Setting a Net-Zero Target
Untangling corporate decarbonization targets
5 minute read Decarbonization targets reflect a company’s commitment to reduce its emissions of greenhouse gases. If the target is net-zero, it means the company aims to first decrease its emissions and then offset the remaining emissions with carbon removal.
- Stress testing net-zero transition scenarios
- An interactive tool for visualizing net-zero alignment
- Using scenario analysis for climate change
- Making sense of greenhouse gas emissions types
- Untangling corporate decarbonization targets
- Setting interim emissions-reduction targets
- A checklist for climate-aligned investment portfolios
A growing number of companies are setting some sort of decarbonization target
Understanding companies’ climate commitments, particularly with regard to net-zero, and being able to compare the variety of corporate climate promises on a consistent basis is critical for investors seeking to measure or mitigate climate risk in their portfolios.
But not all decarbonization targets are equal. As more organizations report net-zero targets, investors may struggle to sort the varying claims. While some companies aim to achieve net-zero emissions across their entire carbon footprint, others map their targets to something less than the whole.
Dimensions of decarbonization targets
MSCI has developed a framework for assessing company targets based on their comprehensiveness, ambition and feasibility.
Comprehensiveness addresses whether a target is focused on all scopes and geographic sources of the company’s total emissions.
- It considers two aspects: the emission scopes that are covered by the target, and the activities and geographies covered by the target.
- Net-zero targets may not be comprehensive. An analysis of net-zero targets issued by companies in the MSCI All Country World Index as of Jan. 5, 2021 found that few targets had effective coverage of the company’s complete carbon footprint.
Ambition refers to the amount of the emissions reduction embedded in the target and the target timeline.
- Targets usually carry a stated reduction amount, conveying how much a company aims to reduce emissions by. Because the base year may differ from the most recent year of reporting, it’s useful to recalculate how much reduction a target entails by referring to the company’s latest reported or estimated emissions.
- Targets also typically state a year by when the target is to be achieved. For a given amount of emission reduction, a shorter timeline denotes a higher level of ambition. Too short a timeline may also be unrealistic.
Feasibility refers to how much confidence an organization can have that a net-zero target will be achieved.
- Feasibility can help to examine an organization’s track record in meeting previous targets. MSCI, for example, assesses a company’s track record by comparing expired targets’ original target emissions and the reported emissions in the target year.
- The feasibility of a target relates to its ambition. More ambitious targets are more difficult to achieve. Feasibility is a key consideration for net-zero targets because such targets are the most ambitious. The timeline matters too. A timeline that is very short may not be feasible, especially if the technology required to achieve such a target is currently unavailable.
The interactive visualization below shows the year in which a portfolio’s greenhouse gas emissions are likely to reach net-zero based on the strategy, scope of emissions covered and rate at which a portfolio is set to decarbonize annually. Users also can factor in investments in offsets and their impact on the target date. It can be set to the reflect a dozen MSCI Climate Indexes, which illustrate a variety of approaches to addressing climate change.
As the tool suggests, it’s one thing to set a decarbonization rate, it’s another to deliver on it. Less than a quarter of the world’s listed companies cut their carbon intensity by at least 10% every year – the amount that companies need to cut each year on average to align with a 1.5°C warming scenario – in the five years that ended Dec. 31, 2020.
Net-Zero Target-Setting Tool
Index illustrations (please see disclaimer below) - Max 4
Portfolio value**
Scope 3 25%
Select the percentage of Scope 3 emissions (indirect emissions that occur in a company's value chain)
Decarbonization 12%
Select a decarbonization rate (yearly index reduction in total emissions)
Offset amount
Enter the amount of carbon to be actively offset per year in tons of CO2
Advanced controls
Scope 1 100%
Select the percentage of Scope 1 emissions (direct emissions from owned or controlled sources)
Scope 2 100%
Select the percentage of Scope 2 emissions (indirect emissions from the purchased energy/cooling)
Offset Method
Select the way carbon is offset
Offset Price
Enter the price to offset a ton of CO2 equivalent emissions
Offset Price Increase
Enter the annual price increase to offset a ton of CO2 equivalent emissions
Offset Ratio 20%
Select the percentage of overall emissions offset at the portfolio level
| INDEX | Net-Zero Year | Emissions Now | Offsetting Now | Net Emissions Now | Offsetting Cost Now | Relative Cost Now | Reduction by 2030 | Reduction by 2040 | Reduction by 2050 |
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*MSCI Climate Paris Aligned Indexes are designed to align with a 1.5° scenario using MSCI Climate Value-at-Risk and an ongoing self-decarbonization rate of 10% year on year
**Hypothetical portfolio that replicates the selected index or indexes
Disclaimer
This tool is for informational purposes only. This information is subject to MSCI Inc's and MSCI ESG Research LLC's terms of use that you can find here: Terms of Use and here Additional Terms of Use - MSCI ESG Research LLC.
This information may not be used for investment decision making purposes or as a basis for any financial instruments or products (including, without limitation, passively managed funds and index-linked derivative securities) or other products or services, to manage any funds or portfolios, to verify or correct data in any other compilation of data or index, to create any derivative works, nor to create any other data or index (custom or otherwise), without MSCI's prior written permission.
Continue reading
Breaking Down Corporate Net-Zero Climate Targets. A guide to best practices in assessing decarbonization targets that addresses such questions as the percentage of total emissions a company’s targets aim to reduce, the speed with which a company intends to achieve its reductions and the confidence that investors or other stakeholders can have that the target will be met.
