Large carbon emitters deter key indices from reaching Paris Agreement goals
The progress to a 1.5°C alignment has been slow for indexes. Leading indexes from G7 countries are on an average temperature pathway of 2.95°C, according to their listed companies’ current corporate climate ambitions.
A report by the Carbon Disclosure Project (CDP) and the UN Global Compact on behalf of SBTi found that four of the seven indexes, including the FTSE 100 and S&P 500 are on a dangerous temperature pathway of 3°C and above. France’s CAC 40, which has 41% of the companies covered by science-based targets (SBTs), is on a 2.7°C pathway while the German DAX 30 index has 71% of the index emissions covered by SBTs and is on a 2.2°C pathway.
Given the relevance of large companies in G7 countries, SBTi decided to assess the climate ambitions of these listed companies using their temperature ratings framework, to see if companies and indexes are aligned to the Paris Agreement goals. Advanced indices like CAC40 (France), DAX30 (Germany) and FTSE 100 (United Kingdom), with the largest adoption of science-based targets, have a few large companies with less ambitious targets and high emissions.
These companies bring down the temperature rating for the entire index, explained Alberto Carrillo Pineda, Director of science-based targets at CDP and a Steering Committee Member at the SBTi. “We really need to put pressure on large carbon emitters who have not set science-based targets yet. These companies, who have a much heavier weight in the index, have a massive implication on the trajectory they are putting us on,” Pineda told Asset News.
Brown companies drag down indexes
Fossil fuel companies are often the large emitters in these indexes, where there is no science-based targets or absolute reduction targets set, bringing down the level of ambition of the aggregated index, said Pineda. An exception, he added, was in Germany, where most of the large or very large carbon emitters are setting science-based targets. “We are seeing the actual transition of the automotive sector. There are still a few companies that have not yet done so but a large number of them are already on the way,” added Pineda.
Four urgent climate actions are needed from financial institutions, corporates, investors and governments. This includes harnessing the “ambition loop” between the private sector and government policies and corporations should work towards decarbonising their supply chains. Additionally, investors must include science-based targets in climate financial standards and sustainability-linked bonds and financial institutions should set a portfolio-level science-based targets.
Financial firms are still in the early stages of setting portfolio-level climate targets. “Many do not have a good enough understanding of where the impact is in their portfolio. It is a process, which is similar to what is going on in the corporate sector: to first understand where the impact is and then devise the best strategy to drive ambition. It is important to find the right collaboration and incentive model so that financial sector’s portfolios decarbonise. The first step is to have a policy about not funding new fossil fuel developments,” said Pineda.
Ultimately, the need of the hour is to create aligned incentives between financial institutions, companies in the real economy and harder-to-abate sectors such as aviation and downstream enterprises. The solution is in finding and distributing decarbonisation efforts across different parts of the economy, added Pineda.
“We are seeing important progress but now, we need the heavy emitters to act so that we can see the transition needed. This requires action from all stakeholders and stronger policy frameworks,” he told Asset News.