No major G7 stock index aligned with Paris climate goals

Cornwall

New research from the Science Based Targets initiative (SBTi), a body enabling businesses to set ambitious emissions reduction targets, reveals that none of the G7’s leading stock indexes are currently aligned with a 1.5°C or 2°C pathway and calls on the largest listed G7 companies to urgently increase climate action.

In the lead up to the G7 Summit, the analysis shows that the G7 countries’ leading indexes are on an average temperature pathway of 2.95°C, according to their constituents’ current corporate climate ambitions. Stock indexes, composed of stocks of the most significant companies listed on a country’s largest exchange, are vital benchmarks to understand market trends.

The report, prepared by CDP and the UN Global Compact on behalf of the SBTi, finds that four of the seven indexes are on dangerous temperature pathways of 3°C or above. Notably, fossil fuels are a key contributor to the emissions of all seven indexes, making up 70% of Canada’s SPTSX 60 3.1°C temperature rating and almost 50% of Italy’s FTSE MIB 2.7°C rating.

Lila Karbassi, Chief of Programmes, UN Global Compact and SBTi Board Chair, said: “G7 companies have the potential to cause a ‘domino effect’ of positive change across the wider global economy. This report highlights the urgent need for markets and investors to deliver on the goals of the Paris Agreement. As the G7 meets this week, Governments must go further to incentivize ambitious science-based target setting.”

Aligning investment with 1.5°C

G7 ministers responsible for climate and environment recently urged businesses and investors to align their portfolios with the Paris Agreement goals and set science-based net zero targets by 2050 at the latest.

Passive investing currently makes up around 40% of US and 20% of European funds, but passive investors are warned that just 19% of listed companies in these seven leading indexes have climate targets aligned with the Paris Agreement.

The UK government plans to reduce emissions by 78% by 2035, in line with a 1.5°C pathway. Encouragingly,  the SBTi finds that 35 of the FTSE 100 companies have already committed to align with 1.5°C. However, despite significant progress in the adoption of science-based climate targets among FTSE companies, some of the largest emitters still do not have ambitious climate targets, resulting in an overall index temperature rating of 3.1°C (see Fig.1).

Despite the findings, momentum for climate action in G7 countries is growing. Of all corporate greenhouse gas emissions reduction targets disclosed to CDP in 2020, 64% of targets were set by companies headquartered in G7 countries. Overall, 2020 was a milestone year for climate commitments, with the annual rate of adoption of science-based targets doubling in 2020 versus 2015-2019.

Alberto Carrillo Pineda, Director of science-based targets at CDP and a Steering Committee Member at the SBTi, said: “Ignoring climate science is like continuing smoking despite knowing the risks. Climate and environmental breakdown is the biggest health, economic and societal challenge of our time – it requires immediate action from the world’s largest companies. Today’s findings highlight vital progress, but show there’s more to be done to incentivize firms to set science-based climate targets and accelerate the pathway to net-zero.”

Urgent climate action

Today’s report also identifies four urgent climate actions for financial institutions, corporate actors, investors and governments. Firstly, businesses and governments must collaborate to harness the “ambition loop”, a positive feedback cycle in which private sector action and government policies reinforce one another, such as the recent Executive Order on Climate-Related Financial Risk by the US Government that introduced a requirement for major federal suppliers to set science-based targets.

Secondly, corporations must work to decarbonise supply chains by engaging with suppliers. Thirdly, investors should embed science-based targets into sustainability-linked bonds and climate financial standards.

Finally, financial institutions should aim to create a domino effect in all sectors of the economy through setting portfolio-level science-based targets and engagement with underlying assets. One such example is the CDP Science-Based Targets campaign, which coordinates global financial institutions to engage the world’s highest impact companies to set 1.5°C-aligned science-based targets.

In the midst of a growing number of net zero commitments that aren’t always backed up by short-term action, science-based targets are answering the need for nearer term, 2030 plans, through interim targets towards a net-zero future.

Firms are encouraged to join the 570 companies already signed up to the SBTi’s Business Ambition for 1.5°C campaign to make their critical contribution to limiting the worst impacts of climate change ahead of the COP26 conference in Glasgow.

Fig. 1 – The temperature alignment of G7 stock indexes and percentage of Index company emissions covered by science-based targets.

Index CAC 40 DAX 30 NIKKEI 225 FTSE 100 S&P 500 FTSE MIB SPTSX 60
Country France Germany Japan UK USA Italy Canada
Temperature alignment 2.7°C 2.2°C 3.0°C 3.1°C 3.0°C 2.7°C 3.1°C
% Index emissions covered by SBTs 41% 71% 12% 7% 16% 41% <1%
% Index companies in SBTi 78% 50% 28% 48% 24% 23% 10%
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