Company categorisation based on size and geography

Recognising the challenges faced by smaller businesses and companies in developing economies, the new framework plans to introduce a two-tier categorisation system based on company size and geography. The new structure could simplify requirements for small and medium-sized enterprises (SMEs) operating in lower-income regions – Category B, offering increased flexibility by making some criteria optional.

The target-setting framework has been enhanced to align with the latest IPCC Sixth Assessment Report (AR6) pathways, replacing previous benchmarks based on AR5.

A categorised approach to near-term targets is put forward, where Category A companies – large and medium companies in high-income countries – must set targets across all scopes, while Category B companies are only required to target Scopes 1 and 2.

For long-term targets, Category A companies would need to set targets for Scopes 1 and 2, while Scope 3 long-term targets remain under consultation.

Scope 1 and 2 target splitting

The current version of the standard allows companies to combine scope 1 and 2 emissions under a single target to simplify the target-setting process. However, since academic research uncovered that the target combination may delay decarbonisation, the draft standard requires separating Scope 1 and 2 targets.

Veyt’s review of the sustainability reports stemming from the Corporate Sustainability Reporting Directive (CSRD) requirements revealed that few companies set Scope 2 GHG reduction targets in the way the European reporting standards (ESRS) instruct companies. Where targets are set, Scope 2 GHG emission reduction targets are often merged with Scope 1 targets, which can most likely be explained by companies’ adherence to the SBTi standards.

With the proposed changes, the practice could be changed to align with the ESRS.

Dual reporting for Scope 2

The draft also proposes requirements to set Scope 2 targets with the two accounting approaches currently in use. All companies could be required to set targets to reduce location-based Scope 2 emissions, and either a target to reduce market-based Scope 2 emissions or a zero-carbon electricity target.

To remain technology-neutral and accommodate nuclear-dominant grids, zero-carbon electricity targets are suggested to replace the renewable electricity targets found in the current standard. This would open the door to the use of nuclear GOs.

Temporal and geographical matching

To support effective grid decarbonisation, the draft suggests introducing temporal and geographical matching where possible. The level of granularity is not specified (i.e. geographical matching – bidding zone or national level, temporal matching – hourly, monthly, annual?).

Where matching is not an option, the draft standard proposes to allow companies to contribute to carbon-free electricity from other grids but only as a time-limited alternative, without providing a time horizon.

Additionality

The draft standards plan recommending procuring contractual instruments that result in additional renewable energy production.

Thus, per Veyt’s interpretation, the additionality recommendation is made in relation to the contractual instrument type used.

Companies should procure contractual instruments that result in additional renewable energy production, thereby directly contributing to grid decarbonization.

The plant age threshold is not set. For comparison, the revised RE100 criteria entered into force on 1 January 2024, introducing a 15-year age limit on commissioning/repowering of power plants.

Given the ongoing discussions on the effect of EACs on the additional capacities build-out, clarity is lacking as to whether GOs from younger renewable plants would meet the criteria or whether power purchase agreements (PPA) are preferred.

Scope 3

To effect decarbonisation along the supply chain, the SBTi draft would either require or recommend that companies develop procurement policies in which they commit to progressively source from businesses that have achieved a level of emissions performance compatible with reaching net-zero emissions at the global level.

This means that the SBTi could have ripple effects along the supply chain, as SBTi-compliant businesses implement requirements that could provide a competitive advantage to decarbonised suppliers of goods and services. This means that decarbonised businesses could, in theory, have a ” decarbonised” competitive advantage. In 2024, the SBTi decided to extend the use of EACs for Scope 3 emissions management.

Market impact

Over 2000 companies in Europe have validated their SBTi targets, while 400 companies have net-zero targets.

Scope 1 and 2 targets disaggregation, if approved, could lead to a more robust Scope 2 target setting, closely aligning with the European Sustainability Reporting Standards.

By giving companies the option to choose between the market-based Scope 2 emission target or a zero-carbon electricity target instead of a fully renewable target, the SBTi could open the door to greater use of nuclear GOs. Veyt’s 2024 disclosure cycle preliminary cancellation data reveals that nuclear GO cancellations in the AIB area (excluding Switzerland) shot up to 57.9 TWh, up by 7 % year-to-year.

When it comes to temporal and geographical matching, it is unclear whether SBTi frames matching as a recommendation or a requirement. Depending on the final wording of the standards and clarifications regarding the level of granularity, the GO market could be encouraged to time- and location-match their electricity consumption, akin to EU renewable hydrogen production requirements (on bidding zone level and on a monthly basis until 2030).

If the additionality requirement is instrument-agnostic (i.e. no preference to PPAs over EACs), it could direct the corporate sourcing strategies to procure from younger plants, perhaps following RE100 criteria by a lack of clarification from the SBTi.

According to the CDP data, in Europe, the average project was commissioned over 40 years ago, if we consider unbundled EAC purchases.

Passing on decarbonisation requirements along the supply chain, encompassing Scope 3 emissions, could direct smaller businesses to increasingly source from the GO market, resulting in rising demand.

Per the latest CDP data that SBTi companies report to, the corporates consumed more than 330 TWh of electricity in Europe, of which 146.3 TWh was renewable in 2023 in the AIB area. 50 TWh of RES-E was procured through unbundled EACs, with German and French companies being the largest consumers; 23.4 TWh of RES-E were secured via PPAs, and 60.9 TWh through contracts with suppliers.

According to 2023 disclosure cycle cancellation data, GO demand stood at 785.65 TWh (723.1 TWh during the calendar year). We could thereby assume that SBTi/CDP companies could have been responsible for 7 % of the total demand in 2023. As these companies strive to reach net-zero by 2050, we could presume that their demand is going to rise and with the suggested changes in the draft standards, this could give rise to GO premiums based on plant age, time of production and location.