Science-Based Net Zero Targets: Insights from engaging ASX-listed companies

Survey identified key issues for SBT adoption

Since we began tracking SBTs, we have seen improvements in the verification statistics for S&P/ASX 200 companies, improving from 15% of the market committed or verified in July 2022 to today’s 26% as mentioned above.

However, in consolidating the company responses to our specific questions, we have been surprised by the results. Instead of embracing SBTs, we found that many companies are choosing not to pursue an independent verification or are even dialling back on their original commitments.

The reasons for this were multi-faceted:

1. Regulatory compliance on carbon emissions takes precedence

Demands upon companies to provide more transparency on climate and emissions, from regulatory agencies, industry bodies and investors, have accelerated over the last 10 years.

This year, the Government has established new mandatory Australia Sustainability Reporting Standards for large Australian businesses, which includes climate-related disclosures, with ASIC responsible for administering the reporting requirements under the Corporations Act.

With a short implementation timeline, companies have told us that they are focussing their initial efforts on ensuring compliance with the Corporations Act, which doesn’t require external validation. Many are considering revisiting other Net Zero frameworks and benchmarks including SBTi verification in the future.

2. Stringent SBTi requirements

SBTi verification is aligned to a 1.5-degree scenario and requires the ability to measure Scope 3 emissions and an ongoing recalibration of targets. Many companies are still struggling with Scope 3 emissions, but this should change with the ramp up of mandatory reporting in Australia.

Companies in ‘Hard to abate’ industries are sharing that it is extremely difficult to commit to a 1.5-degree pathway based on current technology pathways. The lack of progress in green hydrogen is notable in this regard and is a global phenomenon. SBTi excludes companies with over 5% of revenue from fossil fuel assets, irrespective of use case (coal for steelmaking vs. coal for energy generation).

Many companies have also noted that business complexity, i.e. conglomerate structures, make it difficult to align.

Furthermore, setting carbon reduction targets is a material issue, and  companies and Boards rightly hold themselves to very high standards when making these commitments. Without a reasonable basis supported by evidence, they are finding it hard to make such commitments.

The substantial cost of transition is also another factor given the post-Covid inflationary environment that we all operate within. For many companies, ESG issues may well take a back seat should the economy weaken and unemployment rise, with social issues already ranking above climate for many Australians. The Australian Energy Market Operator (AEMO) is also pointing to acute shortages of base load power in coming years, and companies that can readily access renewable energy are in a much stronger position to be able to meet Net Zero targets.

Meeting a linear reduction in emissions was also referred to by many survey respondents as a ‘theoretical target’ and therefore they didn’t see it as applicable in the real world.

3. Sector and Australian specific challenges

Given the Australian market’s resource-heavy composition, many non-resource companies are questioning if there really is a requirement of gaining SBTi validation when these large emitters are not.  SBTi verification has not been widely adopted in the mineral resource sector in Australia, with Fortescue being the only significant large company signatory.

4. Alternative industry frameworks

Many companies cited that there are alternatives to SBTi-based verification that are more relevant for their industries, including the Australian government’s voluntary Climate Active Carbon Neutral Certification and the UN’s Net Zero Banking Alliance guidelines. In the property space, alternative verifications include NABERS Energy ratings, Global Real Estate Sustainability Benchmark (GRESB) scores and the World Green Building Council’s Net Zero Carbon Buildings Commitment.

That said, we also heard the alternatives that some companies have identified are currently in their early stages of being like-for-like replacements. For example, the Climate Active Carbon Neutral Certification standard emphasises transparency and public reporting but does not consider climate science-aligned reduction levels and allows a heavy reliance on offsets. We have seen companies such as Telstra move away from this offset approach, making the decision to move funds away from the purchase of carbon credits in favour of investing directly in decarbonisation projects that will directly reduce their carbon footprint overall.

SBTi is also currently in the process of developing the Financial Institutions Net-Zero (FINZ) standard, and some companies we contacted in the financial sector are waiting on this before moving forward to avoid an incomplete view of transition.

Emerging trends

What these comments highlight to us is that a single-minded pursuit of perfection (1.5 degrees) may perversely be hindering independent verification. We suspect more companies will look to align with an organisation like SBTi if a below 2-degree scenario was the gateway as opposed to 1.5 degrees.

Companies also noted that their Net Zero targets are already more ambitious than SBTs, and therefore SBTi participation would not drive further emissions reductions beyond their voluntary commitment.

Another emerging theme that we are hearing is community objections and social implications from building wind farms in regional communities, and how this will impact the rollout of the renewable energy infrastructure required to facilitate the emission reduction targets. This also may be impacting the desire to lock in verified targets.

The rise of protectionist policies and economic competition, as seen in recent US political trends, could shift global focus away from climate action, potentially influencing corporate priorities. The US election of Donald Trump on a large popular vote also demonstrates this social trend, and we anticipate further pushback on ESG topics.

What's next?

The SBTi sets a high bar for climate action, and while our goal of achieving verified SBTs for 100% of portfolio holdings by 2040 may be too ambitious, we remain committed to driving progress, albeit at a slower pace than the linear trajectory of our Funds suggests.

Our research and analysis results  suggest that achieving Net Zero requires a balanced approach — combining ambition with adaptability towards verified and non-verified targets — to encourage broader industry participation and meaningful action.

By engaging with companies transparently and supporting pathways that balance ambition with practicality, MCA remains committed to playing a pivotal role in a more sustainable, low-carbon future.