investment viewpoints
Decarbonisation: are companies making progress?
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:
|
|---|
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 intensity4 for 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
Source: LOIM, Trucost, SBTi. The figure shows the average carbon intensity relative to the base year (the year prior to the first SBTi publication). The shaded area outlines two standard deviation bounds. For illustrative purposes only.
We observe that companies with SBTi commitments tend to have already started decarbonising before the publication of these commitments, with an average rate of emissions reduction of -15% at the base year. The tightness of the bounds gives us high confidence in this conclusion. The decarbonisation trend seems to continue past the base year, indicating that commitments do not materially change a company’s behaviour.
Transition leaders are first movers
The decarbonisation trend shown in Figure 1 may also be a result of a general tendency for companies to decarbonise over time. Figure 2 provides additional an insight by illustrating how the emissions of companies relative to their sector7 averages have evolved around the base year.
First, we observe that the companies in our sample already had lower emissions than the wider peer groups, with an average of 30% fewer emissions in the base year. Additionally, we notice a downward trend, which indicates that these companies were decarbonising faster than their sector peers both before and after formal commitments. While our statistical confidence is not as strong as in Figure 1, these results are nevertheless reassuring. Indeed, we expect that the leaders of the transition would be more likely to deliver on their commitments going forward.
FIG 2. Emissions relative to the sector average before and after SBTi commitment
Source: LOIM, Trucost, SBTi. The figure shows the average carbon intensity relative to its sector average for a given number of years around the base year (the year preceding the first SBTi publication). The shaded area outlines two standard deviation bounds. For illustrative purposes only.
Commitments and performance
When discussing investment-related topics, we cannot avoid talking about performance. In this context, the obvious question is whether a company’s decarbonisation commitments are rewarded by the market. While it is probably too early to expect a material effect on stock valuations given the uncertainty about future actions, we could not resist the temptation to study the performance applications.
We limited ourselves to a fixed sample of companies where we have at least two years of performance history since the base year8. To be consistent with our TargetNetZero equity portfolios, we further restricted ourselves to companies within the MSCI World Index. While this reduces the size of our sample, it makes the results more interpretable from an investment point of view.
Figure 3 shows the average yearly excess returns9 of these companies two years prior to and after the base year. We observe that the companies in our sample did not perform better than their peers before the base year. However, there is some evidence that they outperformed their peer groups in the year they made an SBTi commitment (year 1) and the following year (year 2).
FIG 3. Excess returns prior to and post SBTi commitment
Source: LOIM, Trucost, SBTi. The figure shows the average excess return relative to sector and regional peers over a given number of years around the base year (the year preceding the first SBTi publication). The returns are calculated for a fixed sample of companies that belong to the MSCI World Index in the base year and are limited to those that have at least two years of returns after the base year. The shaded area outlines two standard deviation bounds. For illustrative purposes only. Past performance is not an indicator of future results.
| While the confidence bounds are clearly not tight enough to guarantee any strong statistical significance, we believe these results are quite encouraging for our TargetNetZero portfolios. Further analysis in the future, with more years of performance data since emissions-reduction commitments were made, would be instructive. |
sources.
important information.
For professional investors use only
This document is a Corporate Communication and is intended for Professional Investors only.
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.
This document is issued by:
Lombard Odier Asset Management (Europe) Limited (hereinafter the “Company”). The Company is authorised and regulated by the Financial Conduct Authority (the “FCA”), entered on the FCA register with registration number 515393.
This document is approved at the date of the publishing. The Company is clustered within the Lombard Odier Investment Management Division (“LOIM”) of Lombard Odier Group which support in the preparation of this document and LOIM is a trade name.
Any opinions or forecasts provided are as of the date specified, may change without notice, do not predict future results and do not constitute a recommendation or offer of any investment product or investment services.
This document is the property of LOIM, is provided for information purposes only and is addressed for the recipient exclusively for its personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. It is not intended for distribution, publication, or used for any other purpose without the prior written permission of LOIM.
The contents of this document are intended for persons who are professionals and who have been vetted by LOIM and assessed as suitable to the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories, you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person. This document contains the opinions of LOIM, as at the date of issue or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice.
The contents of this document has not been reviewed by any regulatory authority in any jurisdictions and does not constitute an offer or a recommendation to subscribe for any securities or other financial instruments or products.
It contains opinions of LOIM, as at the date of issue. These opinions and information contained herein in this document does not take into account all the specific circumstances of the addressee. Therefore, no representation is made that the information presented in this document are suitable or appropriate to the individual circumstances of any investors. Tax treatment depends on the individual circumstance of the investor and may be subject to change in the future. LOIM does not provide tax advice.
The information and analysis contained herein are based on sources believed to be reliable. While LOIM uses its best efforts to ensure that the content is created in good faith and with greatest care, it does not guarantee the timeliness, accuracy, validity, reliability or completeness of the information contained in this document, neither does it warrant that the information is free from errors and omission not does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Particular contents of third parties are marked as such. LOIM assumes no liability for any indirect, incidental or consequential damages that are caused by or in connection with the use of such content.
The Source of the data has been mentioned wherever it was available. Unless otherwise stated, the data is prepared by LOIM.
Not for US Person: This corporate communication is not intended for any "U.S. Person" as defined in Regulation S of the Act, as amended or pursuant to the 1940 United States Investment Company Act as amended and will not be registered pursuant to the 1940 United States Investment Company Act as amended, or pursuant to other US federal laws. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Data Protection: You may be receiving this Communication because you have provided us your contact details. If this is the case, note that we may process your personal data for direct marketing purposes. For more information on Lombard Odier’s data protection policy, please refer to www.lombardodier.com/privacy-policy
©2024 Lombard Odier IM. All rights reserved.
