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Climate commitments from S&P 500 companies remain unclear despite emissions goals: Morgan Stanley

·Assistant Editor
·6-min read

Sustainability reports and emissions targets are becoming commonplace in corporate America, but more companies may be pushed to revise their targets given the ambition gap between what is being pledged and what is required to meet Paris Agreement goals.

Two-thirds of companies in the S&P 500 have set targets to reduce greenhouse gas emissions, according to a recent note from Morgan Stanley, and mentions of "net zero" and other sustainability themes have been on the rise at corporate events. However, only 29% of S&P 500 companies have implemented or plan on implementing science-based targets, which create a clearer pathway to decarbonization.

“In general, most companies did not provide detailed "roadmaps" to net zero goals — which we view as one of the areas most lacking in corporate target setting,” the analysts wrote. “In many instances, targets appear in part reliant on the scalability of still nascent technologies — and while expected, this presents a need for a more fulsome discussion of the substance underpinning emissions targets.”

Companies in the S&P 500 with emissions targets compared with those with science-based targets. (Source: Morgan Stanley Research)
Companies in the S&P 500 with emissions targets compared with those with science-based targets. (Source: Morgan Stanley Research)

According to the note, carbon-intensive industries, such as utilities, materials, and energy had the highest percentage of emissions targets. But these industries had a lower prevalence of science-based targets.

The analysts said they expect growing pressure to adopt science-based targets from policymakers, proxy advisers, and investors.

In a recent webinar on sustainability, Rich Kushel, head of the portfolio management group at BlackRock, noted the “tectonic shift” in the allocation of capital towards sustainability-oriented assets and away from unsustainable assets.

“The second part which I think is arguably a little more interesting, frankly, is that the opportunities and risks for sustainability and for the climate transition are being increasingly recognized and reflected in asset prices,” he said. For investment teams, he added, it will be a matter of identifying "sustainable business models and sustainable business practices that are going to benefit from what is a once-in-a-lifetime transition that we're going on now towards that net-zero economy.”

Science-based targets are most prevalent in the consumer staples and real estate sectors. (Source: Morgan Stanley Research)
Science-based targets are most prevalent in the consumer staples and real estate sectors. (Source: Morgan Stanley Research)

The role of science-based targets in corporate climate efforts

While the imperative to reduce greenhouse gas emissions is clear, there is still a great deal of uncertainty around paths to net-zero carbon emissions. 

Many technologies that have been deemed critical to climate action — such as hydrogen fuel, long-duration batteries, and carbon capture and storage — have yet to be proven out at scale. At the same time, since company disclosures around emissions are voluntary, they tend to vary in their scope and consistency, which can make assessing climate efforts complicated and can create room for greenwashing.

Science-based targets aim to reduce some of that uncertainty by using the latest scientific models, as outlined by the IPCC, the UN's climate body, to inform short- and long-term goals. Third parties, such as the Science Based Targets initiative (SBTi), certify science-based targets have met a set of criteria and are aligned with the Paris Agreement's stated goal to keep warming well below 2°C and ideally under 1.5°C, compared to pre-industrial temperatures.

Vehicles move along the The New Jersey Turnpike Way while a Factory emits smoke on November 17, 2017 in Carteret, New Jersey. (Photo by Kena Betancur/VIEWpress/Corbis via Getty Images)
Vehicles move along the The New Jersey Turnpike Way while a Factory emits smoke on November 17, 2017 in Carteret, New Jersey. (Photo by Kena Betancur/VIEWpress/Corbis via Getty Images)

When reviewing company emissions profiles, SBTi first checks that the company has established an appropriate baseline year, against which it will measure its carbon emission reductions. 

Then, SBTi recommends that companies set long-term targets with milestones every five years. These targets must include Scope 1 and Scope 2 emissions, which are under the direct control of the company. And if 40% of a company's emissions are considered Scope 3 — or indirect emissions, such as those generated within a supply chain or by investments — those emissions must also be covered. 

One notable aspect of science-based targets is that they do not count offsets in emissions reductions, and this is one of the key ways they differ from other climate commitments. While offsetting emissions by planting trees and other means can help compensate for pollution that has already been released into the atmosphere, the benefits of offsets are limited as they do not reduce the absolute amount of emissions that are released. Furthermore, an overreliance on offsets can muddy the waters by presenting the illusion of lowering carbon emissions while allowing pollution to continue.

Stakeholder scrutiny could dial up the pressure for SBTs

Finalizing the timeframe of Paris Agreement goals and strengthening nationally determined commitments to reduce greenhouse gas emissions will be a major objective at COP 26, the major UN climate summit that is set to begin on Oct. 31. A number of corporate sponsors will also be in attendance at this conference.

On the policy side, all eyes are on the Securities and Exchanges Commission (SEC) as Chairman Gary Gensler seemed to indicate a willingness to increase climate disclosure requirements in his remarks to Congress earlier this month. The Financial Stability Oversight Council, led by Janet Yellen, also released a report on Thursday that laid out the first steps in addressing risks to financial stability from climate change.

Speaker of the House Nancy Pelosi, D-Calif., and other Democratic lawmakers join activists in support of solutions to climate change as part of President Joe Biden's domestic agenda, at the Capitol in Washington, Wednesday, Oct. 20, 2021. (AP Photo/J. Scott Applewhite)
Speaker of the House Nancy Pelosi, D-Calif., and other Democratic lawmakers join activists in support of solutions to climate change as part of President Joe Biden's domestic agenda, at the Capitol in Washington, Wednesday, Oct. 20, 2021. (AP Photo/J. Scott Applewhite)

And recently, the movement to get large institutions to divest from fossil fuels has been gaining momentum. For example, New York City's pensions have committed to doubling their investment into renewable energy assets and to divesting nearly $4 billion from fossil fuel investments. 

And science-based decarbonization plans have become more important to investors as well, especially those adopting environmental, social, and governance-oriented (ESG) portfolios. The Morgan Stanley note highlighted the relevance of this theme as “decarbonization pathways under SBTs could present risks and opportunities” for investors.

“I would say Europe is moving faster than the rest of the world, … but the world is moving, the financing opportunities are moving in a sustainability way,” Rick Rieder, chief investment officer of global fixed income at BlackRock, said. “So almost de facto your portfolios are going to move in a more sustainable evolution.”

Grace is an assistant editor for Yahoo Finance.

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