Net-Zero standards, which one(s) are right for my company?
With increasing pressure by stakeholders on companies to set meaningful Net-Zero targets, companies need to know which climate standards may be the most useful for them to build a robust climate strategy.
As stakeholder pressure on companies and their suppliers to set Net-Zero targets increases, coinciding with the COP26 Summit, there has been an emergence of climate standards which aim to help companies set decarbonization targets and meaningful climate-related Key Performance Indicators (KPIs). Among these standards, companies face the challenge of choosing the right standards that will support their decarbonization strategy as there is no single standard that can meet all needs, but rather depends on various elements such as the type of company, emissions profile, size, how far along they are with their climate strategy etc.
The three leading standards include the Task Force on Climate-related Financial Disclosure’s (TCFD) Guidance on Metrics, Targets and Transition Plans , the Science-Based Target Initiative’s (SBTi) Corporate Net-Zero Standard , and CDP’s recently released Climate Disclosure Framework for Small and Medium-Sized Enterprises (SMEs) . Additionally, the CA100+ Net-Zero benchmark, an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, may provide further insight to the reported data that investors are seeking. Below we provide a summary on each of the standards to help companies select the one(s) that may be right for them.
1. TCFD’s Guidance on Metrics, Targets and Transition Plans
The TCFD is well known for its guidance on corporate reporting on climate-related risks and opportunities and has recently gone one step further to provide guidance for companies on how to set metrics and targets and formulate an effective transition plan. Its new guidance document lays out key characteristics of what successful climate-related metrics look like while also highlighting what metrics are essential for creating credible interim and Net-Zero decarbonization targets (see Table 1). This supplementary guidance will likely prove useful to companies already familiar with the TCFD which seeks to establish alignment between the company’s climate strategy and financial planning. In addition, investors are looking for companies to demonstrate credibility of their transition plans through specific initiatives, which is outlined by the TCFD standard.
2. The Science Based Target initiative (SBTi) Corporate Net-Zero Standard
SBTi is a non-profit organization that helps companies understand how much and how quickly they need to reduce their GHG emissions to align with a 1.5C future. The standard clarifies the key role of decarbonization in corporate Net-Zero strategies, with the aim of reaching Net-Zero CO2 emissions by 2050 and Net-Zero GHG emissions in 2050 or later. It provides guidance, criteria, and recommendations to support companies in setting and working toward Net-Zero targets. SBTi has identified that Net-Zero planning needs to be tailored to each company process and has therefore developed sector-specific guidance for Net-Zero transition plans.
The SBTi standard is more rigorous in target setting than the TCFD and CDP standards and requires constant re-setting of near-term targets once reached. With investors increasingly pushing companies to set science-based and verified Net-Zero targets, the standard offers a more thorough approach compared to other standards with certification of company targets, and through the use of periodic near-term targets.
3. CDP’s Climate Disclosure Framework for Small and Medium-Sized Enterprises (SMEs)
CDP is a non-for-profit charity that runs a disclosure system for managing environmental impacts currently being used by over 9,000 companies (see Figure.1). CDP has recently released its new climate reporting guidance for Small and Medium-sized Enterprises (SMEs) with fewer than 500 employees looking to set Paris-aligned Net-Zero goals. It aims to cater to a larger portion of the economy which lacks the resources of larger companies, including suppliers that large companies depend on. For instance, globally, SMEs with fewer than 10 employees account for 70% to 90% of all firms .
The standard outlines seven modules that companies can use as guidance, thereby simplifying the process for creating a climate strategy. SMEs are suggested to report their climate goals and adopt the core modules immediately and to integrate the additional modules within 3 years, thus allowing for the comparability of reported data.
The standard allows for SME companies to report emissions and set targets that are more aligned with the size and resource constraints experienced by smaller companies, rather than having to align with standards that are set for larger companies. While the CDP climate disclosure standard does not provide detailed guidance on setting Net-Zero targets as TCFD and SBTi do, it does allow for SMEs to ease their way into establishing a climate strategy.
Table 1. Comparison between the 3 different approaches
Figure 1 below highlights CDP as the leading framework collecting companies’ responses on climate emissions. However, the data shown applies only to the broader framework and not the SME standard as the latter was released only at the end of November 2021.
Figure 1. Participants in existing climate disclosure frameworks December 01st 2021
Source: Leaders Arena
Given the prevalent interest in decarbonizing global economies, businesses of all sizes will be expected to play their part in achieving global Net-Zero 2050 targets, essential to limiting the global temperature rise to 1.5°C and minimizing the systemic risks of climate change. Companies face the challenge of choosing the right standards that will support their decarbonization strategy as there is no one-size-fits-all and depends on company-specific variables. With this in mind, larger companies already familiar with the TCFD framework might find easier to adopt its net-zero recommendations. For those sustainability leaders seeking to validate their net-zero goals by a third party, SBTi could be the right choice . For smaller companies that have not ventured yet into the more ambitious TCFD standard, CDP’s could be a good starting point. Companies may progress with more than one standard if they so desire.
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