ESG Reporting Revolution: SBTi's New Strategy to Reshape Corporate Climate Action by Early 2024

The Science Based Targets initiative (SBTi), the globally recognized body driving corporate climate action, has announced its intention to publish a new, ambitious strategy “no later than early next year.” This significant development signals a potential shift in how companies approach their environmental, social, and governance (ESG) reporting and net-zero targets, impacting everything from carbon accounting to corporate sustainability strategies. The upcoming strategy is expected to significantly influence the future landscape of corporate sustainability, prompting businesses worldwide to reassess their climate commitments and reporting practices. This news comes amidst growing investor pressure, regulatory scrutiny, and increasing public awareness of the climate crisis, making the SBTi's announcement even more impactful.

SBTi's Current Impact and the Need for a New Strategy

The SBTi currently provides a framework for companies to set science-based emissions reduction targets aligned with the Paris Agreement's goals. Thousands of companies globally rely on SBTi's validation and guidance to demonstrate their commitment to climate action. However, the increasing complexity of ESG reporting, coupled with evolving scientific understanding of climate change, demands a recalibration of the SBTi's approach.

The current framework, while effective, faces challenges:

• Scope 3 Emissions: Accurately measuring and reducing Scope 3 emissions (indirect emissions from a company's value chain) remains a significant hurdle for many organizations. The new strategy is anticipated to address this critical area, offering enhanced methodologies and clearer guidance.
• Net-Zero Commitments: The proliferation of net-zero pledges requires stricter validation and verification processes. The SBTi's updated strategy is likely to introduce more rigorous criteria for assessing and validating companies' net-zero targets, potentially focusing on carbon removal strategies and the avoidance of carbon offsets.
• Industry-Specific Targets: The SBTi's approach currently utilizes industry benchmarks. The upcoming strategy might explore more nuanced, sector-specific targets, recognizing the unique challenges and emission profiles of various industries.
• Enhanced Transparency and Disclosure: The new strategy is expected to incorporate more robust requirements for transparency and data disclosure. This increased transparency aims to improve the credibility and comparability of corporate sustainability reports.

Key Expectations for the New SBTi Strategy:

Experts predict the new SBTi strategy will address several key areas:

• Strengthening Target Setting: Expect stricter criteria for target setting, potentially incorporating a more granular approach to emission reductions across different scopes. This might include more demanding near-term targets and a clearer pathway to long-term net-zero goals.
• Improved Scope 3 Guidance: Anticipate more comprehensive and practical guidance on measuring and reducing Scope 3 emissions, likely involving new methodologies and tools to help companies track and manage their supply chain emissions effectively.
• Addressing Net-Zero Ambiguity: The strategy will likely provide clearer definitions and criteria for net-zero targets, potentially limiting the reliance on carbon offsets and emphasizing real emission reductions.
• Enhanced Corporate Accountability: Expect increased transparency and accountability mechanisms, requiring companies to regularly report on their progress against their targets and undergo more rigorous validation processes.
• Integration of Nature-Based Solutions: The new strategy may integrate nature-based solutions (NbS) into the target-setting framework, recognizing the role of natural systems in carbon sequestration and climate mitigation. This aligns with growing interest in ESG investing and sustainability-linked finance.

Implications for Businesses and Investors

The impending SBTi strategy update will have profound implications for businesses worldwide. Companies will need to proactively prepare for stricter requirements, potentially requiring significant adjustments to their sustainability strategies and operational practices. This includes:

• Reviewing Existing Targets: Businesses should reassess their current climate targets to ensure alignment with the anticipated stricter standards. This may involve setting more ambitious near-term reduction goals.
• Strengthening Scope 3 Reporting: Companies need to enhance their capabilities for tracking and managing Scope 3 emissions, potentially investing in new technologies and processes.
• Improving Data Management: Accurate and comprehensive data is crucial for effective ESG reporting. Businesses should invest in robust data management systems to ensure compliance with stricter disclosure requirements.
• Engaging with Supply Chains: Collaboration with suppliers is vital for achieving ambitious Scope 3 reduction targets. Companies need to engage with their value chains to support their climate transition efforts.

For investors, the SBTi's new strategy will provide a more robust framework for assessing the credibility of corporate climate commitments. This will improve the quality of ESG data, allowing for more informed investment decisions and enhanced corporate accountability. This in turn will drive greater investment in sustainable business practices and encourage further advancements in environmental sustainability.

The Broader ESG Context

The SBTi's move comes at a crucial juncture for ESG reporting globally. Increased regulatory scrutiny, such as the EU's Corporate Sustainability Reporting Directive (CSRD) and similar initiatives worldwide, necessitates a more standardized and robust approach to climate reporting. The SBTi's updated strategy will play a critical role in shaping the future of corporate climate action within this evolving regulatory landscape. This heightened focus on ESG factors is also heavily influencing investor decisions and shaping the broader financial markets.

Looking Ahead

The SBTi's new strategy, expected by early 2024, represents a critical turning point in corporate climate action. By enhancing target-setting methodologies, strengthening accountability mechanisms, and addressing emerging challenges, the SBTi aims to accelerate the transition to a low-carbon economy. The implications for businesses and investors are significant, demanding proactive adaptation and a renewed commitment to sustainability. The impact on global ESG reporting will be far-reaching, and careful monitoring of the upcoming strategy will be crucial for companies navigating the complexities of sustainable business practices. The next few months will provide further details and clarifications as the SBTi finalizes its updated strategic framework, providing the roadmap for a more ambitious future for corporate sustainability and climate action.