ERM Energetics Exchange

Episode 14: Insights and advice on SBTs versus net zero emissions goals

• Energetics • Season 1 • Episode 14

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More and more businesses are pursuing emissions reductions. In this podcast we demystify the process of target setting. Energetics’ experts, Sonya Samson and Matthew Sprague discuss what they have seen when supporting clients to determine the type of target and the framework to be used, the need to align to business strategy, the importance of transparency and the use of offsets. The conversation is guided by Energetics' strategy and policy services lead, Sally Cook.

Featuring:  Matt Sprague, Senior Manager and Sonya Samson, Senior Consultant

Out host: Sally Cook, Principal Consultant

Note: The information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Speaker 1:

Welcome to the energetics exchange podcast conversations with energy and climate experts. Please note that the information and commentary in this podcast is of a general nature only, and does not take into account the objectives, financial situation, or needs of any particular individual or business business should not rely upon the content in this podcast without first seeking advice from a professional,

Speaker 2:

Hello, and welcome to the energetics exchange podcast. I'm Sally cook, a principal consultant at energetics and leader of our strategy and policy services area. And this episode, we will be discussing emissions reduction targets. There are increasing expectations on companies and governments to demonstrate emissions reduction, commitment by setting ambitious targets. However, there are many types of targets which can be set and they have different benefits and trade offs and levels of commitment here with me today to demystify target setting is energetic. Sonia Sampson and Matt Sprague. Sonya helps clients with setting science based targets for scope one, two, and three emissions, and brings insight into strategies such as internal carbon pricing to drive. De-carbonization. Matt helps companies to sit in at zero targets and develop long term de-carbonization plans to achieve them. Welcome to you both. Thanks. So there are many businesses who want to set a greenhouse gas emissions target, but don't know what type of target to set Sonya, where should they start? I do think that the target setting landscape is quite crowded. And so that can make it challenging for a company when they're choosing which target setting approach or even combination of approaches to choose. So one of the things that a company could do, particularly when they're just at the start of this process is to really ask themselves why they're setting an emissions reduction target. So for some companies that could be a desire to be aligned to best practice in their industry. And in that case, it would be quite important to look at what their peers are doing or what frameworks their peers are using for target setting for other companies. It could be around brand integrity or brand reputation. And so for those companies, selecting targets, setting frameworks that have strong brand recognition or very strange and requirements for actually getting accreditation could be more important. And these are just some examples, but I think what it highlights is how if a company really interrogates the objectives for setting an emissions reduction target, they can start identify the criteria that's most important to them, and then use that criteria in assessing or comparing different targets setting frameworks. And that should help start the process of choosing which proach

Speaker 3:

Is most relevant to you or your company.

Speaker 4:

So I think the other thing to add there, Sonia, those are some really good points. The thing other companies are doing is setting targets to be doing the right thing from an environmental and climate change perspective, rather than a brand reputation or a purely financial position. If they're trying to align themselves with the climate science and set targets, either in line with the Paris target or to meet other environmental sustainable goals, then that has a different viewpoint around the frameworks that are applicable to them as well.

Speaker 3:

Well said, Matt, can you give us an outline of, um, some of the common standards, for example, science based targets and net zero targets and what they actually mean and how they interact with other, um, frameworks like carbon neutral.

Speaker 4:

Yeah. Thanks Sally. So to start off with science based targets is aligning your emissions reduction strategy with the current climate science. So the climate science set under the Paris agreement projects, a one and a half degree target, and also a two degree target over the next few decades and setting a science based target means that you understand your emissions trajectory for your sector, for your organization and your market penetration out over the next few decades, whether you say one and a half degree target or well below two degree target a net zero on the other hand is a little bit more tailored to an individual organizations. So under net zero, we need to set a target. That's either inclusive of scope one and scope two, or also scope three emissions to achieve zero by a target year. And organizations and businesses are changing three elements of that target one being the inclusion of scope three or not the second one being the timeframe for which they set the target for. And thirdly, whether it's a, a target for the entire portfolio or certain elements. So a recent example is the West farmer announcement where they announced a net zero 2030 target for their retail branches. And then they've also set a net zero 2050 target for some of their industrial elements of their portfolio.

Speaker 3:

I think a couple of other things to consider with when setting in that zero target is that there's currently no generally accepted standard for net zero targets. And you need to be careful about potential greenwashing. So if you are choosing to do a target, which potentially incorporates partial scope, so maybe scope one and two, but not scope three or parts of your business. So for example, the way that Westfarmers has set a different type of target for different parts of their portfolio, I think as long as you're really clear in the public domain about what your target, you

Speaker 2:

Potentially avoid some of those issues of being perceived as being greenwashing. Whereas if you're really ambiguous about what your target covers, it might call it into question. The other differentiator between science based targets and net zero targets is that science based targets need to be over a period of five to 15 years and that there's set standards for those. So you could set them in combination, for example, a science based target over the shorter term, and then a net zero by 2040 or 2050.

Speaker 4:

Yeah, that's a, that's a really good point. What we saw in the amp net zero strategy is that they're going to buy renewable electricity, but they're also undertaking energy efficiency and neighbors upgrades. They're also undertaking electrification studies for their natural gas heating systems and, uh, at a range of other opportunities that they're exploring with offsets being the last resort for the remaining emissions. When we're talking about a net zero economy offsets is, is a limited opportunity. So when we're talking about Australia or new South Wales or any of the other States and territories that have set net zero targets, the use of offsets is really the last resort.

Speaker 2:

Both of you touched on the use of offsets and different standards. Tonya, what to companies need to consider when they're planning to use offsets to meet a greenhouse gas target. Yeah, I think almost too to summarize some of the points that we've been raising up until now, there's two ways you can look at the use of offsets against an emissions reduction target. So the first is maybe more short term or operational. And that's really just understanding if offsets are committed against your chosen emissions reduction framework. An example of that is ended the science based target initiative, offsets confused towards meeting your target. And then also just understanding if offsets are allowed, if there are any technical requirements, for example, around the vintage or type of offset that's allowed, but then there's also the longer term view and offsets which massive needed to, and that's considering the future availability and your potential or your ability to access those future offsets. One of the things you need to consider is if you've set a net zero target or an emissions reduction target that requires upset for a particular date in the future, say 2030, then the expectation is you will be net zero if year following that. And that does mean you need to understand your offsets procurement strategy well into the future and changing demand for offsets in the market may need for your ability to access those offsets.

Speaker 4:

So the other, the other thing to include in that strategy is aligning the offset projects or the offset sources with other internal environmental or sustainability targets for the, for your business. So whether you're an Australian land-based company and you wanted to support indigenous offset projects or other Australian based land-based offset projects, or whether you do a lot of work, for example, in India, like Telstra do and want to support Indian offset projects. So aligning the sources, project types, and also which frameworks for offsets you want to support as well with other targets will assist in the co benefits. And also the narrative that organizations can put around those offset procurement.

Speaker 3:

Yeah. Doing your due diligence on international offsets and international standards is fleshly important to make sure you're getting what you're paying for as well, ensuring that the state, you know, both the standard and the type of project is likely to generate real offsets. It's very important

Speaker 4:

And aligning the offset with the emissions sources as well is a good opportunity. So a lot of businesses and targets that are being set in Australia are using renewable electricity certificates, such as algae cities to offset their scope to electricity emissions and using carbon offsets to offset everything else. So while offsets are applicable for scope two emissions, it's more common to use renewable electricity to offset your electricity emissions than it is to use offsets.

Speaker 3:

The points that you touched on Sonia was the availability of offsets. And I think it's fair to say that the more people who are setting ambitious emissions targets and the more net zero emissions targets that are coming to the fore, um, the greater, the demand on offsets over time and therefore the potential for prices to go up. And that should also be a consideration of your, of your offset strategy and whether or not you could be potentially partnering with other, with offset providers to secure longterm offset needs and press, or potentially originating offsets within your own portfolio, if you can, as well. In addition to your emissions reduction activities, both considerations that you could take into account. And I think just also the importance of understanding what your emissions forecast looks like into the future, because if you're preparing offsets for your businesses, emissions profile may look quite different to what it looks like in 2020. And so you need to have this forward looking view of your emissions profile as well.

Speaker 4:

An understanding of the emissions profile is understanding your business business strategy. So are you forecasting growth within the organization? Are you plateauing or are you contracting as a, as a business or as a sector? So for example, you know, if you're a property company and you're actually looking to transition away from C and D grade buildings, and you've got an internal strategy to start procuring a and B grade buildings, that's a different emissions mix, even though the organization size might be the same, you'll have a different profile. The other thing to look at is for example, airports. So those airports are unlikely to grow unless you build new terminals, having the property and procurement strategy out over the next 10 years and understanding what new infrastructure is going in, what new energy using equipment is going in, whether it's more control systems, more communication systems, um, bigger HVAC systems for example, is, is really important. And just what we found is that a lot of organizations don't have a strong grasp on that forecast out one, two or three decades. Most people have a really good handle on what, where the business is going in the next two to three years. But having that longer term view is going to be key to understanding the overall target cost or the number of offsets you're going to need, or the number of opportunities that you can do to reduce your emissions. So as you're building your new infrastructure, or as you're growing your business building in low emissions materials, low emission technologies into that, uh, into that strategy and into those designs can be one of your emissions reduction opportunities, which can reduce your offset requirements later on. But that often comes at a cost. So understanding the offset cost in the future can help inform those procurement decisions. Now for, you know, for assets with 20 or 30 year lives,

Speaker 3:

Very important points. And I think you don't necessarily have to have one forecast either if you've got an uncertain future and you're projecting out for a long time, having different forecasts to sensitivity test against is valuable as well. So forecasting is obviously a vital element as well of the process of understanding how you might achieve a target that your business has already set Matt. Some businesses do do that. They go and they set an ambitious necessarily target. And then they work back in terms of how they will achieve that. How do they start from?

Speaker 4:

So once you've set your target, as you mentioned, Sally, you then need to go and work out how to achieve it and say, you set a 2030 target. What we don't want to do is leave everything until 2029 and then go and buy however many offsets we need. That's probably not the most economically viable way of achieving that target. So you've got, we've obviously got a decade to achieve a 20, 30 target, but the action needs to start now. So you need to start understanding what your base here emissions are and identifying the emissions reductions opportunities, and often there's projects that we can do now that will have emissions, reductions and cost saving benefits. There's projects will have emissions benefits, but will be neutral financial outcomes. And there'll be some projects which will cost the organization over the, over the decade. So having a blended approach over, over the timeframe to achieve the target lowest total cost will be important. So really developing a roadmap and a strategy, which we've done for a few clients, one being a larger government organization really outlining the key milestones, the key steps and the key projects that they need to undertake in each year between now and 2030 to achieve a target, working out the lowest possible cost and moving projects space on capital budget constraints and the payback of each project to reduce the total costs.

Speaker 2:

We're also working with a number of clients who have very uncertain future emissions profiles and very emissions intensive businesses in the time horizon of their targets out to sort of the 2050 type time horizon. A lot of the technological developments that might happen between now and then could be highly influential on what they end up doing. Um, and some of the technologies that they might need are not yet developed.

Speaker 4:

That's what we found in this strategy roadmap is we looked at electrification studies for the client and at the moment they don't have positive financial outcomes, but what we've built into the roadmap is review points. So in 2025, do you want to go and re review your electrification study, have costs, come down, have electricity prices changed. You want to review your renewable electricity procurement, whether it's through a PPA or through LGC off take agreements two or three years out from the end of that contract to assess if it's still the right strategy for you. And every couple of years you want to do program assessments, are we still on track? Are we still going in the right way? Are there any new technologies opportunities that we can do differently to reduce costs overall for the business?

Speaker 2:

That's a really important point, Matt, and we've seen it in the clients that we've worked with is that understanding they develop that the target setting process, it's not a oneself static event, but if we is a process that you should start folding into your general business or strategic processes, where you're constantly looking back and reviewing the decisions you've made the man's day, how have we changed technologically, but also who you're working with in your value chain. And then we should become a active moving part of your day to day business processes, not something that's done once and filed away. And when we work with clients over a period of time, that's a key development that we see start happening.

Speaker 4:

I think the other thing to loop back on is the carbon inventory sources of emissions. So we've seen organizations set targets based on scope one and scope two targets because when they set that target scope three was considered too hard or out of their control. And they thought that it was unachievable unrealistic to set a target, but over the last two or three years, they've now got a better handle on their scope one and scope twos. And they're starting to look at more ambitious scope, three targets. So even going back and re baselining or resetting a target based on this year's emissions, including additional scopes is, is more than acceptable. Going back to Sally's point earlier, as long as you're transparent and open about what sources are included in a target, then there should be no repercussions, um, from stakeholders around setting more ambitious targets based on better understanding and better data.

Speaker 2:

So might you bring up different scopes of target. And one example is science based targets, which requires you to set a scope three emissions target as well. If your scope three emissions are greater than 40% of your scope one and two, which is the case for the majority of companies. So now you've assisted a number of our clients to navigate the process of setting science based targets for their scope, one, two, and three emissions. What are some of the challenges that they're experiencing through that process, recognizing that for different companies, there may be specific challenges. There are some general ones we've seen. So maybe a more fundamental one around data. It can be challenging for some companies to make sure they have rec data available and where data is available to make sure that it's credible data to say an emissions baseline. We've also spoken quite a bit of us forecasting today. And so data is also very important to develop a credible or a series of credible projection of low emissions into the future. And then when we come to actually setting targets for companies that we've worked with, the challenge is then how to drop their business as usual emissions projection. So that it's in line with a target emissions profile and for scope one and two, this challenge is often framed as financial or technology. So max mentioned, um, being aware of what technology options are available both now and in the long term to meet your emissions reduction targets for scope three, that challenge often becomes more a challenge of engagement and influence along your broader value chain, because often to meet some of your, what I like to call non-operational scope, threes, um, you need engagement. So what I mean by that is there are some scope threes that are operational, that you have direct influence over. For example, business travel or accommodation use of taxis in your organization. You could set up some policies and processes to reduce emissions from those sources, but for some our other clients, particularly clients with consumer goods or any FMCG client where they're really have very big upstream value chains, a lot of emissions reduction opportunities, there will involve engagement in that value chain.

Speaker 3:

I think one of the challenges, as well as that level of influence around your scope three, and being able to influence that scope three, but also the way that you measure it influences how you can reduce it over time. Can you tell us a little bit more about that?

Speaker 2:

That's true, Sally. So it comes back to the question around data availability. I think you'd want to have the best data available. And so when we're using an example of say, product supply chain, the best or gold standard data would be actually understand, and the emissions at each stage of that product being made and then delivered to your facilities and what the specific emissions off for your specific suppliers, but often that data isn't readily available, or when you have hundreds and thousands of products may not be available for all of your products. And so we can start using proxy information, which in a lot of cases could be financial spend data. And that does introduce some challenges because it restricts your ability to understand where you could potentially implement emissions reductions activities, and then measure those against a financial baseline. But we've spoken quite a bit in various ways through this discussion about this, being a protest about being able to change and adapt as you move along the process. And so what we've seen, some of our clients doing setting science based targets, it's starting with the best information they have now, which is often financial data using that to set a target in the first instance, and then working towards improving the quality of the data. You're using more direct activity data to better understand actual points of emissions in the value chain and then revising and updating the target and emissions reduction activities. As that understanding progresses,

Speaker 4:

The opportunity that that approach also gives you is it highlights the hotspots and the main emission sources for the initial targeted emission reduction strategy. So if you know that 50% of your spend is on waste products, well, that's a really good place to start looking for working with your waste suppliers, but if you're, if half your spend or your half your emissions on embedded carbon in properties, well, then you probably want to start working with your supply chain in that element.

Speaker 3:

And I think some sources almost necessitate working with your supply chain to better understand your emissions. So for example, if you've developed your scope three emissions profile on the basis of, um, financial spend data multiplied by an emissions factor, if you continue to spend more over time, your emissions will grow. And so understanding the potential for emissions reductions and actually being able to quantify potential emissions reductions in those types of sources, almost necessitates you over time to move away from that financial spend times emissions factor approach. And this might not be relevant to all of your scope, three sources. And if it's, it might not be even relevant to your material ones, but for those who have material scope three, and those types of areas where they're using that measure, it does make it very difficult to reduce your scope three emissions without better measurement and more specific commitment to your own business. Thanks Sonia and Matt for talking with us today, I think we've covered a lot of ground. What are the main pieces of advice you'd like to leave that listeners?

Speaker 4:

I think there's three main things that organizations and businesses need to understand when they're setting targets. Firstly is understanding the inventory and the baseline and setting targets. Now for the next decade, you need to know where you are before you can work out where you're going and setting longer term targets needs to happen sooner rather than later, and not leaving it to the, to the last minute. The second, the second part and developing that strategy is understanding what projects you can do within your own asset base, whether that's energy efficiency or renewables projects, identifying those easy wins to reducing emissions, not only gives you runs on the board to take on more challenging targets, but it starts reducing the emissions at low cost. And then thirdly is developing that longer term strategy for the harder to abate emission sources. So it'd be that natural gas or refrigerants in HVAC plant and alongside that, developing your offset strategy as we mentioned earlier.

Speaker 2:

Yeah, I think those are really good. Three takeaways, Matt, and really describes the process, um, all the points along the process, and a lot of detail from my side, Sally, maybe just looking at the broader process of target setting, some key takeaways would be, make sure you ask the question of why you're actually choosing to set an emissions reduction, target, understanding that it is a process, not a once off static event and making sure that you really pay attention to transparency in disclosure to all of your stakeholders throughout the process.

Speaker 3:

Thanks. Those were excellent points. Thank you both for your time today and thank you again to our listeners. Stay tuned for more episodes on climate change management and energy markets,

Speaker 2:

Energetics exchange, podcast conversations with energy and climate experts.