Corporate climate ambition – comparing like for like
Corporate climate ambition – comparing like for like
Over 9,000 of the largest companies in the world have now set meaningful climate targets and have combined supply chain emissions of more than world’s releases of greenhouse gases.1 Nearly 3,000 of these firms have net-zero or emission reduction targets verified by the Science Based Targets initiative (SBTi) – widely considered as the highest integrity corporate climate target-setting standard. Other targets are self-imposed.
These numbers matter, not just to show that companies are being global citizens, but investors are increasingly judging firms on their climate ambition and performance. In 2022 consultants PWC predicted that asset managers globally would increase their ESG-related assets under management (AUM) to US$34tn by 2026, from US$18tn in 2021. ESG assets are on pace to constitute over 20% of total global AUM in less than 5 years.2 Climate performance is forming a growing part of the “E” of ESG.
The challenge is comparing different company climate ambitions when they have very different target profiles. Trove Research’s database of corporate climate targets already converts large volumes of messy data into a structured format but even then, comparison is difficult. One firm may set absolute net zero targets for 2050 for scopes 1, 2 and 3, while another may set intensity-based targets for scope 1 and 2 in the short term. There are hundreds of variants in between.
Trove has therefore developed its version of a well-recognised indicator that compares company climate targets on a consistent basis – Implied Temperature Rise (ITR). The ITR shows what the expected global temperature rise would be if every company behaved like the one in question and allows comparison of company targets across sectors. A number of asset managers, and even regulators in some countries (such as Switzerland) have started to incorporate ITR analysis into their decision-making.
A company that stops all its emissions tomorrow would have an ITR of 1.2°C (the amount of global warming already ‘locked in’), and a company that does nothing is assumed to have an ITR of 4.5°C(estimated to be the global temperature rise if we continue as we are today).
Trove’s ITR model improves on other versions of ITR analysis in two respects. First, we include and combine all types of corporate climate targets (not just SBTI targets). Second, we include current and expected purchases of carbon credits, e.g., under a (current or future) carbon neutral or net zero target. This enables a more complete comparison of corporate climate ambition via a Credit-Adjusted ITR figure.
We recognise that a tonne of carbon credits is not always equivalent to a tonne of emissions released, due to factors such as the permanence and uncertainty over the determination of baselines when assessing credit issuances. We therefore apply an “equivalence rating” to adjust down the expected emissions benefit of different types of credit purchases.
Europe leads the US on corporate climate ambition
Our analysis shows considerable differences in climate ambition across sectors and regions. For example, the average ITR for major European companies stands at 2.1°C, in comparison to the S&P 500 in the US at 2.6°C and the extended set of US companies (in the Russell 1000 index) averaging 3.2°C.
These differences are driven in part by an absence of any formal climate ambition amongst many US companies, with nearly a quarter of that country’s 500 largest corporations lacking a quantified climate target – a figure that rises to 50% for the largest 1,000 US companies. Even with these differences accounted for, across major firms with stated targets in Europe, the average ITR is 1.8°C versus 2.1°C for those in the S&P 500 with targets. In the US, fewer firms are making commitments, and those which do tend to be less ambitious than their European counterparts.
Clothing and power generation top the industry league table
Taking a sectoral slice through our data, two industries stand out as leaders in setting climate targets – clothing and power generation – with average ITRs of 2°C, followed by transport and food & beverage. In the financial services there is a clear divide between those firms setting targets and those who are not. As a whole, it is one of the least ambitious sectors at an average ITR of 2.9°C. However, this is driven by the fact that half of financial companies do not have any climate target – among those that do, the average ITR is a much more ambitious 1.6°C. Similar effects are seen in the Biotech and Services sectors, but with even weaker underlying ambition.
Trove Implied Temperature Rise by Sector (Degree Celsius above pre-industrial levels)
Ambition to action
Corporate climate ambition is just that: ambition. To be effective, these targets need to be turned into action. Trove is therefore developing additional tools to assess corporate climate targets in even more detail in terms of deliverability and performance.
The high-level message is that, despite the continuing momentum on corporate commitments, many companies need to be more ambitious if climate goals are to be hit. The overall Credit-adjusted ITR for companies in Trove’s current dataset is 2.8°C, well north of the 1.5°C decreed as an objective in the Paris agreement – and this assumes that all of these companies succeed in achieving their targets.
Furthermore, our ITR analysis shows carbon credits can play an important role in mitigating a company’s contribution to global warming – abatement is key, but carbon credits can also help make a difference whilst implementing abatement targets.
1.Trove Research database of corporate emissions and targets. World greenhouse gases c. 50Gt./yr. Total emissions covering scope 1, 2 and 3 from corporate emissions targets – c 70Gt. Because of the way scope 3 emissions are counted, corporate emissions coverage figures significantly overlap.
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