- Three-quarters of European corporates have set targets to cut carbon emissions, but only one-third cover Scope 3, according to Fitch Ratings.
- Moreover, only 9% of European companies are on track to hit their net-zero targets by 2050, says Accenture.
- Growing pressure from investors and lenders, and legislation like the Corporate Sustainability Reporting Directive, could help spur action.
European companies have started to adopt targets aligned with the 2015 Paris Climate Agreement to reduce carbon emissions, but there is a growing sense that they are paying mere lip service to environmental concerns to keep investors and regulators happy.
On the face of it, companies are striving to do the right thing. A reduction in greenhouse gas emissions (GHG) remains the most common key performance indicator (KPI) incorporated into sustainability-linked bonds and loans.
And 76% of European corporates have publicly announced targets to cut emissions, according to a report published by Fitch Ratings at the end of September. Moreover, it says, most European companies have lined up with the EU’s target date of a 55% net reduction in GHG emissions by 2030 (see chart below).
All this sounds positive, but there are two key issues here.
Firstly, most corporate carbon-cutting goals incorporate Scope 1 and 2 emissions – respectively, direct emissions from the reporting company and indirect emissions from the generation of electricity, steam, heating and cooling consumed by the reporting company.
"There is still a clear, dominant trend that there tends to be a KPI linked to carbon emissions – [those under] Scope 1 and 2,” said Arthur Krebbers, head of sustainable finance for corporates at British investment bank NatWest Markets, during a sustainable finance media update on 4 October.
But Scope 3 – all other indirect emissions that occur in a company’s value or supply chain – is a lower priority, even though it accounts for a far larger proportion of overall emissions. Fitch reports that only 32% of those companies that committed to reducing emissions include Scope 3 within their pledges.
The second issue is that only 9% of companies are on track to hit their net-zero targets by 2050, says a study of 1,000 listed European companies released this month by consultancy Accenture.
“It is still clear that organisations are not moving fast enough,” says Peter Lacy, Accenture’s chief responsibility officer and sustainability services global lead. Companies need to double the pace of emissions reduction by 2030 and triple it by 2040, he adds. Especially those in the five sectors representing 42% of carbon emitted by all companies in the research sample: automotive, construction, manufacturing, oil and gas, and transportation and storage.
Given that European corporates are, as Fitch says, ahead of their North American and emerging market peers in terms of climate strategies, this is somewhat concerning.
Scope 3 efforts
Admittedly, reducing Scope 3 emissions is recognised as particularly challenging, but some companies are making efforts nonetheless.
British fashion house Burberry is targeting Scope 3 with the help of long-standing relationships with its suppliers, some of which go back a century. It is a case of talking to and supporting suppliers as they transition to greater efficiency or renewable energy in their manufacturing, Pam Batty, the company’s head of corporate responsibility, has told Capital Monitor.
Others, such as French high-tech auto parts manufacturer Valeo, work with suppliers to help them integrate carbon dioxide emissions into design specifications. And Turkish white goods maker Arçelik intends to achieve it targets by cutting the energy consumption it uses for manufacturing by 45% and by increasing the amount of recycled plastic that goes into its products from 10% to 40% of its total plastic usage.
However, even setting aside the lack of focus on Scope 3, companies are not doing enough to tackle Scope 1 and 2 emissions, as noted by Accenture.
Companies need to double the pace of emissions reduction by 2030 and triple it by 2040. Peter Lacy, Accenture
Hitting net zero by 2050 is a long-term target, says Simon Kennedy, head of Europe, Middle East and Africa corporate research at Fitch. Not only is there uncertainty about how companies will hit such targets, he adds, but it will not be clear for some time which ones are merely paying lip service to sustainability.
Two factors are widely cited as having the ability to drive real change: regulation and companies’ need for funds.
Harmonised standards would help no end, as companies are working from different bases. Direct comparison of the level of planned carbon emissions reductions is not possible because of the differences in base year, time frame and breadth of the targets, says Fitch’s report.
“It’s frustrating for investors, regulators and for stakeholders because there is this asymmetry, not just in the volume of information but also in terms of what the information means and how it compares to each other,” says Marina Petroleka, global head of ESG research at Fitch Ratings.
“When you have a more standardised system ecosystem, then you can move on to really scrutinise and compare how these targets are met,” she tells Capital Monitor.
Pressure for carbon emissions action
The EU’s Corporate Sustainability Reporting Directive (CSRD) – which becomes effective at the end of 2023 – will be a “large driver” for greater compliance, says Petroleka. Intended to set a global standard for ESG disclosure, the rules are expected to more than quadruple the number of companies reporting non-financial information from 11,600 to 49,000.
Moreover, at least 2,600 organisations have expressed support for the latest recommendations from the Task Force on Climate-Related Financial Disclosures, it said in its 2021 status report, released last week. That is an increase of around a third since last year’s report.
At the same time, there is “growing pressure” from investors and lenders for companies not just to disclose their emissions but also to set ESG targets, Fitch’s Kennedy says.
Banks such as Credit Suisse and Deutsche Bank are increasingly incorporating ESG factors into their decision-making. And the average size of “ESG-committed” private capital fund that closed last year was $918m as against $313m for its average non-ESG-committed counterpart, according to data provider Preqin.
Moreover, asset managers and owners are increasingly unwilling to be fobbed off with overly vague promises of action from companies that want their money – and are pushing regulators to act.
“If companies aren’t measuring their Scope 1 and 2, and material Scope 3, emissions, they certainly aren’t managing them,” said Deborah Ng, head of responsible investing at Ontario Teachers’ Pension Plan, speaking on a panel at the Sustainable Investment Forum North America in late September.
She said the Canadian C$221bn ($174bn) fund had been working with groups such as the Sustainability Accounting Standards Board – which has now merged with the International Integrated Reporting Council to form the Value Reporting Foundation – to push for better corporate reporting.
“We've had conversations with and sent letters to the SEC [US Securities and Exchange Commission] on their work right now in terms of looking at ESG disclosures,” Ng added, “and of course… with our Canadian Securities Association and other groups.”
Investors will certainly need a good deal more transparency – and action – from the companies they hold stakes in if they are to achieve their own environmental and social targets.