In the name of science: how to set your emissions targets

Just over two years ago, concerns were raised about the validity of the Science Based Targets initiative’s (SBTi) methodologies to create its science-based targets (SBTs). The key question being, were the SBTs set scientifically?

SBTi is a partnership between CDP, United Nations Global Compact, World Resources Institute and World Wide Fund for Nature, aiming to help companies and financial institutions set SBTs to reduce greenhouse gas emissions, in line with the 1.5°C objective outlined in the Paris Agreement.

The concerns haven’t been resolved, yet SBTi has validated a total of 15 SBTs for GPs, with four more currently committed to submit targets in the near future. More than 4,000 businesses globally have already set targets with the initiative’s support.

It is hard to deny the great work that has been achieved so far and the ambitious commitments made by firms in the PE industry, but a closer look at the methodologies used might make other fund managers think twice about how they commit to net zero.

Square one
Bill Baue, one of the original instigators of the initiative and current senior director at r3.0, first raised a formal complaint in February 2021, highlighting concerns over potential self-dealing and conflicts of interest. His concerns were validated by a study first published in February 2021 by Anders Bjørn and his Concordia University colleagues, which found the Center for Sustainable Organizations' context-based carbon metric (CSO), to be the most scientifically robust methodology.

The study found the CSO method, followed by the sectoral decarbonisation approach (SDA), to have the lowest overall emission imbalance across all scenarios. However, it also found the SDA method not to be in line with latest scientific developments as it relies on sectoral emissions scenarios predating the IPCC’s Special Report on Global Warming of 1.5°C.

Despite this, SBTi recommends the use of two methodologies – SDA and the absolute contraction approach (ACA) – both of which were developed by SBTi partners themselves, above all other methodologies. The ACA method is most used by SBTi but, according to the study, is the least scientific.

SBTi disallowed the CSO method in 2018.

Weak wins
In this light, Baue originally questioned why the methodology with the strongest results (CSO) was actively recommended against, while weaker approaches (ACA and SDA) were actively being promoted.

Since then, a further study, Rekker et al. 2022, supports the finding that CSO is the strongest decarbonisation method currently available.

Speaking with Baue on the different types of methodologies available, he elaborates: “A sectoral decarbonisation approach like SDA is problematic because it has never covered all sectors of the economy; the accompanying analogy is slicing a pie when the size of the pie is unknown or changing. It is also incredibly time consuming to lay out all the sectors of the economy and make sure emissions ‘mass balance’ with each other.

“The ACA method draws a straight line based on a specific timeframe and a median ‘envelope’ of all the 1.5°C scenarios, each with its own set of assumptions. I’ve yet to see any scientific scenario that linearises between now and the future. A problem with the ACA method is that, while it encourages faster decarbonisation at present, it compensates with much slower decarbonisation in the future.

“The CSO method can be applied per capita or by economic allocation. The benefits of these approaches are that they are globalised and can respond to changes. If a company grows or shrinks in size, this can be represented in real time via the CSO method.

“While the research demonstrates shortcomings with the SDA and ACA methods, there is no reason to suggest these should not be allowed. All I’m saying is that there is also no reason to disallow the CSO method, which is what SBTi has done.”

When SBTi was approached by The Drawdown about the ongoing scrutiny regarding its governance model, it issued this statement: “Feedback is essential for evolution and growth, especially for an organisation grounded in science. To ensure that different expert voices are heard and that the SBTi makes the greatest impact possible, the initiative has taken multiple steps to strengthen its technical governance. This includes the expansion of the executive board and the launch of a new technical council.”

Better the devil you know
It is better to have targets than not – an idea Baue also supports. For this reason, we decided to approach GPs to understand which pathways they have used to achieve their decarbonisation goals.

Serge Younes, head of sustainability at Investindustrial, spoke to us about the key involvement he continues to have with SBTi and how he has helped shape the requirements for the PE industry: “By the time I had joined Investindustrial in 2018, it had already measured the carbon footprint of its portfolio companies, so I started to work on our portfolio decarbonisation trajectory. We engaged with our portfolio companies to have them set scientifically aligned decarbonisation targets by 2019 – at the time we weren’t sure about what the market’s reaction to this would be.

“Alongside our work with iC International, we worked with SBTi and its partners to create an LP, GP and NGO academic advisory committee, which consisted of 33 organisations in total, of which nine were PE firms. From a PE perspective, we needed to explain to the organisation the extent and the limitations of the PE model when it comes to the influence it has over its portfolio companies, and who was responsible for the emissions.

“Together with five other PE firms, we tested all of the frameworks, using theoretical future funds all the way up to 2035 to understand the art of the possible. We then were able to set our own targets – 100% portfolio coverage by 2030 and 50% coverage by 2026, alongside a decarbonisation of our own firm. We are pleased to say that we already hit 55% portfolio coverage back in December 2022.”

In terms of the scrutiny over the SBTi methods available, Younes adds: “Yes, there are other methodologies and yes, more development is needed, but we're hearing firms are struggling to go back and do things retrospectively. Today, SBTi is still considered the ‘gold standard’ and it's easy to explain – there is a well-recognised standard and framework that you can follow. It's not perfect, for example we have an ongoing debate about the lack of guidelines for portfolio companies in certain sectors and sub-sectors that SBTi has no guidance for, but most of the time it does the job.”

Another fund manager, who spoke to The Drawdown on their firm’s recent 2030 net-zero commitments, decided to align their targets with the Net Zero Investment Framework (NZIF), based on the IEA Paris-aligned pathway. While SBTi is also based on this pathway, this GP opted for the NZIF framework instead because they preferred a portfolio alignment approach rather than SBTi’s sector-based approach.

The manager explains why this approach suited them best: “You could set a different target, which is an absolute CO2 reduction objective, but this is not appropriate for a lot of firms because they're trying to grow and their carbon footprint might increase. Also, SBTi is very challenging in an emerging markets context.

“There is also often a focus on delivering reductions in the near term, which can be at odds with transitioning assets. If you are investing to transform and transition during your ownership, you may well need to take on CO2 (if you invest in high carbon-emitting sectors) with a view to bending that curve really quickly. You are going to take more carbon on your books before you're able to achieve that decarbonisation outcome. So, it’s important to be clear about your objectives – is it reductions or transitioning assets from brown to green, or mitigation by investing in renewables? All are valid strategies, and all are needed for evolution to a net-zero global economy.”

The choice is yours
The Drawdown has previously reported on SBTi’s validation of emissions targets from IK, EQT, Astorg, Bregal Investments, FSN Capital, Hg, ICG and Investindustrial, with other firms committing to having their targets approved. A full list of firms with approved and committed targets is available on SBTi’s website.

There are many paths to achieving emission-reducing objectives. It is important to be aware how the targets are set out and what impact they are really having.

Each GP has its own investment strategy, which will influence the type of target it may wish to commit to. Whichever methodology is ultimately chosen, it’s important to have a degree of flexibility knowing that the science behind the targets could develop and evolve.

A final question to consider is this: should reputation outweigh the scientific evidence?