How to Assess Company Targets Efficiently with Net Zero Tools

Assessing company targets with the Net Zero Investment Framework (NZIF)

There are many frameworks that aim to bring together indicators for assessing company targets, including the SBTi for Financial institutions and the NZIF, which is the framework we use at Clarity AI. We believe that Net Zero alignment cannot be achieved only by using one metric, but using a multi-dimensional approach instead, to have a 360 view on all Net Zero aspects and reinforce our clients’ understanding of where their portfolios stand. This is why we are relying on the NZIF. 

The NZIF recommends a set of criteria for measuring the net zero maturity of a company. In our tool we currently cover five of these criteria:

1. Ambition: measures whether a company has stated that they have an ambition to reach net zero emissions by 2050
2. Targets: tracks whether a company has disclosed near term GHG emissions reduction targets in line with net zero pathways. This target is used to calculate a Temperature Alignment, or implied temperature rise of a company, ranging from 1.5 to 3.2 degrees celsius   
3. Emissions performance: assesses if a company is on track to achieving its Scopes 1, 2 and 3 targets by comparing current emissions to committed emissions as per their targets 
4. Disclosure: tracks whether a company discloses all its material emissions
5. Decarbonization strategy: tracks whether a company has developed a low carbon transition plan 

Which criteria a company meets determines its overall net zero maturity level, from not aligned to aligned. And the more criteria a company meets, the higher it is placed on the maturity scale:  

This framework is useful for understanding target credibility, with the overall maturity level acting as a sign post for target credibility and the underlying criteria as indicators. A higher net zero alignment maturity or company indicates they could have more credible targets. 

If a company has only set an ambition on its website that it wants to be net zero by 2050, it has committed to aligning, but that commitment is not very credible because they have demonstrated very little to no effort towards actually achieving that ambition. However, using the underlying criteria as indicators, if a company has set a target, but also is performing in line with those targets, discloses its emissions, and has put in place a low carbon transition plan, we can infer that target is more credible than that of a company who has only set an ambition and nothing else. This company in turn would be ‘Aligned’ according to the net zero investment framework, so investors can be more confident that the company is likely to achieve its targets, and therefore they are more likely to achieve their own. 

However, it is crucial to note that additional due diligence must be performed by investors. A company disclosing its emissions does not imply that it is serious about its targets, and knowing that a company has a transition plan in place does not guarantee that this plan is of high quality. Further, it takes years after a target is published to be able to observe how a company is performing in line with its targets. Investors must therefore perform due diligence by investigating underlying indicators of net zero alignment. If a company is disclosing its emissions, are they high or low relative to their peers? If a company has published a low carbon transition plan, is it a high quality plan? 

Transition plans in particular are a key forward looking indicator of a companies’ decarbonization performance, and there are several frameworks to help guide investors in their assessment of these documents. The Transition Plan Taskforce (TPT), for example, outlines three key principles (along with key recommendations) that should be covered in a high quality transition plan: Ambition to mitigate climate change, Action the entity plans to take, and Accountability mechanisms. Beyond better understanding how a company plans to achieve net zero, transition plans are useful for investigating the actions an organization has taken to meet their targets. Is the company making the right investments? How much of their spending is aligned with their climate transition plan? How are they engaging with their suppliers?

Assessing the credibility of 1.5°C-aligned targets is important for understanding how investors can meet their own targets, but looking at companies with no targets or with targets that are not aligned to net zero is also crucial. To increase the likelihood of meeting targets, and to help enact real-world decarbonization, investors must look beyond metrics and take action to positively influence investee company behavior.