Most listed companies fail to meet the 1.5 target, but divestment might make the path to net zero harder, new research reveals.
While companies are making rapid progress in setting decarbonization targets, only 17% are on track to meet the 1.5 temperature goal set in the Paris Agreement. Among these, less than a third are on track to meet net zero, according to Morningstar’s latest Carbon Tracker Report.
Net zero pledges are on the rise: Almost half of all listed firms now have a target to decarbonize in place. However, these targets are generally not bold enough and leave firms on track towards a 2.7°C world.
The report, based on firms in the MSCI ACWI IMI Index, which has 9,144 constituents and covers 99% of global equity markets, showcases that firms in the fossil-fuel heavy sectors such as energy, materials, and utilities have a much stronger likelihood of being misaligned with global temperature targets.
But it also points out that simply divesting from these firms might not be the answer. Paradoxically, the exact same sectors also have the highest revenue exposure to sustainably produced power and clean technologies, leaving investors with an opportunity to fund the transition towards net zero.
For asset owners, this raises the challenge of having to stomach a potential deterioration of the carbon footprint in their investment portfolio in the short run, in order to engage with fossil fuel heavy companies on their transition towards net zero.
“Investors and other capital-market participants have a critical role to play in narrowing that gap by using the strategic levers at their disposal to spur companies to reduce emissions in line with the Paris Agreement,” MSCI said.
But with this year’s AGM season well underway, investors have so far had very little success in pushing companies for more ambitious climate targets.
For example, earlier this month, BP shareholders rejected a proposal for more ambitious climate targets, similarly, Chevron shareholders also sided with the boards and similarly, in the banking sector, investors also so far fell short of winning a majority to more ambitious climate targets.
