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Blog | Thursday December 16, 2021

China’s Carbon Emission Trading Scheme and its Implications for Businesses

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Since its inauguration in July 2021, China’s national Emission Trading Scheme (ETS) has become the world’s largest emission trading system, its accumulated trading volume exceeding 800 million Yuan. What exactly is the national ETS? What will likely be the key trends for the sustainability world to watch, and what will be its impact on companies?

What is China’s National Carbon Emission Trading Scheme?

The ETS, a critical part of China's plans to use market mechanisms to reach peak emissions before 2030 and net zero by 2060, puts a price on emitting carbon. It provides financial incentives to companies which reduce emissions by allotting credits to those who pollute below their allowances, while requiring those who go beyond their limit to purchase additional credits.

The scheme currently covers only one sector: power and electricity. With more than 2,000 power plants, the sector is responsible for over 4 billion tons of CO2 emissions per year, about 30-40 percent of the national total. This alone amounts to around 10-15 percent of global CO2 emissions.

The expanded scheme will cover a total of eight sectors (power generation, petrochemical, chemical, building materials including cement, steel, non-ferrous metals, pulp and paper, and aviation) in the coming years. Institutional and individual investors will also be covered. However, the government has not yet unveiled an official roadmap or timetable for expansion.

The national ETS market is still at an early stage, the overall trading volume is limited compared to the size of China’s economy, and trading prices are showing fluctuations. However, key enterprises have been pushed to start their journey toward carbon management, from carbon accounting and reporting to carbon reduction target- and goal-setting. The Ministry of Ecology and Environment (MEE) has also revealed that it plans to publish the Interim Regulations on the Management of Carbon Emissions Trading in the near future.

From Regional Pilots to a National ETS

Since 2011, China has piloted ETS in eight different cities and provinces (Beijing, Shenzhen, Shanghai, Guangdong, Tianjin, Hubei, Chongqing, and Fujian) to see if China can use market mechanisms to regulate carbon emissions and to prepare for the national ETS.

These pilot ETS have some features in common but vary considerably in their approach on some issues, such as the coverage of sectors, allocation of allowances, local policies, and management of noncompliance. For example, while the Beijing and Shenzhen markets cover business giants in the public transport and service sectors, the Shanghai market covers the hospitality, textiles, and financial sectors, and the Hubei market covers the automotive, healthcare, and ceramics sectors. These markets are all highly customized to regional industrial characteristics and conditions. These pilot markets were also given considerable leeway to design their own schemes.

Although their impacts on carbon emissions reduction and cost savings might be very limited so far, the regional pilots provided rich references and lessons for the national ETS.

What Can We Expect from the National ETS, and What are Its Potential Impacts on Business?

The national ETS will take several years to ramp up to full sectoral coverage. Current coverage of the power and electricity sector will have a limited impact on electricity costs since the market is mostly dominated by government-owned or operated companies. It will take years to generate real financial impact on companies and drive significant emissions reduction. But experts at the Shanghai Environment and Energy Exchange (SEEE) and the Climate Bonds Initiative see it as a signal to boost China’s overall climate action efforts. The process will also provide the foundation for developing and improving many other carbon policies.

In the coming years, the legislative basis of the ETS will be further strengthened, both to establish a legally binding commitment as a cornerstone of the scheme and to turn the current ETS, which is more of a governmental administrative intervention to control CO2 emissions, into a market-based approach.

Actual business impacts will also need to be weighted together with the provincial and sectoral dual carbon plans and roadmaps (to be released at the end of 2021) and other carbon-related policy developments. 

In this regard, it will be hard to predict the price impact of ETS on a final product that will include multiple layers of materials, components, industries, and production inputs. That will be further challenged by different regional policies with regards to the readiness and implementation road map; e.g., a lighting product with glass, aluminum, wood etc., coming from different regions. Thus, it will be hard to predict price impacts clearly and simply. 

Nevertheless, China’s ultimate carbon emissions goal will not change, and the ETS will eventually take effect, and have a large impact on businesses over time. Therefore, businesses should prepare in advance through understanding and mapping relevant risks and opportunities as a first step.

This blog is part of a series examining the business impacts of China’s 14th Five-Year Plan, which has drawn great interest in the international community, from policymakers to business. To learn more, read our previous posts on what business can expect, China’s climate goals, and impacts for investors.

BSR’s China team continues to track and analyze the plan’s potential business impacts.  If you are interested in learning more about how BSR can help shape your China strategy, please reach out to speak with someone on our team.

Blog | Wednesday December 15, 2021

Inside BSR: Q&A with Erin Leitheiser

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Inside BSR is our monthly series featuring BSR team members from around the world. This month, we connected with Erin Leitheiser, who recently joined BSR’s Climate team as a Manager.

Erin chatted with us about how her educational experiences abroad brought her to sustainability work and about her passion for climate issues.

Tell us a bit about your background. Where are you from, and where are you based? How did you get where you are today?

I’m an American living in Denmark, and it has been quite the journey to get here. I grew up in Nebraska and left the US for the first time at age 18 for an educational program in Egypt. The differences between rural America and the busy streets of Cairo were drastic but enlightening. Beyond the rich history, the cross-cultural experience fascinated me and gave me a completely different vantage point for viewing and understanding my culture. From there, I was hooked on exploring the wonderfully diverse world around me. 

While in Nicaragua on a study program, I met a garment factory worker who told me about the difficult working conditions and low pay, which showed me how consumer demands for cheap goods in the Global North impact the lives and livelihoods of those in the Global South producing those goods, piquing my interest in corporate sustainability. These experiences were crucial in developing my worldview and understanding of the interconnectedness between people, economies, businesses, and cultures. 

I lived my adult years in Minneapolis, but my family and I moved to Denmark when I received an amazing offer to pursue my PhD at Copenhagen Business School. Scandinavia has long embodied and led in sustainability, so it has been an amazing place to learn, live, and work. 

How did you first get involved in sustainable business? What issues are you passionate about and why? How does your work at BSR reflect that?

My passion for sustainability began at a young age. I still remember being shown a sustainability documentary in elementary school that showed me humanity’s impact on the planet and our ability to rectify it. I became a thorn in my family’s side, demanding that we be more sustainable by recycling everything, a tall order when the only option was hauling our recycling to a far-off center and sorting it ourselves. 

It was probably unsurprising that I pursued a career in sustainability. Over the years, I’ve had the opportunity to work on social and environmental issues and across sectors. One of the things I love about BSR is the opportunity to work on classic consulting engagements directly with companies and grant-funded projects bringing together multiple partners to work on big, thorny issues and drive progress across the board. It’s a fantastic hybrid. 

I’m passionate about how research and knowledge can drive better insights and about exploring the intersectionality between issues, like how a net-zero transition might affect jobs and local economies. 

How long have you been at BSR? What is your current role, and what does that entail? What are some interesting projects that you get to work on as part of your role at BSR? What do you enjoy about them? 

I joined BSR in spring 2021. I am a Manager on our Climate team, where I drive several grant-funded projects and serve as an advisor on member company engagements. My work is focused on sustainable procurement and Scope 3, so supply chain sustainability. 

I’ve gotten to work on many projects, from developing tools and guides to help companies engage their suppliers on net-zero action to exploring new and innovative ways that companies can collaborate together on their climate goals. Many of my projects had large deliverables for COP26, including the 1.5°C Supplier Engagement Guide, which provides practical guidance on buyer-supplier engagement for decarbonization, and Climate Fit, a free course for SMEs on making progress on their net-zero journeys. 

Adjusting to life during a pandemic can be complicated. What were the things that brought you joy amid the uncertainty and challenges of the past year? As 2021 ends, what are you looking forward to in 2022?

Aside from not seeing family for nearly two years, I was thankful to be in Denmark during the pandemic, where lockdowns and restrictions were managed well. While it was a challenge juggling a full-time job while homeschooling two kids, I am grateful for the time I got to have with my children. 

My family loves traveling, so this has been one of the biggest changes in our lives during the pandemic. As a family of four, we’ve made it to 17 countries so far (and buy high-quality carbon offsets to help mitigate the negative climate impacts of our travels). Probably like everyone, I’m eager for a semblance of pre-pandemic normalcy! 

Blog | Tuesday December 14, 2021

Race and Ethnicity: Civil Society Expectations for Business and Recommendations for Company Action

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More than a year ago, the Black Lives Matter movement spurred companies into addressing long-standing race and ethnicity issues and developing or stretching their diversity, equity, and inclusion (DEI) goals.

However, most of these initiatives have focused on the US, and companies are struggling to address these issues in other countries. Nevertheless, racism and ethnic discrimination are global problems, from racist abuse of England’s Black football players to sexual violence against Indigenous women in Argentina—and addressing these issues benefits everyone. Increasingly, there is a growing societal expectation for businesses to look globally at their internal DEI programs, including those that address race and ethnicity, and as part of their product portfolio, supply chain, and presence in local communities. 

Multinational companies are seeking effective practices for addressing race and ethnicity issues globally. We conducted interviews among BSR’s 300 member companies to identify common challenges companies face when addressing these issues and the potential opportunities this can represent for businesses. We also interviewed civil society organizations around the world to understand their expectations for corporate action.

How Are Companies Addressing Race and Ethnicity Issues outside of the US?

Leading companies are setting global policies with executive support and are creating frameworks for local and regional action plans and initiatives to be developed. Global efforts have been framed around “multi-culturalism,” “full spectrum diversity,” and “culture and heritage.” However, companies’ global commitments do not always come through at the local level. Success in this area depends on support from headquarters and local ownership.

Internally, companies are creating safe spaces for employees to reflect, share, and learn from each other’s experiences related to race and ethnicity and providing opportunities to learn about racism and discrimination through trainings, roundtables, town halls, etc. Although a necessary first step, these practices alone will not achieve lasting impact for employees or the company.

Until recently, most company efforts have used “band-aid” solutions for a specific issue, like quotas for representation or philanthropic contributions. Few companies have designed the necessary structural changes required to address the root causes of racism and inequality inside and outside their operations, and industry collaboration remains limited.

What Do Civil Society Organizations Expect of Companies?

Civil society organizations stressed the need to address discriminatory structures and systems instead of trying to change individuals. The organizations we spoke to noted that currently most internal efforts are top down and focus on behavior change or solely on diversity, with less attention paid to inclusion and equity. For example, setting quotas for leadership positions can ensure accountability, but it can also make certain groups feel that there is no longer a place for them or reinforce the idea that someone was promoted because of their diversity characteristics and not their skills and experience.

Reviewing practices that may perpetuate racism and discrimination, such as recruitment or pay policies, allows for a discussion on how employees and stakeholders can work together to create a more equitable system that benefits everyone.

Based on this research, we have developed a set of global DEI recommendations to address race and ethnicity issues that enables localization and long-term flexible investments. Companies can act on issues related to race and ethnicity in their countries of operations and learn from civil society organizations in the following ways:

• Commit to a global, long-term DEI policy with highest-level buy-in from senior leadership and frameworks for local and regional action plans and initiatives. For example, Cisco developed a set of Social Justice Beliefs that inform how it acts as a business for its employees, customers, and communities. As part of those principles, it has developed specific actions to address racism against the Black Community in the US, and it plans to explore expanding these actions to make them applicable to a global context. ID_Brazil works with global companies with footprints in Brazil and other Latin American countries to review policies and practices across operations and identify racism-related challenges and gaps through its Yes to Racial Equality Seal. 
• Focus on dialogue and learning as a first step: Foster safe dialogue for employees to share experiences, connect leaders with underrepresented staff at the local level, and implement training and toolkits for leaders and employees to identify and speak on racism and discrimination (e.g., this toolkit from Berkeley Haas). Accenture has created a training program that supports employees in identifying and speaking on racism (currently available in the US, the UK, and Ireland, and it will soon be available in Canada and South Africa). 
• Co-create through partnerships: Companies cannot and should not aim to address racism and discrimination alone. They can establish community engagement board(s), leverage and support employee resource groups (ERGs), focus on creating an effective reporting and ethics hotline, and join collaborations tackling racial justice to work with other companies committed to addressing these issues, like the WEF’s Coalition on Racial Justice in Business or the European Network Against Racism. Companies will need to commit financial and human resources to support these partnerships and ensure they are not adding additional work to groups that are already under-resourced.
• Advocate for systems change: Using an equity lens, examine your company’s business operations and product development processes to identify if and how it has enabled and benefited from systemic racism. Some examples: Starbucks, Airbnb, and Facebook completed civil rights audits. Companies should also explore how they can use their voice to advocate externally for wider systems change. For example, Ben & Jerry’s call to dismantle white supremacy provided actionable steps, and Dr. Bronner’s pledged funding to four organizations fighting racial justice and called out systemic racism in the criminal justice system.

Meeting today’s societal expectations for social justice and robust DEI programs requires long-term planning and readjusting business strategy. By joining the handful of leaders already committing to address race and ethnicity issues throughout their global operations, companies can strengthen existing commitments to human rights and non-discrimination and become a leader in their industry, especially as DEI becomes less about counting employees and more central to meeting growing stakeholder expectations to embed equity across company value chains. For more information, please reach out to our Equity, Inclusion, and Justice team.

Blog | Friday December 10, 2021

The Future of Business and Human Rights

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As we celebrate Human Rights Day on December 10—the anniversary of the adoption of the Universal Declaration of Human Rights—we are taking the opportunity to reflect on the role of business in shaping a future in which human rights are respected and protected in both law and in practice.

Business touches the lives of people in diverse ways, from workers to customers to community members throughout global value chains. Ensuring respect for human rights across these many touchpoints has never been more important.

The past few years have seen enormous changes in the business and human rights landscape. The emergence and intensification of destabilizing dynamics like climate change, the COVID-19 pandemic, political instability, socioeconomic inequality, and the rapid growth of new technologies with yet unknown human consequences heighten the risk that business activity will adversely impact people. At the same time, businesses are under increased public scrutiny for their human rights footprint, face growing regulatory and legal pressures to proactively manage and remediate these impacts, and are increasingly expected to disclose both human rights impacts and management measures.

Looking Back: Taking Stock of the First Decade of the UNGPs

The UN Guiding Principles on Business and Human Rights (UNGPs) offer guidance to companies on how to manage human rights risks associated with their business activities and value chains amidst these global challenges. Unanimously endorsed by governments 10 years ago in June 2011, the UNGPs lay out the corporate responsibility to respect human rights. They provide guidance on the steps businesses should take to avoid infringing on the human rights of others and to address adverse impacts with which they are involved (Principle 11).

Over the past decade, the UNGPs have given companies a shared roadmap for respecting human rights and spurred progress toward this goal in a business context, demonstrating that changing ways of doing business to reduce harm to people is possible. Yet gaps between aspirations and implementation still remain, leading to the continued occurrence of human rights abuses despite corporate commitments to the contrary. This is due in part to the scale and complexity of today’s global challenges, as well as barriers to change such as corporate capture of the state, lack of meaningful corporate human rights disclosure, and business models with inherent human rights risks.

Looking Ahead: Ensuring Respect for Human Rights in the Next Decade

The UNGPs and its key concept of human rights due diligence provide a powerful normative and practical tool for companies to tackle inequalities and realize a just and sustainable future for all—including in the context of “building back better” from the COVID-19 crisis and the just transition to a low-carbon economy.

The roadmap for responsible recovery during times of crisis, released last month by the UN Working Group on Business and Human Rights, emphasizes the role of business, including financial institutions, in addressing our most pressing global challenges in the next decade.

The roadmap sets out key action areas for strengthening business respect for human rights in the coming decade and leveraging the power of business enterprises to overcome the shared challenges of today and tomorrow. These include strengthening and mainstreaming human rights due diligence across value chains, increasing collective action to tackle systemic challenges, ensuring alignment between the UNGPs and the development of standards and regulations, strengthening access to remedy, deepening stakeholder engagement, and better tracking of progress.

To help companies fulfill their human rights responsibilities and align with the vision set out by the UNGPs and the UN Working Group’s roadmap, BSR has released a series of deep dives on the emerging issues and approaches that are critical to realizing the promise of the UNGPs and closing the gap between aspiration and action.

This month, we released our final installment: an update to our human rights assessment approach. Grounded in the UNGPs, our approach guides companies through the process of identifying and prioritizing their salient human rights risks and impacts. This is the critical first step for business to prevent and mitigate harm to people.

As stated in the UN Working Group’s roadmap, “Respecting people and the planet, by preventing and addressing adverse impacts across business activities and value chains, is the most significant contribution most businesses can make toward sustainable development.”

As we say goodbye to 2021 and move into 2022, we look forward to supporting business across sectors throughout the globe to fulfill the vision set out by the UDHR by shaping a rights-respecting future.

Blog | Thursday December 9, 2021

The Rise of Circular Fashion Brings Opportunity to Design a Fashion System That Works for All

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The fashion industry is transforming from linear to more circular business models—including repair, recycling, resale, and rental—while simultaneously being shaped by macro forces, such as automation and climate disruption.

This transition brings both an opportunity to proactively address the industry’s long-standing labor concerns by designing new business models and a responsibility to ensure that the new jobs created are good jobs.

The significant momentum behind circularity begs the question for both industry and policymakers: How can we leverage this transformation to reimagine and rebuild the global fashion system so that it works for all?

Through Keeping Workers in the Loop (KWIL), we convened over 45 major fashion industry players—established brands, emerging circular businesses, worker representatives, sustainable fashion experts, and international institutions—to explore this very question.

Our research uncovered three key findings:

1. As business models change, circularity offers an important opportunity for entrepreneurship and upskilling.

Growth and investment in circular fashion signal the significant commercial potential in transforming the fashion industry. For example, just four luxury resale platforms attracted over US$134 million in total investment in the sixteen months to August 2021. Businesses that offer recycling services, repair, rental, or resale platforms are emerging quickly and growing rapidly.

As major legacy businesses seek to adapt, circularity can also provide economic and entrepreneurship opportunities for workers. Our research, in which we surveyed almost 200 workers, suggests significant appetite to engage in and start new circular businesses. In India, 66 percent of workers surveyed, and particularly women, are keen to start their own businesses but feel constrained by lack of investment and business skills. Workers already possess much of the knowledge needed to successfully navigate the transition. For example, informal waste workers understand how garment and textile waste is segregated, processed, and reentered into the marketplace.

Jobs in the circular economy require soft skills such as agility, language and business skills, and technical competencies (e.g., garment deconstruction). Our research found that both skills (broadly) and training are currently lacking at all levels of the industry. Equipping diverse groups of workers with the necessary skills and entrepreneurship opportunities can accelerate the creation of a circular and resilient fashion value chain.

2. Marginalized and disenfranchised groups are overrepresented in value chain segments likely to expand in a more circular system, and there is a strong risk of perpetuating existing labor issues in circular roles.

The transition to a more circular industry means the opaque and complex global fashion value chain will expand to encompass new segments and activities like recycled plastic, agricultural waste, and textile recovery, sorting, and recycling. Our research found that the parts of the industry that are already circular today, such as waste-picking for recycling or sorting for resale, have some of the worst labor conditions, high levels of informality, and negative social impacts on communities. Informality in the garment and textiles industry poses a major challenge to a just, fair, and inclusive transition to circularity, as many of the activities to support a circular fashion system rely on informal workers. Furthermore, harassment, long working hours, and low levels of representation for workers are also key concerns among today’s circular workers.

3. The transition will take place amidst a backdrop of growing precarity and economic inequality throughout the global fashion system.

KWIL’s economic modeling suggests that circularity, automation, and other macro factors could significantly disrupt fashion industry job growth by 2030. The variation between the number of jobs today and what we see in the scenarios is a range of 6.72 million jobs—that’s over 11 percent of the fashion value chain jobs included in the model. Regional variance in job losses and/or gains across our economic scenarios is significant, with China and India seeing the biggest shifts. KWIL’s economic modeling also finds that wages in the garment and textiles industry are likely to be highly volatile relative to the rest of the economy. Worryingly, most scenarios see a decline in wages for low-skill jobs across geographies, whilst high-skill wages tend to increase.

Circularity’s social impact potential can only be realized through intentional action.

Our findings suggest that the circular fashion transition brings a number of potentially important benefits for workers, including:

• The potential of strong job creation;
• More multifunctional, stimulating roles, with improved health and safety for workers;
• Entrepreneurship opportunities, particularly for women, and;
• Increased potential to integrate informal workers into the value chain, offering them social protection etc.

Conversely, without intentional integration of jobs and social justice aspects, and adapting the operating norms in the industry, there is a real risk of perpetuating the same challenging outcomes for workers due to a lack of representation, consideration in decisions, regulatory protection, and an imbalance of power along the supply chain.

KWIL’s report highlights how changing industry dynamics and potential job disruption heightens the need to address these legacy industry challenges in the circular transition. To help prioritize a path to circularity that supports workers, it lays out 10 recommendations to enable a transition that is just, fair, and inclusive.

You can find the full report here, offering an initial mapping on skills needed, an exploration of how circularity will affect different roles, how job impacts will play out in diverse circular models, and detailed recommendations for both fashion and textile businesses and policymakers.

If you are interested in exploring how your company might work collaboratively with peers and BSR to help develop new strategic approaches which improve the global fashion system so that it works for all,  please connect with our team.

This research project was developed and supported by a grant from the Laudes Foundation. The Foundation's partnership and financial contribution were invaluable to the success of the project. We are also very grateful for the contributions of Sida—the Swedish International Development Cooperation Agency, H&M Group, and Target to the project outcomes and to the diverse organizations that contributed their insights and ideas to this work.

Reports | Thursday December 9, 2021

Human Rights Assessments: Identifying Risks, Informing Strategy

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Why Assess Human Rights Risks?

Identifying the human rights risks associated with business is the first critical step in preventing and mitigating harm to people due to business activity.

The UN Guiding Principles on Business and Human Rights (UNGPs) lay out the expectation that companies should avoid infringing on the human rights of others and should address adverse impacts with which they are involved.¹ To achieve this, businesses should carry out human rights due diligence, which is a four-step process for identifying and assessing actual and potential impacts, implementing measures to prevent and mitigate impacts, tracking the effectiveness of these measures, and reporting on how impacts are being addressed.² Human rights assessment is the first step in this process.

Reports | Wednesday December 8, 2021

Keeping Workers in the Loop

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The environmental and commercial benefits of a transition to circular fashion are clear, but the social impacts have received less attention. While a shift to circularity will create new roles and important opportunities for entrepreneurship, there are also serious challenges around marginalized groups, reskilling, and labor market disruption. 

This report explores the job impacts of the circular fashion transition, informed by BSR’s 18-month collective research with industry leaders and stakeholders via Keeping Workers in the Loop (KWIL). From automation to climate disruption, it considers the impact of a changing industry context and dynamics on workers and offers recommendations to industry and policymakers on creating a just, fair and inclusive circular fashion system.

KWIL has been supported by Laudes Foundation and the Swedish International Development Cooperation Agency (Sida); is led by BSR, in partnership with Catalyst Management Services, India and economists from the University of Lincoln; and includes H&M Group, Shahi Exports, The Renewal Workshop, Target, and VF Corporation as industry partners.

Blog | Wednesday December 8, 2021

The New SBTi Standard Places Science at the Heart of Corporate Net-Zero Targets

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The launch of the Science Based Targets initiative (SBTi) Net-Zero Standard just before COP26 marks a significant milestone. It is the first independently certifiable standard that assesses a company's net-zero targets, and importantly it clearly grounds them into 1.5°C-aligned short-term and long-term action.

Experts from civil society, corporates, and academia worked together over the past year to develop the standard, which was then piloted by more than 80 companies. The result brings much-needed clarity to corporate net-zero targets—a rapidly evolving, and sometimes criticized, topic.

The standard finally invites climate science to the net-zero conversation and, importantly, distinguishes between near-term and long-term science-based targets.

Near-term science-based targets focus on a short timeframe (5-10 years). They require companies to align their Scope 1 & 2 targets with a 1.5°C goal, while Scope 3 ambitions should retain a threshold of well below 2°C.

Setting longer-term targets is an important development. It requires companies to achieve 1.5°C-aligned decarbonization by their net-zero target year, but by no later than 2050. Achieving that ambitious goal translates to reducing greenhouse gas (GHG) emissions by at least 90 percent for the vast majority of Scopes 1, 2, and 3.

These changes are significant in that they provide a mechanism for increased accountability in the near term, but also for the longer term, when a company pledges to reach net zero. With this robust new framework, the question for businesses is no longer “by how much should I reduce emissions and on what scopes?” but rather “how do I transform my business to align with the 1.5°C ambition?”  

And that is why this new SBTi standard is so important: it enshrines 1.5°C across scopes as the minimum ambition, in alignment with the UN Race to Zero initiatives. And, as a standard, it provides a pathway to independent verification. This is a much-needed and welcome development, which provides companies with a clear framework for action.

The standard also clarifies the meaning of the "net" in net zero. The mounting criticism of net zero has focused on companies claiming net zero by simply offsetting emissions without decarbonizing.

The new standard addresses this critique by clearly stating that a company will not be able to claim it has achieved a net-zero goal until the long-term decarbonization target is met. When companies reach such deep decarbonization across Scopes 1, 2 and 3 at their target year, they are required to net their emissions by balancing out residual emissions with permanent carbon removals.

This means that in their target year, companies should reach net zero by netting a portion of emissions by investing in technological or nature-based solutions that effectively remove GHGs from the atmosphere. What this also implies is that avoided emissions or reduced emissions credits will not be part of the "net" of net zero.

Companies will need to plan for their carbon removal strategies. Companies should expect additional guidance on this topic in 2022, both from SBTi and initiatives such as the Voluntary Carbon Markets Integrity Initiative (VCMI).

The standard also provides initial guidance on climate solutions beyond companies’ value chains. While the standard insists on the essential importance of deep decarbonization, it recommends that companies also step up action beyond their Scopes 1, 2 and 3 by investing in appropriate climate solutions; e.g., by investing in forest conservation to eliminate deforestation by 2030 on their way to net zero.

The urgency of the climate crisis could not be more acute, and immediate action is needed. The new SBTi standard makes science-based decarbonization across scopes the baseline for businesses. Climate leadership will increasingly require companies to concurrently look beyond their value chain, with additional investments to slash methane emissions and scale nature-based solutions, on the way to net zero.

Further guidance and clarity on the role of SBTi to encourage climate action beyond the value chain is needed. Here are a few things to look out for in 2022:

• Increased company uptake of the SBTi Net-Zero Standard: SBTi had validated the targets of seven companies by launch, including Transform to Net Zero member Wipro. Early signs suggest more than 70 companies are already interested in validation, and this is poised to grow further.
• Increased clarity: Two main SBTi projects are in the works. A review and development of long-term Scope 3 target-setting methods will help build confidence in comprehensive Scope 3 decarbonization targets; the cited "beyond value chain mitigation" project will bring clarity on expectations for climate investments to supplement decarbonization efforts.
• Guidance on forest, land, and agriculture: The forest and agriculture sector especially requires additional guidance; e.g., accounting rules for land-based removals. The release of the forest, land, and agriculture (FLAG) methodology will help and likely trigger updates in the standard.
• Net-Zero Standard for financial institutions: It is worth noting that a separate process is ongoing for financial institutions, with more information available here.

As we recently wrote after COP26, it is very clear that net-zero corporate commitments are here to stay, and so is the pressure to define what good looks like.

The key pillars of the SBTi Net-Zero Standard delineate the backbone of robust corporate net-zero implementation. We encourage businesses to embrace them and think strategically about the business transformation needed to achieve them.

The publication of the SBTi Net-Zero Standard is a start and not an end, as some topics need additional guidance—but we now have the "what." The challenge ahead lies in the "how" companies will reach those targets through business transformation in a just and equitable way.

Blog | Tuesday November 23, 2021

COP26 Made Climate Action Mainstream Business and Put 1.5°C on Life Support

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At COP26, the global community made meaningful progress. Unfortunately, it also is wholly insufficient to meet the Paris Agreement’s goals.

National 2030 targets announced in Glasgow take us to 2.4°C of warming by 2100, a noticeable improvement from our path six years ago in Paris, but these are still very far from the objectives of the Paris Agreement. The stretch target of 1.5°C, which the UK hosts aimed to keep alive, is now on life support. 

That is why the Glasgow Climate Pact asks countries to strengthen commitments by the end of next year, in 2022, instead of waiting until 2025. It also calls on countries to accelerate “the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies.” The UN outcome also enabled countries to apply carbon credits to their national targets and to have credits flow across international borders.

International cooperation was not limited to the official negotiations.

• Over 100 countries joined the Global Methane Pledge to reduce global methane emissions by at least 30 percent below 2020 levels by 2030. Conspicuously absent, however, were the largest methane emitters: China, India, and Russia.
• In one of several nature-related announcements, 140 leaders whose countries account for 90 percent of global forests joined the Glasgow Leaders’ Declaration on Forests and Land Use to work collectively to “halt and reverse forest loss and land degradation by 2030.”
• A disappointing 40 Ministers supported the Global Coal to Clean Power Transition Statement to transition away from unabated coal power generation. This group did not include some of the major producers and consumers of coal.
• The US and China issued a joint declaration, making climate a rare issue of cooperation between the two largest emitters.

COP26 also clearly showed how climate action has become mainstream business. 100 pavilions inside the official site and many parallel conferences outside of it produced announcement after announcement. Future COPs will be more trade fair than international negotiation. Among the highlights:

• The formation of the International Sustainability Standards Board, which will consolidate the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB), is a major breakthrough for unified ESG reporting.
• The First Movers Coalition will gather companies to use their purchasing power to create early markets for innovative clean energy technologies in industries whose emissions are hard to abate.
• The Glasgow Financial Alliance for Net Zero, an umbrella initiative grounded in the UN’s Race to Zero criteria, includes 450 financial services firms managing US$130 trillion of private capital.
• A multistakeholder COP26 declaration accelerated the transition to 100 percent zero-emission light vehicles.

At COP26, BSR launched or co-launched several collaborative efforts to build the net-zero economy, including:

• A free online training course for SMEs called “Climate Fit,” part of a set of tools that SMEs can freely access on the SME Climate Hub, which was developed with CISL.
• A 1.5°C Supplier Engagement Guide for the 1.5°C Supply Chain Leaders, a group of companies making climate a key procurement criterion. The guide is an open framework available to any company, with clear steps and an open/evolving repository of best practices shared by leading companies.
• The Business Alliance to Scale Climate Solutions, a group of corporate funders and partners dedicated to increasing the scale and impact of carbon credits and other forms of climate solutions funding. BASCS is now open for new members!
• The Sustainable Freight Buyers Alliance, which will be incubated over the coming six months and aims to achieve 100 million tonnes of reductions in freight and logistics emissions this decade and to contribute to 1.5°C-aligned net-zero logistics by no later than 2050.

Finally, COP26 evidenced several trends which will intensify in coming years.

Net-zero commitments are here to stay. The release of the Science-Based Targets initiative’s Net Zero Standard will help to make them more consistent and environmentally integral. But with activists protesting for climate justice and decrying the credibility of those commitments, the main question for business will be how to implement net-zero goals quickly and equitably while benefiting local communities. Businesses will have to get their arms around climate justice.

The connection between climate and nature will become more prominent. Companies will increasingly be asked not only to decarbonize energy, but to look upstream at their impacts on land and materials they source. And there is growing momentum to rapidly reduce methane emissions. For business, this means an expectation to consider not just CO₂ but all greenhouse gases in their accounting and their decarbonization strategies, e.g., related to agriculture, waste, and land use.

F. Scott Fitzgerald wrote that the “the test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.” So it was with COP26. The 1.5°C goal, with all the impacts that the IPCC documented in 2018, is slipping away, even as climate action mainstreams into the business community.

Reports | Tuesday November 16, 2021

Action for Sustainable Derivatives: Annual Update on Progress, 2021

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The latest update from Action for Sustainable Derivatives (ASD), BSR's collaborative initiative driven by palm oil derivatives users to transform their supply chains, shows that a centralized, collective approach to enhancing transparency, boosting engagement, and identifying risks is working.

Highlights include collective transparency for 825,000 tons of palm-based materials—nearly double the volume covered during the first year of ASD. This represents around 1.1 percent of the global palm production and 20-25 percent of the palm kernel oil-based oleochemicals market.

Learn more about ASD's impact.