Consumer Staples take lead in SBTi target alignment; Financials slip across most transition metrics
Ian Stannard
Top climate signals:
- Consumer Staples - positive transition momentum
- Utilities - relatively high alignment (on-track) with temperature targets
- Financials - relative slippage across most transition metrics
The transition leaders
The Consumer Staples sector stands out as generating the most positive signals across our transition metrics, both from a current position perspective and in terms of progress over the past year. A relatively high and increasing level of targets coverage, especially for Science-Based Targets Initiative (SBTi) aligned targets, are the key drivers of the Consumer Staples climate alignment progress in our analysis.
However, despite the relatively high targets coverage, it must be noted that the Consumer Staples sector has a relative low percentage of companies currently on-track to meet those climate targets, with only moderate signs of improvement seen over the past year. A relatively healthy pace of emissions reduction across Scopes 1, 2 & 3, together with the largest relative decline in Implied Temperature Rise (ITR) score over the past year are other factors contributing to the Consumer Staples sector’s overall positive transition progress, which is also consistent with the positive ICE Transition Score reading.
Source: ICE. Note: The sum of relative positive and negative (Positive: >67%, Negative: <33%, Net: Positive-Negative) signals from each of the 10 metrics assessed are highlighted for each sector on both a current position (latest reading) and progress (% year-on-year change) basis.
Just behind the Consumer Staples sector in our transition analysis is the Utilities sector. The current positive transition position of this sector is strengthened by significant progress over the past year. A high level of material Scope 3 emissions reporting, a relatively strong pace of emission intensity reduction across all Scopes and a relatively high and increasing percentage of companies currently on-track to meet their targets, together with a relatively low ITR, are all contributors to the Utilities sector’s relative positive performance.
Source: ICE. Note: Percentage of companies in each sector with SBTi aligned targets. It must be noted that the SBTi currently does not have methodology for companies deriving revenue from fossil fuels. As such many companies in the Energy sector cannot currently achieve SBTi alignment of their targets. Hence why the Energy sector in our sample portfolio currently has 0% SBTi aligned targets.
The Materials sector has shown significant relative progress over the past year, on par with the Consumer Staples sector. However, despite this progress, the sector’s current relative transition standing within our analytical framework is held back by relatively low Scope 3 reporting coverage and a relatively high percentage of companies currently more than 20% off-track with their targets. While the Materials sector appears to be closing the gap to the leading sectors in our transition analysis, there remain areas for improvement.
Source: ICE. Note: Percentage of companies in each sector on-track with their temperature/emission reduction targets.
And the Laggards
At the other end of the climate transition scale, our analysis suggests there is one sector that stands out as not only lagging but slipping further behind over the past year. The sector in question is the Financials sector. Using our transition analysis framework, this sector is showing signs of relative slippage in all areas except one, the percentage of companies more than 20% off-track with their targets which has remained relatively low. However, with a relatively high ITR it could be argued that the targets in the Financials sector are undemanding.
Source: ICE. Note: Percentage of companies in each sector reporting complete or material categories of Scope 3 emissions, which vary by sector.
Under our transition criteria, the Energy sector is also lagging as a result of relatively low material Scope 3 reporting, and low Scope 3 and SBTi target coverage (although it must be noted that the SBTi currently does not have methodology for companies deriving revenue from fossil fuels, and as such many companies in the Energy sector cannot currently achieve SBTi alignment of their targets). Additionally, there are other factors hindering the Energy sector’s relative transition standing including a relatively high ITR and a high percentage divergence from the Net Zero pathway. However, there are some bright spots for the Energy sector, including a relatively strong pace of emission intensity reduction across Scope 1, 2 and 3 emissions. In fact, taking all emission scopes together, the Energy sector has been leading the way over the past year, even outpacing the Consumer Staples sector.
Source: ICE. Note: Average percentage year-on-year change of Scope 1, 2 and 3 carbon intensity by revenue (tCO2e/$m) for each sector.
Conclusion - Overlooked opportunities?
An analysis of our sample portfolio across an array of different transition related metrics identifies several sectors generating positive signals and showing further signs of progress over the past year, and highlights areas for further analysis in the search for climate opportunities. Interestingly, our analysis suggests these opportunities could reside in sectors and industries often overlooked when climate transition is considered.
Methodology - Transition investing gathering momentum
For this analysis, we have assessed both the relative current position of each sector, and the relative progress made over the past year across the 10-transition metrics. Our analysis helps to identify sectors which may have been lagging on a relative basis, but are starting to catch up, or sectors that have been in a relatively strong position but are losing momentum.
Transition investing is one of the key themes gathering momentum as the focus switches from climate risk to climate opportunity. This approach opens up the potential for investment in a wider range of opportunities across different sectors and climate solutions, including those in hard-to-abate industries. However, companies’ strict adherence to credible transition plans is required to maintain eligibility for inclusion in a transition strategy.
So, which sectors are making the most progress and leading the climate transition? To answer this question, we used the ICE Climate Analytics Platform (ICECAP) to assess an array of 10 different metrics, both from a current position and progress perspective (% change year on-year) to track the relative transition performance of different sectors.
The transition tracking metrics analysed include:
- Scope 3 emissions reporting coverage - Level of complete/material Scope 3 emissions reported
- Emissions reduction momentum - Pace of Scope 1, 2, and Scope 3 intensity (by revenue) reduction
- Targets data reporting coverage - All targets, Scope 3 targets and Science-Based Targets Initiative (SBTi) alignment
- ICE on-track with targets indicator - Percentage increase of companies on-track to meet their own targets
- Implied Temperature Rise scores (ITRs) - Both current ITRs and pace of ITR reduction
- Alignment to Net Zero 2050 pathway - Percentage divergence of cumulative emissions from the NGFS Net Zero 2050 pathway
- ICE transition scores - Results cross referenced with ICE transitions scores
The relative sector assessment was carried out using a sample global portfolio of 2005 companies reporting high quality climate data (complete Scope 1 and 2 emissions and at least one category of Scope 3 data) for at least the past two years.