Setting Science-Based Targets: SBTi Methodology

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

Zero Standard, focusing on the distinction between near-term and long-term targets.

• Scientific Alignment: Targets are considered "science-based" if they align with the latest climate science necessary to meet the goals of the Paris Agreement—limiting global warming to 1.5°C above pre-industrial levels.
• Near-Term vs. Long-Term: Organizations must set near-term targets (5–10 years) to drive immediate emissions reductions and long-term targets to achieve deep decarbonisation of 90% or more by 2050 at the latest.
• Scope Coverage: The methodology mandates comprehensive coverage of Scope 1 and 2 emissions, with stringent requirements for Scope 3 (value chain) emissions if they represent more than 40% of the total footprint.
• Neutralisation vs. Abatement: The SBTi prioritises direct emission abatement over carbon offsetting. Neutralisation of residual emissions is only permitted after a company has achieved its long-term reduction target.
• Regulatory Convergence: The SBTi framework is increasingly integrated into mandatory reporting regimes, including the EU’s Corporate Sustainability Reporting Directive (CSRD) and the IFRS S2 Climate-related Disclosures.

Why It Matters

For finance and risk professionals, the adoption of SBTi-validated targets serves as a critical proxy for transition risk management. As carbon pricing mechanisms expand and institutional investors demand granular decarbonisation data, "greenwashing" has become a significant litigation and reputational risk. The SBTi provides a third-party validated methodology that moves beyond vague "net-zero" claims toward measurable, time-bound milestones.

Market capitalisation is increasingly tied to climate resilience. According to recent investor surveys, a validated science-based target is often a prerequisite for inclusion in ESG-focused funds and indices. Furthermore, the operational efficiency gained through the target-setting process—such as identifying energy waste in the supply chain—directly impacts the bottom line.

From a governance perspective, setting an SBTi target forces cross-functional alignment. It requires the Chief Financial Officer (CFO) to evaluate the capital expenditure (CAPEX) required for electrification, the Chief Procurement Officer (CPO) to renegotiate supplier contracts based on carbon intensity, and the Board of Directors to oversee long-term strategic pivots.

The Standard / Framework in Detail

The SBTi Corporate Net-Zero Standard is built upon the principles of the GHG Protocol. It distinguishes between four key components of a credible corporate climate strategy:

1. Near-Term Science-Based Targets

These targets cover a 5-to-10-year period from the date of submission. They are designed to encourage immediate action. For most companies, this involves a minimum absolute reduction of 4.2% per annum for Scope 1 and 2 emissions, consistent with the 1.5°C pathway.

2. Long-Term Science-Based Targets

These targets define the state of the company by 2050 (or earlier). For most sectors, this requires reducing emissions by at least 90% across all scopes compared to the base year. This acknowledges that some residual emissions may remain, but these must be kept to a minimum.

3. Beyond Value Chain Mitigation (BVCM)

While not a substitute for reaching targets, the SBTi encourages companies to invest in climate mitigation outside their value chains. This includes purchasing high-quality carbon credits or supporting forest restoration, though these actions do not count toward the 90% abatement requirement.

4. Neutralisation of Residual Emissions

Once a company has achieved its long-term reduction target, any remaining emissions (the final 10% or less) must be permanently neutralised through carbon removal and storage technologies.

Comparison of Target Types

Key takeaway

"The shift from 'net-zero' as a marketing slogan to 'science-based' as a technical requirement represents the most significant evolution in corporate governance since the introduction of standardized financial reporting. It moves the conversation from intent to impact."

Sector-Specific Pathways

The SBTi recognizes that some industries, such as power generation, cement, and aviation, face unique technological hurdles. Consequently, it provides Sectoral Decarbonization Approaches (SDA). The SDA allows for intensity-based targets (e.g., tonnes of CO2 per megawatt-hour) rather than absolute targets, provided they result in the same level of cumulative atmospheric protection.

Practical Applications

Implementing the SBTi methodology requires a robust data architecture. The process typically begins with a comprehensive GHG inventory, which must be audited for accuracy before submission.

Data Collection and Baseline Setting

Companies must select a representative base year. The SBTi recommends using the most recent year for which data is available, provided it is not an anomaly (e.g., 2020 due to COVID-19 disruptions). For Scope 3, companies often rely on spend-based modeling initially, transitioning to supplier-specific data as their maturity increases.

Marginal Abatement Cost (MAC) Curves

To make the business case for SBTi, finance teams should develop MAC curves. This tool ranks potential decarbonisation projects by their cost-effectiveness. For example, LED lighting retrofits often have a negative cost (they pay for themselves), whereas transitioning a heavy vehicle fleet to hydrogen may require significant subsidies or future technological breakthroughs.

Supplier Engagement

For many firms, Scope 3 emissions account for over 80% of their footprint. Practical application involves "Supplier Engagement Targets," where a company commits that a certain percentage of its suppliers (by spend or emissions) will set their own science-based targets within a five-year window.

Industry Examples

Example 1: Global Consumer Goods (Fast-Moving Consumer Goods)

A major multinational in the food and beverage sector committed to the SBTi Net-Zero Standard. Their primary challenge was Scope 3, specifically land use and agriculture.

• Action: They implemented a "Forest Positive" strategy, requiring all key suppliers of palm oil, soy, and paper to provide geospatial data proving zero deforestation.
• Lesson: Decarbonisation in the consumer sector is inseparable from biodiversity and land-use policy. Without addressing the "upstream" agricultural practices, their 1.5°C target would have been mathematically impossible.

Example 2: European Commercial Bank

A large financial institution focused on its "financed emissions" (Scope 3, Category 15).

• Action: The bank used the SBTi's Financial Sector Guidance to set targets for its mortgage and commercial real estate portfolios. They linked interest rates on corporate loans to the borrower's achievement of validated science-based targets.
• Lesson: The financial sector acts as a force multiplier. By mandating SBTi alignment for clients, the bank reduced its own Scope 3 risk while driving systemic change in the real economy.

Example 3: Heavy Manufacturing (Cement)

A global cement producer utilized the Sectoral Decarbonization Approach (SDA).

• Action: Recognizing that process emissions from calcination are hard to abate, they focused on Carbon Capture and Storage (CCS) pilots and the development of low-clinker cements.
• Lesson: For "hard-to-abate" sectors, the SBTi provides a realistic but demanding glide path that acknowledges technological readiness levels (TRL) while maintaining 1.5°C integrity.

Regulatory Implications

The SBTi methodology is no longer a private, voluntary standard; it is being woven into the fabric of global regulation.

• 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 third-party validation. SBTi is the primary reference for this requirement. IFRS S2 Official Site
• EU CSRD / ESRS: The European Sustainability Reporting Standards (ESRS E1) specifically require companies to disclose their GHG emission reduction targets and whether these are grounded in scientific evidence. The SBTi framework is the de facto method for complying with these disclosures. EFRAG ESRS E1
• TCFD / TNFD: The Task Force on Climate-related Financial Disclosures (TCFD) emphasizes the importance of metrics and targets. The Taskforce on Nature-related Financial Disclosures (TNFD) is now following suit, with SBTi working on "Science Based Targets for Nature." TCFD Recommendations
• SEC Climate Disclosure: While currently facing legal challenges in the U.S., the SEC’s proposed climate rule highlights the need for transparency regarding how companies define and track their climate targets.
• IAASB (ISSA 5000): The International Auditing and Assurance Standards Board is developing standards for sustainability assurance. Auditors will increasingly use SBTi criteria to verify the "reasonableness" of management's climate claims. IAASB Standards