By Garrett Delk, Pickering Energy Partners
The Science Based Targets initiative (SBTi) has removed a number of firms, including prominent sustainability reporting corporates like Microsoft, Unilever, and JB, from its climate plan validation for not setting ambitious enough targets. Despite over 1,000 companies worth $23 trillion pledging to net-zero emissions before 2021’s UN COP26, many failed to meet SBTi’s standards by the 2023 deadline, resulting in over 230 companies being dropped from the Business Ambition (BA) for 1.5°C campaign.
News of climate target declines set by corporates comes shortly after headlines that insurance companies and asset managers are exiting industry climate associations, respectively the Net Zero Insurance Alliance (NZIA) and Net Zero Banking Alliance (NZBA). Much of each group’s stated language includes descriptors such as “transition plans” and “net-zero by 2050” which are in reference to the Science Based Targets Initiative (SBTi). SBTi ultimately calls for the phase out of all financial support by financial institutions to projects and companies that are unable or unwilling to follow a 1.5°C transition by 2050. However, as exemplified by the latest corporate, insurance and investor departures, there is currently a very justified re-thinking of the viability of net zero by 2050.
In short, the takeaway for U.S. energy companies is that the shift away from climate targets, net-zero targets specifically, is a positive development. There are likely three key drivers behind these decisions:
- As we’re quickly approaching 2030, a benchmark year for privately set climate goals, many of which are likely to be missed, corporates, insurance and asset managers are plausibly (and correctly) adding up that net zero targets by 2050 will not be achievable.
- The foreseeable future of geopolitics looks to ensure that energy security remains a high priority for lawmakers in the U.S. and E.U., which will require long term investment (and hopefully profit) from asset managers and other financial institutions.
- Irreconcilable reality between scientists stating emissions must be cut by 43% by 2030 in order not to breach the 1.5 level, and the $150 trillion price tag over 30 years to reach net zero. There is a growing awareness that the capital intensity of the energy transition will be far higher than previously anticipated. Even if the money was available today, there are serious constraints to achieving net zero in the allotted timeframe.
This is not to say energy companies aren’t or shouldn’t operate sustainably, in fact many do and are currently pursuing accretion to sustainability capabilities in line with U.S. regulation via the EPA and recently the SEC. This is to say the valuation premiums associated with net zero 2050 targets and a responsible operator incorporating sustainability should not be mutually exclusive as the SBTi would like to see. U.S. energy companies should continue to focus on quantitative and qualitative disclosure in line with the EPA/SEC in order to maintain access to insurance, financing, capital markets and mitigate methane related taxes.
Sources:
- https://www.reuters.com/business/insurers-climate-alliance-loses-nearly-half-its-members-after-more-quit-2023-05-30/
- https://www.reuters.com/sustainability/sustainable-finance-reporting/jpmorgan-fund-arm-quits-climate-action-100-investor-group-2024-02-15/
- https://newsroom.accenture.com/news/2022/nearly-all-companies-will-miss-net-zero-goals-without-at-least-doubling-rate-of-carbon-emissions-reductions-by-2030-accenture-report-finds
- https://www.reuters.com/sustainability/climate-energy/world-needs-27-trillion-annually-net-zero-emissions-by-2050-wood-mackenzie-2023-09-14/
- https://www.sec.gov/news/press-release/2024-31
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Garrett Delk is Associate, ESG Strategy & Integration.
