In March, the Securities and Exchange Commission adopted a final rule to enhance and standardize climate-related disclosures by public companies. The SEC says the rule responds to investor demands for information on the financial effects of climate-related risks and how a registrant manages those risks while balancing the associated costs of the rules. The final rule requires large filers and large accelerated filers to disclose material information about Scopes 1-2 emissions. Scope 3 was not included in the final rule. On April 5^th, the SEC announced they will pause the implementation of the rule until litigation by a range of opponents including companies, Republican-led states, and the Sierra Club, is resolved.

Many companies already report and collect climate-related risk data, their GHG footprints, and their GHG reduction goals and other climate efforts, either for voluntary sustainability programs, or for emerging regulation in jurisdictions including California, the EU, UK, and others. In fact, a Duke survey found that many large corporate respondents did not anticipate high marginal costs for complying with a new SEC climate rule, because they already find and disclose the information that will be required under the rule, either for voluntary initiatives or regulations in other jurisdictions.

The exclusion of Scope 3 in disclosures by the SEC underscores many of the challenges with current Scope 3 reporting and guidance. As emissions disclosure becomes mandatory, companies need to meet a higher standard to verify the information they disclose – a task that is difficult under the current Scope 3 accounting norms. Scope 3 emissions are often the majority of a companies’ footprint, and a range of stakeholders, including investors, urge companies to account for and take action to reduce Scope 3.

Despite litigation delays, most companies are likely facing demands to report climate-related information in other jurisdictions. As such, they should be prepared to collect the necessary information sought by emerging disclosure requirements and ensure that they meet steps for data assurance and validation.

SBTi released new guidance on the Beyond Value Chain Mitigation (BVCM), currently a recommendation – not a requirement – under their Net Zero Standard. Under SBTi’s definition and guidance, BVCM activities are not accounted for in a Scope 1-3 inventory and can include both carbon avoidance, reduction, and removal activities, including investments in and purchases of carbon credits.

SBTi’s Corporate Net-Zero Standard identifies four components: near-term reduction targets for a company’s Scopes 1-3 value chain, long-term reduction targets, the neutralization of residual emissions, and Beyond the Value Chain Mitigation, which refers to a range of activities outside of a company’s value chain that SBTi advises “should” be undertaken now. and increase even more thereafter to stay below the 1.5C threshold globally. Beyond enabling companies to meet their GHG reduction targets, climate finance also needs to support a range of complementary activities including preserving nature, restoring ecosystems, and scaling up different forms of carbon removals. Many companies have already gotten started, and SBTi’s BVCM is among the set of recent emerging guidelines to inform company decision making.

BVCM is not the only guidance advising companies on how to integrate carbon reductions outside of their boundaries into their climate strategies. Last year, the Voluntary Carbon Markets Integrity Initiative (VCMI) published its Claims Code of Practice that allows companies to indicate that they are both credibly reducing emissions while purchasing high-quality carbon credits. (VCMI is also launching a Scope 3 “Flexibility Claim” that will allow companies to buy an amount of carbon credits equal to the gap between their current and future Scope 3 emissions reduction target). Oxford recently revised their Principles for Net Zero Aligned Carbon Offsetting, which outlines principles companies can follow when purchasing carbon credits as part of their net-zero strategy, only after prioritizing direct emissions reductions in a given year.

Does this replace direct, rapid emissions reductions? Absolutely not. But BVCM is crucial.

On April 9, 2024, the Science Based Targets initiative’s (SBTi) Board of Trustees released a statement explaining that SBTi “has decided to extend [environmental attribute certificate and instrument] use for the purpose of abatement of Scope 3 related emissions beyond current limits.” The Board implies that SBTi will reverse its long-standing guidance and allow a range of environmental attribute certificates[1] and instruments (including renewable energy credits (RECs), carbon credits, and credits for low-to-zero-emission commodities like sustainable aviation fuel) to meet Scope 3 reduction targets. This announcement caught many by surprise – including SBTi staff, who a few days later wrote a strongly worded letter criticizing the Board’s actions. At the moment, the organization is clearly beset with internal turmoil.

We do not yet know how all this plays out. But because companies’ upstream and downstream value chain emissions (Scope 3) inventories are often far greater than its Scopes 1 and 2 inventories, changes to SBTi’s approach along the lines suggested by the Board’s statement could have a profound impact on how companies meet science-aligned Scope 3 targets and could drive new demand in voluntary carbon and clean energy markets.

What We Know

• While internal dissension could disrupt the timeline, there has been no change to SBTi’s announced intention to provide a first draft update to its “flagship” Corporate Net-Zero Standard by July 2024. While the Board’s signal that that guidance will include a new approach to the use of certificates and carbon credits as “a way to accelerate the decarbonization of value chains”, we will have to wait and see. In a clarification to its original statement, the Board indicates that SBTi will follow its standard operating procedures (which includes public consultation and internal technical review and approach) for updating the Net-Zero Standard and that a discussion paper will be shared along with the first draft proposal of potential changes to Scope 3 in July 2024.

 

• SBTi expanding the use of environmental attribute certificates and instruments would represent a significant change of course. SBTi has historically restricted the use of environmental certificates and instruments to demonstrate Scope 3 GHG reductions and meet Scope 3 targets. In its statement, the SBTi Board of Trustees expressed its view that environmental certificates “could function as an additional tool to tackle climate change.” Many stakeholders (including us) have argued that SBTi’s legacy rules were inhibiting the range of actions companies can take to address climate change.

 

• If SBTi does move in this direction, it will establish “basic rules, thresholds, and guardrails” regarding the use of certificates in Scope 3. In its statement, the SBTi Board of Trustees acknowledges that some stakeholders continue to object to the use of certificates and instruments in meeting science-based reduction targets and indicates that SBTi will establish provisions to ensure “the responsible use of environmental attribute certificates in target setting.”

 

• SBTi itself will not validate carbon credit quality. The SBTi Board of Trustees implies that SBTi will look to groups like the Integrity Council for Voluntary Carbon Markets (ICVCM) and its Core Carbon Principles (CCP) to determine the standards for instrument quality.

 

What We Do Not Know Yet

• What might be the full range of certificates and instruments that SBTi will permit to be used in Scope 3? In its 2023 “Call for Evidence” on the effectiveness of the use of certificates in GHG reduction targets, SBTi indicated that certificates and instruments can include: energy attribute certificates for electricity (such as RECs); energy carrier certificates for green hydrogen, green gas, and Sustainable Aviation Fuel; emission reduction credits; and commodities certified to have been produced with a given emissions profile like green steel. SBTi has not yet indicated whether all types of certificates can be used to demonstrate reductions in Scope 3, including carbon credits which depending on a project type, may reflect avoided, reduced, or removed emissions. SBTi has previously indicated that activities outside a company’s value chain, whether carbon avoidance, reduction, or removal, may not fall under the scope of its potential updates for Scope 3 (also see SBTi’s Beyond the Value Chain Mitigation report).

 

• Even if the Board approach prevails, to exactly what extent will certificates and instruments be permitted to meet Scope 3 reduction targets? Previously, SBTi was very clear that environmental attribute certificates and instruments could not be used to meet Scope 3 targets, and in adopting new guidance, SBTi will have to clarify how much certificates can contribute to Scope 3 reduction. For example, can carbon reduction credits be used to meet 100% of a Scope 3 reduction target or just a certain percentage? Similarly, can carbon credits apply against any category of Scope 3 emissions or just a narrower subset of categories – for example, will SBTi allow a company to apply carbon credits against a supplier’s Scope 2 emissions or just RECs? Can a company offset its emissions anywhere in the world based on reductions it achieves from one project in one location in its value chain—for example, if a company invests in methane reduction in one country, can it apply credits originating from that project to emissions that occur elsewhere? Regarding removal credits, SBTi’s current Net-Zero Standard also explains that the primary purpose of carbon removals is to neutralize a company’s “residual” emissions that are not otherwise possible to mitigate. We do not know whether removals will be allowed to contribute to mitigation targets.

 

• Will SBTi limit the use of instruments to only those generated within a value chain (so-called “insets”) or more broadly allow instruments to be used against targets even if generated outside a value chain (an “offset”)? Many companies have complex global supply chains and often lack visibility into their supplier base. In some instances, limited visibility has hindered company interventions in their upstream supply chains, and it is not yet clear whether SBTi will adopt greater flexibility regarding whether certain interventions do or do not fall under a Scope 3 boundary into its updated guidance. For example, a company may wish to make an investment in regenerative agriculture knowing a farm is likely in its supply shed but may not always know if that farm is in its supply chain. Similarly, a company may purchase SAF, knowing that it will displace conventional jet fuel, even if not used directly by the company. SBTi has not always accepted environmental certificates generated by these activities to demonstrate Scope 3 reductions, but given its interest in accelerating supply chain action, SBTi could address known challenges for companies in taking Scope 3 action.

 

• How can interested companies engage SBTi as it finalizes changes to the Corporate Net-Zero Standard? In its statement, the SBTi Board of Trustees indicated that consultations with all the relevant stakeholders would be part of the update process but has not provided any additional information. In its statement, the Board indicated the results of the 2023 Call for Evidence, which collected feedback from stakeholders on instrument effectiveness, had been shared internally and implied that external consultation had already guided its decision making.

 

The SBTi Board of Trustees’ announcement is welcome news to many – but a cause of great concern to others. Perhaps it means that SBTi is ready to amend its long-standing policy of limiting the use of certificates and instruments in meeting Scope 3 targets, but the extent to which it might do so remains uncertain. In our view, if SBTi decision-making is in fact guided by science and influenced by the urgency of the climate crisis, we will see change.  As we and others have argued, much of SBTi’s approach is no longer well-suited to meeting the willingness of leading companies today to drive positive climate impact. Inviting and rewarding private sector investment in the reduction, avoidance, and removal of greenhouse gas emissions using the full range of credible and verified market instruments would be a step in the right direction – for companies and the climate.

 

References and Media

1. GreenBiz (initial story); (follow-up story on staff disagreement with Board of Trustee statement)
2. Bloomberg
3. ESG Today
4. VCMI statement
5. “Scope 3: What Question are We Trying to Answer?”

 

 

[1] SBTi defines environmental attribute certificates as “instruments used to quantify, verify and track the environmental benefits associated with climate mitigation activities or projects.”

We are thrilled to announce that Miranda Ballentine, founding CEO of the Clean Energy Buyers Alliance (CEBA), will be joining Green Strategies as a Senior Advisor to Green Strategies. During her decade leading CEBA, Miranda oversaw the growth of the team from 6 to 50 staff, increased revenued six-fold, and helped the CEBA member community add over 71 gigawatts (GW) of wind, solar, and storage capacity in the United States.

Before CEBA,  Miranda was appointed by President Obama and confirmed by the U.S. Senate as the 4th Assistant Secretary of the Air Force (Installations, Environment, & Energy) in 2014 where She was responsible for a $9 billion energy budget (including $7.5B in aviation fuel and $1.5B in electricity), as well as environmental programs for 9 million acres of land, 200 miles of coastline, 600,000 acres of forests, and 270,000 acres of wetland.

Miranda was named to the inaugural TIME100 CLIMATE list, honoring the 100 most influential climate leaders in business, and she has a history of successfully launching and overseeing clean energy and ESG strategies at executive levels in corporate, association, non-profit, and government sectors.

We have no doubt that Green Strategies’ work will benefit immensely from Miranda’s experience and passion in accelerating clean energy and solving climate change.

Issues around Scope 3 have appropriately gotten a lot of attention lately. Scope 3 emissions (or “value chain” emissions) often make up the majority of a greenhouse gas inventory and so adequately accounting for these emissions is crucial. It is becoming clear that the greenhouse gas accounting system as designed currently is ill-suited to serve its fundamental purpose: driving corporate actions to reduce, avoid, and remove greenhouse gas emissions. Scope 3 inventories are often seen as an end in and of themselves, yet from a climate perspective they are only tools – and only useful if they help lead to emissions reduction. 

While SBTi’s recent announcement on market-based mechanisms indicates a move in a positive direction, we need to act quickly to design an effective Scope 3 system on the timeline that science calls for.

Green Strategies’ President Roger Ballentine has published a paper in Frontiers’ Sustainable Energy Policy journal which helps shine light on problems with Scope 3 accounting and how we might make it better — for companies and the climate. We recommend giving it a read!

Frontiers Sustainable Energy Policy – Scope 3: What Question are We Trying to Answer?