This week I want to talk about the Science Based Targets initiative. Investors who are actively pushing companies to improve their disclosure on ESG topics, many times mention they would expect companies to align to this initiative, and that their emission reduction targets should be science based. But, what does this really mean? And how can companies comply with it?
First, what is a science-based target?
“Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the 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.”
This means, that for a company to align with this initiative, it must constantly be in the loop of what’s happening globally, how near or far are we from getting on the path that takes us to reaching the goals of the Paris Agreement, and dynamically adjust its GHG emissions targets to help the world get there.
How can a company do this?
- The steps
- Step 1: Sign the commitment letter (which puts you on the “Committed list” in the partners websites). There are different letters depending on the level of ambition the company has.
- Step 2: Develop your target for GHG emissions reduction.
- Step 3: Validate your target.
- Step 4: Publish your target. You have 24 months to get here after completing step 1.
- The methods
- Sector-based approach: The global carbon budget is divided by sector and emission reductions are allocated to companies based on the sector they belong to.
- Absolute-based approach: The percent reduction in absolute emissions required is applied to companies equally.
- Economic-based approach: a company’s share of emissions reductions is determined by its gross profit as a percentage of the global GDP.
Why do it?
We believe the biggest driver for most companies will be that investors are pushing towards it. So far 942 are aligned with this initiative, and 427 already have approved science-based targets. There already are 6 Mexican companies aligned with the initiative (Orbia, Nemak, Banorte, GCC, Coca Cola FEMSA, and America Móvil); only 1 has an approved target already published (Coca Cola FEMSA). Latin America has 41 companies aligned with the initiative, 4 with targets set (3 companies from Chile, and Coca Cola FEMSA).
We are still in early stages of ESG activism in Mexico, but we think companies will do better if they use the best possible frameworks from the get-go. It will save time in the future when investors’ requests are more specific (and note that per the recent CCFV initiative, the use of Science Based Targets is already part of a formal request from Mexican investors).
I hope you found this useful. As usual, if there is anything we can help you with, please reach out.
Partner, Miranda ESG
Contacts in Miranda Partners