Decarbonisation: are companies on the right track?

This article was originally published in Finanz und Wirtschaft, 2 November 2024.
 

The transition to net-zero greenhouse-gas emissions will lead to a drastic transformation of the global economy, impacting every industry. However, the success of the climate transition eventually depends on the decarbonisation of the few carbon-intensive sectors that are responsible for the majority of global emissions. As the transition unfolds and industries are re-shaped, assessing how companies within such sectors are moving towards net zero will be important for the positioning of portfolios. This will ensure that they can minimise risks and benefit from opportunities. 

Behaviour offers insights for valuations

Companies are increasingly setting themselves ambitious climate targets for decarbonisation, although these vary considerably – from general statements of intent to quantitative targets that define the extent of greenhouse gas (GHG) reduction over a certain period of time. Targets that have been validated by the Science Based Targets Initiative (SBTi) are considered particularly credible, as they ensure that emission reductions are in line with the Paris Agreement and are scientifically sound. They provide guidance for investors to better assess the decarbonisation performance of companies and make strategic investment decisions on a sound basis.

Read also: Decarbonisation: are companies making progress?

Transition leaders are first movers

Given the importance of SBTi targets, Lombard Odier Investment Managers (LOIM) has investigated whether companies are delivering on their decarbonisation commitments. The study analysed the evolution of companies' emissions before and after the publication of their SBTi commitments. It showed that these companies appear to be ahead of their competitors in terms of the extent of their emissions and the speed of decarbonisation. Even before the official publication of their decarbonisation plans, they made significant progress, emitting on average 30% less GHG than their industry peers and also decarbonising faster than the sector as a whole. This suggests that companies with SBTi-based targets are leading the way in the global transition to decarbonisation.

Potential advantages for companies and investors

The results of the LOIM study are encouraging and show that decarbonisation is gaining momentum. Overall, the results reassuringly suggest that companies with SBTi targets are likely to be at the forefront of the transition and will therefore be able to fulfil their commitments. For investors, it is essential not only to look at a company's current emissions levels, but also to thoroughly assess the ambition of its future decarbonisation plans and their credibility. We expect companies that have set themselves ambitious and scientifically sound targets to be better prepared for regulatory changes and the growing demand for climate-friendly products. These pioneers can secure a strategic competitive advantage in the long term and strengthen their market position.