Listen to the Science
As the fallout continues over the Science Based Targets initiative’s approach to offsets, questions arise over the net zero target-setting landscape for corporates.
In 2024, the number of listed companies with a climate commitment validated by the Science Based Targets initiative (SBTi) jumped to 20% from just 12% in 2023. In 2020, a mere 1% of listed companies had a decarbonisation target validated by the organisation.
According to SBTI’s website, the number of companies and financial institutions setting greenhouse gas (GHG) reduction targets and having them validated doubled to 4,204 by the end of 2023 from 2,079 in 2022.
This steep growth marks SBTi as a focal point of corporate climate action, said Guy Turner, Head of Carbon Markets at MSCI. “It holds a significant cachet among companies,” he explained.
But SBTi’s status as the gold standard for companies serious about decarbonising in line with the Paris Agreement took a serious hit last month after a highly public spat between staff and executives.
On 9 April, SBTi’s board of trustees released a public statement announcing a consultation on allowing validated companies to use carbon credits to offset their Scope 3 emissions. Mere hours later, SBTi staff and advisors fired off a letter to management, calling for the statement to be withdrawn and for the resignation of CEO Luiz Fernando Do Amaral and any board members who supported the decision.
The incident reheats the long-running debate on whether credits are a credible way for companies to reduce their carbon emissions. But it also raises questions about whether organisations are fit to assess and accredit the decarbonisation strategies of corporates.
Cottage industry
MSCI’s Turner addressed this issue in a LinkedIn post that went viral, arguing that while NGOs have played a critical role in the creation of global decarbonisation frameworks and benchmarks to date, an update to their modus operandi was needed, given high stakes measured in degrees of global warming and investment dollars.
Using the voluntary carbon markets (VCMs) as an example, he noted that what used to be a cottage industry is now in the mainstream. Billions of dollars are dependent on decisions made by its ecosystem of verification bodies and carbon credit sellers. “I don’t think the organisations have grown up in line with the decisions they are making.”
SBTi, a UK-registered charity, is a collaboration between the UN Global Compact and NGOs CDP, World Resources Institute and the WWF. Its remit is to support firms via standards, tools and advice in their efforts to reduce GHG emissions, achieved by setting and meeting targets aligned with the latest climate science.
Turner said the carbon credits row and a subsequent statement – explaining that any changes to SBTi standards would be informed by evidence – demonstrates that the organisation has governance problems.
“The most dangerous thing is when you have a 180°-turn in policy like Verra [carbon credit verification body] having to redo its forest protocols and recalculate those [after media reports questioned the efficacy of its forest-based offsets]. Once you’ve got hundreds of legacy projects using the old system, how do you transition them to the new one, when the credits from those projects have already been sold?”
As an example of good practice, Turner cited the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). “It moves relatively slowly – and when it does, it does so quite thoughtfully.” He added that bodies such as the International Sustainability Standards Board (ISSB) and the International Organization for Standardisation (ISO) are also well-governed and could provide lessons for others.
“I don’t know how the SBTi should be governed, but there are obvious pitfalls in the way it is currently governed if this latest statement came out without appropriate internal consultation,” he said.
Governance dysfunction
In their public letter, SBTi staff said they had not been consulted, with usual due process ignored. Media reports suggested that SBTi donors pushed the organisation to reverse its stance on offsets.
Bill Baue, a sustainability expert who helped instigate SBTi’s creation in 2012 and sat on its technical advisory group for six years, said “governance dysfunction” has been a long-running issue. In 2021, he issued a formal complaint against the SBTi for making a decision without consulting the group, for which he was removed without prior notice.
Baue said SBTi needs to become more transparent to be credible and be more open to working with independent scientists and others offering constructive critique.
“You can’t leave your technical advisory group in the dark when there are technical issues,” he contended. He also points to reports that the organisation has signed non-disclosure agreements with companies, which means independent scientists can’t peer review SBTi targets. “It doesn’t make that information public,” said Baue. “So that’s blocking the scientific method right there.”
He contended that SBTi is plagued by conflicts of interest as it generates revenues from companies for validating and approving their science-based targets. SBTi said that income it receives from companies has no influence on decisions surrounding their targets and it has a conflict of interest policy.
In a move indicating the robustness of the organisation’s processes, last year 239 companies had their net zero commitments removed for failing to set credible targets within the 24-month limit set by SBTi.
The offsets controversy is part of SBTI’s broad governance challenges, said Baue, but he also notes that it is “attempting to hide a deeper problem” this time around.
According to press reports, SBTi core funder Bezos Earth Fund is a keen supporter of the Energy Transition Accelerator, also backed by the Rockefeller Foundation and the US State Department, which aims to fund the transition to renewable energy in developing countries via the sale of carbon credits.
“So you’ve got the largest funder [of SBTi] seeking to do a specific move and you have the board make a bumbling decision before the due process has been followed through,” said Baue.
“They were essentially floating a balloon. I think they made that announcement to send signals to the marketplace that SBTi intends to remove its current blockages of offsets.”
Divided opinion
Last year was a challenging one for the VCMs. Across all categories, prices slumped throughout the year. Major corporate buyers stepped back from purchasing carbon credits as accusations of greenwashing grew.
Just as the SBTi controversy has put the spotlight on NGO governance, the scientific soundness of both carbon credits and targets is also under debate. A new scientific paper has challenged the claim that corporate emissions reduction targets, including those of the SBTi, are aligned with the Paris Agreement.
According to John Lang, Project Lead at Net Zero Tracker, a collaborative initiative focused on increasing the transparency of net zero targets, the SBTi proposal on offsets is not grounded in science or due process. “If companies are allowed to achieve their Scope 3 targets through carbon credits, the incentive to align their business models with the Paris Agreement temperature goals all but evaporates.”
Lang cited the UN Expert Group on the Net Zero Emissions Commitments of Non-State Entities, which clearly outlined carbon credits “cannot be counted toward a non-state actor’s interim emission reductions”.
Analysis from the NewClimate Institute for Climate Policy and Global Sustainability, one of the entities that formed Net Zero Tracker, has shown that use of offsets for Scope 3 targets could nullify the already insufficient climate pledges of most companies.
Simon Puleston Jones, Founder of Emral Carbon, disagreed, referencing data showing that companies which are voluntarily choosing to buy carbon credits are decarbonising twice as quickly as those who do not. “Far from a shortcut, they are being used as part of a coherent and considered decarbonisation strategy. Carbon credits actually accelerate decarbonisation and do not act as a disincentive.”
In 2023, Ecosystem Marketplace, a NGO which researches the VCMs and is supported by market participants, found that nearly 60% of carbon credit buyers reported lower year-over-year carbon emissions and are more likely to disclose their emissions than their non-buying counterparts. Trove Research, recently acquired by MSCI, has found buyers of high integrity credits are cutting emissions quicker than users of lower integrity credits.
On SBTi’s governance, Puleston Jones said it should not only allow use of carbon credits, but make accredited companies purchase a minimum amount in relation to their Scope 3 emissions.
“From a policy perspective, we should be embracing the use of carbon credits to offset Scope 3 as the data says it will accelerate decarbonisation.”
Credit provisions
This is already taking place. A number of key sustainability-focused disclosure frameworks already contain provisions for carbon credits, such as Europe’s Corporate Sustainability Reporting Directive (CSRD), the ISSB, the US Securities and Exchange Commission’s (SEC) climate disclosure requirements and the UK Transition Plan Taskforce (TPT) Disclosure Framework.
Carlota Garcia-Manas, Head of Climate Transition and ESG Engagement at Royal London Asset Management (RLAM), who helped develop the TPT’s asset manager guidance, told ESG Investor that a new suite of internationally-aligned TPT tools will shed greater light on the decarbonisation journey of corporates.
She added that it is not only important to understand decarbonisation, but also the resilience of a company to climate change risk and its alignment with a net zero economy. As such, the TPT guidance supports climate transition assessments through indicators akin to the Climate Action 100+ benchmark.
A theory of change – to help articulate a companies’ intentions – is also an important element of the TPT’s approach, said Garcia-Manas. The TPT framework, which has an ambition to become the gold standard for climate transition plans globally, is currently voluntary, but the UK government is expected to mandate it.
Lang said governance at the voluntary level will always be challenging and fall prey to conflict-of-interest traps. “That’s why we need global net zero standards to be set through ISO, so actual standards are certifiable and auditable via a wholly independent assurance body.
“The voluntary climate accountability system is extensive but lacks coherence. Ultimately investors need more than information on the intent and the integrity of targets. They need credible and independently verified data on whether companies are implementing their plans and demonstrably reducing emissions.”
SBTi was approached for comment on this article.
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