Insights

Building Credibility Through Target Validation: The Rapid Rise in SBTi-Approved Companies

ㅣTaehan Kim, COO of KoSIF and Min-ah Kim, Researcher of KoSIFㅣ

The number of companies setting net-zero targets is rising rapidly. At the same time, awareness is spreading that climate change is not only an environmental issue, but also a financial risk.

Following the establishment of the Task Force on Climate-related Financial Disclosures, or TCFD, in 2015, concerns grew that climate change could have a significant impact on financial stability. Climate risk management subsequently became a major priority for financial institutions.

Leading financial institutions around the world have begun incorporating climate change into their risk management systems. They are also requiring the companies they invest in or lend to to establish and implement credible climate strategies. The starting point—and a central component—of any corporate climate strategy is the establishment of emissions reduction targets.

According to CDP, the global environmental disclosure platform, 4,997 companies worldwide had established greenhouse gas emissions reduction targets as of 2022. This represented an increase of nearly 2,000 companies in just two years, from 3,055 in 2020.

In Korea, the number more than doubled from 80 companies in 2020 to 180 in 2022. Establishing an emissions reduction target is no longer unusual. Attention is now shifting to which companies have set credible targets, how ambitious those targets are, and whether they are being implemented effectively. (Excerpt omitted)

Net zero refers to achieving a balance in which net greenhouse gas emissions reach zero. This means that any residual emissions remaining after reductions are balanced by an equivalent amount of greenhouse gas removals or neutralization.

     Criteria for Net-Zero Targets

Net-zero targets may appear simple in theory. In practice, however, applying them to companies and comparing the ambition of different corporate targets is far more difficult.

Consider two companies in the same sector with similar market capitalizations, product portfolios, and emissions intensity relative to revenue.

Company A establishes a near-term target to reduce Scope 1 and 2 emissions by 40% by 2030. Its net-zero target aims to reduce Scope 1, 2, and 3 emissions by 70% by 2040, with the remaining 30% neutralized through offsets. For Scope 3 emissions, however, it sets an intensity-based rather than an absolute reduction target.

Company B establishes a target to reduce Scope 1 and 2 emissions by 95% by 2050, with the remaining 5% offset. Scope 3 emissions are not included.

At first glance, both targets may appear to deliver substantial emissions reductions. Yet they differ in target year, emissions coverage, reduction level, target type, and use of offsets.

Are both targets appropriate? Which is more ambitious? These questions are not easy to answer without a consistent and transparent standard.

A range of initiatives, including the Net-Zero Asset Owner Alliance and Race to Zero, provide criteria for corporate and financial institution net-zero targets. Among the most widely recognized is the Science Based Targets initiative, or SBTi.

As its name suggests, SBTi’s net-zero criteria are grounded in climate science, including pathways developed by the Intergovernmental Panel on Climate Change, or IPCC.

The IPCC has stated that limiting global warming to 1.5°C requires not only reaching net zero before 2050, but also reducing emissions by approximately 43% by 2030. Rapid near-term reductions are critical because greenhouse gases accumulate in the atmosphere and continue to generate warming over time.

SBTi therefore requires companies to establish both a long-term target to achieve net zero by 2050 or earlier and a near-term target, generally with a target year around 2030.

The emissions boundary must include not only Scope 1 and 2 emissions, but also Scope 3 emissions where they represent a material share of a company’s total footprint. (Excerpt omitted)

Required reduction pathways may differ by sector to reflect factors such as growth prospects and emissions reduction potential. On average, however, SBTi-aligned pathways require annual emissions reductions of at least approximately 4%.

Corporate emissions reduction targets generally take one of two forms:

1. An absolute reduction target, which reduces total emissions in the target year relative to a base year; or
2. An intensity target, which reduces emissions relative to a unit of revenue, production, or another business metric.

Intensity targets are permitted in some sectors but not in others. Depending on the target type, reductions may therefore be expressed as an absolute percentage reduction from the base year or as a percentage reduction in emissions per unit of revenue or production.

The use of offsets is also restricted. Under net-zero criteria, companies are generally expected to reduce the large majority of emissions directly, with only approximately 5–10% of residual emissions neutralized.

     Why Companies Seek Target Validation

Establishing and implementing targets that meet SBTi criteria is not easy. Nevertheless, the rapid increase in companies committing to set science-based targets or receiving formal validation represents a significant shift. (Excerpt omitted)

Why are so many companies submitting their targets to SBTi?

Two key factors are concerns about greenwashing and the need for comparability. (Excerpt omitted) Growing expectations from investors and other external stakeholders have also played an important role.

SBTi publicly discloses its target validation criteria and publishes validated targets in a standardized format that external stakeholders can readily understand.

During the validation process, companies submit information on their greenhouse gas emissions accounting methodologies, reduction strategies, and proposed targets. Where a target does not meet the criteria, the company is required to revise it. Targets that successfully complete the process are aligned with a 1.5°C pathway.

Independent validation therefore allows companies to demonstrate that their climate targets are based on a recognized scientific framework rather than self-defined ambition alone.

     From Target Setting to Implementation

As the number of companies with SBTi-validated targets continues to rise, attention is naturally shifting from target setting to actual performance.

Once a target has been validated, SBTi requires companies to disclose their emissions annually through publicly accessible channels such as CDP, sustainability reports, or corporate websites.

Based on these disclosures, SBTi publishes monitoring reports and a Progress Dashboard that allows stakeholders to review company-level progress. It also plans to further strengthen its methods for tracking target performance and develop additional indicators for evaluating implementation.

Whether to establish a net-zero target, which standard to follow, and whether to seek validation through a global initiative such as SBTi are ultimately decisions for each company.

One point, however, should not be overlooked: a company’s commitment and capacity to manage greenhouse gas emissions are increasingly becoming core indicators of its future competitiveness.

In a low-carbon economy, greenhouse gas emissions increasingly carry a direct financial cost. For export-oriented Korean industries in particular, strengthening climate capabilities—including the validation of emissions reduction targets—will be essential to maintaining competitiveness in global markets.