Don't take corporate net zero pledges at face value

Very few companies on track to meet targets

clock • 4 min read
Don't take corporate net zero pledges at face value

The COP26 climate summit underscored the role of the private sector in combatting climate change.

On the surface, corporates seem mobilised. Even the airlines and energy majors have publicly committed to achieving ‘net zero' carbon emissions.

Climate-focused investors should not take these pledges at face value.

Distant timelines, reliance on unproven carbon removal technologies, and an emphasis on the ‘net' side of the equation are all means of getting a public relations boost while avoiding the difficult work of significant emissions reduction.

Morningstar EU climate benchmarks can be used by investors to identify the shares of companies across the globe with credible net zero plans and contributing to the fight against climate change.

Net Zero AM Initiative - the five firms with the lowest initial commitments

Uncomfortable Truths

Just 9% of European companies are on track to meet 2050 emissions reductions targets, according to an Accenture study.

Corporate pledges are facing legal challenge. In May 2021, a court in the Netherlands told Royal Dutch Shell that its net zero commitment was inadequate.

Australian gas supplier Santos is being forced to defend whether its net zero plans for 2040 are 'clear and credible'.

Clearly, investors must separate the companies paying lip service from those taking measurable steps to cut emissions and promote a low-carbon economy.

That is the mandate of the European Union's Sustainable Finance Action Plan, which targets a 55% emissions reduction by 2030.

Morningstar EU climate benchmarks help investors achieve regulatory requirements while providing broad equity market exposure.

The EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (PAB) employ a few exclusions but rely principally on a tilt methodology to assign companies above and below market weight based on carbon intensity, carbon risk, and whether they offer green solutions.

The benchmarks use Sustainalytics carbon solutions for:

  • Scope 1, 2, and 3 emissions data, which are reported when available and estimated when not (Note: more than one third of companies in sectors where climate change is a material issue do not disclose emissions);
  • Carbon risk ratings: forward-looking measurements that evaluate how well companies are transitioning to the low-carbon economy;
  • Controversial product involvement data and environmental, social and governance controversy research.

Morningstar also cross-references the science-based targets initiative, which helps companies gauge the extent and the timing of greenhouse gas emissions reduction programmes.

$23trn held by top 100 asset owners 'key' to achieving net zero goals

Naming names

Here are some index constituents that do very well, well, and not so well based on this methodology.

Kone

The Finnish elevator manufacturer receives maximum index weight for these reasons:

  • Its emissions intensity is much lower than the industry median, and it demonstrates a steady year-on-year reduction trend;
  • It uses renewable energy for part of its operations, in line with good practice (5%-10%), reports its Scope 3 emissions, and considers environmental impact at each stage of development;
  • It has shown commitment to a ‘green buildings' agenda;
  • It has set empirical targets for a 50% cut in emissions, as well as carbon neutrality by 2030.

Whirlpool

The US home appliance manufacturer receives above-market index weight, for these reasons:   

  • It participates in more than 45 programmes in different states, provinces, and countries to recycle or reuse appliances;
  • Though its operations are quite carbon-intensive, the company has reduced energy intensity by roughly 12% since 2015 and achieved a 20% reduction in its absolute emissions.
  • It has committed to the science-based targets initiative and has formulated a goal to reduce greenhouse gas emissions from its manufacturing plants by 50% by 2030.

Volkswagen

The German auto giant receives below-market index weight because:

  • Though it is attempting a comeback from its 2015 emissions scandal, it continues to rely on diesel models, and has made a relatively late entry to the electric vehicle race;
  • It is facing at least $120m in fines for missing its 2020 EU emissions reduction targets. Its Porsche unit has also been investigated by the German authorities for allegedly falsifying fuel consumption figures.

Shell

One of the world's largest energy companies receives well-below-market index weight, because:

  • Although it has begun diversifying into hydrogen, energy storage, and renewables, none of those represents a significant revenue source;
  • It anticipates over $10bn of near-term spending on integrated gas and upstream projects, compared with $2bn-$3bn on renewables;
  • While it has committed to reducing the carbon intensity of its business (including emissions from the use of its products) by 100% by 2050 and has an interim reduction goal of 45% by 2035, that does not align with a net-zero target and relies on future technologies.

Investors seeking to align their portfolios to a 1.5-degree Celsius warming scenario and funnel capital to companies taking real action on climate change must get beyond ‘net zero' pledges.

Dan Lefkovitz is a strategist for Morningstar Indexes and Alex Osborne-Saponja is an associate director of Sustainalytics

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