By Patricia Torres, Global head of Sustainable Finance Solutions at Bloomberg and Nikki Gwilliam-Beeharee, Investor Engagement Strategic Lead at the World Benchmarking Alliance
Greenhouse gas emissions have continued to rise globally and we are getting close to some critical tipping points. In 2023, the Stockholm Resilience Centre found that six of the nine planetary boundaries, within which humanity can continue to develop and thrive for generations to come, have been transgressed.
However, we are also close to some positive tipping points in the energy transition. For example, real-economy investment activity reached parity between fossil fuels and low-carbon supply for the first time in human history in 2023, according to the strategic research provider BloombergNEF.
The world’s largest electric utilities nearly doubled the share of wind and solar energy in their energy mix between 2017 and 2022.
Their solar generation is on track to grow sevenfold by 2030, surpassing the International Energy Agency’s Net Zero growth targets – according to the Electric Utilities Benchmark published by the World Benchmarking Alliance (WBA). This immense scaling up has led to remarkable declines in unit costs of renewable energy, benefitting industry and consumers.
There is also mounting evidence that corporate climate leadership can align with a favorable earnings outlook, such as a recent Bloomberg Intelligence study which found that S&P 500 companies with a lower carbon-intensity returned higher EPS growth estimates for the 2nd quarter of 2024.
As a result, financial firms increasingly view the energy transition as a key opportunity for boosting investment returns, and look for information on companies’ transition plans.
As of today, Bloomberg’s newly expanded net zero datasets show that over 8,000 companies across the world have set various forms of climate targets.
While these should help investors understand which businesses are better prepared for a low-carbon world, there are concerns that companies may be overstating targets, which have been further amplified by reports that some are backtracking from them.
Financial firms are therefore looking for better data to identify which companies are taking actions aligned to their targets, and what these
companies should be doing to achieve real-world decarbonization. This amounts to performing a holistic assessment of a company’s targets, its transition plan, the actions that are aligned to these, and how it maintains accountability for performance.
The good news is that company disclosures have improved over the years aided by regulation, voluntary frameworks and investor demand, and much more data is now becoming available.
“Financial firms are looking for better data to identify which companies are taking actions aligned to their targets"
By assessing and benchmarking these data, investors have a strong basis for understanding companies’ future pathways and identifying transition leaders and laggards.
For instance, Bloomberg data shows that 1 out of 4 companies reporting on EU Taxonomy alignment have increased their proportion of low carbon
capital expenditures between 2022 and 2023. Over half of these companies have also already increased their proportion of green revenues, thereby realising opportunities from the transition.
While this is a sign of progress, companies need to do a lot more for their net zero targets to appear credible, as evidenced by the WBA’s recent Heavy Industries Benchmark, which reported the performance of 91 of the world’s most influential aluminium, cement and steel companies, representing 18% of global CO2 emissions.
Only 12% of these companies commit to reporting progress annually on their transition plans and have a defined stakeholder feedback process, and only 8% are aligned to a low-carbon scenario.
A similar conclusion can be drawn from Bloomberg’s Transition Credibility Assessment tool, which shows that only 21% of steel manufacturers have set climate targets and report metrics related to their transition plans.
In the coming months we are expecting significant developments in the climate space, from New York Climate Week to the United Nations COP29, where climate finance will be in the spotlight.
These are pivotal moments that the investment community should keep a close eye on to seize opportunities and stay up to date on evolving risks.
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