How investor-proof are your climate goals?

Stakeholders’ growing appetite for climate data should act as a wake-up call to improve your climate communication.



As climate-related financial risk continues to grow as a key consideration for investors, ESG ratings agency data, investor expectations and regulations, companies will need to consider how best to communicate their Net-Zero strategies and overall climate goals.


Climate change is now widely considered one of the greatest challenges of our lifetime, with rising global temperatures and ever-increasing carbon dioxide (CO2) levels, companies across industries are under pressure to help be part of the solution to reverse this trajectory. A growing number of investors are considering climate as a key risk/opportunity factor in their investment decision-making process, while they rely on climate disclosures from companies to manage, monitor, set targets, and report on greenhouse gas (GHG) emissions. Despite efforts to standardize these disclosures, through the Carbon Disclosure Project (CDP), the Task Force on Climate-Related Financial Disclosures (TCFD), and many other reporting frameworks, the quality of climate reporting varies enormously.


Given the mounting pressure on companies to provide credible climate goals and comparable data, the next frontier in climate initiatives is to set carbon reduction goals and ultimately, Net-Zero goals. The challenge going forward is how best to set credible goals and report progress against those goals. Key questions for companies considering setting climate goals:

  • Are you confident in how your carbon reduction and Net-Zero goals meet ESG investor expectations?

  • When you disclose your climate goals and performance, how do you identify any data gaps or data timeliness issues in the data collected by ESG rating agencies?

How are ESG ratings agencies targeting decarbonization performance?

We recently attended a webinar presentation for corporates of MSCI’s new Climate Solutions, a set of tools and data that are designed to support investors in “…measuring and reporting on climate risk exposure, implementing low carbon fossil-fuel-free strategies, factoring climate change research into risk management processes, engaging companies and external stakeholders, to better align with a Net-Zero trajectory.”


In a recent interview with the Financial Times, MSCI CEO Henry Fernandez outlined his view on the new data set:

“We are increasingly breaking out the climate as its own product line. Climate feeds into Paris-aligned equity and fixed-income indices. A big part of what we’re doing in analytics is to make climate be a large part of risk management and risk reporting. [Our climate work] is going to be a lot about estimating data and the models that give you a trajectory of the data going forward. So I believe that climate is going to be much bigger than ESG.” - MSCI CEO Henry Fernandez

MSCI, one of the most influential ESG data providers for institutional investors according to our research, has collected ESG climate data for years but this launch reflects the growing market demand for deeper climate-based data and analysis. Its recent presentation highlighted that, as of January 2021, only 939 companies, 35% of the All Country World Index (ACWI) had set decarbonization targets [1]. Many companies are focusing on disclosing Scope 1 and 2 data, while Scope 3, which constitutes as the most emissions for many sectors, is being underreported.


All other major ESG data providers, such as Sustainalytics, Bloomberg, ISS and Vigeo Eiris, also include climate performance data and targets.


How can this data be used for forecasting?

MSCI uses a trajectory model to see if companies will meet their Net-Zero targets by the specified year that the targets are set for, factoring in the percentage that the company needs to cut emissions by on an annual basis and balancing with the stated plan of how they plan to get there.


Making sense of Net-Zero goals

Net-Zero goals should include all Scope emissions, 1, 2 and 3. If a company does not disclose emissions, ESG rating agencies such as MSCI will tend to apply estimate models using publicly available data. Scope 1, 2 and 3 performance metrics and targets are brought together to provide a more realistic view on the feasibility of achieving those Net-Zero goals.


Companies can leverage the Science Based Targets initiative (SBTi) as a useful framework to plan those emissions reductions. ISS is one of the ESG data providers which gives credit to those companies using this scheme.


What role do investor led initiatives play?

Investors are very aware that the largest producers of GHG emissions need to show their commitment to Net-Zero and broader climate goals in a clear and understandable way. Through investor led initiatives such as Climate Action 100+, investors engage and encourage companies to prove they are taking the necessary action on climate. The recently released Climate Action 100+ Net-Zero Company Benchmark rates company efforts based on a set of 10 factors which include, climate lobbying, just transition, emission targets, decarbonization strategy, among others, thus providing guidance to companies embarking on their Net-Zero journey.


What can companies do to meet ever-growing investor and regulator expectations?

Businesses are expected to use climate scenarios to analyze their climate risk, adapt their business strategies and provide more consistent and comparable disclosures. Meanwhile, governments around the globe are updating their policies and legislation to enforce the Paris Climate accord. A great example is the recent introduction by the EU of the Sustainable Finance Disclosure Regulation (SFDR), making portfolio climate disclosure mandatory for ESG funds which has heightened the need for more consistent climate data from companies.

Companies can benefit from the additional expertise of our team of consultants and analysts at Leaders Arena. We have a wealth of experience assisting companies optimize their sustainability strategy and communication plans, and verify that the climate disclosures and all other ESG data items collected from various ESG rating agencies is accurate, thus helping them prioritize time and resources. Some of the ESG Data Provider-related in-house solutions that Leaders Arena has developed over the years include our unique ESG Ratings Impact Analysis, ESG Data Verification Support and ESG Data Provider Gap Analysis.


References

[1] https://www.msci.com/documents/10199/9172b38f-5d67-4346-a15b-9b8233f81da0

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