*Originally written 6/29/22. Combination of twitter threads here and here.
I’ve recently been seeing headlines and reports that have prompted me to ask the question of whether the world is slowly approaching an inflection point on Net Zero targets where we are transitioning from asking companies/governments to simply set comprehensive targets to focusing on what is actually feasible/likely by individual corporates/countries? Some supporting thoughts below and examples for both countries (G-7) and corporates (Unilever). I wanted to share some of this recent research and thoughts to drive discussion around the best way to approach these complex topics as investors. While investors need to be aware of global trends and the direction of travel, they also need to define an appropriate range of outcomes and underwrite what is actually going to happen in reality.
It’s interesting to see some of the push-pulls at both the country and corporate level, especially because many corporates are taking cues from how quickly and aggressively governments are moving/acting. What are the best methods for firms to push companies to set robust targets in-line with best practice but also be intellectually honest about how realistic and achievable those plans are?
The ongoing global energy crisis is putting leaders charged with the energy transition at a tough crossroads: work on securing short- and medium- term energy supplies to manage energy inflation at the expense of surely backtracking on climate commitments. Few bits of recent news with commentary in-line:
Behind the scenes, their proposals are getting criticized for doing the opposite: “G7 leaders have been accused of ‘backsliding’ on climate goals after they watered down pledges to halt fossil fuel investment because of fears over energy security“
Politico described the situation as the following: While they boasted of uncommon and unprecedented shared purpose in tackling all of these challenges, the solutions they endorsed in some cases seemed self-defeating and contradictory, such as seeking to lower the prices of oil and gas while simultaneously restating their aims to end the use of fossil fuels. They want to end the war but not fight in it. They want to promote rules-based capitalism, while imposing price controls on energy.
We’re increasingly moving into a world where leaders want the credit for saying the right things on fighting climate change whereas the reality of their proposals and policies may not align with what most Net Zero by 2050 pathways and climate models have modeled. That’s neither right nor wrong as many would agree that many of these actions are necessary responses to the current crisis which has caused exceptional circumstances. It’s a unenviable position to be for global leaders as an increasing number of the electorate is getting concerned about climate change and wants action while the majority of the current electorate is demanding a fix to high energy prices and inflation while regions like Europe are dealing with energy shortages ahead of winter.
Nations that want to be seen as aggressive on climate change are not wanting to invest in legacy fossil infrastructure given long-term stranded asset risk and risk of backtracking on climate commitments. However, they then have no negotiating power when asking legacy fossil fuel-based partners to produce more. Simultaneously, the same nations need to dramatically scale clean energy technologies and supply chains that have been sore underinvested for years at a time where many are calling for a restraint in government spending.
There’s undoubtedly been a steady uptick in companies setting decarbonization and net-zero targets in recent years. This is evidenced by the fact that less than 500 companies in the MSCI ACWI Index had such targets in 2015 and are now 1,330+ as of 2021 [Chart 1]. While it should be celebrated as companies commit to aggressive decarbonization targets in-line with aggressive 1.5C or Well Below 2C climate scenario pathways, it does call into question how realistic their execution will be and what the resulting effect will be on the firm’s financial productivity. The Science-based Targets Initiative (SBTi) is an organization that validates a corporate decarbonization targets and in its most recent 2021 update report, they called out 1,082 companies with approved targets and 1,171 committed to setting targets [Chart 2]. Of the validated targets, 68% are aligned to 1.5C per SBTi’s framework for Scope 1 and 2 targets [Chart 3] and from June 2022 onward, the SBTi will only validate targets aligned with 1.5°C for Scope 1 and 2 and a minimum level of ambition of well-below-2°C for Scope 3.
For a specific company example, Unilever is considered by many to be a champion of Sustainability and a relative leader in many respects: 1.5C validated science-based target, CDP A-list, 4 – Strategic Assessment ranking by TPI (out of 4), and meets all criteria for 4 categories and meets partial criteria for 5 categories of CA100+’s framework assessment of 9 categories, and has won a host of sustainability awards from third-parties over the years (example: Ranked #1 corporate sustainability leader for 12 straight years by GlobeScan). They are one of the companies that published and validated a science-based target back in 2017 that was classified as aligned with a 1.5C target and included a target on Scope 3 emissions from use of products sold which was rare at the time (“Dutch-British transnational consumer goods company, Unilever commits to reduce scope 1 and 2 GHG emissions 100% by 2030 from a 2015 base year. The company also commits to reduce GHG emissions from the life-cycle of their products 50% per consumer use by 2030 from a 2010 base-year”).
Now that we’ve set the stage on corporate targets, I wanted to transition to the focus on feasibility, as evidenced by two notable pieces of news that came out last week.
“The company’s goods range from Dove soap to Knorr noodles and Surf detergent, and the energy used by consumers to cook food, wash clothes or clean their hair and skin ‘accounts for 60% of our total carbon footprint’ Jope said at the Consumer Goods Forum in Dublin”
“The energy output from its factories and distribution network is ‘almost immaterial’ by comparison, the CEO added. Jope was outlining the challenges in meeting scope 3 goals, which the company has less influence over, by 2039. He said it would require significant changes in consumer behavior and action from governments, including the adoption of much higher use of renewable energy worldwide. Unilever focuses on advocacy to help promote the changes needed as part of its overall carbon reduction strategy, he said.”
“The consumer giant is on track to meet its scope 1 and 2 emissions, which are those directly under the control of the company, said Jope.”
“Having analyzed the carbon-reduction commitments made so far by the largest Western food and beverage companies, AlixPartners estimates that, even if all these commitments are met, the companies will still have only reduced their carbon emissions by 29% between 2019 and 2030. That is more than one fifth (23%) short of the global industry target of 38%”
“According to the research findings this gap then widens further when you take into account the industry’s lack of confidence in meeting these carbon commitments.With only 49% of suppliers, 36% of manufacturers and 31% of retailers from across the food and beverage industry claiming to be very confident that they will meet their carbon-reduction goals related to their own carbon emissions (as opposed to those created elsewhere in their value chains)”
“Of those surveyed, only 27% of executives from suppliers, 13% of executives from manufacturers and 4% of executives from retailers are confident that they will meet their carbon reduction goals relating to emissions made by other companies in their value chains”
“The research findings reveal that only 34% of the executives from the suppliers surveyed feel that they are successfully measuring their downstream carbon footprint (i.e., emissions made by manufacturers and retailers). Meanwhile, only 19% of the executives from those retailers surveyed feel that they are successfully measuring their upstream carbon footprint (i.e., carbon emissions from their manufacturers and suppliers).”
“Manufacturers show similar uncertainty with only 25% claiming to be successfully measuring their upstream footprint and only 32% claiming to be successfully measuring their downstream footprint.”
“Manufacturers show similar uncertainty with only 25% claiming to be successfully measuring their upstream footprint and only 32% claiming to be successfully measuring their downstream footprint.”
This is not apples-to-apples as its CDP data, but as an additional datapoint, Alliance Bernstein found: “Among companies that reported Scope 3 emissions data, only 29% went through some type of assurance process on their most material source of Scope 3 emissions”.
I would be remiss to not call out that composition of emissions (Scopes 1 vs. Scope 2 vs. Scope 3) and feasibility/in measuring and reducing them, especially scope 3, varies considerably between sectors (e.g., automotive moving to EVs versus O&G major needing to shut down production and transition businesses versus consumer goods company that needs to reformulate products or change customer behavior). However, the point still stands that many companies across many sectors are increasingly concerned about their ability to meet the carbon commitments they’ve publicly pledged to and wonder about their ability to effectuate emissions tied to them that are out of their control (supply chain partners, consumers, etc.). I’ve previously called this out using Microsoft as a case study of this where they had overall total emissions rise in FY21 due to Scope 3 even though they are hyper focused on reducing emissions (see previous post: Assessing Corporate Decarbonization in a World of Volatile Emissions Growth). This may result in corporates relying on offsets or other compensation mechanisms in order to fill in the gaps as evidenced by the fact that nearly 40% of all Forbes 2000 companies with net zero targets intend to use offsets, and close to 60% for those companies with targets for 2030 or earlier (see previous post: Status and Trends of Net Zero Target Setting across Countries, Governments and Companies). We may very well end up in a situation where corporates are “achieving” their “Net Zero” targets superficially and not actually meaningfully reducing emissions.
Further assessments of actual progress against targets reveals slower performance out of the gate:
Many of these realizations are prompting investors to take a more careful eye to targets. In the most recent proxy season the proportion of E&S proposals that passed declined YoY, notably this included Scope 3 targets not passing at several US O&G companies.
Copy link