Latest SBTi Updates: Impacts on Financial Sector & Environmental Attribute Certificates

The Science Based Targets Initiative (SBTi) continues to evolve, shaping the landscape of corporate sustainability with updates tailored for both financial institutions and the use of Environmental Attribute Certificates (EACs). These changes, which include addressing the potential use of EACs for voluntary carbon markets to allow scope 3 emissions abatement, mark significant shifts towards aligning business practices with ambitious climate goals, and it is important for us to monitor its feasibility and impact.

Accelerating climate action in the financial sector

In recent years, there has been a shift towards recognizing the financial sector’s potential to support the transition to a low-carbon economy. Regulatory frameworks are adapting to encourage transparency and accountability. Key updates are listed below:

Coal phase-out and Paris Agreement alignment:
  • Financial institutions mandated to phase out most coal-related activities by 2030.
  • Requirement to publicly declare cessation of financing for non-Paris Agreement compliant projects.

Shortened timeframes for emissions targets:

  • Near-term emissions reduction targets now to be achieved within five to ten years.
  • Recalculation of targets every five years to ensure ongoing ambition and relevance.

Portfolio coverage requirements:

  • Minimum 67% coverage of emissions reduction targets across financial portfolios.
Implications for corporate finance teams

For corporate finance teams, these updates could lead to increased pressure from stakeholders to set and achieve credible emissions reduction targets, which will require robust tracking of greenhouse gas emissions and a closer collaboration between finance and sustainability departments. CFOs can also benefit from aligning corporate climate transition plans and sustainability strategies with financial partners. This alignment not only enhances sustainability reporting but also strengthens the resilience of financial strategies in a low-carbon economy.

EACs in emissions reduction strategies: key topics corporates need to understand

Environmental Attribute Certificates (EACs) are defined by the SBTi as instruments used to quantify, verify and track the environmental benefits associated with climate mitigation activities or projects. While the SBTi is looking to expand the role of Environmental Attribute Certificates (EACs), including voluntary carbon markets for scope 3 emissions abatement, market challenges remain, and corporates wanting to leverage the opportunity need to be aware of the following topics:

  • Additionality: It’s crucial that carbon credits or offsets represent emission reductions or removals that would not have occurred without the financial support from purchasing entities. Ensuring additionality is challenging and involves complex methodologies to assess the baseline scenario.
  • Verification and Integrity: The verification process for carbon credits or offsets is critical to ensuring their environmental integrity. Concerns arise around issues such as double-counting, inadequate verification standards, and the legitimacy of projects claiming emission reductions or removals.
  • Permanence and Leakage: Carbon credits, offsets, and capture projects should address concerns about permanence (ensuring that sequestered carbon remains stored) and leakage (the unintended increase in emissions elsewhere due to mitigation actions).
  • Social and Environmental Impacts: It’s essential that offset projects do not have negative social or environmental impacts, such as land-use change, displacement of local communities, or lack of sustainable development benefits for affected regions.
  • Regulatory Frameworks & Market Dynamics: The lack of unified global standards, frameworks, and regulatory oversight contributes to uncertainty and inconsistency in the voluntary carbon markets, which are influenced by factors such as market demand, pricing dynamics, and evolving consumer expectations regarding corporate environmental responsibility. These factors can affect the effectiveness of carbon offsetting strategies using EACs.
RESET’s view on the role of EACs on decarbonization

The topics listed above highlight the need for clear standards and frameworks to ensure EACs contribute effectively to emissions reduction goals. When such guidance exists to enhance the transparency, quality, and credibility of EACs, their effectiveness and usage will be more practical. Without a balanced approach and robust regulatory oversight in the form of standards and frameworks, the full potential of carbon credits in mitigating climate impacts remains undetermined; establishing clear guidelines and standards is essential to enhance market transparency and effectiveness. Progress is underway — the SBTi plans to publish a draft proposal by July 2024, outlining rules and guardrails for the potential use of EACs in scope 3 emissions abatement strategies and starting the public consultation phase. The collaborative approach underscores SBTi’s commitment to transparency and inclusive governance, inviting feedback from stakeholders to refine and finalize these pivotal standards.

Steering towards sustainability: The next steps for corporates

The integration of rigorous emissions reduction targets in financial strategies and the responsible use of EACs represent critical steps towards a sustainable future. As corporates navigate these updates, they should focus on directly impacting their sustainability goals by continuing to develop and set ambitious decarbonization targets and roadmaps — especially considering the shortened emissions reductions timeframes given in the latest SBTi updates. Following that, action must lie in executing the strategy, engaging value chains and boosting green investment portfolios to drive meaningful change.

As the urgency of climate action increases, RESET continues to innovate and support its clients in addressing the complexities of the global carbon landscape. For guidance along the path to decarbonization, speak to our team.