Equities

Decarbonisation: are companies making progress?

Decarbonisation: are companies making progress?
Alexey Medvedev, PhD - Portfolio Manager

Alexey Medvedev, PhD

Portfolio Manager
Cesar Vaurof Moura - Senior Sustainability Data Scientist

Cesar Vaurof Moura

Senior Sustainability Data Scientist

The transition to net-zero greenhouse-gas emissions will result in a drastic transformation of the global economy, impacting every industry. The fate of the climate transition, however, will eventually depend on the decarbonisation of the few high-carbon sectors that account for most global emissions. Assessing how companies within such sectors align to net zero will be key for the positioning of portfolios to reduce risks and benefit from opportunities.

Although the forward-looking analysis of companies’ decarbonisation pathways is still in its infancy, this paper explores whether there is any evidence that companies are starting to deliver on their commitments.

 

Need to know:

  • Companies’ decarbonisation commitments are key elements for forward-looking assessments; quantitative targets validated by the Science Based Targets initiative (SBTi) are considered to be the most credible 
  • Our study found that companies with SBTi-based commitments seem to be ahead of their peers in terms of the scale of their emissions and the speed of decarbonisation
  • Overall, our results reassuringly suggested that companies with SBTi targets are already likely to be transition leaders and therefore more likely to deliver on their commitments


Keys to our forward-looking assessment

At Lombard Odier Investment Managers (LOIM), we evaluate companies’ ambition to decarbonise through a comprehensive analysis that combines an assessment of their past decarbonisation efforts with a future outlook derived from stated commitments. There is, of course, a big difference between committing to decarbonise and actually reducing emissions. Therefore, our analysis focuses on assessing the credibility of emission targets where we use a variety of metrics relating to a company’s climate-related actions, as well as our proprietary ESG scoring methodology.

In addition to assessing the overall credibility of companies’ commitments, we further differentiate between sources of emission targets. Those approved by the Science Based Targets initiative (SBTi1) are considered to be the most credible.
 

Behaviour offers insights

Given the importance of SBTi targets, we felt it would be helpful for investors to have a better understanding of whether companies are delivering what they promise in terms of decarbonisation. It is, however, too early to perform a comprehensive analysis, since the majority of SBTI targets have only been validated very recently2. We have nevertheless studied the behaviour of companies before and after their commitment to SBTi targets to gain useful insights.

Companies’ commitments take various forms, from mere statements of intent to precise quantitative targets specifying the rate of carbon reduction over a certain period. While precise targets clearly represent the most powerful commitments, our analysis considered companies that have published targets in a variety of forms. Since we are unable to verify targets given the time frame, using a broader sample allowed us to draw more confident conclusions3.

For each company in our analysis, we define the base year as the year prior to the first publication of its decarbonisation commitment. Then we calculated the company’s carbon intensityfor a certain number of years both before and after the base year. Figure 1 shows the average carbon intensity normalised to the base year across all of the companies in our sample, where the shaded area outlines the confidence bounds5 of these estimates. Such confidence bounds tend to be tight around the base year and then widen as we move away due to fewer observations. We only show three years after the base year where we have a reasonable degree of confidence in our estimates6
 

FIG 1. Absolute emissions before and after SBTi commitment

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