The Perils of Uncertainty: Understanding Science-Based Targets
Carolina Angarita
Carolina Angarita
Senior Investment Analyst

The current pandemic is a harsh reminder of the extreme challenges which can arise when dealing with uncertainty. With Covid-19, it has quickly become apparent that the lack of testing capabilities and accurate data have made it more difficult to answer key questions such as when we should relax social distancing, or when the economy will truly begin to recover. Climate change is a looming crisis threatening life and its support systems, and our ability to deal with its complexity is equally reliant on consistent data.

Carbon emissions data from companies is arguably the best tool we have to understand the impact of climate change on economic activity. In this article we look at Science-Based Targets (SBT) and their vital role in tackling the next big decisions that a carbon-restrained future will inevitably present.

The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. Effectively a company committing to a science-based target (SBT) will aim to reduce its carbon footprint in line with these guidelines.

Science-based targets are based on a carbon budget, or the amount of greenhouse gas (GHG) emissions that can be produced before reaching a temperature rise of a specific amount (e.g. 2.0°C). Over time, the carbon budget will be reduced as we produce more GHG emissions. There is strong scientific evidence of a relationship between cumulative GHG emissions and temperatures; this relationship is at the core of the complex emission scenario models behind the science of SBTs.

Companies can choose from a number of different target-setting methods. A common approach considers the extent to which an industry sector is responsible for a certain level of emissions output. For example, the energy, utilities and industrial sectors are by far the largest contributors (more than 70%) to emissions output in the MSCI ACWI. This approach to SBTs will factor in issues such as the sector’s mitigation potential and how fast it can grow relative to economic and population growth. Moreover, SBTs consider the company’s relative contribution to total emissions in the sector and carbon intensity relative to the sector’s intensity. A commitment period is then established, with the latest target year being 2050, by which time the company should be carbon neutral. Smaller targets throughout the period are recommended, however, as progress towards the ultimate goal can be tracked against these targets. SBTs are revised periodically to ensure projections used are still valid, including those for company growth and carbon budget assumptions.

The Science-Based Targets Initiative, which is the organisation that validates the SBTs submitted by companies, reports that more than 800 companies have committed to SBTs since 2015, of which 333 have approved SBTs to date.

What are the Benefits?
The most obvious benefit of SBTs is improved profitability as a result of resource efficiency and low carbon processes, which leads to lower operational costs. SBTs also encourage companies to think long-term. This can spur innovation and drive resilience, as they are forced to anticipate their future growth and how the market will evolve. A company committing to an SBT will also be more prepared for impending regulatory changes in a carbon-restrained world. This will allow the company more flexibility while using its leadership position to influence policymakers and future legislation. SBTs are considered best practice and can generally lead to competitive advantage.

There is also a clear link between SBTs and company reputation. As the impact of climate change becomes more conspicuous, companies at the forefront of tackling the climate crisis are rewarded with better stakeholder relations, increasing client and employee loyalty. For investors, SBTs are evidence of a meaningful commitment by a company to mitigate its climate change related risks, while increasing confidence in the company’s ability to pay a secure and growing dividend in a low carbon economy.

Not surprisingly, companies with a strong public commitment to fighting climate change have consistently outperformed the broader market. Over the past five years to 28 February, the STOXX Global Climate Change Leaders index, which includes only companies with an A score from the CDP (formerly the Carbon Disclosure Project), has outperformed the MSCI World by a margin of 10%. This A score highlights the quality of a company’s disclosure, as well as its effective strategy of managing risks and opportunities from climate change through credible measures, such as SBTs.

Companies committing to SBTs recognise climate change as a business continuity issue. Thus, efforts to set SBTs rarely stay within the confines of a single organisation. SBTs require high levels of collaboration across the value chain to deliver meaningful impact. Stakeholder engagement, from clients, suppliers, governments and employees, is part of a crucial change in mentality spurred by SBTs: the imperative to stop targeting what is conveniently doable and start doing what is needed to avoid an environmental catastrophe.

Carolina Angarita is Senior Investment Analyst with the L&P team at Cantor Fitzgerald, which provides ethical investment management and stewardship advisory services to non-profit clients.

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