Are investors right to worry about waning corporate climate commitments?

THE Paris Climate Agreement, signed in 2015, marked a turning point in global climate policy, urging nations and businesses to take more aggressive actions to combat climate change. The agreement set the stage for heightened corporate engagement in climate action, leading to a surge in climate commitments from companies worldwide.

Following the Paris Agreement, the Science-Based Targets initiative (SBTi) emerged as a framework for companies to set targets aligned with the latest climate science. By providing clear guidelines for emissions reductions, the SBTi encouraged companies to commit to ambitious climate goals.

As at late 2023, more than 2,000 companies had signed up to the SBTi, reflecting a broad and growing corporate commitment to addressing climate change.

This backdrop of corporate commitment offered investors a new lens through which to view the climate risks and opportunities faced by companies. Investors seeking exposure to decarbonisation were no longer confined to focusing on the companies providing the building blocks for the low-carbon economy, such as those manufacturing wind turbines or batteries providing energy storage.

They could now take a broader look at which companies across all sectors were aligning themselves with the transition through ambitious decarbonisation goals (which we refer to as climate leaders), and which companies were lagging. 

High-profile withdrawals and missed targets

Despite this progress, recent developments have raised questions about the durability of corporate climate leadership. Several high-profile companies have withdrawn from or scaled back their climate commitments. For example:

Volvo: In September 2024, Volvo scaled back its plans to produce only fully electric cars by 2030. The carmaker cited changing market conditions and customer demands, including uncertainties created by tariffs on electric vehicles (EVs) and changes to government support as the reasons behind the change. It also highlighted a slower-than-expected roll-out of EV charging infrastructure.

Air New Zealand: Similarly, Air New Zealand faced backlash after withdrawing (on Jul 30, 2024) a commitment to cut emissions by 2030. The airline cited operational difficulties and high costs associated with transitioning to sustainable aviation fuels as reasons for this change.

Shell: On Mar 14, 2024, Shell scaled back its climate targets by revising its goal for reducing operational emissions by 2030 from a 20 per cent cut to a 15 per cent reduction compared to 2016 levels. This adjustment was attributed to the challenges in scaling up new technologies.

In addition to these examples, it is worth noting that more than 200 companies had their SBTi net-zero commitments removed in March this year, having failed to meet a two-year deadline for submitting targets outlining how those commitments would be achieved.

Is the climate leadership theme waning?

How should we interpret this retreat? An obvious point is that reaching net-zero carbon is not easy. Companies may have set overly ambitious goals without fully understanding the practical challenges, such as implementation costs, grid permitting issues, technological limitations, or fluctuating regulatory environments.

Companies alone cannot solve climate change and are reliant on governments to set supportive regulatory frameworks or promote the build-out of necessary public infrastructure. To some degree, these announcements could be symptomatic of broader governmental and international failings and delays in the effort to address climate change, which is of course troubling.

Sustainable aviation fuel, for example, does not have a hope of becoming widely commercially viable without system-level change, which itself requires the right regulation, technology advancement, and infrastructure development in addition to buy-in from the airlines themselves.

These withdrawals may also reveal instances of greenwashing. Critics argue that some companies may have initially made grand climate commitments to enhance their public image rather than out of genuine intent.

As the hype surrounding environmental, social, and governance initiatives fades, these companies may be retreating from their commitments, revealing a lack of real dedication.

True leadership and a maturation of the theme

Conversely, the retreat of some companies from their climate targets also clarifies the nature of true climate leadership. What we are seeing is something of a shakeout, where the leaders separate from the pack.

The challenges faced by companies in meeting their climate commitments underscore the transition from setting ambitious targets to achieving practical implementation. While the initial phase was about signalling intent, the real challenge lies in delivering on these targets amid complex operational realities. Companies that persist despite these difficulties demonstrate a higher level of genuine climate leadership.

One area we see this is in the cloud providers. The advent of artificial intelligence (AI) and the vast computing power required are leading their carbon footprints to rise rather than fall. Instead of abandoning targets, companies are addressing this problem head-on.

For example, in September 2024, Microsoft signed a landmark 20-year deal to buy zero-carbon nuclear power, prompting the restart of a dormant nuclear facility. Together with other investors, Microsoft also launched a US$30 billion fund to support the build-out of AI infrastructure, including renewable energy. This is a company seeing a decarbonisation challenge and rising to it.  

The shift from setting targets to achieving real-world outcomes represents a maturation of the climate leadership theme. This transition reflects a more rigorous approach to climate action, moving beyond symbolic gestures to substantive changes in business practices. It highlights the need for robust strategies and genuine commitment rather than merely setting lofty goals.

Conclusion

The recent withdrawals and missed targets by some high-profile companies might initially seem to challenge the concept of corporate climate leadership. However, they actually signal an evolution of the theme, moving from mere target-setting to the more complex phase of achieving real-world outcomes.

Climate change will continue to impact nearly every sector, presenting both risks and opportunities. Leadership in this context remains crucial, and true leaders are becoming increasingly apparent. Investors will need to focus on identifying companies that demonstrate genuine commitment and effective implementation of their climate strategies.

The writer is portfolio manager and global sector specialist for utilities sector and climate change, Schroders