Tackling climate change on the investor agenda: how to monitor progress in practice

In 2015, the UN climate conference reached a binding agreement among member states to limit global warming to 2 degrees Celsius. Based on scientific consensus, reaching this target by 2100 requires the world to be carbon neutral by 2050.

The most significant direct contributor to climate change is the use of fossil fuels. Significant amounts of investments have been made to exploit and use them. As the use of fossil fuels is reduced, much of this will be reduced or gradually phased out.

This has been recognised by large institutional investors - climate change has become one of the biggest systematic risks to investment. On the other hand, climate change mitigation opens up opportunities to invest in the solutions and practices required to achieve the green transition. The shift from fossil fuels towards renewable energy sources is key to mitigating climate change.

For investors, it is important to understand how exposed their investments are to climate change risks and to assess the extent to which companies have taken action to reduce emissions in line with the Paris Agreement targets.

The Science Based Targets initiative (SBTi) is an initiative run by a consortium of NGOs to encourage companies to set science-based targets to reduce emissions. SBTi provides guidance to help companies identify how much and how fast they should reduce greenhouse gas emissions to prevent the worst impacts of climate change.

The SBTi framework promotes transparency on the targets set by companies and enables monitoring of progress towards targets in line with the Paris agreement. Companies will have to publish their plans on how they intend to reduce emissions and reach the net-zero target of carbon neutrality by 2050. The SBTi, in turn, will validate whether the measures announced appropriate to achieve the target.

In addition to long-term plans, companies also have medium-term targets, many of which have been set up to 2030, providing a benchmark for both the company itself and external parties to assess to what extend has the company progressed in line with its plans.

SBTi is constantly working to improve its guidance. In 2025, several reforms will come into force. One of the most significant changes is that, while the starting point has been that a company achieves its net-zero target through its own efforts, going forward it could be possible to include in the calculations externally sourced emission reductions.

SBTi targets are set based on the total emissions of the company. The Greenhouse Gas Protocol (GHG) is used to measure and report greenhouse gas emissions. It divides emissions into three categories: scope 1, scope 2 and scope 3.
Scope 1: Direct greenhouse gas emissions from sources owned or managed by the company
Scope 2: Indirect greenhouse gas emissions from purchased electricity, heat or steam
Scope 3: All indirect greenhouse gas emissions that occur in the value chain of the company, excluding indirect emissions related to energy production (included in Scope 2). Such emission sources include, for example, emissions from third-party transport.

SBTI TARGETS HELP INVESTORS MONITOR PROGRESS ON CLIMATE ACTION

By autumn 2024, more than 6,000 companies had set emission reduction targets based on SBTi criteria. Looking at the extent of SBTi adoption at country level, for example, in one of the leading countries in the green transition, Sweden, around 60% of companies listed on the main stock market index OMX 30 have validated SBTi targets. This includes a large proportion of industrial companies. The most significant group that does not have SBTi targets is the financial sector.

A common reason for companies not having set SBTi targets is that, although their own carbon footprints can be very small (Scope 1 and Scope 2), Scope 3 emissions related to finance and investment activities make up the majority of their overall carbon footprint and are perceived as challenging to influence. This can also be due to not wanting to overly restrict financial activities in their various forms in relation to fossil fuels in order to maintain business freedom in a highly competitive market.

However, it is important to note that even if companies do not have validated SBTi targets, almost all major companies today already have very ambitious targets to reduce emissions and make their business carbon neutral.

CONSIDERATION OF SBTI TARGETS IN THE UB INFRA INVESTMENT FUND

In recent years, the UB Infra investment fund has paid a lot of attention to reducing its carbon footprint. The work done has paid off, as in spring 2024 the fund was awarded five globes in Morningstar's sustainability assessment, where it is evaluated for its environmental, social responsibility and good governance (ESG) performance. The fund is thus rated in the top 10% of its peer group. Reducing the carbon footprint has played a crucial role in this development.

(We publish a quarterly ESG report on most of our investment funds, including a comprehensive set of carbon footprint metrics.)

Through the fund’s investment selection one of the aims has been to reduce the carbon intensity (Scope 1 and Scope 2 emissions). In particular, the reduction of the traditionally high fossil fuel use in the power generation sector, the most important industry in the infrastructure sector, has been a key factor. The fund has invested primarily in the best performing companies in the industry in terms of greenhouse gas emissions, but also in companies that are making progress in the deployment of renewable energy.

In other industrial sectors, the fund has also sought to invest in companies that have been successful in meeting their greenhouse gas emission reduction targets.

Looking at the fund's situation in autumn 2024 in terms of efforts towards carbon neutrality, around 40% of the companies in the portfolio have targets validated by SBTi. Almost all other companies in the fund have committed to a net-zero target, but not to the extent required by the SBTi.

There can be many reasons for the lack of SBTi targets. According to the SBTi survey, the most common reasons for a company to not set a net zero target were challenges related to Scope 3 emissions in the value chain, uncertainty about future technological developments and uncertainty about the company's ability to meet the targets.

Setting and making progress against SBTi targets are not the only indicators that the portfolio manager monitors. While emission reduction targets are indicative of the direction and level of ambition of the investee company to contribute to climate change mitigation, there may also be companies with a significant proportion of their business contributing to climate change mitigation. In addition to monitoring climate targets, a broader understanding of the business and operating environment of companies and the sustainability factors that are relevant to the overall picture is required when considering investment opportunities.

Fund investments always involve financial risk. The value of the investment made in the fund may increase or decrease and investor may lose part or all of the invested capital. Historical performance is not a guarantee of future returns. The information presented is based on United Bankers´ own estimates and sources considered reliable by United Bankers. The information on which the conclusions are based may change quickly and United Bankers may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest.