Are environmental targets a reliable guideline for investment decisions?

For many listed companies environmental target setting is very much in vogue and is a potentially useful tool for investors to chart progress in this all-important area. But there is also a great danger that targets simply become another form of “greenification”, an attempt to demonstrate high aspirations with little in the way of substance or indeed credibility behind the pledges being made.

Projects such as the Science Based Targets Initiative, a partnership between organisations including the Carbon Disclosure Project and the UN Global Compact help provide an empirical backing for the statements by defining and promoting best practice. But participants in this scheme are woefully low with 1,713 targets set at the time of writing. This figure has grown strongly over recent years but is a global figure so all but insignificant when compared to the estimated number of businesses worldwide. In the UK alone there are 8,000 companies which employ over 250 employees each (Source: BEIS, Business Population Estimates 2020). So there remains a long way to go before many of the targets we see today have the technical backing required to make them truly credible.

If environmental targets are to play a role in our company analysis it is important that we do not take them at face value and challenge the companies that are issuing them over their methodology and underlying assumptions. Two recent examples serve as a warning as to how even the best intentions may be built on shaky foundations.

Lloyds Bank has recently made a commitment to a 50% reduction in the emissions the company finances through its loan book. An impressive pledge to make but one where the underlying methodology makes us question the validity of the aim. The bank openly admits to us that data is hard to source in terms of monitoring the project and the success relies not just on the actions they can take as an institution but requires governments to introduce laws and regulations which will change the behaviour of their customers. Here we have a commendable target but one which today is impossible to meet.

CRH is a building products manufacturer whose cement producing activities makes it one of the highest CO2 emitters in our portfolios. They too have made some equally impressive sounding targets including a 33% reduction in CO2 per tonne of cementitious product by 2030. Further investigation reveals that the baseline for this claim is 1990 and by 2020 they had already achieved a 26% reduction meaning the average annual decline required between now and 2030 is less than 1%. Furthermore, if the company continues to grow cement volumes over that time-period, then the net result will be considerably more CO2emissions despite the headline claim of a 33% reduction should the target be met.

In both cases we are not questioning the validity of managements’ approach. The targets can be viewed as a starting point to promote the appropriate culture and influence not only employees and managers responsible for the delivery but also policy makers and regulators who will be equally influential in determining the eventual outcome. But what is abundantly clear is that these targets cannot be taken for granted and certainly not used at face value to reach an accurate investment decision.

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