New global initiatives aim to consolidate climate and sustainable financial standards


The SBTi’s standard aims to clarify the goal of net zero emissions, while the Common Ground Taxonomy shows the cooperation between China and the EU on sustainable finance issues.

Last month, the Science Based Targets Initiative (SBTi) launched its Net Zero Standard, which aims to provide a globally recognized, science-based target for companies wishing to commit to net zero emissions to ensure a unified approach and Avoid accusations of greenwashing.

Shortly after the SBTi announcement, the EU and China took a step to further consolidate ESG-related standards by agreeing on how closely their visions for defining green investments are aligned. The Common Ground Taxonomy-Climate Change Mitigation (CGT) builds on the EU Green Taxonomy and the Chinese Green Bond Catalog and marks the climax of the two-year work of the International Platform on Sustainable Finance (IPSF), a forum for dialogue between political decision-makers numerous countries with the aim of increasing the amount of private capital for sustainable investments.

What is the net zero standard?

The Net Zero Standard offers companies wishing to commit to net zero emissions the opportunity to demonstrate the scientific legitimacy of their goals to investors and the general public. The Net Zero Standard was developed together with an independent Expert Advisory Group of the SBTi, which was composed of participants from science, civil society, science and business and wanted to provide input from these different perspectives on what a universal standard should look like.

Companies adopting the Net Zero Standard must set short-term goals (i.e., the next five to 10 years) and long-term goals (i.e., over 10 years but before 2050) that they align with the goal of halving global emissions by 2030 and a 90% to 95% reduction in overall emissions by 2050. In particular, the Net Zero Standard covers Area 1, 2 and 3 emissions, although given the limited impact a company can have on its Category 3 emissions, the SBTi “recognizes the challenges” associated with including Scope 3 objectives in each standard, and on this basis has introduced slightly different rules with regard to Scope 3.

The requirements of the Net Zero Standard

Short-term goals must cover at least 95% of company-wide Scope 1 and Scope 2 emissions. For companies where Scope 3 emissions account for at least 40% of the company’s total emissions, at least 67% of Scope 3 emissions must also be included in a short-term target. Companies must also try to target the short-term goals for Scope 1 and 2 with an ambition of below 1.5 ° C (i.e. keeping the earth’s temperature below 1.5 ° C above pre-industrial times), while short-term goals for Scope 3 can instead be aligned on a path “well below 2 ° C”.

Long-term goals must cover at least 95% of a company’s Scope 1 and Scope 2 emissions, but also at least 90% of a company’s Scope 3 emissions. In particular, this Scope 3 requirement applies to all companies (not just those with a minimum proportion of Scope 3 emissions) and must also be based on a 1.5 ° C path. The SBTi recognizes that this will be “challenging” for companies, but is developing plans to further support companies through a specific follow-up project to be carried out by the Expert Advisory Group on Scope 3 emissions in 2022, as well as through a Supplier Engagement Toolkit to be released this year. Stakeholders will be interested in following the work of the expert group as the Scope 3 emissions will prove difficult, especially given the fact that the SBTi has found that carbon offsets only apply to 5 to 10% of emissions A company’s emissions can be applied if the target is to be brought into line with the Net Zero Standard.

The SBTi previously put in place specific pathways and guidelines for specific sectors, including the power generation sector and the forest, land use and agriculture sectors. While the “cross-sector” path, which applies to all companies that do not apply to sectors with their own tailor-made path, requires the setting of targets based on absolute emissions reductions, certain sector paths allow or even encourage intensity-based targets. Oil and gas companies in particular cannot currently have targets verified against the Net Zero Standard, but have to wait for a path for the oil and gas sector (which is under development) to be published.

The SBTi announced that seven companies have already set goals that correspond to the Net Zero standard. Other companies won’t be able to validate their targets until 2022, but at least they are now (with certain exceptions) able to understand the likely requirements.

The SBTi also released a consultation document regarding a Net Zero Standard for Financial Institutions, recognizing the importance that financial institutions will play in the transition process and the different requirements for the goals that these institutions will have.

Common Ground Taxonomy

In July 2020, the IPSF initiated a working group on taxonomies, which aims to evaluate the existing ecologically sustainable taxonomies and to identify similarities and differences. The announcement of the CGT four months later was the first step in the working group’s efforts to cover the criteria for climate change but not yet any other environmental goals.

Although the CGT is not a legal document requiring the EU or China to change their national taxonomies, or a single overarching taxonomy with universal application, it is a useful way of comparing the requirements for sustainable investments in the various legal systems. The IPSF encourages interested parties to use the CGT as a voluntary reference point when operating in the EU and Chinese markets.

The most notable aspect of the CGT is that it shows the EU-China sustainable finance cooperation which will be of particular interest to companies doing business in both jurisdictions. Interested stakeholders will also be curious to see whether the cooperation process extends to other environmental areas or compares other jurisdictions, or whether the CGT becomes an independent work product.

Both the CGT and the Net Zero Standard are, in their own way, clear steps towards the consolidation of standards in this area, similar to how the announcement by the International Sustainability Standards Board signaled a consolidation in the area of ​​ESG disclosures. This development, which Latham highlighted in ESG 2021: 10 Things to Look For, is not surprising and clearly shows that the global ESG market is maturing in response to investor demand.

This article is provided by Latham & Watkins for educational purposes only and to provide you with general information and understanding of the law, not to provide specific legal advice. The mere receipt of this notice does not create a legal client relationship between you and Latham & Watkins. The contents of this article should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.


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