This is the current reality of long-term emission reduction targets: only 18 percent of companies are on track to limit rising temperatures to 1.5°C by 2050. Although a sizeable proportion of the world’s companies have voiced their support and developed short-term responses to the Paris Agreement, an analysis shows that we all need to move faster.
In October 2018, the Intergovernmental Panel on Climate change (IPCC) special report on global warming introduced an alarming new climate change red line. The report, a compilation of existing scientific knowledge on climate change, shows that the difference between 1.5 and 2-degree warming – the ‘former’ upper limit governments committed to in the Paris Agreement – is critical to millions of people’s homes, jobs and lives. With this accelerated call to tackle climate change-causing emissions, the onus falls on corporations now more than ever to take radical climate action.
To be in line with the 1.5-degree ambitions, it is crucial for companies to set long-term strategies that outline how it will pursue its development trajectory while phasing out net emissions over time. Nevertheless, long-term target setting is a complex task, especially given the unpredictable nature of longer time horizons.
To address this uncertainty, companies need to carefully plan and develop targets, and think about what the 1.5-degree ambition means for their own long-term emissions trajectories.
In this article, Mila Krivokapic, Sustainability Consultant at Schneider Electric, outlines 4 key considerations to guide companies in setting (and achieving) long-term climate goals.
1. Strategic overview – Internal, market and competitor analysis
Before declaring an emission reduction target, it’s important to first step back and assess the organization’s internal ambitions. Organizations should think about their core business purpose and how sustainability fits into it. The only way long-term targets have a chance to become reality is if they are embedded in a company’s overall strategy. Instead of thinking about targets with the “what do we want to do?” mindset, it is better to think of them as defining “who do we want to be?”. In addition, companies should consider how corporate sustainability can influence their public reputation. Some organizations are satisfied with being followers, or even merely meeting basic compliance demands, while others are keen on paving the way forward as a climate leader.
A company should also review the expectations of its various stakeholders. Historically, B2C sectors, such as consumer goods or the fashion industry, were most affected by stakeholder sustainability preferences, however, we are seeing more and more B2B companies whose stakeholders, such as investors, companies in their supply chain or NGOs, are putting pressure on their sustainability performance.
Benchmarking an organization’s sustainability ambitions against its competitors is an important final step in conducting a strategic overview, to check if targets will be both reasonable and challenging. These can be regional or global competitors, companies in the same sector or even organizations up and down the value chain. It is important to identify peer organizations with robust sustainability actions and understand your organization’s position compared to them.
For instance, an IT company using a small percentage of renewable electricity might want to double its use in their portfolio. However, after running a benchmark analysis, they could discover that their competitors are already running on a high percentage of renewable electricity. Doubling their use will still leave them falling short of the competition. In this context, they might need to revisit their initial idea and build a roadmap to procure equivalent amounts of renewable electricity so that the effort will pay off. Similarly, a company might realize that their top five competitors are all A-listed CDP respondents and consequently adopt long-term targets to increase their CDP score to the same level.
2. Methodology for target setting
Organizations have followed different, mainly individual paths to establishing targets, and non-profits and sustainability consultancies offer their own target setting tools and methodologies using a combination of criteria. After the Paris Agreement, Science-based targets (SBTs) were introduced to not only focus on the organization, but also ensure that targets are in line with the latest climate science. SBTs use the notion of a global carbon budget—an analysis of GHGs in the atmosphere and their effect on the climate. This helps to estimate the level of emissions that can be added to the atmosphere and stay below 1.5 degrees of warming. Once the budget is understood, companies can build reduction scenarios based on their individual contribution to this budget.
SBTs are the leading global standard to decrease emissions; more than 250 organizations have set and approved SBTs, while almost 700 companies have committed to setting the targets in the coming years. While the main purpose is to help avoid devastating effects of climate change, long-term SBTs are also beneficial for companies themselves:
- SBTs can boost innovation. For instance, instead of merely complying with environmental laws, companies can be key actors that help governments shape climate regulations. In the current state of increasingly stringent climate legislation, this can also help companies stay ahead of regulation and avoid the financial and reputational risk of non-compliance.
- SBTs can strengthen confidence of investors or clients. A growing number of investors are asking their portfolio companies for CDP responses and SBTs can significantly increase CDP scores. Moreover, some companies are directly asking their key suppliers to set SBTs to address the Scope 3 portion of their own SBT target.
- SBTs can have a direct effect on the company’s financials. With increasing fears of rising prices of fossil fuels and carbon taxes, setting long-term reduction targets can significantly reduce operational costs.
- Defining targets
Once a company has decided on the methodology it is time to set up the actual targets for various time horizons. Target setting can be an arduous exercise, especially for companies seeking for SBTi-approved targets, which can take anywhere from 2-6 months. Although there is no set rule around the time span of short, medium and long-term targets, as a general rule, ‘short-term’ usually refers to a 1-2-year horizon, medium-term usually means 2-5 years, while anything beyond 5 years is considered long-term. SBTi-approved targets must cover 5-15 years, however, SBTi encourages organizations to set targets trough 2050.
A key differentiator between short, medium and long-term targets is the level of ambition. A typical component of a short-term target can be setting the medium and long-term targets themselves (“In the next two years, we want our targets approved by the SBTi committee”). Such a short-term target will not require significant resources, it is tangible and has a clear deliverable. It can then be supported by the medium and long-term targets that are more impactful. An example of a medium target could be reaching 100% renewable electricity procurement by 2025. A long-term target can go even beyond an organization’s own operational boundaries to target the whole value chain (“Reduce 50% of our base Scopes 1, 2 and 3 CO2 emissions by 2030”).
Defining a long-term target can be particularly difficult as it involves a large degree of uncertainty and factors that an organization cannot control. As an option, long-term targets can include a reference to business intensity. For instance, a company might expect to buy a production unit from a competitor in the coming years and as a result, produce more products overall. Their absolute emissions could, therefore, increase, having an impact on their overall target, due to the higher production levels. This will have a misleading effect on progress to their target, as the absolute emissions will increase compared to the base year without the company making significant changes in the production methods. In such a case, it might be more relevant for a company to set targets per unit produced, which will enable them to track their progress relative to the quantity they produce and avoid deceptions related to fluctuations in the production. However, intensity targets in line with SBT are only eligible when they lead to absolute emission reductions in line with climate scenarios below 2°C.
Finally, long term targets do not necessarily have to be quantitative. A long-term target can be qualitative (for instance, a strategic positioning on the market). This qualitative target can then be supported by a short and medium-term target that is more tangible. As an example, companies can choose to have a strategic ambition such as “we want to be #1 real estate choice for customers wanting greener buildings”. These can then be supported by several short- and medium-term concrete KPIs, for instance deciding to implement green building certifications such as LEED to 100% of their real estate portfolio in the next 5 years.
3. Governance and setting control
Even the most ambitious targets are futile unless there is a governance mechanism in place to achieve them. A key risk with long-term targets is losing momentum. While short- or medium-term targets might easier be integrated into current operations, long-term targets need to be embraced by the entire organization with a dedicated, continuous follow-up and change management process. Organizations should first define which key internal stakeholders will enable reaching the target. These are typically sustainability and energy management departments; however, finance, production, real estate, HR and supply chain should be equally involved. C-suite level support is also crucial to show the importance of the targets and ensure they are put on top of the corporate agenda.
It is proven best practice to set up a steering committee, who continually reviews gaps in progress to goal. Other good ways to ensure target adoption throughout the organization are their inclusion in policies and codes, their promotion via educational presentations, and their inclusion in business KPIs. Finally, it is crucial to keep reviewing targets to stay on top of new developments. For instance, SBTi requires companies to review their targets every five years. In September 2019, SBTi updated its requirements to be in line with the accelerated 1.5-degree ambition. This means that all companies who have set their targets prior to this in line with the 2-degree scenario will have to update their targets as part of their mandatory five-year target review.
Whether they are driven by internal ambition or external pressures, it is evident that strong and well-defined sustainability targets will only grow in importance. A robust target setting mechanism, backed by the analysis of the internal capabilities, competition, stakeholder expectations and, most importantly, in line with science, can help companies drive their progress towards long-term sustainability management. Target setting is complex, and it is understandable that key decision makers sometimes feel overwhelmed. Thankfully, we are seeing more and more useful solutions that are emerging to help companies understand better how they can develop meaningful and impactful long-term targets and sustainability strategies.
To get help with your own company’s long-term climate targets setting, we invite you to reach out to Schneider Electric or download their white paper on Science Based Targets.
This article was written by Mila Kivokapic, Sustainability Consultant at Schneider Electric