Joining forces: Science Based Targets and the XDC

Companies are progressively committing themselves to setting a Science Based Target ("SBT"). SBT are science-based climate emission targets that have been promoted by the Science Based Targets Initiative ("SBTi") in an attempt of generating a robust corporate response to climate change. From a theoretical perspective, they are deemed strategic for enabling ambitious climate protection - but when looked at from a practical perspective, outcomes are proving otherwise.
 
Companies that have set themselves a SBT are able to tell compelling stories about their climate competence. NGOs such as the CDP, WWF, WRI and UN Global Compact with their deep knowledge of climate protection serve as excellent multipliers of such stories. Since they have enough seniority to deliver credibility in the "science-based" aspect of SBT. Providing a tremendous opportunity for companies to pioneer and profit from building climate competence. Nonetheless, not all that glitters is gold. Despite the high political pressure and advertisement behind this initiative, its uptake is still minimal; up to now only 91 companies have set themselves a SBT.
 
What is the reason behind this low uptake? If it is so appealing ... 
 
An explanation:
 
Abstraction

The methods available to companies for setting themselves a SBT are based on scenarios developed by climate science institutions, such as: the International Panel on Climate Change ("IPCC") and the International Energy Agency ("IEA"). Both quite complex systems model different parameters to determine the emission reductions required to stay within the 2 °C target. The credibility of setting a SBT depends on a company having fully understood the complexities and assumptions behind these models. The time investment required for this understanding is considerable and rarely available for companies. In addition, a high affinity to climate science is necessary – but not often found in the people in charge of climate management within a company. The intrinsic complexity of the science behind the targets results in corporate representatives reluctance to talk about them. This reluctance is increased by the fear of making mistakes as well as not feeling confident enough to communicate the targets in an appropriate manner. Which leads to SBT not being promoted and publicized, thus stumping their growth and uptake.
 
Rigidity

Climate as a scientific topic is full of uncertainties, discussions and room for interpretation. The methods of the SBTi allow for variation of certain basic parameters, such as e.g. company-specific growth in the first 5 years based on the year selected in the C-Fact method. Nonetheless, practitioners perceive the methods as a rigid corset they are demanded to fit into, rather than as an instrument they can use to accommodate to their own climate strategy. The consequence is often a mediocre and isolated integration of climate goals in the form of a SBT into other core management processes. Processes such as risk management, investment strategy or governance. Which ultimately leads to slowing down the effectiveness of the SBT approach.
 
Political Facet

The SBTi, a group of well-known NGOs, pursues strong political goals which the initiative integrates into the requirements for setting a SBT. The SBTi follows the "commit, develop, submit, announce" approach. If a company has submitted a SBT, it must be verified by the SBTi. An exclusion criterion is the existence of an "ambitious" climate target. The verification process is often criticized as lacking transparency, partly due to the fact that the SBTi is determining on its own with no established parameters, what is to be defined as an "ambitious" target. The consequence of this unruly issue is that many companies get the impression they are being patronized and feel under an uncomfortable pressure to commit to standards they do not fully grasp.
 
Lack of resilience

Further weaknesses arise due to questioning of whether the methods of the SBTi are sufficiently resilient to ensure the quality of the metrics they create. Metrics which underpin the long-term investment decisions they are targeting. The main point here is the question of whether a requirement for a company, (which has been derived from an IEA scenario), is sufficiently valid and legally acceptable as a control indicator. The scenarios of the IEA do not claim to be precise, the IEA is known by the far-flung reality of their scenarios. This uncertainty results in an extreme reluctance to using SBT as part of a decision-making basis for investing in emission reductions.

Interim conclusion 

The issues described above may provide some insight into the barriers companies face for setting themselves a SBT. Due to the enormous political pressure and communicationrelated benefits of a company to join the initiative, a behavior of "as much as necessary, as little as possible" is being adopted. That's too bad, since there is so much more to it and great opportunities for innovation remain unexploited.
 
At this point and as a result of the previous considerations, the introduction of another science-based climate metric, seems appropriate: The X-Degree Compatibility ("XDC"), is a metric that claims to fill the gaps denounced, in order to reduce the barriers inhibiting the uptake and use of SBT. The XDC measures a company's contribution to global warming by expressing how many degrees °C the earth would warm up to by 2050 if all companies were as emission-intensive as the company under consideration, provided the same economic output.
 
As an example, if a company’s XDC is 2.7 °, this would signify that the earth would heat up 2.7 °C by 2050 according to the XDC's calculation logic. The XDC is calculated using the XDC model. The XDC addresses the weaknesses of the SBTi in the following manners:
 
Relevance

The XDC as science-based climate metric, communicates relevant information regarding individual contributions to global warming in a simple language, a single °C number. This information is relevant because it refers to a company’s present stance, to the here and now. This is most evident when calculating a portfolio’s XDC: "How hot is your portfolio?" or when comparing a high XDC with the lip service of a company which claims to be sustainable. By relating to what is important to the individual human being, the XDC combines climate considerations with personal identities of climate fund managers, sustainability managers or risk managers.

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Dynamics

The XDC and its use is based on the assumption that the user is competent for independently assessing the potential risks and opportunities brought upon a company by climate change. The XDC itself is a fully objective physical measure to be read and applied by its user. It asks the user to apply its expertise and experience in the face of a new challenge. The XDC itself serves only as an instrument, making no moral or qualitative judgments of a company’s contribution. This is achieved by providing the XDC model, which allows the user to vary all the parameters that determine the XDC. The consequence of this is providing its users with complete sovereignty over their climate strategy, which makes it easier to take responsibility about as well as to stand behind the measures the user deems appropriate to increase and manage the company’s climate competencies.
 
Objectivity

The XDC is a purely physical measure, free of sector-specific requirements, economic considerations or political objectives. Thus, it leaves little room for denial or interpretation. Rather, it requires a posture, a stance, in regards to climate treatment in different levels within an organization. This posture may lead to generating sector-wide XDC comparisons or demanding comparisons with the XDCs of direct competitors.
 
Load-bearing capacity

The XDC is a science-based climate metric which first identifies how many emissions would reach the atmosphere if everyone were as emission-intensive as the company in question. Secondly, current climate science findings are used to model which temperature increase would result. It is not based on scenarios and is therefore more of a forecast than a scenario analysis. This makes it the safer alternative when it comes to providing information as a basis for making investment and risk management decisions that should be in line with governance requirements.

Conclusion

SBTs are a valuable tool for companies to demonstrate that their climate strategy is serious. Providing a strong signal of climate competence, they are gaining attention among climate-conscious investors and other stakeholders. 350 companies have already joined the SBTi, but only a rather modest number have actually committed to the targets. 
 
The XDC reduces the barriers for up taking SBT, making it much easier for companies to set a SBT. The trick is to use the emission reductions required in the SBT in the dynamic XDC model, which can function as a control instrument of the SBT. With numerous functions, especially for investment management, SBTs can be directly linked to the processes that are necessary for the implementation of an "ambitious" climate strategy. The first DAX companies are experimenting with this approach at the moment.

An upcoming webinar on 23.03.2018 will be held, in which the XDC will be presented with its applications, the connection with the Science Based Targets will be explained and a first insight into the "XDC webApplication" will be provided.

 

You are welcome to join by clicking here

Hannah Helmke is managing partner of the young climate data provider, right. based on science, located in Frankfurt. 

 

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