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Asset class / Equity

Why Science-Based Targets are no substitution for coal policies

Science-Based Targets are a vital starting point for a company’s transition plan, but the inclusion of high-emitting coal companies on the initiative's approval list presents problems for investors forming policies around them.

Hot air? Investors’ coal policies should not rely on the Science-Based Targets initiative alone. (Photograph by kodda via iStock)
  • Some asset owners rely on the Science-Based Targets initiative (SBTi), but analysis shows high-emitting coal companies are slipping through the net.
  • Several companies adopting the SBTi have coal phase-out plans deemed inconsistent with 1.5°C scenarios.
  • Capital Monitor found that roughly a third of the 262 companies examined plan to expand their coal operations in the coming years.

Pledging to reach net zero by 2050, and laying out a detailed roadmap of how to get there, are two very different things, and investors are increasingly becoming sceptical of promises without a plan.

Speaking at the recent Making Sense of Net Zero event hosted by Capital Monitor, Oliver Marchand, global head of ESG research and models at index provider MSCI, pointed out that while more and more companies are setting net-zero targets, “there are so many diverse ways of having a target that it’s a science in itself to make them comparable”.

The Science-Based Targets initiative (SBTi) attempts to do just this. As an independent, regulatory body that approves companies’ net-zero targets, the SBTi is widely considered to be one of the most reliable benchmarks.

Currently, 899 companies are SBTi-aligned, although this only includes 20% of the world’s largest companies with broader net-zero pledges, according to a recent report from financial services company Jefferies.

Once a company has committed to the SBTi, it has two years to establish a net-zero strategy in line with SBTi guidance, which includes interim emissions-reduction targets.

The robustness of a company’s net-zero pledge should be of concern to investors that have themselves pledged to become net zero by 2050. Many are signatories of the Net Zero Asset Managers Initiative, a commitment  to ensure all assets under management are net zero, taking into account portfolio Scope 1 and 2 and, where possible, Scope 3 emissions.

This means that while only a few investors have to date announced a detailed strategy, if they are to meet net-zero targets they will have to ensure portfolio companies are equally aligned.

Exemptions for Science-based Targets

While the SBTi is a useful indicator of how companies plan to decarbonise, it cannot guarantee that they will achieve their targets. Investors should therefore be wary of using the SBTi as a replacement for their own robust policies, although there are plenty of examples where this is the case.

Take Aviva Group’s investment and underwriting policy on coal, which, relative to the market, is strong, according to an analysis by environmental non-profit organisation Reclaim Finance. However, its stringent policy of divesting from all companies that make more than 5% of their revenue from coal has one exception: companies that are signed up to the SBTi.

Aviva Group is not alone here. While not explicitly tied to the SBTi, Allianz’s policy, updated in May, includes an immediate exemption for companies it assesses as aligned with a 1.5°C pathway, and places on a watch list companies assessed as having a “well below 2°C pathway”, as validated by data sources including the SBTi.

Similarly, French insurer Macif’s coal policy has an explicit exemption for companies with a “well below 2°C pathway” validated by the SBTi, as does that of OFI Asset Management, which has assets under management (AUM) totalling €73bn, and Swiss-based asset manager Edmond De Rosthchild AM, which has an AUM of $72bn.

An initial issue with this caveat is the “well below 2°C” figure. The Intergovernmental Panel on Climate Change (IPCC) recommends keeping global warming to 1.5°C higher than pre-industrial levels, not 2°C, to avoid its catastrophic consequences.

Currently, just over half of the 899 companies that are SBTi-aligned have a 1.5°C target; the rest are ‘well below’ 2°C or 2°C. In July this year, the SBTi announced its phase-out of all companies with a target for warming higher than 1.5°C, although companies already aligned have a four-year window to make the necessary changes.

Legitimate criticism for SBTi?

In a document shared with Capital Monitor, German environmental non-profit organisation Urgewald makes a series of critiques about the targets validated by the SBTi, including the fact that historic emissions are not taken into account in its process of approving targets. It says: “SBTi applies a universal approach, which means its expectations are the same for any company on the planet. From the viewpoint of climate justice, this approach is highly controversial.”

Urgewald proposes that “to have impactful climate policies, financial institutions need to follow a facts-based approach”, such as its own Global Coal Exit List (GCEL), which includes coal companies the SBTi recommends it should phase out by 2030.

The SBTi tells Capital Monitor that “Urgewald is correct that SBTi is focused on forward-looking greenhouse gas reduction targets rather than assessing current performance”, and that while it has “provided coal-related recommendations in its financial sector guidance”, it does “not presently have other coal or specific fuel-related criteria, although this is an area under consideration for financial sector net-zero target formulation”.

All eyes on RWE

The main issue with having an investment policy that includes companies on the basis of having an SBTi is that a company can be SBTi-aligned while continuing to produce coal. An example is RWE, one of Europe’s largest carbon emitters, according to a study commissioned by Greenpeace this year.

When Bloomberg reported in March this year that French insurer Axa SA dropped RWE as a client “over coal”, many pointed out that the move appeared to undermine the SBTi, given that the initiative had already approved its targets.

Although Axa refused to confirm the exact reason for dropping RWE, the charity ShareAction, which promotes responsible investment, cites in its 2021 Paris Alignment report the fact that RWE’s coal power capacity is above the insurer’s policy threshold of 10GW as evidence this is the case.

RWE’s emissions reductions and target on paper look feasible and strong, although what they do not capture is the full story of a company’s transition strategy, as the Greenpeace study demonstrates.

For example, RWE’s plan to phase out coal by 2038 is later than the 2030 threshold established by German non-profit Climate Analytics. Furthermore, the Greenpeace study suggests that while RWE has succeeded in drastically cutting emissions so far, it will struggle to cut the rest without a transition plan that includes switching to renewables, gas and solar.

The study adds that RWE’s SBTi target does not include emissions intensity and is "anything other than ambitious and makes no significant contribution to climate protection".

In an updated guidance report for financial institutions published in April this year, the SBTi emphasised its model "does not replace a robust assessment of the companies’ business model or associated risks".

Indeed. Capital Monitor found a handful of other power companies, aside from RWE, that feature on Urgewald’s coal exit list, and whose coal phase-out plans have been called into question by think tank Carbon Tracker, despite being SBTi-aligned.

This includes Enel SPA, which has a phase-out target of 90% by 2030 that is assessed as "falling short" of 2031 targets recommended by Carbon Tracker, and NRG Energy, which is assessed as being  "inconsistent" with its recommendations that the company phase out all coal by 2029 to be aligned with a well below 2°C scenario.

Loose thresholds

Another potential issue with existing policies is that most include an exclusion threshold, the most common of which is for companies earning more than 30% of their revenue from coal, according to Reclaim Finance. This standard enables investors to manage financial risk while investing in some of the largest coal producers, many of which have diversified business operations.

However, out of 238 publicly listed companies involved in thermal coal extraction, 50% derive less than 5% of their revenues from coal, according to second-party opinion provider Sustainalytics. Less than 40% derive 25% or more of their revenues from coal production and therefore the majority of companies would not be removed from possible investments in BlackRock’s actively managed portfolios.

It also enables investment in companies with coal expansion plans. Within the GCEL database, Capital Monitor found that roughly a third of the 262 companies that derive less than 30% of their profits from coal revenue plan to expand their coal operations in the coming years. What will investors do then?

Clearly, setting a coal policy is no easy feat, and investors have to rely, to some extent, on the SBTi or similar guidelines. But as Yann Louvel, senior policy analyst at Reclaim Finance, tells Capital Monitor:​​ “Serious climate-conscious investors should do their homework properly and consider the adoption of SBTi in addition to, and not instead of, a Paris-aligned coal closure plan."

Polly Bindman

Data Journalist

Polly joins the team as our data journalism lead tasked with making sense of the world via data and infographics.