector Standard. Their primary impact is "Financed Emissions" (Scope 3, Category 15). Standard Chartered has committed to reaching net-zero in its financed emissions by 2050, focusing on high-carbon sectors like power and mining.

• Lesson: For banks, the SBTi methodology serves as a portfolio management tool, guiding the transition of the loan book away from high-carbon assets toward green financing.

Regulatory Implications

The shift from voluntary to mandatory climate disclosure is rapidly accelerating. SBTi alignment is increasingly cited as a "safe harbour" or a best-practice benchmark in several jurisdictions.

• IFRS S2 (Climate-related Disclosures): The International Sustainability Standards Board (ISSB) requires entities to disclose whether and how they have set climate-related targets, including the use of science-based methodologies. IFRS S2 Standard
• EU CSRD / ESRS E1: The European Sustainability Reporting Standards (ESRS) explicitly require companies to disclose their GHG emission reduction targets and whether these are compatible with limiting global warming to 1.5°C. EFRAG ESRS E1
• TCFD (Task Force on Climate-related Financial Disclosures): TCFD recommendations, now integrated into IFRS, emphasise the importance of metrics and targets in assessing climate risk. TCFD Guidance
• TNFD (Taskforce on Nature-related Financial Disclosures): While SBTi focuses on climate, the Science Based Targets Network (SBTN) is expanding to include nature and biodiversity, following the TNFD framework. TNFD Framework
• SEC Climate Disclosure Rule: Although facing legal challenges in the US, the SEC’s proposed and final rules reflect a global trend toward requiring disclosure of climate targets and transition plans. SEC Climate Rule
• SBTi Corporate Manual: The primary source for all technical requirements. SBTi Resources