Over the past several years, growth in corporate sustainability reporting has soared.1 Reporting can take many forms, but the best approaches focus on a company’s material environmental, social and governance (ESG) issues and outline goals for improving ESG performance. By setting targets, companies can illustrate commitment and rally support for direct efforts to achieve them. Our corporate credit analysts review these goals when analyzing bond issuers.
For most companies, carbon emissions are among the most-commonly addressed ESG goals. As climate risk becomes an increasingly challenging issue for many corporate sectors, over 80 percent of Fortune 500 companies have laid out carbon emission-reduction goals.2 Figure 1 provides two examples.
Some goals are clear. For example, the electric and gas utility highlighted above seeks to reduce its carbon dioxide emissions by 75 percent within 22 years. This goal is straightforward and is supported in the company’s most recent corporate sustainability report (CSR) with a baseline for measurement, a description of why achieving it would be important to the company and an explanation of how the utility intends to reduce its reliance on coal plants.
But in other cases, a goal can be opaque. The construction equipment maker in Figure 1 wants to cut its greenhouse intensity by what appears to be a meaningful amount. However, little else is said about the goal in the CSR. Although an admirable objective, more detailed disclosure about the goal could reveal whether a 50 percent reduction reflects the true needs of the company and is enough to make the company’s emissions fall to levels that are acceptable in terms of environmental impact. Due to the lack of information, evaluating the rigor of this goal is difficult.
The best practice on outlining goals is to do so in accordance with the Science Based Targets initiative (SBTi). Recognizing the need for greater transparency around setting goals for carbon emissions, the SBTi was established in 2015 through the collaboration of five organizations, including the World Resources Institute, the World Wildlife Fund and CDP. The initiative calls on companies to align their plans for cutting emissions with the recommendations of the Fifth Assessment Report drawn from the Intergovernmental Panel on Climate Change (IPCC).3 This report recommends that global warming be kept under 2 degrees Celsius to counteract the most extreme effects of climate change. To do this, IPCC believes that total carbon emissions going forward should not exceed an estimated budget of 1 trillion metric tons of carbon dioxide. A company’s emissions-reduction plan must align with the carbon budget to be SBTi compliant.
To set a science-based emissions-reduction target, companies must submit a commitment letter to the SBTi, develop a target within a specific time frame and have the target validated by the SBTi. To date, 362 companies have committed to a target, while 96 have reached full approval status. Although the figures are modest, the number of committed companies is growing at a pace of two per week.4
Science-based target setting is “going to become a growing part of the reputation narrative,” according to “The Executive’s Guide to 21st Century Corporate Citizenship.”5 In addition to the reputational benefit, companies see value in signing on to the SBTi. As examples, Kellogg Co. and Proctor & Gamble Co. have signed on to demonstrate leadership and to ensure that their ESG goals are meaningful, among other reasons.6
Defined goals help drive improvement in company sustainability performance, in our view. But not all goals are the same. By having goals verified by the SBTi, companies send a signal to investors and the global community that they are serious about cutting emissions at a scientifically defined rate. We believe this is an important step for companies in their sustainability reporting, and science-based goals will be an increasingly important factor in our ESG research.
 The Governance & Accountability Institute reports that 85 percent of S&P 500 companies published a sustainability report in 2017, up from 20 percent in 2011.
 CDP 2016 climate change disclosure data, Science Based Targets initiative.
 The Intergovernmental Panel on Climate Change (IPCC) is the organization established in 1988 by the United Nations Environment Programme and the World Meteorological Organization to prepare a scientific report on the status of climate change and its potential economic and environmental impacts.
 The Science Based Targets initiative – Webinar for Investors, hosted by CDP, March 20, 2018.
 Dave Stangis and Katherine Valvoda Smith, The Executive’s Guide to 21st Century Corporate Citizenship: How Your Company Can Win the Battle for Reputation And Impact (Bingley, England: Emerald Publishing, 2017), 97.
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