An analysis of five large sectors reveals that none is aligned to the 1.5 degrees C target
We compared the Implied Temperature Rise score of Sustainalytics across different sectors. The banking sector scores better than energy-intensive sectors, such as utilities, but still lags behind the 1.5 degrees Celsius target required to meet the goals under the Paris Agreement. However, not all utility companies score as bad as the average – for instance, Ørsted A/S scores very well in comparison to its peers.
ESG data providers have developed tools that can track how much issuers contribute to global warming. The new Low Carbon Transition Rating by Sustainalytics is one of these tools
These are computed in the form of an “implied temperature rise” score, which aims to answer the question “What would be the expected increase in global temperatures, if all companies manage their emissions in the same way as this company?”
We compared the implied temperature riseacross different sectors
The banking sector scores better than energy-intensive sectors, such as utilities, but still lags behind the 1.5 degrees Celsius target required to meet the goals under the Paris Agreement
However, not all utility companies score as bad as the average – for instance, Ørsted A/S scores very well in comparison to its peers
The ESG data company Morningstar Sustainalytics developed a tool named Low Carbon Transition Rating, which measures the degree to which companies are aligned with the goals of the Paris Agreement of maintaining global temperature rises below 1.5 degrees Celsius. But what is this “rating”? The rating represents how much would the world temperature rise if all the companies in the world were to manage GHG emissions in the same way as that company. Although this measure (implied temperature rise) is not entirely new to the market, given that other providers have also developed similar tools, for instance MSCI and Bloomberg, we focus for now on the Sustainalytics scores.
In this piece we first provide a brief explanation of Sustainalytics’ methodology. Afterwards, we analyse the data, and show a comparison of the average scores across different sectors of interest – banks, utility companies, real estate, materials and energy companies. The overall results show that more needs to be done, suggesting that companies’ targets are not yet ambitious enough.
The methodology
Sustainalytics bases its implied temperature rise calculations on three different GHG emissions pathways:
The GHG Emissions budget which represents the amount of emissions a company can have while being aligned with the 1.5 degrees Celsius Pathway. This alignment – often referred to as ‘net zero alignment’ – is based on companies cutting GHG emissions to (close) to zero over the next three decades.
The Baseline GHG Emissions Projection which represents the emissions the company is expected to have if it continues its business “as is” and takes no actions to manage its emissions
The Expected GHG Emissions Projection which represents the emissions the company is expected to have based on its existing plans to manage GHG emissions. Ideally, the Expected GHG Emissions Projection should be lower than the Baseline GHG Emissions Projection.
The difference between what the company would emit under a “business as usual” approach, and what it aims to emit given its current decarbonization plans is the so called “management adjustment”. Hence, taking into account management’s action, this leaves us with the gap between what the company should emit in order to be net zero, and what it aims to emit. This is called the emissions gap. The emission figures are then converted into implicit temperature rises based on certain CO2 conversion factors. If a company has a gap of zero, then this implies that it is planning to emit exactly what is expected from it in order to be aligned with the goals of the Paris Agreement.
Banks are lagging on temperature reduction, but not as bad as utility and energy companies
Now that we have explained the methodology, we will compare the relevant ratings across five different carbon-intensive sectors. Our aim is to better understand the difference in performance between the banking sector, due to its significant scope 3 emissions emanating from loan books, and energy-intensive corporate sectors, such as utilities, real estate, materials and energy companies. Our regional focus is on European countries. Below, we present the results.
In the first four columns, we count the number of corporates, across each sector, which are “severely misaligned”, :highly misaligned”, “significantly misaligned”, or “moderately misaligned”. The alignment refers to the path to net zero. While no bank or real estate company is considered severely misaligned, that is not the case for utilities or energy companies. The latter two sectors include exploration operations, producers, distributers and users of fossil-fuel based energy which, inevitably are some of the largest CO2 emitters. As such, the numbers are not surprising.
On the other hand, it is interesting to see that all banks included in our sample are still perceived as significantly or only moderately misaligned. Nevertheless, these ratings might be underestimating the amount of scope 3 emissions of banks. Given that banks’ methodologies to calculate scope 3 emissions are still in their infancy, the amount of emissions reported is most likely below the actual number of scope 3 emissions. Which, ultimately, gives banks better ratings.
In terms of the average temperature rise, the overall scores are a bit worrisome, especially since many banks claim that they aim to reach net-zero by 2050. Even though banks are set to achieve on average 2.3 degrees temperature rise, which is the lowest score across the five sectors, this number is still well above the 1.5 degrees Celsius target, suggesting that banks still have a considerable amount of work to do to reduce emissions. The table below shows the implied temperature rise for a sample of the largest banks and what these banks plan to achieve by 2050.
Even though these banks are committed to a net-zero alignment by 2050, Sustainalytics’ ratings indicate that the measures / actions that these banks are taking are not ambitious enough to limit the temperature rise to 1.5. As such, banks should step up their game, at least according to Sustainalytics methodology or otherwise they will not be able to meet their own targets.
Despite the bad results of utility companies, there are a few that stand out due to their better-than-average performance
At the other end of the spectrum, utilities and energy companies are on track to contribute to a 3.7 degrees Celsius rise in world temperatures. This comes despite efforts taken in a switch to renewable energy sources. Below we show the implied temperature rise scores (x-axis) for a range of European utility issuers, as well as their management scores (y-axis). Theoretically, we would expect a downward sloping trend, illustrating that management action/plans are indeed feeding into lower rise in temperature. Indeed, such a trend is visible in the chart (see trendline).
Despite the average standing quite above the target of 1.5 degrees Celsius, there are still companies that stand out due to their better-than-average performance. That is the case of Ørsted A/S which is on track for an average temperature rise of 1.8. This is the result of a company that relies heavily on renewable energy, i.e. 91% of Ørsted A/S heat and power generation was green in 2022. Furthermore, the sustainability targets of the company (see ) are quite ambitious (e.g. net zero emissions in scope 1-3 and 90% reduction in absolute emissions, by 2040), which explains why the company scores a high management grade of 67.1, clearly above the average of 50.1 that utilities companies score.
There is still a long way to go
To conclude, the tool that Sustainalytics developed provides several insights about the ambitiousness of companies’ ESG plans and targets. Unfortunately, the results are discouraging. Between the five sectors that we studied – banks, utility companies, real estate, energy and material companies – the results are very different but none is currently aligned with the 1.5 degrees Celsius target. Even though some European banks register the lowest temperature rise (1.8 degrees) across the five chosen sectors, that number still lags behind the target.