The Sillion Briefing 19.04.2024
Need-to-know corporate sustainability and ESG news, delivered fortnightly
In this edition...
SBTi uproar
TPT sector guidance
Swiss human rights ruling
EU carbon removals
EU buildings directive
Scotland scraps target
SEC Rule paused
Tesla cuts workforce
Disclosures
Wobble at SBTi: tempers rise over use of offsets for scope 3
It would be hard to have missed our headline story this week, given the buzz it generated – intensifying discussions around carbon offsets, scope 3, and the role of the Science Based Targets Initiative (SBTi).
What happened exactly?
On April 9th the SBTi, the most widely adopted GHG reduction standard and an important central body for emissions target setting by companies, released a surprise statement relating to the ongoing revision it is undertaking of its flagship Corporate Net-Zero Standard (CNZS). It stated that for scope 3 targets, the use of environmental attribution certificates for abatement purposes – which in SBTi parlance includes types of carbon offsets – would be extended beyond current limits. This means that in the final revised CNZS, to meet scope 3 targets companies would be able to purchase more carbon offsets than they are currently allowed under SBTi rules, up to an as yet undefined limit.
This unexpected concession to offsets by the usually strict SBTi shocked the corporate sustainability world. A protest letter the very next day from senior internal members of the SBTi called for the resignation of the CEO and board. In response to the turmoil, the SBTi appended a statement to the bottom of their original release clarifying that no immediate change has been made to current standards, and that any eventual change would be the product of prior research and consultation. The statement said a draft proposal on changes to scope 3 is set to be published in July.
Scope 3 is typically the most challenging part of emissions reductions. By making scope 3 targets easier to set and meet through allowing offsets, the SBTi may be banking on the benefits of having a greater number of SBTi-aligned companies outweighing the drawback of reduced ambition levels. Briefing readers will recall last month’s news that over 200 companies, including sustainability leaders Unilever, had commitments removed, with difficulties around scope 3 targets cited by these companies as a key barrier.
What’s the controversy?
Carbon offsets are controversial for two main reasons: i) They can be purchased to meet targets in lieu of taking direct action, and ii) The market has never been properly regulated, meaning there are many products which likely do not create the carbon reductions they claim.
The uproar is stoked by SBTi’s apparent about-face on the topic. True to the “Science Based” in its title, it has long been celebrated for being scientifically hardcore, insisting that commitments be strictly delimited by adherence to 1.5C of warming. Greater allowances for corporate practicalities, such as measures to ‘make it easier’ for companies, were not in the picture.
The SBTi’s view had previously been that scope 3 is an extraordinary challenge, one for which the tools of action – which will include collaboration, state-driven planning, supplier engagement and more – have not yet been fully figured out or implemented. Allowing more offsets obviates the expensive and complex work that companies are undertaking to reduce these emissions. With an easier way through, there would be less of an incentive to drive the economy-wide changes necessary.
What’s going on at the SBTi?
It’s unclear exactly what prompted the SBTi’s move, but there is speculation around pressure from carbon markets actors. As the SBTi is dominant as a standard-setter, entities in the carbon market industry argue that by blocking offsets the organisation is acting as a barrier to growing the market – which means blocking flows of capital into carbon reduction projects. According to Bloomberg, at meetings in London last month SBTi representatives were pressured to loosen requirements, with reports that one particularly imploring attendee even grabbed the shoulder of one of the representatives. Ultimately, the lack of a unified front – with even staff caught off guard – translates into a frustrating lack of clarity for companies.
If you’d like to talk with the Sillion team about your SBTi targets or what this news might eventually mean for you, then feel free to get in touch with us.
TPT publishes sector-specific transition plan resources
The Transition Plan Taskforce (TPT), which publishes the TPT framework for developing and disclosing transition plans, has released additional sector-specific resources complementing the main framework. Covering the following sectors (deep breath) – Asset Owners, Asset Managers, Banks, Electric Utilities & Power Generators, Food & Beverage, Metals & Mining and Oil & Gas – the documents do not add additional mandatory requirements, but companies in these sectors developing plans should consult them and will find them helpful.
The FCA’s decision on whether TPT will be mandatory for UK listed companies (potentially as early as FY25 reporting) is expected sometime this year. As the FCA is endorsing ISSB’s S2 standard, disclosures on transition plans – whether using the TPT’s framework or not – will nevertheless be required in the coming years.
EU
European court: Climate inaction violating human rights in Switzerland
In a significant court case, the European Court of Human Rights has ruled that inadequate climate action taken by Switzerland to meet its emission reduction targets violates fundamental human rights. A group of over 2,000 elderly Swiss woman called KlimaSeniorinnen launched the case nine years ago to call for better protection of women’s health in relation to climate change, on the basis that their age and gender makes them vulnerable to climate-related heatwaves. The ECHR ruled that the KlimaSeniorinnen were subject to a violation of Article 8 of the European Convention on Human Rights - the right to effective protection by the state “from the serious adverse effects of climate change on lives, health, well-being and quality of life”. The ruling may well make legal waves elsewhere. For example, in previous decisions on climate UK judges had noted that the European Convention had not yet been applied, suggesting that future cases will have to face this challenge.
EU certification on carbon removals progresses
Last week an EU law to create an EU certification framework for carbon removals passed into the final stages of approval. The legislation is focused on removals from industrial technologies and carbon storage through agriculture. In time, this could support a market for captured CO2 and storage – although such markets will require rigid certification to avoid controversy. Parliament member Lidia Pereira celebrated the potential of a new revenue stream for farmers, who as a group are often placed under pressure by environmental legislation.
EU buildings directive adopted
A revision to the bloc’s Energy Performance of Buildings Directive (EPBD) was adopted by member states, intended to boost flagging renovation rates of buildings. Passed by a slim majority, the goal of the legislation is to get Europe’s housing stock ready for net zero by 2050. EU countries will be asked to present their plans by 2026 to achieve a 20% to 22% reduction in residential buildings’ energy use by 2035, with 55% of gains coming from the bottom 43% of worst-performing buildings.
Policy and Regulation
Scottish Government to scrap 2030 net zero target
The Scottish minister for Wellbeing Economy, Net Zero and Energy Màiri McAllan has announced the government's flagship 2030 climate change target will be scrapped. McAllan called the target to reduce 1990 levels of greenhouse gas emissions by 75% by 2030 "out of reach". The Scottish government developed a reputation for pioneering climate target setting, and was one of the first in the world to declare a climate emergency back in 2019. The decision comes after another highly critical report from the Climate Change Committee (CCC) last month, which concluded the rate of emission reduction in most sectors would need to increase by a factor of nine in the years up to the end of the decade for the target to be met. So far, McAllan's rollback has been hailed as humiliating for the SNP, and may be critical in the context of an impending election date. More broadly, it raises questions on whether we can expect similar target adjustments from national governments as the finish line draws ever closer.
SEC hits pause on Climate Rule implementation
The US Securities and Exchange Commission has announced that it has halted the implementation of its new climate disclosure rules amid a court review over the measure’s legality. The SEC announced the adoption of what is its first climate-dedicated regulation in early March – we covered the full disclosure requirements in the Briefing last month. The appeals court ordered a temporary stay blocking the rule’s enforcement shortly after, on the basis that the requirements are too onerous and expensive for companies. The rule has been under scrutiny since it was first proposed in 2022, including facing a lawsuit from the U.S. Chamber of Commerce who argued that the SEC was overstepping its duties. Given its controversial nature in the US, the court review is unlikely to be the last of the issues the SEC faces in making its disclosure rules mandatory.
Corporate
Tesla cuts 10% of workforce
Automotive company Tesla has announced it is cutting over 10% of its global electric vehicle workforce, equivalent to 14,000 jobs. The email sent by Elon Musk couched the move as a strategic decision ahead of the company’s next phase of growth. However, the decision signals the broader context of cost pressures and the slowing demand for electric vehicles. For the first time in nearly four years, Tesla reported a decline in vehicle deliveries in the first quarter of 2024. In China, home to the biggest market for electric vehicles in the world, Tesla’s share of total sales has fallen against domestic competition led by BYD.
Calendar
May 2024 | UK FCA: New SDR and investment labels
June 2024 | SFDR requires financial institutions to report on new ESG disclosure requirements
July 2024 | UK Sustainability Disclosure Standards (SDS) published
December 2024 | EU Deforestation Law due diligence obligations imposed
FY24 reporting | CSRD: EU firms already subject to NFRD (and large non-EU subsidiaries) to report ESRS
FY25 reporting | ISSB S1 and S2 standards become effective in the UK
FY25 reporting | CSRD: Large private companies to report ESRS
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