With the boom in sustainable investing it can be hard to see the wood for the carbon-offsetting trees.
Fund managers will probably struggle to find investee companies not burnishing their sustainability credentials, but identifying whose words are turning into actions isn’t always as easy as it might sound.
A new standard has emerged, though, that should help investors identify the firms that are truly ‘walking the walk’.
At a time when ESG investing, is apparently a skill everyone possesses, the new science-based indicator from the Science-Based Targets initiative (SBTi) could be a vital development.
Effectively, if fund managers are better able to identify the companies with robust GHG reduction objectives, then their claims of green know-how will be more legitimate.
Going for goal
The SBTi’s Net-Zero Corporate Standard is the world’s first science-based certification of a company’s net-zero targets in line with the Paris Agreement’s goal of keeping global warming to 1.5 degrees Celsius.
The standard will require companies to reach net-zero emissions by 2050, and it provides relevant tools and guidance to help companies ensure that they navigate a path forward that will eventually reach the target.
See also: – Asset managers back engagement campaign for science-based climate targets
While it isn’t the only standard out there, it certainly aligns with our own aims of advising our institutional and retail investment clients to choose firms with these kinds of standards.
Vital scrutiny
This is a positive development because it can be difficult to decipher whether a company’s emission targets truly align with global climate ambitions.
Given the complexity of establishing this without third-party verification, it’s difficult for investors to know whether the businesses whose shares they own are thinking long-term, acting to protect their firm from potential regulatory penalties in the future, and ensuring that they are truly mitigating their impact on the planet.
The SBTi’s Net-Zero Standard provides a common, robust, science-based framework to achieve net-zero that will provide clarity around both near- and long-term decarbonisation plans.
The Standard was created with input from a public consultation, helping to ensure it as rigorous as it can be.
It will require, among other things, that firms reduce emissions in line with a global temperature increase of 1.5 degrees Celsius before 2050, across Scope 1 and 2 emissions, while Scope 3 (or downstream emissions) should at least be consistent with a well-below 2 degrees Celsius outcome.
Furthermore, it will require firms to set near-term targets to reduce emissions, and to achieve these in five to 10 years, rather than the five to 15 years that the SBTi had previously set.
To monitor this, SBTi will verify progress on these targets and report the results.
Picking winners
This move by the SBTi might seem like a small step, but small steps lead to great leaps.
Currently, 1,181 companies have set targets limiting global warming to between 1.5-2 degrees Celsius based on the SBTi’s previous, less stringent framework, known as Verified Targets, with 818 (69%) of these setting targets aligned to 1.5 degrees Celsius.
However, the new Net-Zero Standard requires all companies to target emission reductions that tally with a 1.5 degrees Celsius warming scenario, and it urges companies to move more quickly.
This science-based target setting makes business sense – it future-proofs growth, saves money, provides resilience against regulation, boosts investor confidence, spurs innovation and competitiveness – while also demonstrating concrete sustainability commitments to increasingly-conscious consumers.
AstraZeneca, CVS Health and Ørsted, were among the first seven companies worldwide to meet these new standards, and investors will want to watch closely as to who joins this impressive cohort.
