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Cutting emissions: a tale of two targets from the steel and shipping industries
Elise Beaufils
Deputy Head of Sustainability Research
Mona Shah
Senior Sustainability Strategist
key takeaways.
Ambitious emissions-reduction targets can’t always be taken at face value. While they reflect a firm’s level of ambition, only effective strategy and strong discipline will ensure the desired results are likely to be achieved
Ultimately, a company that backs up decarbonisation goals with clear processes and accountability will be far more likely to succeed than one that makes ambitious proclamations without a clear strategy to achieve them
In our view, openness to engagement is an important factor, providing us with opportunities to add value to a business through actionable conversations that drive successful long-term decarbonisation outcomes.
Can an ambitious, verified emissions-reduction target be taken at face value? Not always. Targets express a company’s ambition, but strategy and discipline is required to turn good intentions into action and measurable results. Here we present a tale of two targets. Both appear credible, but in reality, we believe one is more likely to be achieved than the other.
The companies involved are real but have been anonymised. Our intention is to demonstrate how seemingly comparable targets can mask factors that point to very different outcomes rather than highlight individual names. We have chosen firms in higher emitting sectors – steelmaking and shipping – that have significant parallels in terms of the challenges they face to decarbonise.
Such analysis is integral to our TargetNetZero investment strategies, which focus on companies making real emissions reductions in such hard-to-abate sectors.
SteelCo: bold intentions, true mettle?
According to the World Steel Association, steel is responsible for around 7-9% of total global greenhouse gas emissions. Steelmaking is a low-margin industry that is highly dependent on fossil fuels, particularly as a heat source for blast furnaces. Steel plants are massive, complex and typically have a lifespan of 30-50 years, making cost-efficient replacement or retrofitting of assets for lower carbon technologies extremely challenging. Currently, new chemistries and processes are still at the development stage and are not yet available for large-scale commercial deployment.
Despite the challenges, on the face of it ‘SteelCo’ looks to be setting out well on its decarbonisation journey. The Science Based Targets initiative (SBTi) has independently validated its decarbonisation targets, which are aligned with keeping global warming below 1.5 °C. The company is committed to a 50% reduction in its absolute scope 1 and 2 greenhouse gas emissions by 2030, and to reducing its scope 3 emissions from business travel and waste generated in operations by 14%. Meanwhile, it has pledged to ensure that 80% of its suppliers of purchased goods and services and upstream transportation and distribution by emissions will have science-based targets by 2025.
SteelCo is indeed a transition leader in terms of aligning itself to the 1.5 °C temperature trajectory set by the Paris Agreement. However, before investing we would want to understand why the firm has set its targets at these levels and what the implications for its balance sheet are of the capex required to achieve these goals. We would also question why it has yet to set a downstream scope 3 target for emissions. We believe strongly in direct engagement with companies on sustainability matters as a means to unlock long-term value for shareholders. To date, SteelCo has been unwilling to engage with us.
“Experience and expertise are needed to spot the difference between wishful thinking and achievable targets.”
Shipping is vital to the global economy, being involved in the transportation of 90% of goods traded worldwide. It is also responsible for 3% of overall global emissions, making it imperat5ive the sector decarbonises as quickly as possible. However, tight profit margins make transitioning to lower-carbon fuels challenging, while the cost of adapting infrastructure and rolling out new energy-efficient fleets (or retrofitting existing ones) is often prohibitively expensive – particularly given that ships would usually have a lifespan of 20-30 years. To add to the issues, low-carbon fuels like hydrogen and ammonia occupy high volumes, reducing precious cargo space, while battery-powered and wind-assisted ships are not yet commercially viable for deployment at scale.
Yet, although the sector faces major challenges to decarbonise, ‘ShippingCo’ is taking clear action to maximise its chances of success. The company has just appointed an expert on biofuels and other alternatives to its board, who will head a committee of experts to comprehensively oversee its decarbonisation strategy. Having already committed to a target of reducing emissions by 30% by 2030, it has announced a capital-expenditure programme aligned with achieving this goal. Finally, it has commissioned additional consulting studies to assess the potential to further improve on its goals and aims to declare a science-based target by the second quarter of 2025.
In contrast to SteelCo, ShippingCo has signalled to us that engagement around decarbonisation could be very fruitful. Its actions to date show strong intentions, but at the same time they are honest about not yet knowing exactly what they can achieve and by when. The company’s openness presents a strong opportunity for holistic conversations in which we can contribute our understanding of what its peer group are doing to address the issue, as well as how they can benefit from developments beyond the sector and across the value chain.
Ultimately, the right course of action for ShippingCo will depend on its specific situation. In an industry with very high fixed costs and significant capex outlays, the company will need to pay careful attention to protecting its balance sheet. It may be in a position to elongate the lifespan of its existing fleet by retrofitting ships with lower-carbon technologies within a reasonable timeframe. On the other hand, the age of its fleet may make the best option to plan investment in new vessels as soon as the right technology is available and affordable. The right decision should also consider a range of other factors, from changes to port infrastructure and cost curves for alternative fuels, to decarbonisation progress in the fossil-fuel sector.
Assessing achievability requires sustainability experience and expertise
These two examples demonstrate the importance of looking beyond bold proclamations and enthusiastic press releases to understand the reality behind companies’ aspirations to decarbonise. Only by understanding a firm’s fundamentals and thoroughly assessing the strategy designed to achieve decarbonisation goals can investors make an accurate judgement regarding whether they can be achieved. Experience and expertise are needed to spot the difference between wishful thinking and achievable targets.
We have been applying our understanding of decarbonisation to our TNZ strategies for almost four years. LOIM was among the first asset managers to create proprietary Implied Temperature Rise metrics – and our methodology was commended by the Task Force on Climate-Related Financial Disclosures. We have also developed strong qualitative expertise in terms of an understanding of nuances by sector, region and across value chains relating to the issue. This arms our engagement team with market-leading, non-consensual insights to enable actionable conversations with companies that support successful long-term decarbonisation outcomes in hard-to-abate sectors.
This article was originally published in the Q1 2025 issue of Alphorum, our global fixed-income quarterly. The full report can be downloaded below.
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
