The New Net Zero Standard: Corporate Challenges and Opportunities

Table of Contents

• Introduction
• Net Zero, Carbon Neutral, Carbon Positive… Terminology Overload?
• Who Is the SBTi and What Is the Purpose of the Net Zero Standard?
• How Does the Net Zero Standard Work?
• Committing to Reaching Net Zero Demonstrates Leadership but Should Not Be Taken Lightly
• How To Win the Race to Zero

As the world’s governments gather in Glasgow for COP26 to discuss how society can meet the Paris Agreement goals and reach Net Zero by 2050, a new standard on setting Net-Zero targets for the corporate sector has been released.

The new ‘Net Zero Standard’ established by the Science Based Targets initiative (SBTi) is a framework designed to enable companies to set robust and credible emission targets in line with what science considers to be ‘Net Zero’; in other words, targets aligned with what is needed by the planet, rather than what might be achievable by a particular company.

Specifically, the Standard defines:

• the amount of emission reduction a company needs to make (and by when) to limit global warming to 1.5°C, as set by the Paris Agreement;
• the type of offsets and the role they (and other mechanisms) can play in neutralizing emissions that are hard to, or that a company is unable to, reduce; and
• the nature of the claims a company can (and cannot) make concerning the term ‘Net Zero’ (note that the SBTi will independently validate a company’s targets against the Standard).

What does this mean for businesses?

• Greater clarity in the relatively new and often confusing space of corporate Net Zero emission target setting; and
• increased stakeholder confidence in the legitimacy of company climate targets through SBTi’s independent validation.

But it also means:

• Committing to making significant emission reductions across the whole value chain by 2050¹; and
• the ability to access (in the future) the carbon offset and climate finance market, which for many companies is unfamiliar territory.

Given that some elements of the Standard remain unclear and a number of the sector-specific guidance documents will not be released until late 2022, there is still some way to go before we have a full and comprehensive picture. Nonetheless, the Standard does provide much-needed clarity for corporates on what a robust Net Zero target should look like.

In this article we untangle some of the core concepts of the new emission Standard and explore the challenges and opportunities it will bring to companies setting emission reduction targets.

Net Zero, carbon neutral, carbon positive… terminology overload?

What do we mean by Net Zero? What is the difference between Net Zero and carbon neutral? Why has the SBTi produced a ‘Net Zero Standard’ rather than a ‘carbon neutral standard’?

There are a myriad of climate, carbon and emission reduction terms increasingly used (sometimes interchangeably) by organizations wanting to demonstrate their commitment to sustainability goals and climate action.

Whilst different, all the terms describe an ‘end state’ in which there is a theoretical ‘balance’ between Greenhouse Gases (GHGs) emitted by the organization (e.g., from fuels, energy use and raw materials sourced) and emissions associated with sequestration of carbon by (mainly) natural sinks (i.e., carbon removed from the atmosphere by, for example, trees).

As we are all aware, our economic activities are currently ‘out of balance’ with nature, with more GHGs emitted globally than are sequestered naturally, resulting in anthropogenic climate change.

To create balance, we need to reduce human-related GHG sources to absolute zero. However, ‘absolute zero’ is neither practical, nor technically or economically feasible—especially for the private sector.

Organizations can, however, achieve balance by reducing their emissions and using proxy instruments (such as offset credits from carbon sinks) to ‘neutralize’ hard-to-abate emissions.

This concept of ‘balance’ and the various degrees of emission reduction and neutralization for each of these terms are shown in Figure 1.

In simple terms, Figure 1 shows how companies achieve different types of ‘Future End States’ by pulling on different levers in varying amounts (and at different times).

Whilst complex GHG accounting rules are required, some key components to consider when setting a climate target include:

• the amount of emission reduction a company needs to make (and across which parts of its value chain);
• when the company intends to reach its ‘end state’ (i.e., the target year: 2030, 2050?); and
• the amount and type of instrument a company will use to ‘neutralize’ its residual emissions (which remain leftover at the target date)².

Who Is the SBTi and What Is the Purpose of the Net Zero Standard?

The SBTi was launched in 2015 as a collaboration by the CDP (formerly the Carbon Disclosure Project), the UN Global Compact (UNGC), the World Resources Institute (WRI) and the World Wildlife Fund (WWF). Its mission is to help companies set emission targets that are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement—limiting global warming to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.

The SBTi has built solid credibility in the climate action space, with over 2,000 companies (including big names such as Nestle, Unilever, Nike, and Apple) taking action with the SBTi to reduce their emissions in line with climate science.

Companies commit to setting a target, developing the target in line with the SBTi’s science-based criteria, submitting the target for validation, communicating it externally, disclosing progress in-line with target requirements regularly and neutralizing residual emissions at the target date (see technical descriptions below). The new Net Zero Standard released by SBTi in October 2021 builds upon and extends the foundations already laid out by the original emissions reduction standard.

See ENGIE Impact’s insights into setting science-based targets →

How Does the Net Zero Standard Work? What Are the Technical Requirements? What Does ‘Science-Based’ Targets Actually Mean?

The SBTi Net Zero Standard defines four pillars of a robust and credible long-term target.

The SBTi has historically sought to help companies define short-term targets through the adaptation of society’s global carbon budget to a company’s specific context. Capitalizing on its influence and legitimacy in the climate space, the initiative now seeks to standardize the landscape of companies’ long-term climate strategy through the following four pillars:

1. GHG emissions from all Scopes should be accounted for. A minimum of 90% of companies’ emissions should be covered by emission reduction targets, including all Scope 3 mandatory categories. For near-term targets, if Scope 3 emissions represent >40% of companies’ total GHG emissions, they should be included in the mitigation actions. If <40%, then Scope 3 needs only be included in long-term targets.
2. Only the most ambitious emission reduction pathways are acceptable. The emission reduction trajectories of all three Scopes must be aligned with a pathway that limits global warming to no more than 1.5°C by the end of the century. These mitigation pathways can be sector-specific (energy, steel, transportation, etc.) or apply to mixed sectors, based on the SBTi’s Absolute Emission Contraction (AEC) method. All pathways align to ambitious climate goals, requiring all sectors to reduce emissions by 90-100% by 2050, apart from the FLAG (Forestry, Land Use, and Agriculture) sector emissions which will have to be reduced by 80%.
3. Companies need to define a near-term and long-term trajectory. Companies, if they haven’t already done so, should define their target with a flexible near-term milestone, 5-10 years from the starting point/baseline year and aligned with a 1.5°C pathway. For long-term targets, the standard is clear: the Net Zero state should be achieved by no later than 2050.
4. Only high-quality and permanent removal offsets will be accepted. The Standard distinguishes the use of offsets en route to Net Zero—called compensation measures—and the financing of activities that remove CO₂ from the atmosphere once emission reduction requirements have been reached.

While the Standard only recommends compensation³ between now and Net Zero, it requires companies to use high-quality and permanent removal offsets when reduction targets have been reached.

What is meant by high-quality and permanence remains, however, to be defined by the Standard in later documentation.

The Net Zero Standard Defines When Companies Can Claim They Are Net Zero

The proposed Standard demonstrates a shift from the UN-inspired Net Zero definitions, which have mostly focused on the balance of emissions and sinks at a given time.

With the SBTi Standard, companies will only be able to claim they are Net Zero once they have achieved the target level of emission reduction (80-100%) and neutralized the remaining residual emissions. Until then, companies are considered en route towards Net Zero.

Committing to Reaching Net Zero Demonstrates Leadership but Should Not Be Taken Lightly

Committing to a Net Zero target engages companies in a highly ambitious and transformative pathway. Reducing CO₂ emissions by around 90% over the next 30 years is an essential but incredibly challenging goal, especially as 2050 is, in global terms, just around the corner. Before engaging on this path, companies should do two things:

1. Study the methodology most appropriate to their sector and ensure the associated guidance is final (according to the SBTi, only the mixed-sector pathway (previously Absolute Emission Contraction) and the power-generation pathway are available as of now). For many sectors, this means patience will be required as the SBTi develops the appropriate guidance. This should not, however, slow down the initiation of immediate and ambitious climate action. Indeed, whether the required reduction is 90% or 100%, the magnitude of actions required to move away from ‘business as usual’ is transformative. Companies can use the Net Zero tool developed by the SBTi to understand the order of magnitude of the required mitigations, should they set absolute targets.
2. Assess the feasibility of achieving the mitigation level by defining actionable roadmaps: identify and mobilize stakeholders, identify and mobilize CAPEX to deploy, for example, renewables, build alliances across the entire value chain, define indicators to track progress, acquire the ability to enter the voluntary carbon market for removal credits purchase, etc.

These roadmaps should allow decision-makers to build a consensus, internal credibility and momentum, and to identify immediate actions and investments to engage reductions and avoid locking in carbon in long-life assets.

Reaching these targets will be an incredible challenge for companies, but so is climate change. By committing to these targets and designing the appropriate roadmaps, companies have a unique opportunity to signal to their clients, their employees and their supply chain that long-term climate targets matter most, and that they are prepared to activate all the necessary levers and enablers—at all scales—to deliver on these goals.

See ENGIE Impact’s approach to delivering on companies’ climate goals →

Reduce then Offset or Reduce and Offset?

Mitigation and Offsets: Historically, the SBTi has focused on mitigation pathways, leaving the offset talk aside. However, a Net Zero state at the planet level cannot be reached without a significant increase of our carbon sinks’ capacity. While companies must contribute to emission reduction, it’s only logical they contribute to the increase of carbon sinks through—if not available within the value chain—financing activities that enhance the capacity to remove carbon from the atmosphere.

Neutralization: While neutralization of residual emissions is mandatory to claim Net Zero (long term claim), the Standard remains unclear as to what kind of removal activities should be funded: tree plantations, regenerative agriculture, Carbon Capture and Storage, etc. Also unclear at this point is how the Standard will assess their quality.

Compensation: The Standard recognizes that all levers of decarbonization and removal must be activated today in our global effort. However, it only recommends that companies engage in financing external reductions or removal (otherwise known as offsets) with no further recommendations on quality, type, hierarchy and possible claims following the purchase of offsets.

How to Win the Race to Zero

COP26 in late 2021 will be a decisive point on the road to reaching the Paris Agreement climate goals and achieving Net Zero by 2050. The new SBTi Net Zero Standard provides a robust and solid foundation for all companies looking to set credible Net Zero targets aligned with climate science. The Standard is, however, ambitious and requires companies to make significant commitments to taking climate action over the coming years.

These actions include:

1. Reducing their emissions from across most of their value chain by approximately 90% by 2050.
2. Using balance mechanisms (such as carbon removal offsets) to neutralize the remaining residual emissions.

Delivering against this level of ambition will require significant changes across all aspects of a company’s value chain. This will create challenges and opportunities, as companies will need to deploy more internal decarbonization investment in more places over a longer period of time and will be obliged to work with suppliers to identify financially efficient, lower-carbon solutions across their entire value chain.

The authors would like to thank Mark Chadwick, Jeremy Handler and Jessica Brooks for their contributions to this article.

¹ Minimum target boundary is 95% of Scope 1, 2, and 3 long-term science-based net-zero targets applied to mixed sector pathway absolute contraction of 90% reduction overall by 2050 or sooner (1.5°C ambition).

² Residual emissions are emissions sources that ‘remain unabated by the time Net Zero is reached at the global or sector level in 1.5°C mitigation pathways with low or no overshoot’ (Source: Science Based Target Initiative Net Zero Manual & Criteria (September 2021)). In this article, carbon offset credits are presented as the main instrument to neutralize residual emissions. Other balance mechanisms exist including GHG removals from value chains, avoided emissions from sold products and renewable energy certificates.

³ Compensation refers to Measures that companies take to prevent, reduce or eliminate sources of GHG emissions outside their value chain (Source: Science Based Target Initiative Net Zero Manual & Criteria (September 2021)).