How much does it matter for companies?

The fundamental data for interpreting the CRedibility of Net Zero objectives and the capital expenditure for the decarbonisation of companies. He underlines it Thomas Leys, investment director of abrdn, explaining that companies are increasingly aware of the challenge to be addressed so much so that the proliferation of corporate objectives of achieving the net zero by 2050 in the last few years it was remarkable. Especially since investors rightly consider it a positive attribute of the company.

For Leys, companies engaged in this area are reducing transition risk and should benefit from the demand for goods and services low carbon emissions.

Leaders and laggards

“It is not so simple to choose the winners of the climate transition,” explains the expert in a long analysis. According to data collected by Carbon Disclosure Project (CDP), the reference standard in climate reporting, 41% of the nearly 5,700 participating companies have a goal of reaching net zero by 2050. And 81% have some form of decarbonization goal, up from 76% last year. There are other reasons to be optimistic. Perhaps counter-intuitively, companies in sectors that will have more difficulty reducing emissions are more likely to have set targets; in fact, more than 90% of the 534 companies that filled out CDP questionnaires in the oil and gas, steel, cement, chemicals and transportation sectors have set Net Zero targets. It is a important aspect, considering the 29 gigatons of CO2 equivalent emissions reported by these sectors overall (albeit with overlapping supply chains). Nearly half of these companies (48%) have set goals to reach net zero by 2050. In contrast, the subject sector agricultural commodities, which contributes most to climate change, has set the fewest targets. This suggests increased transition risk for companies in this sector.

This type of macro reference objectives – he continues Leys – “often hides a real lack of intention, both in the scope and timing of business plans. While 81% of companies have a decarbonisation target, only 24% have a Scope 3 target, which relates to supply chain emissions which typically account for more than three-quarters of a company's emissions. About half (48%) of companies with Scope 3 objectives include fewer than five of the 15 possible categories related to your objectives”

Decarbonize your wallet

Many sectors “will have to get their hands on the portfolio to decarbonize, ininvesting in new technologies and supply chains. However, setting a goal of reaching net zero by 2050 is not enough, because while it is true that on the one hand it allows companies to defer transition costs, on the other it increases the risks while competitors make progress. So it's the capital expenditure for the decarbonizationand the fundamental data for interpreting the credibility of a company objective. CDP data shows that 81% of companies with net zero targets for 2050 have not reported investments in line with that transition. It follows that the target of net zero emissions by 2050 is an unreliable indicator at an operational level. Currently, a third of utilities without one are spending more than 80% of their capex on climate transition. Actions speak louder than words.”

Don't overlook avoided emissions

As for investor assessments related to climate change “They often don't consider avoided emissions. These are emissions that are avoided through the implementation of cleaner technologies, energy efficiency measures and more. Think of the benefits offered to companies in terms of decarbonisation by some products: batteries, wind turbines and building insulation. The net zero target by 2050 may pale in comparison to the positive impact of these products. Investors who are too focused on targets tend to overlook the companies that will actually benefit the most from the energy transition. According to CDP, in 2022, 183 companies recorded a greater volume of avoided emissions than actual emissions. If correct, this probably already makes them “net zero”. However, nearly half of these organizations (48%) did not have a target of net zero emissions by 2050. Once againa, having a goal for 2050 is not everything.”

The scenarios

“Reach net zero by 2050 is important“, concludes Leys underlining that “limiting global warming should be an immovable objective dthroughout society and companiesAnd. However, targets must be broad in scope and include intermediate milestones. Furthermore, avoided emissions should be taken into account to get a complete picture of the climate-friendly activities undertaken by companies. That's why investors should look beyond net-zero emissions by 2050 targets at the moment assess transition risk”.