Ten things to know about the Science-based targets

Recently, we released a report exploring the opinions of 125 key influencers in the alternative investments industry to understand the extent to which they are adopting the Science-based targets (SBTs) and the barriers blocking their path. You can read the report here.

Following the report we hosted a webinar with Thomas Kansy, Director at Vivid Economics and Partner at McKinsey and Company, Emily Hamilton, Head of ESG at Savills Investment Management, and Bradley Davidson, ESG Lead at RBS International, where we interrogated the report findings. Below are  ten key points that came out of that discussion.

1. There’s growing pressure on investment funds to adopt the SBTs

The SBTs set out a clear path towards decarbonisation for companies and financial institutions. Targets are deemed science-based if they follow the latest science and are in line with the Paris Agreement to limit global warming to 2⁰C or preferably 1.5⁰C above pre-industrial levels. The SBTs help funds incorporate these ambitions into their business plans and incorporate climate as part of their growth strategies. They’re also a good way for funds to benchmark themselves against the competition and provide evidence of their actions.

According to Thomas Kansy, there’s considerable pressure from investors on funds to adopt the SBTs. “Pension funds are asking what you’re doing and what targets you’ve set. We also see how some of the most successful funds have anticipated new regulation and accounting standards and then everyone else has to catch up.”

It’s not just investors – the general public and regulators also want to see change. And there’s considerable internal pressure from employees looking to hold their company to account. They see SBTs as the most robust way of proving their firm is doing something about climate change.

2. The SBTs promote transparency and a long-term vision

The SBTs facilitate transparent communication which benefits both internal and external stakeholders of an alternative fund. Adopting them also enables funds to benchmark and compare and contrast funds’ efforts. Eventually, funds will be able to show how incorporating SBTs in their procedures enhances their performance and reduces downside risk.

The SBTs also require funds to think about the long term and both their financial and climate aspirations, how they intertwine, and how one can support the other. Adopting the SBTs or doing the work to prepare for them ensures that a fund won’t be caught out down the line. Bradley Davidson said  “being transparent in regards to carbon across the market will benefit all participants. It's not about trying to trip people up, we want to know where everyone is starting from, so we can deliver the necessary actions to meet the goals listed under the Paris Agreement and other societal goals.”

3. There are still big challenges to overcome

Our survey showed clear appetite to adopt the SBTs, but implementation is lagging behind appetite.

One of the challenges to adoption is that many alternative investment funds are still trying to get to grips with what embracing the SBTs actually involves. Many funds need to focus on the upside potential involved in adopting the SBTs rather than concentrating on the downside, so a change of mindset is needed.

Access to good data is another challenge. According to Emily Hamilton, this is a particularly big problem for real estate funds: “A crucial part of SBTs is understanding your carbon emissions – if you can’t understand the electricity and gas your building is using, you have to rely on estimates, so a lack of energy data is a challenge. And the methodology for SBTs hasn’t been fit for purpose for real estate – it’s worked well for other asset classes as they’re more passive, but real estate is actively owned and we need a way to measure both energy and carbon. Reducing energy intensity is just as important as reducing carbon emissions. The good news is that SBTs are now focusing on that”.

Upskilling is also a challenge, but not as much as a few years ago. Investment teams are increasingly taking it upon themselves to enhance their skillset because if they don’t it will be much harder to make a return on the investment. ESG teams are there to support them.

4. Get your employees on board

At RBS International we often talk about the importance of collaboration. Many funds are looking for external support to implement the SBTs, but they also need in-house capabilities. Climate and ESG are no longer niche parts of a business – funds need to invest in their organisational knowledge so they have a team able to engage the rest of the company to really embed this.

Target-setting is important, but to deliver on those targets funds need everyone on board. According to Bradley Davidson, “RBS International employees all undergo mandatory climate training and we’ve entered a partnership with the University of Edinburgh to educate all our staff on climate issues. This has also been important in our ability to attract talent, especially younger talent”.

It’s vital that key stakeholders understand what the SBT process means for your business. The targets you set don’t sit in isolation – all parts of the organisation need to be on board. Once you’ve set the targets, the hard work begins.

5. A holistic approach to ESG is vital

As it stands there’s a plethora of ESG KPIs, but they’re not necessarily comparable. ESG is three distinct topics – E, S and G – and within the E, SBTs currently only focus on climate – they don’t consider other environmental issues such as biodiversity or natural habitats. The good news is that other metrics are being developed, and with impact reporting and other initiatives coming this should help to standardise reporting for issues such as biodiversity and social inclusion.

Bradley Davidson believes it’s important to take a holistic approach. “We, at RBS International, often talk about A Just Transition and what that means to us is when we are looking at those climate metrics we are also accounting for the social impacts. We can’t look at ESG metrics in isolation there is a societal impact so you have to have that view across, otherwise you get unintended consequences."

6. Standardisation is going to become increasingly important

SBTs are only one part of a firm’s ESG KPIs. Normalising standards and comparing across the market involves challenges – ESG ratings are a good example of this, as the ratings from different providers still aren’t fully comparable. It’s a complex area and what’s right for one company won’t be right for another. We need to achieve standardisation so that we can compare performance without losing the granularity of detail as that is where the impact is delivered.

7. Funds’ carbon footprints might go up before they go down

If the world is to meet its emissions targets, it’s going to have to decarbonise. Alternative investment funds have a big role to play, but that might mean their emissions go up in the short term. According to Thomas Kansy, “As energy systems change over the next couple of years I believe we’ll see alternative investment funds go out and buy highly carbon-intensive assets with the goal of decarbonising them. This will get attention and they might be accused of greenwashing as their emissions will go up in the short term, but we need to wait and see their actions to decarbonise. It’s all about acting to promote the transition and using their influence for good”.

8. Be careful not to greenwash

Thomas Kansy sees greenwashing risks coming from adopting a target but then not having any actions. “It’s perfectly fine to be aspirational and ambitious but then you need to backfill the capabilities.” Bradley Davidson added ”there are two causes of greenwashing: it can either be through intent, or because a firm has underestimated what it needs to do to adopt the SBTs and it doesn’t have the data and governance in place. Saying it has adopted the SBTs isn’t enough – investors are still going to want to see evidence of a firm’s decarbonisation efforts and the tangible support it’s providing to the  transition. I think the risk of greenwashing is there but if firms allocate appropriate time and resources to SBTs then greenwashing shouldn’t be a concern. If funds are nervous they should engage with the industry to find and agree on the best way of doing things.” Emily Hamilton agreed and highlighted transparency is key, "regardless of the science based commitment you are aligning to, it’s about the transparency and finding the right tool for your part of the industry."

9. Progress is needed in several areas

According to Thomas Kansy, the industry needs to work together on the data side: “At the moment, lots of companies are all trying to produce their own data, which is a wasted effort. We need to come together in partnership and act together as a sector”.

He also believes that funds need to be more vocal about their successes. “We’re seeing a lot of climate-aligned funds doing extremely well, both in terms of attracting capital and producing good returns. This energises their staff, but they need to promote their success externally as well to motivate others.”

Emily Hamilton believes that education and training are key: “Companies have set lots of goals, but they need to be executed. Without good technical training, I think firms will struggle. Invest in your people, in that technical training and I think we’ll see rapid benefits”.

Bradley Davidson added that funds need to focus on a range of environmental and social topics, not just climate. “I want to see a drive to improve not just on carbon emissions, but also when it comes to a range of other environmental and social factors. If we don’t achieve that broad focus, we’re likely to end up with unintended consequences.”

10. Doing nothing is not an option

Even if a firm doesn’t seek to achieve SBT certification and validation right now, building the foundation to be able to do so at a later date is critical. Thomas Kansy believes that we’ll see bottlenecks in certification and validation processes at a later stage as more firms come on board.

Adopting the SBTs impacts the entire reputation of a firm, including its standing in the market and its ability to attract talent. And, according to Emily Hamilton, “It’s at the very heart of business strategy. If you choose not to adopt the SBTs, you risk not being able to raise capital, sending your business into decline and risking eventual extinction. It’s as simple as that”.

You can watch the full webinar here