Why investors shouldn’t take companies’ net-zero pledges at face value

12 April 2022

5 minute read

It’s a concept that barely existed for companies even a decade ago1. Yet, achieving “net-zero” carbon emissions by 2050 or sooner is today seen as the global benchmark, and a key measure of corporate progress on climate action.

But to get there it seems that companies are making an increasing number of climate promises. And with no global regulation yet in place to monitor such claims, how do we know that these pledges are as good as they sound?

It’s also important to consider not only whether a pledge was made, but also how credible it is compared with the level of current emissions, the timelines set and the robustness of implementation.

The path to achieving net-zero is far from straightforward, and many tough decisions will still need to be taken by companies – especially the larger emitters – to meet these lofty aims.

Zeroing in on carbon emissions

With most of the consequences of the shift to a low-carbon world to come, investors face a tricky task today in identifying which companies will be successful pioneers in following their emission-reduction pathways. 

Companies that fall short face having future emissions capped, carbon taxes imposed or dealing with potential shifts in consumer behaviour – as well as the very real danger of investors eventually walking away and selling their assets if promises aren’t met.

Whereas, the potential rewards for companies that do meet their emissions targets are clear, with expected returns in the longer term – over the next 10 to 30 years – likely to be higher.

It’s just in the short term where things are trickier to predict – and where results and financial outcomes for those committed to taking more action are likely to be more mixed. The positive effects of mitigating future carbon risk can remain masked, as initial investments, and hence costs, might be required to implement and reach these emissions targets.

There is also the issue of future carbon-pricing regulation. While there’s still uncertainty about its rollout across all sectors and industries, momentum is building for a mechanism that will reduce emissions by adding a cost to the creation of emissions. And if there are signals that carbon pricing is to be applied more widely, markets could turn more volatile as investors overreact to the news.

Working out if net-zero plans are credible or not

To see how watertight company pledges are, we leveraged data from the Energy & Climate Intelligence’s Net Zero Tracker2, which covers the Forbes 2000 list of the world’s largest public companies, and focused on the 382 companies in there from the S&P 500, the benchmark US equity index.

There are a variety of climate targets companies can commit to – from reduced emissions all the way to net-zero, achieving carbon neutrality, or setting a science-based target.

We found that around half of the 382 S&P 500 companies in our Net Zero Tracker dataset now disclose an emissions pledge, 40% of which promise to achieve net zero (see chart below). It’s worth noting here that sectors with high emissions rates, namely utilities and energy, have been under more pressure to reduce emissions – which may also explain why they have more emissions targets in place.

To make emissions pledges more robust and transparent, important quality criteria should encompass government indicators, such as the existence of a publicly available plan, setting interim targets to ensure action proceeds in a timely fashion, and committing to publishing regular progress reports along with holding management accountable.

Academics and experts have developed checklists that companies should be fulfilling, such as the NewClimate Institute’s 10 basic criteria for net zero transparency, and the United Nations’ starting principles for companies to participate in its Race to Zero campaign.

Additionally, companies should also be working towards best-in-class emission-reduction targets (see chart below), not only in their own operations (by meeting Scope 1 and 2 targets as defined under the Greenhouse Gas Protocol of 20013), but also the wider value chain (meeting Scope 3 targets). It’s Scope 3 targets, from sources they do not own or control, that usually account for 70% of a company’s carbon footprint4.

As our Net Zero Tracker data also shows, pledging to cut emissions is a considerable goal for large emitters, especially in the short term and those with strict net-zero targets (see the chart below, where each dot represents one of the 199 S&P 500 companies in our dataset that have declared a target). It may even be sensible for such companies to aim for longer time horizons than businesses with lower emissions and simpler reduction targets.

Emissions pledges can add extra information to ESG scores

Finally, for investors using third-party ESG ratings as part of their long-term investing strategies through the lens of environmental, social and governance concerns – it’s worth noting that any net-zero pledge made by a company is only voluntary and currently classified as non-standardised information. Most ESG scores, therefore, don’t consider net-zero pledges.

It means that even if a company has a good ESG score, this isn’t necessarily enough for it to achieve a net-zero future. That’s why, to get a broader picture, it may be worth evaluating the robustness of a company’s net-zero pledge alongside its ESG rating to better understand its future carbon risks.

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