Our thoughts on net zero targets

This week I want to discuss corporates’ net zero targets. This year a bunch of companies and even countries (notably, the US) have become more aggressive with their climate change strategies and have announced to the world they are targeting to reach a state of net zero GHG emissions at a given date in the future. Dates differ, scopes differ too, but the ambition in the end is there. Increasingly companies are deploying M&A to help meet emissions targets, which may in part explain Shell’s decision to sell its 50% of Deer Park to Pemex (which is not encumbered by such ESG priorities).

While in Mexico there are just a handful of companies that are on that path (more on that below), we think it is important for organizations to know what it means when you decide to make a pledge like this, and how investors are likely to read into it.

First, what is a net zero target? In a few words, when companies set net zero targets it means they are going to reduce their carbon emissions to the minimum they can (depending on their business this will look very different for different companies), and then compensate the remainder with carbon removals or even paying for carbon offsets.

Having said that, it is important that investors (and all stakeholders really) know that net zero targets are not homogeneous. Thus, it is fundamental to look at the details of such targets to really assess how these targets address the broader problem. MSCI published a report (you can read it here) which proposes a framework to analyze GHG emissions targets which we believe can be useful for it.

According to this report, by 2020, 939 companies within the MSCI ACWI Index had set some sort of decarbonization target (more than 3x the number of targets within the same index’s components in 2015). 139 of them were focused on achieving net zero GHG emissions (up from 6 in 2015).  This naturally shows that companies globally (especially larger companies) are becoming more and more aware of their role in this, which is great. It obviously also shows that companies globally see how investors react to these pledges (when they are deemed feasible and credible). So, for companies who are thinking about how to address this topic within their own ESG strategy, we would say 3 things:

1. Targets ideally should cover most (if not all) of your carbon footprint as an organization. Naturally it is better to have a net zero target on one business unit than nothing, but if possible, set targets for the whole organization too.
2. Targets should be realistic. Assuming all decarbonization will happen out of the blue on the last 2 or 3 years before your target date isn’t necessarily realistic unless there is a very specific catalyst for this to happen then. Do not set targets just for the sake of making noise if you are not going to work towards them (greenwashing is to some even worse than doing nothing).
3. Your progress towards your targets should be as transparent as possible. If you are going to set a target, get comfortable with sharing your progress. We do not recommend setting targets if you are not entirely comfortable with subjecting all your data to stakeholders’ scrutiny.

It is ok if you are not ready to set an ambitious target just yet (as long as you are in the process of becoming fully aware of your responsibility both as an individual and as a representative of an organization with the ramifications of climate change). The time will come when more and more companies will be ready to discuss their targets, and certainly being an early adopter will have had its advantages.

We understand some markets (such as Mexico) are somewhat lagging. However, as you can see in the table below, 58% of the S&P/BMV IPC Index already has a GHG related target to date and 9 companies in that group are committed to net zero (by 2050 usually). This will hopefully also improve over time in smaller companies (especially for companies in industries where emissions are a top material ESG topic) as investors, including AFOREs, push for broader and more robust climate change strategies.

I hope you found this interesting. As usual, if there is anything we can help you with, please reach out.

Best,

Marimar

CEO, Miranda ESG