The Impact of Missing Climate Targets - Episode 47

According to McKinsey Company , about 83% of the world's largest corporations now have some form of climate , but a Wall Street Journal article from last week explored just how difficult it has been for these organizations to execute against those commitments , especially as many of those targets were enacted believing that carbon offsets would be the secret sauce to get mass

reductions . Today , the offset market roils with poor quality , high-priced issues and there is true concern that companies may begin to miss on some of their interim targets towards net zero . So what does it mean for a company to miss their targets ? Does it materially affect their business , their cost of capital ?

What should we expect going forward , as the low-hanging fruit of decovernization has been undertaken ? But the more difficult challenge is still lie ahead . 8 minutes it's how long it takes the sun's race in , or about the amount of time House Republicans discussed amongst themselves last week on how to avoid a government shutdown .

Figure it out already and let's get it on . The CDP is a global organization that encourages companies to voluntarily report their greenhouse gas emissions and their actions towards mitigating that impact . The good news Over 19,000 companies now report to CDP on a yearly basis , complete with their internal targets and their roadmaps for getting there .

The not-so-good news Of those 19,000 companies , cdp says only 81 have credible , viable plans for reaching net zero . Look , decarbonizing is tough , but it comes with so many benefits , both for the planet as well as for the individual organization , that a lot of companies have started to set targets and commitments towards net zero .

That McKinsey study that I cited in the intro found that 83% of the world's largest companies have some form of climate commitment now , and the science-based targets initiative boasts more than 1,000 companies that have pledged to reduce emissions in line with keeping the world from warming 1.5 degrees celsius .

The reasons why so many companies are chasing net zero are abundant . For one thing , a Deloitte study found that 49% of consumers pay premium prices for sustainable products at least once a month , and an NYU Stern report indicated that the average premium for a sustainable product is higher than 27% .

For Gen Z consumers , the numbers get even more eye-opening , as nearly 90% of Gen Z consumers report that they would be willing to pay at least a 10% premium for a sustainable product or service . But net zero commitments go beyond simply pricing . The impact on brand reputation is profound , as is the influence it has on potential employees as well as investors .

To that last point , esg financing has ballooned over the last few years , with over $2.5 trillion now in ESG vehicles . In 2021 , 22% of all new funds launched were tied to ESG Pricing , reputation , employees financing . It's obvious that markets are rewarding companies for doing what's right for the planet , but what happens when things go sideways ?

For many firms , the easy part was in establishing a target and putting it out there . It's been much tougher to follow through on those commitments and even though those companies may have had good intentions in setting up their decarbonization goals in the first place , how is the general market reacted when those goals are missed ? What goes up must come down right .

Well , the research is limited in this area . For one thing , many of these targets have been set out so many years into the future that it's tough to know whether a company's meeting or missing their commitments when measured today . But there has been some data compiled to show that , indeed , consumers and financiers are not happy when a company misses .

A separate McKinsey literature review covered over 2,000 academic studies to find that ESG financing is roughly 10% less than that of non-ESG financing , which means that missing corporate sustainability goals can have a material impact on the cost of capital for a firm .

And an academic report published in 2022 in Sustainable Corporate Finance found that when a company loses one point on their ESG score , it's the equivalent of losing 1% growth on their revenue . So it's apparent that missing targets can affect a company's bottom line , and it could also affect the top line .

Certainly , it's more difficult to charge a premium price when the product or service struggles to meet sustainability benchmarks . And then Harvard Business Review published a piece last year discussing the impact on customer satisfaction scores when a company is accused of greenwashing . The result A 1% to 2% drop in customer satisfaction .

Ok , maybe that doesn't sound like a huge drop in customer satisfaction , but here's the thing Firms in any one industry are really only separated by a narrow 5% to 10% band in customer satisfaction .

To begin with , dropping 1% to 2% can be the equivalent of moving from third place in the industry to sixth overnight , and that translates through to an impact on the company's financials , as that same HBR study found that the result in loss in customer satisfaction resulted in lower net earnings per share , as well as a lower return on investment by nearly half a

percentage point . The good news those results are for companies that get swept up in some form of greenwashing controversy , such as false advertising that their product meets certain green standards or such . Those actions are perceived as more deliberate by the market .

Simply missing sustainability targets is more well-meaning but inadequate More of a green wishing than a green washing . And what's more , this may not be a phenomenon solely situated at a single company . Accenture conducted a survey of over 2,000 company executives to find that 93% would not meet their net zero targets at current investment pace .

There's a massive miss on an economy-wide scale . Any individual company could just hide in the herd and may skirt through without harmful side effects , but then again , maybe that's where we've been thinking about this wrong .

Maybe we shouldn't be looking at this from a punitive view , and maybe the research into the penalties associated with green wishing missed the point . What about those 7% of companies that do meet their targets ?

The ones that can charge 23% more for their products , who access 10% lower cost of capital , the ones who appeal to a broader cross-section of employees and consumers ? Customer buying preferences are unlikely to change . They're just going to favor those few companies who are actually walking the walk on sustainability .

Those companies who actually meet their targets are likely to flourish in a market where their competitors are simply wishing for better outcomes . I'm Paul Schuster and this has been your 8th year , thank you .