Testing the Credibility of ESG Commitments

Corporate pledges to get to “net zero” carbon emissions should not be taken at face value by investors, according to new research from Morningstar Indexes and Sustainalytics. In the recent paper – “Beyond ‘Net Zero’: Supporting the Transition to a Climate-Resilient Planet” – Morningstar leaders provide a framework for evaluating which global companies are actually delivering on their net zero pledges and contributing to the fight against climate change and what this may mean for investor portfolios.

The study is based on data from the Morningstar EU Climate Indexes, which screen companies based on their progress in meeting carbon neutrality goals as outlined by the Paris Accords. Findings show a mixed bag in terms of companies backing their public pledges with actual progress in meeting their climate objectives while pointing out the challenges in measuring company progress on this very important issue.

Notable Observations Include:

• The Carbon Data Conundrum. According to recent Morningstar research on corporate sustainability disclosures, more than one third of companies in sectors where climate change is a material issue are not currently disclosing their greenhouse gas emissions, making measuring carbon intensity a moving target for investors.
• Digging Deeper on Carbon. Surface measures of carbon intensity do not always provide a full picture of a company’s Net Zero progress. For example, to mitigate bias against large companies, it’s helpful to measure emissions relative to the size of a business. And current carbon intensity statistics only paint a partial picture. For example, a power utility can have a high current carbon footprint but be in the process of shifting to renewables.
• Questionable Corporate Commitments. While there is a growing consensus that a company is more likely to decarbonize if it made a public commitment to do so, there is also a growing list of companies whose commitments are being held to question by investors and regulators.

Dan Lefkovitz – Index Strategist, Morningstar:

“Investors today should look beyond corporate net zero pledges to separate the businesses paying lip service from those taking measurable steps to reduce greenhouse gas emissions and adapt their business models to combat climate change.”

Alex Osborne-Saponja – Associate Director, Carbon & Climate Risk, Climate Solutions, Sustainalytics:

“Sustainalytics’ Carbon Risk Ratings evaluate how well companies are transitioning to a low-carbon economy by limiting emissions and developing green solutions. We take a holistic view, examining a wide rage of factors including the company’s track record of reducing carbon intensity, carbon-reduction targets, design and development of sustainable products and performance based high level carbon metrics, and sub-industry level factors. This deeper, sub-industry focused process is a requirement to get at the heart of companies’ real progress on Net Zero whilst managing transition risk.”

To speak with Dan Lefkovitz or Alex Osborne-Saponja, contact Tim Benedict at (203) 339-1912 or tim.benedict@morningstar.com.