The Science Based Targets Initiative (SBTi) is considered the gold standard for setting carbon emission reduction goals for non-government entities. The goal of the initiative is to align corporate climate action with those outlined in the 2015 Paris Agreement, which endeavors to limit global temperature rise to below 1.5 degrees Celsius.
Though the SBTi is generally considered an emissions target-setting process for large corporations, such as Pepsi, Apple, Microsoft, and Unilever, it is also relevant for private markets investors and their portfolio companies.
Investors can benefit from access to greater pools of capital from climate-conscious limited partners (LPs), interoperability with climate regulations and frameworks (e.g., TCFD, SFDR), and better access to increasingly sustainability-minded talent.
Private companies can benefit from enhanced sales to sustainability-focused consumers, compliance with large customer requirements, and value creation through operational improvements (e.g., decreased energy spend).
SBTi for Investors
The SBTi may traditionally be thought of as a tool for companies; however, financial institutions can set science-based targets as well.
At the highest level, aligning business strategy and operations with climate goals makes sense for financial institutions. Climate change poses a material threat to investments, and thus consideration and integration of climate concerns into investment strategies is both consistent with fiduciary duty and protecting returns.
The SBTi has also developed target-setting processes specific to the financial sector, which take into account the unique aspects of investor business models as they relate to climate goal-setting. Given that financial institutions’ largest contribution to climate change is through the impact of their investments, SBTi allows them to set targets by sector, portfolio coverage, or by temperature rating, depending on the asset class.
Private equity firms including Bregal, Intermediate Capital Group, and EQT have leveraged the guidance to set science-based targets. Setting a science based target can unlock multiple levers of growth for investors:
- LPs are increasingly interested in investing in GPs with strong climate goals and programs, with 50% of the largest asset owners aligning with TCFD in some form and 86 asset owners participating in the Net-Zero Asset Owner Alliance (NZAOA). GPs with strong climate goals are better positioned to capture capital from these investors.
- The rigorous carbon accounting and emissions target-setting processes associated with setting a science-based target can help investors comply with relevant frameworks and regulations such as TCFD and SFDR.
- Finally, centering climate in investors’ identity as a firm can attract talent. A Deloitte survey revealed more than 40% of Gen Z and Millennials have changed (or plan to change) jobs or industries due to climate concerns, illustrating the need for investors to consider human capital when weighing climate commitments.
SBTi for Private Companies
Similarly to financial institutions, smaller private companies are not thought of as SBTi’s key demographic, with multinational, typically public megacorporations taking center stage for the initiative’s publicity efforts.
However, the participation of private markets in moving the needle on climate is imperative. Roughly 40% of the U.S. economy is derived from privately held companies, making action from these entities critical to meeting climate goals.
Further, the SBTi has streamlined target-setting for small to medium enterprises (SMEs); the SME pathway provides a simplified process for businesses that meet SBTi’s criteria. The pathway simplifies the target setting process by making Scope 3 optional, setting predefined targets in line with limiting temperature rise to 1.5 degrees Celsius, and reducing the target validation fee.
Setting and working towards SBTi-aligned climate targets can facilitate growth and innovation for privately held companies:
- In pursuit of decreasing emissions, businesses may uncover opportunities for operational efficiencies which reduce costs, such as lower energy bills from energy efficiency initiatives and decreased travel expenses.
- Additionally, signaling a commitment to sustainability can be key to fulfilling supplier requirements. Key players such as Amazon, Walmart, and Apple are rolling out programs to reduce supply chain emissions through supplier engagements, which sometimes require detailed emission reporting and target setting. Microsoft, for instance, requires certain suppliers to report against these metrics annually.
How Novata Adds Value to the SBTi Process
Any SBTi journey starts with carbon accounting, and Novata is well-positioned to support both investors and private companies along the way. Novata’s Carbon Navigator makes tracking emissions a straightforward process, with carbon expertise available for enhanced guidance as well. The Navigator can help private companies establish their baseline emissions and provide investors with insight into the carbon impact of their portfolios. Following initial baseline exercises, Novata’s SBTi tool can help investors and private companies prepare their targets for SBTi submission, with Novata’s Services team available for more bespoke support. Learn more about how Novata supports the carbon journey.
