27 Oct 2023
Limiting the worst effects of climate change will require deep, urgent emission reductions. One option for companies aiming to cut emissions and contribute towards the goals of the Paris Agreement is to set a science-based target for emission reductions. In this note, we explain how science-based targets work, and consider the important role they play in M&G’s range of Paris Aligned investment funds
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Science-based targets are corporate emission reduction targets, which are considered to be in line with the latest climate science. In other words, they reflect emission reductions at a pace necessary to limit global warming to 1.5° C above pre-industrial levels, in line with the goals of the Paris Agreement. Science-based targets are set with a baseline year, from which the company measures its emission reductions. The company will also set a year by which it aims to reach its target. Targets can be near-term (usually with a target date of 5-10 years’ time) or long-term (more than 10 years, with the aim of achieving net-zero emissions by no later than 2050, for most industries). Science-based targets cover absolute Scope 1 and 2 emissions – the emissions from a company’s business operations, and from the heat and power it uses. They may also cover Scope 3 emissions, which are emissions related to a company’s products or services, which are produced from sources outside of the company’s control (such as suppliers or customers).
One option for companies looking to set science-based targets is to engage with the Science Based Targets initiative (SBTi). The organisation works with companies to assess and validate their targets, and provide technical support where needed. As of the end of 2022, more than 4,000 companies comprising over a third of global market capitalisation have either set or committed to setting targets with the SBTi.
However, it is important to note that there are other options for companies looking to set emission reduction targets in line with the pace required to limit global warming. While the SBTi provides a widely accepted framework, investors should not discredit companies that have chosen another route when setting their targets. A company’s ambition, and progress towards its targets, can still be assessed outside of the SBTi framework.
Science-based targets form an integral part of the investment process within M&G’s range of Paris Aligned investment funds, and we expect that at least 90% of holdings within each fund will have science-based targets in place by 2025. We encourage all investee companies to set science-based targets, regardless of the level of emissions they produce, and whether or not they also provide climate solutions that allow their customers to reduce emissions.
Encouragingly, within each of our Paris Aligned funds, the vast majority of absolute emissions are covered by science-based targets, due to the fact that most of our biggest emitters have set or committed to science-based targets with the SBTi.
Setting a science-based targets tells us that a company is committed to the goals of the Paris Agreement over the long term, by reducing emissions at a rate that the latest climate science suggests is needed to limit the worst effects of global warming. The SBTi process involves developing a specific decarbonisation plan with actionable steps, and once ratified, an ongoing requirement to report on progress annually. These requirements help to ensure companies are committed to decarbonisation, rather than simply making empty promises.
Figure 1: Company eligibility
We consider science-based targets when assessing a company’s eligibility for our funds. We request that companies with a carbon intensity (a measure of emissions per million dollars of sales) above 50% of the benchmark should have set or committed to setting science-based targets. We categorise these companies as ‘reducing intensity companies’. However, we encourage all investee companies to set targets, even if they are low emitters.
Science-based targets have been a consistent topic of engagement with investee companies, regardless of how advanced they are along their decarbonisation journey. Across M&G’s range of Paris Aligned funds, our engagements have included:
Decarbonisation is a long-term process, and we do not expect linear emission reductions from one year to the next. Instead, there are likely to be sharp jumps as companies make changes, such as switching to renewable energy or rolling out a more efficient process. However, it is important to hold investee companies accountable. This is why we review progress towards their targets on an ongoing basis, and will engage with the company if we feel it is necessary. We also provide commentary on investee company progress in our funds’ annual emissions reports.
Figure 2: Engaging along investees’ decarbonisation journeys
The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at the UN Climate Change Conference (COP21) in Paris, France, on 12 December 2015. It entered into force on 4 November 2016. Its overarching goal is to hold ‘the increase in the global average temperature to well below 2°C above pre-industrial levels’ and pursue efforts ‘to limit the temperature increase to 1.5°C above pre-industrial levels.’
By John William Olsen and Rory Alexander
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