Essentials for Setting Science-based Targets in the Transition Towards A Low-carbon Economy
“SBTS are grounded in an objective scientific evaluation of what is needed for global GHG emissions reduction determined by relevant carbon budgets, rather than what is achievable by any one company.”
In December 2019, the Hong Kong Stock Exchange has issued its consultation conclusions on proposals to enhance the Environmental, Social and Governance (“ESG”) Reporting Guide and related Listing Rules. Under the new ESG Reporting requirements, which have already been applying to the listed firms for financial years commencing on or after 1 July 2020, what may trip up most issuers in meeting the requirements is the challenge of setting and revealing its development targets concerning sustainability as the latest listing rules expressly require the disclosure of targets for KPIs A1.5 (emission targets), A1.6 (reduction targets), A2.3 (energy use efficiency targets) and A2.4 (water efficiency targets) on a “comply or explain” basis in the ESG Reporting Guide. When reporting on corresponding targets, it goes without saying that essentials for a standard target language including the baseline and context, range and locations of entities included, expected results and timeline for achieving them, and whether they are voluntary or mandatory (i.e. based on legislation), and if mandatory, then specify the relevant legislation that should be considered and disclosed. Among all four types of targets that are to be set and presented, however, setting appropriate targets for emissions, especially greenhouse gas (“GHG”) emissions, seems to be the hardest as it is the only one that is directly related to the impacts the business operations may have on climate change and that can be used to holistically measure the effectiveness of a variety of steps taken to accomplish the reduction targets, energy use efficiency targets and water efficiency targets, which can all be efficiently established step-by-step with reference to the recommendations and indicators in “An Analysis of the Goals and Targets by the Global Reporting Initiative and the UN Global Compact”.
As a company’s GHG emissions performance is inherently linked to its progress in the transition to the low-carbon economy and future-proofing business strategy, it is of paramount importance to understand how to demonstrate the leadership on climate actions by committing to and pressing ahead towards GHG reduction targets that are aligned with the latest climate science (e.g. Paris Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C). Science-based targets initiative (SBTi) offers a plethora of advantages over incremental GHG reduction targets for businesses and importantly, assists companies to identify and promote innovative approaches to setting ambitious and meaningful corporate GHG reduction targets consistent with the best available climate science.
Steps for SBTs
Step 1: Submit the commitment letter (Target Setting Letter for SMEs is for Small and medium-sized enterprises)
Step 2: Develop a target (SBTi Criteria and Recommendations)
Step 3: Submit the target for validation (Target Validation Protocol)
Step 4: Announce the target (Within six months of the date when the approval letter was sent to the company)
In this article, the essentials for setting ambitious GHG reduction targets in an appropriate manner according to SBTi are introduced for companies that are in the process of or have strategic plans to manage emissions and that commit to contribute to limiting global warming, while a case study of how Pfizer, a global pharmaceutical corporation, made use of the framework to set its own SBTs is provided.
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