Setting Science-Based Targets: A Technical Guide to the SBTi Methodology

Zero Standard, providing a roadmap for implementation and alignment with global frameworks.

• Methodological Rigor: SBTi requires companies to align their emissions reduction targets with the 1.5°C goal of the Paris Agreement, moving away from "intensity-only" targets toward absolute reductions in most sectors.
• Scope 3 Centrality: For the majority of organisations, Scope 3 emissions represent over 70% of the total footprint; SBTi mandates comprehensive value chain coverage if Scope 3 exceeds 40% of total emissions.
• The Net-Zero Standard: The framework distinguishes between near-term targets (5-10 years) and long-term net-zero targets (by 2050 at the latest), requiring a minimum of 90% absolute reduction before residual emissions can be neutralized.
• Sector-Specific Pathways: The methodology provides tailored pathways for high-impact sectors such as power generation, cement, and forest, land, and agriculture (FLAG), ensuring that targets reflect the unique decarbonisation potential of different industries.
• Regulatory Convergence: Alignment with SBTi is increasingly viewed as a proxy for compliance with the climate disclosure requirements of the ESRS (E1) and IFRS S2, facilitating streamlined reporting for multinational entities.

Why It Matters

The transition to a low-carbon economy represents the most significant structural shift in global markets since the Industrial Revolution. For finance, audit, and risk professionals, science-based targets provide a standardized metric to assess "transition risk"—the risk that a company’s business model will become unviable as carbon prices rise and regulations tighten.

Without a science-based approach, corporate climate targets often suffer from "ambiguity bias," where vague goals lead to accusations of greenwashing and potential litigation. The SBTi framework provides a common language for investors to compare the decarbonisation trajectories of different firms within the same sector. Furthermore, as the cost of capital becomes increasingly linked to ESG performance, companies with validated science-based targets often secure more favorable terms in green financing and sustainability-linked loans.

From a governance perspective, setting an SBTi-validated target forces a cross-functional integration of sustainability data into financial planning. It requires procurement teams to engage with suppliers, operations teams to invest in energy efficiency, and executive boards to oversee long-term capital expenditure (CAPEX) shifts. In essence, the SBTi methodology transforms climate change from a reputational issue into a fundamental operational and financial discipline.

The Standard / Framework in Detail

The SBTi methodology is built upon the Greenhouse Gas (GHG) Protocol Corporate Standard. It operates on the principle that targets must represent a company’s "fair share" of the remaining global carbon budget.

1. Near-Term vs. Long-Term Targets

The SBTi Corporate Net-Zero Standard defines two distinct phases of decarbonisation:

• Near-Term Targets: These cover a 5-to-10-year period from the date of submission. They are designed to catalyze immediate action. For most companies, this involves a minimum linear annual reduction of 4.2% for Scope 1 and 2 emissions to align with a 1.5°C pathway.
• Long-Term Targets: These define the state of the company by 2050 (or sooner). For most sectors, this means reducing emissions by at least 90% compared to the base year. The remaining 10% (residual emissions) must be permanently neutralized through carbon removal technologies.

2. Scope Coverage Requirements

The boundary of a science-based target is critical. The SBTi requires:

• Scope 1 and 2: 95% coverage of all emissions.
• Scope 3: If Scope 3 emissions are 40% or more of total emissions, a near-term target must cover at least 67% of Scope 3. For long-term net-zero targets, this coverage requirement increases to 90%.

3. Target Setting Methods

There are three primary methods for calculating targets:

4. The Role of Offsets and Neutralization

One of the most misunderstood aspects of the SBTi is the role of carbon credits. The SBTi is explicit: carbon credits (offsets) do not count toward the achievement of near-term or long-term science-based targets. They are encouraged as "beyond value chain mitigation" but cannot be used to meet the 90% reduction requirement. Only at the point of reaching net-zero can the final 10% of residual emissions be "neutralized" using high-quality removals.

Key takeaway

"The SBTi Net-Zero Standard is the world’s first framework for corporate net-zero target setting in line with climate science. It provides the guidance and tools companies need to show consumers, investors, and regulators that their net-zero targets are achievable and consistent with limiting global warming to 1.5°C."

Practical Applications

Implementing the SBTi methodology requires a phased approach that integrates technical carbon accounting with strategic business planning.

Baseline Development and Data Integrity

The first step is establishing a robust GHG inventory. This requires moving beyond high-level estimates to primary data, particularly for Scope 3. For a manufacturing firm, this might involve life cycle assessments (LCA) of key products. For a financial institution, it involves calculating "financed emissions" using the PCAF (Partnership for Carbon Accounting Financials) standard.

Modeling Decarbonisation Levers

Once the baseline is set, companies must identify how they will achieve the required 4.2% annual reduction. This involves:

1. Energy Efficiency: Upgrading HVAC systems, LED lighting, and optimizing industrial processes.
2. Electrification: Switching from gas boilers to heat pumps and transitioning corporate fleets to electric vehicles (EVs).
3. Renewable Energy Procurement: Utilizing Power Purchase Agreements (PPAs) or onsite solar to eliminate Scope 2 emissions.
4. Supply Chain Engagement: Working with "Tier 1" suppliers to set their own science-based targets, thereby reducing the company's Scope 3 footprint.

Financial Integration

Targets must be reflected in the company's Long-Range Plan (LRP). This includes allocating CAPEX for energy transitions and potentially implementing an internal carbon price to shadow-price the cost of emissions in investment decisions.

Industry Examples

Example 1: Global Consumer Goods (FMCG)

A major European consumer goods company (archetypal of Unilever or Nestlé) faced the challenge of a massive Scope 3 footprint, primarily from agricultural raw materials. By adopting the SBTi FLAG (Forest, Land, and Agriculture) guidance, they set a target to reduce absolute Scope 1, 2, and 3 emissions by 50% by 2030.

Action: They implemented a "Supplier Climate Programme," providing technical support to 300 key suppliers to help them measure and report their own emissions. Lesson: In Scope 3-heavy industries, the target is not just an internal goal but a mandate for supply chain transformation.

Example 2: Heavy Industry (Cement)

A global cement manufacturer used the Sectoral Decarbonization Approach (SDA). Because cement production involves unavoidable process emissions from the calcination of limestone, an absolute contraction of 90% is currently technologically impossible without Carbon Capture and Storage (CCS).

Action: The company set a physical intensity target (kg CO2 per tonne of cementitious material) aligned with the SBTi 1.5°C cement pathway. Lesson: Sector-specific pathways are essential for "hard-to-abate" industries to remain competitive while aligning with science.

Example 3: Technology and Software

A US-based software-as-a-service (SaaS) provider focused primarily on Scope 2 (data centers) and Scope 3 (purchased goods and services).

Action: They committed to 100% renewable energy by 2025 and set a "Supplier Engagement Target," where 80% of their suppliers by spend must have science-based targets by 2027. Lesson: For low-intensity industries, the focus shifts from operational changes to procurement policy and influence.

Regulatory Implications

The SBTi methodology is no longer just a voluntary framework; it is becoming the technical backbone of mandatory climate disclosures worldwide.

• IFRS S2 (Climate-related Disclosures): The International Sustainability Standards Board (ISSB) requires companies to disclose their climate targets and whether those targets are informed by international agreements. SBTi alignment is the most common way to satisfy this requirement. IFRS S2 Standard
• ESRS E1 (Climate Change): Under the EU’s Corporate Sustainability Reporting Directive (CSRD), companies must disclose their GHG emission reduction targets. The ESRS explicitly references the need for targets to be based on "scientific evidence" and aligned with the 1.5°C goal. EFRAG ESRS Standards
• GRI 305: The Global Reporting Initiative’s standard for emissions is often used in conjunction with SBTi to provide the qualitative narrative around how targets are met. GRI 305: Emissions
• IAASB (ISSA 5000): As climate disclosures become mandatory, they must be audited. The International Auditing and Assurance Standards Board is developing ISSA 5000, which will require auditors to verify the underlying data of science-based targets. IAASB ISSA 5000
• TCFD: The Task Force on Climate-related Financial Disclosures (now integrated into ISSB) established the "Metrics and Targets" pillar, for which SBTi is the primary implementation tool. TCFD Recommendations
• SBTi Official Resources: The primary source for all methodology updates, including the Corporate Net-Zero Standard and sector-specific guidance. SBTi Resources