10 Jun 2024
More and more companies are falling behind in their efforts to achieve net zero carbon emissions by 2050, according to Fidelity's latest ESG Analyst Survey. But a growing awareness of climate-related risks is reason to believe they will soon ramp up their efforts.
Key points
The number of companies with realistic hopes of achieving net zero is declining.
Fidelity’s latest survey of its investment analysts finds that 43% of companies have a credible net zero goal for 2050 - that’s compared with 57% who were on course last year.1
More encouragingly, though, most of our analysts report that the companies they cover remain keen to talk to us and other shareholders about how they can improve their sustainability efforts. Businesses are waking up to the threats that a warming climate and deteriorating ecosystems pose, providing a strong incentive to stay engaged with the topic.
Little progress on net zero targets
There’s been a flurry of target setting in recent years by companies committing to reduce their carbon emissions and offset the remainder to ensure they’re making a net zero contribution to climate change. Most of those targets focus on 2050, in line with the Paris Agreement.
But as Chart 1 shows, our analysts believe the majority of the companies they cover don’t have a credible plan for achieving that goal.
Chart 1: Most companies still don't have a credible plan to reach net zero by 2050
Question: "What percentage of your companies have a credible 2050 net zero goal?". Source: Fidelity International, May 2024
Worryingly, this gap has widened since last year’s survey when we reported how companies were struggling to marry emissions targets and tangible action.
The analysts cite a variety of consequences as the reality of net zero becomes clearer. “Companies give absolute decarbonisation targets, but then achieve them by selling assets (so the emissions remain under the new owner),” says one analyst who focuses on European energy companies. Another notes a mining company paying “lip service on emissions targets”.
In some cases, the gravity of the task has forced companies to wholly reconsider their goals. One fixed income analyst reports that an ‘ESG leader’ she follows has now “narrowed their set of targets to what they believe is more realistically achievable”.
Three ways we can move the needle
Clearly there’s a way to go in the journey to net zero. How do we get there? The analysts identify three areas that they think will spur improvements in companies’ environmental practices: regulation, government support, and shareholder action.
Chart 2: Regulation, government incentives, and shareholder action will drive companies' environmental practices
Question: "What do you think will drive changes in environmental practices at your companies over the next 12 months?" Chart shows average importance of activity as rated by analysts on a scale from -3 (is not important) to +3 (is the most important). Source: Fidelity International ESG analyst survey, May 2024
We reported last year on the importance of regulation, so it’s encouraging to see the spate of new guidelines that have been introduced over the past 12 months. The International Sustainability Standards Board (ISSB) has created a global baseline for sustainability reporting. And the European Union has implemented its comprehensive Corporate Sustainability Reporting Directive (CSRD) to support its attempt to reduce emissions by 55% by 2030.
Regulation does not work in isolation, however. The influence of government support has been highlighted by measures like the US Inflation Reduction Act, which has provided huge incentive programmes for the adoption of green technologies. It’s also prompted policy responses from other authorities who wish to compete in the race to build robust transition economies, such as the EU’s Green Deal Industrial Plan.
Unsurprisingly, consumer action has the greatest impact on consumer discretionary companies, where it comes second only to regulation as an influence on companies’ environmental behaviour. Its effect is notably more limited on those companies further down the value chain, away from the consumer. Investor divestment or exclusion, and geopolitics, are regarded as ineffective when it comes to improving environmental practices.
Rules of engagement
In contrast, the number of analysts who believe shareholder action can make a difference has increased this year. Some of the most fruitful shareholder actions take the form of engagement with companies’ management teams, according to our analysts.
“I had an environmental engagement with one mining company where it was clear they had taken on board our feedback on emissions reporting,” says one European materials analyst. As Chart 3 shows, that’s a common sentiment - most companies are open to engaging on ESG issues.
Chart 3: Companies remain open to ESG engagement
Question: "In general, how responsive have your companies been to your engagement efforts over the past 12 months?". Source: Fidelity International ESG Analyst Survey, May 2024. Note: Analysts who responded "Neither responsive nor unresponsive" are not included.
As one analyst reports on his conversations with a Spanish utility: “We have seen changes in their behaviour as a result of our annual engagements. On remuneration, for example, the board now have to have 20% of their salary in stock and hold this for at least five years to make sure they are more aligned with long-term investors.”
Often it’s the collective efforts of investors working together that can have the greatest effect. Fidelity led Climate Action 100, a group of institutional investors responsible for about $US68 trillion in assets under management, in an ongoing engagement with Australian miner Rio Tinto. As a result, the company has agreed to start reporting how much it spends and the progress on so-called green steel projects, as well as encouraging management to pursue these initiatives through long-term remuneration incentives.
It is of course possible that some businesses are just paying lip service to sustainability. Almost half of our analysts say their companies will promote better sustainability credentials than their actions justify, a finding in line with previous years’ surveys.
Chart 4: Many companies still promote better ESG credentials than their actions justify
Question: “Thinking about your companies’ efforts to promote their ESG credentials, which of the following would you say companies typically do?" Chart shows percentage of analysts. Source: Fidelity International ESG Analyst Survey, May 2024
What this means in practice varies. Our analysts note some cases where companies are themselves unclear on the correct course of action. Some analysts highlighted the complexity of electric vehicle (EV) production, for instance.
“Companies are generally praising the positive effects of EVs ‘saving the planet’, but in reality I don't see a lot of discussion around how polluting the production of batteries can be,” explains one fixed income analyst. “Plus, the social impact is questionable at this stage: EVs are less affordable, constraining mobility options for the less well-off.”
Others acknowledge that an environmentally conscious company is not necessarily thinking about social and governance issues. One utilities analyst comments: “A lot of the renewables companies present themselves as being very ESG friendly for environmental reasons while not acknowledging their questionable governance and the very significant uncertainty about end-of-life management for many of their products (e.g. batteries and solar panels).”
Risks become reality
There is another reason why companies continue to engage constructively about their environmental practices: they know the threat is real and affects their operations financially and, in some cases, physically.
Chart 5: Most companies are already addressing the threats posed to their business by climate change
Question: "Are your companies addressing the threats to their business posed by potential changes in climate and nature?" Source: Fidelity International ESG Analyst Survey, May 2024. Note: Analysts who responded "not applicable for my companies" are not included.
“Weather changes are an issue for most of the companies under my coverage and companies are having to adapt,” says one materials analyst.
A sector that is already looking to mitigate that impact is insurance. One European financials analyst reports: “Non-life insurers are collaborating with third-party data providers to combine their own findings with larger datasets on climate and weather patterns. This then allows insurers to engage with customers on preventative action and price policies accordingly.”
That’s one reason why our latest ESG survey should be a cause for optimism - companies may lag on net zero plans but they are at least becoming more attuned to the risks. There is a long way to go, but our analysts find some means - and plenty of reasons - for their companies to get there.
1 Last year we asked analysts what proportion of their companies they believed were allocating enough capex to achieve net zero; this year we asked what proportion they believe have a credible net zero goal for 2050.
Important Information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time.