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February 23, 2022updated 01 Mar 2022 3:56pm

How government and corporate net-zero plans correlate

Data compiled by Capital Monitor reveals a distinct link between strong government policy on net zero and companies headquartered within the same jurisdictions. Australia, however, bucks this trend...

By Elizabeth Meager

Aligning strategies: government climate policy appears to have a knock-on effect. (Photo by BigNazik via iStock)
  • Companies in jurisdictions with ambitious government climate policy are more likely to have rigorous net-zero plans, shows Capital Monitor analysis.
  • As companies are governed by their regulatory domicile and answer to shareholders, often they don’t prioritise cutting emissions.
  • A strong climate commitment from the government could send a powerful signal to corporates, and investor pressure is another major driver.

Companies headquartered in jurisdictions where the government has ambitious climate plans are more likely to have rigorous net-zero plans themselves, according to new Capital Monitor analysis.

Data shows that countries whose net-zero plans are rated higher by the research platform Climate Action Tracker are home to more firms that have submitted their net-zero targets to the Science-based Targets Initiative (SBTi) (see scatter plot below). The latter is an independent regulatory body considered one of the most reliable benchmarks for such goals.

This arguably reinforces the need for governments to be bold when setting their net-zero targets and policies to help achieve them. After all, they will not be able to reach these goals without the corporate sector’s cooperation.

Yet scepticism is rising over corporate emissions-cutting pledges, with many viewing them as little more than a public relations exercise. There are things companies can do to strengthen trust in their commitments, such as setting interim targets, tying emission reductions or other sustainability goals to executive remuneration and forcing disclosure against those targets.

Hence, although 2,497 companies have so far submitted their emissions reduction targets to SBTi, Capital Monitor analysed only those 756 with interim targets that the organisation has approved.

The Climate Action Tracker places government net-zero policies into five categories: critically insufficient, highly insufficient, insufficient, almost sufficient and 1.5°C Paris Agreement compatible. Not one country it rates has achieved the highest rating, and just a handful are in the ‘almost sufficient’ category (see map below, ‘Must do better’).

Leaders and laggards

Most companies with science-based targets are based in one of six countries: the US, UK, Japan, Sweden, Germany and France (see chart below, ‘An uneven spread’). All these countries are rated either ‘almost sufficient’ or ‘insufficient’, indicating that their governments have made better progress than others on setting targets and creating the policy framework to reduce emissions. Most countries are ranked ‘highly insufficient’.

There are some obvious biases in the data. For instance, most net-zero targets have been set by large multinational companies, which tend to be based in the northern hemisphere. It is also easier for a rich country that finds it less difficult to attract investment to set a net-zero target than for a developing country that cannot access cheap debt and is still trying to get parts of its economy on the grid in the first place. Not to mention that many developed nations have become wealthy thanks to decades of cheap fossil fuels.

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Ethiopia, Kenya, Morocco and Nigeria are all scored ‘almost sufficient’ by Climate Action Tracker, yet just one company in any of the countries – Kenyan mobile operator Safaricom – appears in the 756.

That is not particularly surprising, says Mark Campanale, founder of think tank Carbon Tracker Initiative in London. “Companies in [the] northern hemisphere, OECD, developed economies tend to have climate-aware, educated management teams that are setting emissions reduction goals that reflect the culture of where they’re based,” he tells Capital Monitor.

“The laggards tend to be countries where climate has never been a political imperative; [where] they’re often more focused on the daily nuts and bolts of stabilising their debt and meeting local spending for health and education as a priority.”

Investor pressure

Pressure from the investment community – as well as the public – on corporate management teams in rich countries is also having a considerable effect, he adds, citing as an example the Climate Action 100+ initiative, which is backed by 615 investors.

The laggards [on emissions reduction] tend to be countries where climate has never been a political imperative. Mark Campanale, Carbon Tracker Initiative

Australia is an interesting outlier that underlines the analysis’s key finding. It is a wealthy country with plenty of big companies and is at major risk from the effects of climate change, yet has a dawdling government that is lagging behind both its corporate and investment communities on taking action to tackle climate change. Just nine of the 756 companies with SBTi-approved targets are headquartered in Australia. That is fewer even than in New Zealand, whose economy is many multiples smaller, yet has taken strides in recent years on progressive climate change policy.

And, as might be expected, countries with ‘critically insufficient’ net-zero plans – Iran, Russia, Thailand, Turkey and Vietnam – have just three SBTi-aligned corporate net-zero pledges between them, two of which are based in Turkey.

“Companies operate under the regulatory framework in which they’re embedded,” says Alberto Carrillo Pineda, co-founder of SBTi. “The problem is that those frameworks tend to set the minimum standards, not the transformation standards – and we need transformation.”

However, while highlighting the number of companies that have set targets has value, it’s more effective to look at the biggest emitters first, adds Campanale.

Sector comparison

And looking at SBTi-aligned net-zero targets by sector reveals some telling trends (see pie chart below). The biggest proportion of the 756 corporate targets have been set by professional services firms, which inevitably have very low levels of Scope 1 and 2 emissions, so are unlikely to find reaching net-zero particularly difficult.

Meanwhile, just 2.2% of the 756 SBTi-approved targets have been set by utility companies or power producers – and none of them are active in fossil fuel exploration and production.

“There are two major developments that are going to incentivise transformation within companies: their duty to shareholders, who are applying more pressure now than ever, and governments’ target-setting that then translates into policy to reduce emissions,” says Pineda. “The next step is building more accountability into these commitments and shifting them from a voluntary exercise to a compliance one.”

There are efforts being made in this area. The UK announced in October that it would force companies to illustrate how they would hit their climate change targets by 2023.

The hope is that more governments will follow, pushing the corporate world not only to make commitments but ensure they stick to them.

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