As we celebrate World Earth Day today, and its theme of ‘Planet vs. Plastics’, Pustav Joshi, Associate Director, Climate Solutions, Morningstar Sustainalytics, shares a deep dive into the team’s analysis into some of the lessons that plastic -dependent industries can learn from leaders in the low carbon transition.
Limiting global temperature rise to 1.5℃ above pre-industrial levels remains an ambitious goal. In fact, if countries and companies continue to operate as they are currently, temperatures are set to reach more than twice this figure.1 Earth Day provides an opportune moment to assess what it might take to shift the needle and this year plastic-intensive industries such as Containers and Packaging are in the hot seat.
To better understand how businesses are preparing for the low carbon transition, Morningstar assessed 8,000 companies on their alignment with a net-zero pathway and assigned them a Low Carbon Transition Rating (LCTR). When we took a closer look at the best practices shared by the top 10% ranking companies, we found there are six lessons that plastic-dependent industries can learn from the leaders in the low carbon transition.
Setting validated targets
One area where plastic-heavy sectors excel is in reporting on greenhouse gas reduction targets. Nearly half (46%) of containers and packaging companies assessed under the LCTR disclose these goals, outpacing all other industries. The plastic-intensive household products industry also ranks highly, with 39% reporting their targets. Mostly, the targets are aligned with a 1.5 degree or 2-degree trajectory, and increasingly, companies are gaining verification for their targets through the Science Based Targets initiative (SBTi).
However, a factor that distinguishes the leading companies assessed under the LCTR is setting and disclosing targets for reducing scope 3 emissions. Containers and packaging firms lag in this area, with just 18% reporting these figures compared to 32% in construction materials, the highest performing sector by this measure.
Focusing on supply chain emissions
Limiting scope 3 emissions involves significant engagement with suppliers and effort to reduce greenhouse gases generated in supply chains, but these efforts can have material impact on overall emissions. Even amongst the standout firms for scope 3 disclosures, supplier engagement remains low. Only 8% of companies in the entire LCTR universe work with their suppliers to set greenhouse gas emission reduction targets to be reported directly to the company, and a mere 2% ask that their suppliers engage with their own suppliers on reducing emissions. It is important to note here that the containers and packaging industry are often in the supply chain of other industries. Hence measuring and reducing their own emissions will have major effect on their customers’ abilities to reduce emissions as well.
Adopting green tech
Adopting the right technology is a fundamental step for companies looking to lower their carbon outputs. Waste heat recovery and utilisation, and smart technology for energy savings are the most widespread low carbon innovations, as the technology for each has matured. Utilities companies are particularly invested in green hydrogen technology, a lower-carbon contender to replace oil and gas as a major fuel, with knock on impacts for a range of energy intensive industries. We expect to see a wider range of companies embrace innovations as they mature further to reduce pollution and lower emissions, from both plastics and overall.
Tying board and executive pay to emission reduction targets
In industries where the need to decarbonise is most urgent, we see a higher rate of companies linking executive remuneration to emissions reduction targets. Oil and gas companies are under mounting pressure to transition away from carbon-intensive fuel sources towards clean energy and a quarter of those assessed connect their leaderships’ incentives to transition goals, which is the highest rate amongst all industries captured under the LCTR. Containers and Packing come in at joint third by this measure, with 17% linking executive pay to greenhouse gas reduction targets. While this remains well above the 8% average across all industries, more can be done to bring the sector in line with other highly polluting sectors.
Establishing a long-term sustainable finance strategy
Green bonds are utilised by one in 10 companies reviewed under LCTR, but there are no plastic-intensive industries represented in the top five industries for this measure. Over a quarter of utilities, real estate and automobile companies assessed have issued this fundraising tool to improve the sustainability of their infrastructure, operations and products. In practice, this capital is applied to improvements ranging from new manufacturing lines for low emission vehicles in the automobile sector, to more diversified investment portfolios among insurers.
Using carbon pricing to make business decisions
The companies that are most prepared for the low carbon transition factor regulations such as a carbon tax or cap and trade market mechanisms into their business decisions. These practices are prevalent amongst oil and gas producers (28%) and automobiles (23%) but uncommon amongst containers and packaging firms. Using low internal, shadow or modelled carbon pricing enables companies to account for future cash outflows based on their emissions, something well worth considering for plastic-dependent businesses.
Still a minority of cases
Less than 10% of the 8,000 companies assessed under the LCTR consistently utilise most of these best practices and they are largely concentrated in a handful of industries. While highly plastic dependent sectors stand out for some aspects of their goal setting, our figures show that they fall short for their implementation of best practices such as green technology, carbon pricing and executive incentives.
Investors looking to consider transition risk in their portfolios must look closely at companies’ greenhouse gas reduction goals, sustainable financing strategies, and the factors guiding leadership. Assessing uptake of the best practices used by the companies leading the transition can help make sense of how sectors really are preparing for a low carbon future.
