The Science Based Targets Initiative (SBTi) recently released the draft Corporate Net Zero Standard 2.0 (henceforth referred to as ‘Standard 2.0’) for public consultation.
Why is this important?
The SBTi is considered the gold standard for net zero emission reduction targets. The organisation recently achieved an impressive milestone of 10,000 companies with SBTi-approved net zero commitments. With this dominant position in net zero target setting, the updated standard is a big deal and will have huge implications for global emissions reduction plans.
Are Paris-aligned net zero targets even relevant, when the world temperatures have already crossed 1.5°C increase from pre-industrial levels?
The SBTi publication recognises the breach of 1.5°C global warming threshold in 2024 as ‘temporary’ and suggests that these exacerbating conditions only warrant more ambitious and strengthened climate action. Hence, “the Corporate Net-Zero Standard and its underlying pathways maintain 1.5°C as the central ambition.”
What are the key changes in Standard 2.0?
A New Public Commitment Process – Currently most companies enter the ‘SBTi system’ by submitting a commitment letter in which they pledge to set science-based targets within 24 months. The Standard 2.0 intends to replace the current commitment process with a more robust Entry Check assessment, that would review the senior-level commitment as also the communication of its commitment to stakeholders, before initiation.
Requirement for a Transition Plan - Recent analysis by Morningstar Sustainalytics, based on the 9,500 companies within its coverage universe, found that none of the companies having sought SBTi verification actually had a transition plan that aligns with 1.5°C warming scenario. With that context, Standard 2.0 proposes mandatory submission of transition plans within 12 months of target setting and validation.
Differentiated requirements based on company size and location - The company size categorization is guided by EU regulatory definitions, while geographical categorization is based on the World Bank classification.
The categorization divides companies into two groups:
🟢 Category A:
o Large companies in all countries
o Medium companies allocated to high and upper-middle income countries
🟢 Category B:
o Medium companies allocated to lower-middle- and low-income countries
o Small & micro companies in all countries
Scope 1 & 2 target setting and inclusion of nuclear energy – Standard 2.0 mandates separate submission of Scope 1 and 2 targets. Further, revised Scope 2 rules propose to include zero-carbon energy, instead of just ‘renewables’ to accommodate clean energy sources like nuclear energy within the purview.
Changes in base year setting - Under the current version of the standard, companies can choose any year from 2015 onwards as their base year. Standard 2.0 proposes that companies choose a base year no more than three years prior to their Initial Validation. The aim is to maximize ambition and prevent companies from selecting base years that minimize their obligation to reduce emissions, as academic research has shown can happen.
Revised target setting timelines - Previous versions of SBTi standards provided the option to set near-term targets only, through the SBTi Corporate Near-term Criteria, or both near-term and long-term targets under the SBTi Corporate Net Zero Standard. In line with emerging regulation (e.g. CSRD) and best practice (e.g. HLEG), the revision of the Corporate Net-Zero Standard proposes a change in the target structure as follows:
🟢 Category A companies are required to set long-term targets, supported by near-term targets if the timeframe for long-term targets exceeds five years.
🟢 Category B companies may continue to set near-term targets only.
Rationalising Scope 3 targets -
Scope 3 targets, for their apparent difficulty in calculation and extent of control, are a common challenge across the industry. Standard 2.0 proposes significant reforms in the space.
Targets mandatory only for larger companies:
Standard 2.0 proposes mandatory Scope 3 targets only for Category A (larger) companies and makes it optional for Category B (smaller companies).
Reporting on only ‘relevant’ scope 3 categories:
While companies will still be required to publicly report scope 1, 2 and 3 emissions annually, the scope 3 reporting requirement has been revised. Under Standard 2.0, companies will be required to report only on ‘relevant’ scope 3 emission sources annually, with full scope 3 reporting mandatory every three years. This revision is intended to incentivize companies to focus on reducing the most critical emission sources.
Relevant scope 3 categories shall be decided using the following methodology:
🟢 the category that represents 5% or more of total annual scope 3 emissions; or
🟢the category includes defined high emission intensity upstream or downstream activities that exceed 1% significance threshold or exceed 10,000 tCO2e.
Alternate metrics and mitigation measures for value chain related emissions:
The standard proposes alternate metrics to track value chain related emissions such as share of procurement allocated to net-zero-aligned suppliers (transitioned or transitioning) and activities, as well as the share of revenue derived from net-zero-aligned activities. It also permits use of indirect mitigation measures for categories where direct measures are not possible, such as incentivizing low- or zero-carbon commuting practices among employees for Category 7 emissions.
Limited Assurance of GHG inventory - Standard 2.0 proposes Category A companies to mandatorily obtain third-party (limited) assurance on base year GHG emissions inventory.
Use of Carbon Removal, Offsets and Dealing with Ongoing Emissions - SBTi’s official position on offsets remains unchanged – fast and deep emissions reductions must be at the front and center, and it acknowledges a limited role for investment in permanent carbon removals and related carbon credits.
However, use of removals and ‘Beyond Value Chain Mitigation’ (BVCM) has been permitted in specific cases to counter residual and ongoing emissions.
Ongoing emissions refer to the emissions companies release while they work to implement transformations to achieve net-zero emissions. They are different from residual emissions, which remain at the net-zero target year after all feasible abatement measures have been implemented. While tackling these is encouraged in the current version, Standard 2.0 proposes additional recognition for companies that address ongoing emissions through ‘Beyond Value Chain Mitigation’ such as carbon removal, reduction and storage projects.
All in all, the new Standard 2.0 rationalizes many aspects of the current target setting process, provides high degree of flexibility while also encouraging concrete actions to fight climate change.
Kindly note that these are only draft recommendations, open for public consultation until June 1, 2025. They are expected to be finalized in 2026 and come to use in 2027.
To check out the full draft, check out this link here.
For any guidance on your net zero or emission reduction plans, feel free to reach out to us at info@esgityadvisors.com.
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