Investing for net zero: A framework for assessing the credibility of climate targets
Eva Cairns receiving the leading the journey to net zero award at the 2023 Scottish Financial Services Awards
Around 90% of global GDP and emissions are covered by a net zero goal and over 3,800 companies have set a science-based target. Strategies to achieve net zero are by design ambitious. But how do we assess if they are credible and will actually be implemented?
Taking a forward-looking view to identify transition leaders is critical while the risk of potential climate leaders to overpromise and underdeliver is significant. In September, my team and I were delighted to receive the Net Zero Award from SFE at the Scottish Financial Services Awards, recognising our framework to empower investors to hold corporates to account on the credibility of their climate strategies.
Climate change is one of abrdn’s strategic priorities and we joined the Net Zero Asset Managers initiative in March 2021. Working for an international asset manager exposes you to companies of all sizes, operating across many sectors and at differing levels of financial and environmental maturity.
The challenge of delivering on our net zero commitment is to do so with real world impact and not just by quickly reducing exposure to carbon intensive companies. We need to support the transition of carbon intensive industries such as steel, cement, and power rather than dropping them from our portfolios. For real world impact, you need to be able to identify firms that move the dial, innovate, provide solutions, and have leading transition strategies. But that is easier said than done when most focus seems to be on the ambition rather than the credibility of targets.
The abrdn Sustainability Insights team, which I lead, therefore set out to build a framework to cut through the noise of the ever-expanding number of corporates setting net zero targets and to identify credible transition leaders worthy of institutional backing. The result of this project, which was kindly recognised by SFE, was our proprietary credibility framework, which evaluates the following six strategic pillars to rigorously assess the credibility of corporate targets:
Emissions target design
Emissions performance
Green market penetration
Climate governance
Technology readiness level
Policy supportiveness
Drawing on contributions from experts across abrdn, the framework is underpinned by a scoring system that is differentiated from other tools in the industry, because it does not only consider actions within the control of the company being assessed (pillars 1-4), but also enabling factors which include the supportiveness of government policies and maturity of technologies needed for decarbonisation. This is critical to consider given that companies do not operate in a vacuum, and these factors are often ignored by those looking at company actions in isolation from the context they operate in.
The framework supports investors who wish to complement their fundamental company analysis on climate strategies and with a quantitative credibility framework that pulls in a range of data sources and allows for consistent comparison across firms and over time.
There are a number of use cases for the framework within asset management. For example, our active ownership team uses the credibility tool to inform company engagements and set clear objective milestones for companies across all sectors to improve upon their climate targets.
Crucially, the credibility assessment has also been incorporated into the forward-looking climate scenario tool that abrdn has co-developed with Planetrics, allowing investors to better understand and quantify climate risks and opportunities under various possible climate scenarios. The framework has already been used to support clients in the UK, Europe and in other regions globally such as APAC.
I would like to thank my team for their outstanding contributions to driving innovative research within abrdn, and of course SFE for recognising our work and the importance of credible targets in delivering net zero with real world impact.
If you would like to learn more about our methodology, please find an in-depth research paper here
Eva Cairns is abrdn’s PLC’s Head of Sustainability Insights and Climate Strategy