Target setting

Corporates utilize target setting to signal their readiness for a low-carbon economy and their resilience to climate risks. By overweighting companies with verified 1.5°C SBTs, portfolios are more likely to self-decarbonize, potentially enhancing their ability to meet the PAB’s 7% per annum reduction.

Target setting

Rewarding companies that establish and execute on 1.5°C-consistent targets adds credibility to Paris-aligned benchmark portfolios, reduces portfolio turnover as the world transitions to the low-carbon economy, and encourages polluting companies to align with the temperature goal of the Paris Agreement.

Science-based targets
Without standards and verification, corporate net-zero targets can lack real ambition and may not be followed through in practice. One of the options available to companies is Science-Based Targets (SBTs), an emission-specific target scheme overseen by CDP, the World Resources Institute (WRI), WWF, and the United Nations Global Compact (UNGC).

Despite a short history, we hypothesize that setting and executing an SBT might prompt companies to improve their operational efficiency across the entire operation and value chain, resulting in a greater competitive advantage and higher profitability.

There are multiple levels of ambitions: in-line with 2°C, well-below 2°C, and 1.5°C above pre-industrial levels. The 1.5°C-SBT is consistent with IPCC’s most ambitious temperature scenario. Since it was launched in 2015, through March 2022, about a third of the companies in the Bloomberg Developed Markets Index committed to a science-based target.

Executing SBTs
Executing SBTs involves efforts along the entire operations and value chain. The most obvious route to achieving a scope 2 target is to procure renewable energy, for example.

We've found that companies with a 1.5°C SBT generally consume approximately 10% more renewables on average than those with a less ambitious target (Source: Bloomberg), committed to a target, or without a target, for the same amount of energy consumed. Achieving scope 1 reductions, on the other hand, requires adjustments like changes to a company’s production process, alterations in distribution and logistics patterns, and upgrading company fleets to electric vehicles. Scope 3 strategies are highly industry-dependent, but often require supply chain engagement and improving the efficiency of products sold.