SBT and TCFD are two acronyms that are here to stay. The new buzz words in sustainability, they are Science-based targets and the Task Force on Climate-related Financial Disclosures respectively. Here we explore how these two growing initiatives are connected and what this means in practical terms for businesses and investors.
The SBT initiative (SBTi) was established by the World Resources Institute (WRI), CDP, the World Wide Fund for Nature (WWF) and the UN Global Compact (UNGC). It asks companies to publicly commit to setting carbon emission reduction targets that are in line with climate science. So far, 390 companies across different sectors have committed to do so and over one hundred companies already have their targets validated by the SBTi.
The TCFD was founded by the Financial Stability Board (FSB) and has the mandate to develop climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders.
The TCFD recommendations
In summer 2017, the TCFD developed a set of recommendations for organisations. They are widely adoptable recommendations, applicable across different sectors, that can be incorporated by companies in their mainstream annual financial filings. The recommendations are built around four overarching areas: Governance, Strategy, Risk Management and Metrics & Targets. The objective is to advance the quality of financial disclosures related to the potential impacts of climate change in order to improve investors’ ability to assess climate-related risks and opportunities.
It is becoming understood by the international sustainability community that all major reporting initiatives and frameworks are increasingly aligning with the TCFD disclosures. From the new CDP Climate Change Questionnaire to the UN Principles for Responsible Investment (PRI), companies are being called upon more and more to disclose information under the four key TCFD areas.
So what role do SBTs play in this context?
The role of targets under the recommendations
SBTs enable companies to meet the requirements of the Metrics and Targets area of the TCFD recommendations. TCFD’s rationale for this target disclosure is that investors and other stakeholders need to understand how an organisation measures and monitors its climate-related risks and opportunities. Access to information about the targets allows investors and other stakeholders to better assess the company’s potential risk-adjusted returns, ability to meet financial obligations, general exposure to climate-related issues, and progress in managing or adapting to those issues.
Below we explore in more detail the interface between the target theme of the TCFD, and the commitment to setting SBTs.
TCFD recommends disclosing Scope 1, 2 and if appropriate, 3 greenhouse gas (GHG) emissions and associated risks. Companies should calculate their emissions in line with the GHG Protocol and when applicable they should consider providing industry-specific GHG efficiency ratios.
Likewise, for setting SBTs, a company is required to calculate Scope 1 and 2 emissions and screen Scope 3 emissions in order to determine whether a target is going to be needed. If scope 3 emissions comprise more than 40% of the total foot-print a target will need to be set.
Companies are asked to disclose targets for managing climate-related risks and opportunities and performance against these emissions. SBTs are specifically developed in line with climate science for staying below a two degree temperature increase, which is the objective of the Paris Agreement, although companies are equally encouraged to set targets for staying below 1.5 degrees.
The TCFD advocates scenario analysis to account for the impacts of the various possible climate outcomes. Through setting an SBT target in line with a 2-degree climate scenario, taking into account global carbon budgets and sectors, as described by the Intergovernmental Panel on Climate Change (IPCC)and the International Energy Association (IEA), companies have the opportunity to demonstrate that they are doing their bit for meeting the objective of the Paris Agreement and demonstrating their intention to future-proof their business from the impact of climate change.
Based on both TCFD recommendations and the SBTi validation criteria, companies are expected to disclose the following information alongside their targets:
- Type of target: whether the target is absolute or intensity-based.
- Time frames: the SBTs should cover a period of 5-15 years.
- Key performance indicators used to assess progress against targets: in the context of SBTs, progress towards meeting the target should be reported annually.
- Approaches for calculating targets: there are three approaches accepted by the SBTi for setting SBTs.
Future-proofing through target setting and disclosing
Therefore, through setting SBTs, companies are prepared to disclose information required as per the TCFD recommendation on targets as the requirements for both are well aligned: companies must calculate Scope 1 and 2 emissions and screen Scope 3, they need to select a baseline and a target year, and once their target is set, progress towards meeting it must be disclosed annually.
This level of transparency and forward-thinking facilitates long-term planning, which is the aim of both of these initiatives. This maximises preparedness for policy and legislative changes and increases investors’ confidence in the company’s commitment to tackling climate change and managing its associated risks.