Companies set goals for every aspect of their business from sales to customer satisfaction and, increasingly, environmental, social, and governance (ESG) factors.
For example, MSCI data shows over 40 per cent of Australia’s top 300 listed companies have a stated goal to reduce their greenhouse gas emissions. Of these 126 companies (which represent around 80 per cent of the ASX 300 by market capitalisation), many are targeting a 50 per cent reduction by 2030 and net zero by 2050.
Assessing the quality of a company’s targets and the probability of hitting them is challenging.
Logically, companies in dirty, carbon-heavy industries such as manufacturing, mining, and transport will find it tougher than others, yet, across the board, targets are eerily similar. This reflects corporate Australia’s noble desire to align with the Paris Agreement on climate change, which aims to limit global warming to 1.5 degrees by slashing greenhouse gas emissions by 43 per cent by 2030.
It also suggests that companies are being influenced by peer pressure and consumer expectations rather than applying a statistical lens and considering factors like their supply chain, project pipelines, and the availability of renewable solutions in order to understand and quantify the type and extent of action that must be taken to accurately determine science-based targets (SBTs).
For asset owners that represent the holders of long-term retirement savings, insurance premiums and other assets, and financial planners advising socially-minded retail clients, it is increasingly expected that they understand the investment implications of ESG factors and take responsibility to enhance returns, better manage risks, and benefit the environment and society.
Therefore, it is critical that the companies they invest in set SBTs that are attainable and realistic. Corporates must also be open and transparent about their progress towards their goals and held accountable if they fail to meet them.
High quality targets
Goals, by nature, are forward looking and the ability of a company to achieve its goals is dependent on a range of internal and external variables, some of which are beyond their influence and control.
Companies need a robust strategy that details how they will achieve their target.
There are three key ways for companies to reduce their emissions.
- Decarbonise current operations: This includes reducing reliance on grid energy, reducing supply chain miles, minimising overseas travel, and adopting electric vehicle (EV) fleet solutions.
- Transition to clean energy: Alternatives to fossil-based systems of energy production and consumption include renewable sources like wind and solar.
- Buy offsets: This should not be the cornerstone of any strategy but it can form part of a strategy, given there are some emissions that are near impossible to eradicate. Offsets can help a company get over the line but it should not be a core component.
A company’s strategy should also outline sustainability KPIs for senior managers, any potential risks, and quantify how much, if any, capital will be allocated to sustainable projects such as developing clean technologies.
The more thorough and detailed a company’s plan is, the more likely they are to hit their target.
Of course, when it comes to achieving net zero, certain industries are at a significant disadvantage to others. According to Our World in Data, the sectors that produce the largest greenhouse gas emissions globally are energy including electricity, heat, and transport (73.2 per cent); agriculture, forestry, and land use (18.4 per cent); and direct industrial processes (5.2 per cent).
Consider the aviation industry.
For airlines, the biggest challenge will be transitioning to sustainable aviation fuel, given there currently is no economically viable substitute for kerosene-based jet fuel.
As such, they must either invest in the technology or wait for it to be developed, making it difficult to say if they will achieve their target in 2030, 2050 or ever.
Similarly, miners can’t currently produce aluminium and steel without emitting a lot of carbon.
When pushed, many companies concede that their targets are aspirational and since 2050 is so far away, part of their strategy is to wait and see.
For asset owners with a mandate to manage money responsibility, this is a major red flag.
To invest confidently, they need the ability to objectively assess, based on data, the quality of a company’s goals and the probability of them achieving their targets.
Increasingly, investment processes are leveraging technology like artificial intelligence, machine learning, and large language models to gather, analyse, and interrogate data to identify discrepancies and examples of greenwashing. These technologies are also being used to customise portfolios to exclude companies, such as those that are unlikely or unable to transition to the low carbon economy, as well as positively tilt towards those that are.
Overall, it is clear that in order for companies and, in turn, asset owners to achieve their ambitious targets, more innovation is needed across every sector.
Andy Moniz, director of responsible investing, and Matthew Picone, senior vice president, ESG portfolio manager, Acadian Asset Management
