Michele Leung, Green Finance Advisor of Friends of the Earth (HK)

It has been more than six months since COP 26, the priorities remain for issuers and investors to commit to global climate goals. According to the IPCC, emissions need to decrease by around 45% by 2030 in order to stay on course to limit global warming to 1.5°C. How are the companies progressing in their net zero journey?

Climate Action 100+ is the world’s largest investor engagement initiative on climate change, which involves 700 investors, responsible for over $68 trillion in AUM.  They have recently published a Net Zero Company Benchmark, which 166 of the world’s biggest corporates were assessed on their progress against disclosure framework, as well as alignments in capital allocation and climate governance. The benchmark aims to raise the bar on ambition by codifying what companies should disclose in their transition plan in achieving better investor confidence.

The benchmark shows that 69% of focus companies have now committed to achieve net zero emissions by 2050 or sooner, however one should note that,

  1. The commitments largely remain qualitative and fail to include Scope 3 emissions. Only 17% of companies have quantified the proportion of overall GHG emissions reductions each key element of their strategy. Scope 3 emissions include everything beyond its direct operations and electricity use, a separate study showed Scope 3 emissions is on average 2.8x times higher than Scope 1&2 emissions.[1]
  2. Capex alignment is the worst performing indicator. Capex is usually a good indicator of what companies intend to do on their net zero transition strategy, any misalignment with their commitments would warrant investors to take a closer look.
  3. In terms of climate governance, while overall there is board level oversight, there is a lack of incorporation of greenhouse gas reduction targets into executive renumeration.

These are, in fact, aligning with the recent International Sustainability Standards Board (ISSB)’s consultation on climate-related disclosures, which put emphasis on companies’ transition plans, Scope 1 to 3 emissions disclosure and climate resilience of business strategy. As a summary, companies are asked to move beyond target setting to practical delivery.

Another interesting industry study showed, while the companies in developed markets are projected to become more carbon efficient than those in emerging markets, no regions yet aligned with the Paris Agreement target. In fact, the implied temperature rise of listed companies in Emerging Asia is close to 3.5°C. [2]

From the investor perspective, they may use different climate assessment tool to advance their engagements, for example, investors may escalate pressure on these companies to address material Scope 3 emissions, quantify the transition plan on how they intend to implement the greenhouse gas reduction targets and report how to integrate climate strategies into their capex plan. In addition to engagement, investors may use the assessment to support key climate resolutions, flagging votes aligned with the initiatives’ goals and voting against directors when necessary. [3] Lastly, investors may also integrate these assessments to form investment decision making, particularly for the laggards in their portfolio.

In order to achieve net zero emissions by or near 2050, alongside the companies’ commitment in reducing carbon emission, it is also fundamental to channel more investments into green innovation and reduce the cost of renewables. Afterall, the primary driver for a carbon free world will be the economics.

[1] https://www.msci.com/www/blog-posts/scope-3-carbon-emissions-seeing/02092372761

[2] The MSCI Net-Zero Tracker – MSCI

[3] Proxy Season | Climate Action 100+