ASX companies are not on track to reach net zero by 2050

Despite many companies pledging to decarbonise their businesses and achieve net zero emissions by 2050, current data reveals that we are not projected to make this milestone.

Australia's market benchmark, the ASX 300, is significantly misaligned with the reductions needed to limit warming to 1.5 degrees above pre-industrial levels.

Even worse, no Australian-listed company is on track to reach net zero by 2050.

The most severely misaligned ASX companies

Based on the principle that companies are expected to limit their emissions to meet a net-zero budget, Morningstar Sustainalytics developed the Low Carbon Transition Rating, which is an implied temperature rise score that indicates how close a company is toward attaining its net-zero (1.5 degrees Celsius) budget.

A company's Low Carbon Transition Rating comprises of two assessments: the exposure assessment, which provides details on how the company would be expected to perform if it took no actions to reduce emissions, and the management assessment, which provides insights on how prepared the company is to manage its emissions through its governance, policies, programmes, and investments.

Qantas (QAN), a widely held company in investment portfolios, is one of the most severely misaligned, with an implied temperature rise of 6.0 degrees. Said differently, if all companies managed their greenhouse gas emissions in the same way as Qantas, the world would warm by 6 degrees.

Computershare (CPU), Webjet (WEB), Whitehaven Coal (WHC), REA Group (REA), and Seven Group (SVW) are the most misaligned with implied temperature rises ranging from 6.3 to 6.5 degrees.

Alignment to net zero differs between sectors. Investors may be surprised that sustainable sector darlings like IT have challenging transition risks compared with other sectors such as real estate or financials because of their upstream supply chain emissions.

There has been a big uptick in Australia's commitment to addressing the issue of climate change over the past 12 months.

Many of the larger-cap Australian-listed companies have made net-zero commitments, investors are increasingly choosing to invest in climate-themed funds, and new funds are being launched to meet the demand. 

So, given this backdrop of the government, companies, and investors being committed to managing climate risks, why does our forward-looking data show no Australian company is on track to deliver net zero by 2050?

Supply chain emissions matter

Typically, indirect emissions (scope 3) are where the bulk of carbon emissions occur. Depending on the company, it can be as significant as 75% to 90% of all emissions.

While ever improving, most companies do not yet provide the quality and quantity of data required to properly assess their net-zero progress, particularly when it comes to indirect scope 3 emissions within company supply chains.

To that end, Sustainalytics plugs reported data gaps with its own statistical estimations.

Greenhouse gas emissions captured by scope 1 are direct company emissions, scope 2 emissions are indirect company emissions such as purchased energy, and scope 3 emissions are upstream and downstream emissions generated by the value chain.

Scope 3 emissions are the most complex yet vitally important, as these emissions are typically where the bulk of a company's carbon footprint occurs.

For example, a car manufacturer's scope 3 downstream emissions, resulting from its clients' use of its cars, would represent approximately 80% of the company's total emissions.

What the data shows

Morningstar Sustainalytics' data reveals a mixed picture of Australian companies' readiness to deliver net zero by 2050.

Unsurprisingly, companies in some sectors are more challenged than others as their businesses are inherently more carbon intensive. This is the case for companies operating in industries such as oil and gas production, metals mining, and airlines.

Regardless, the data shows that currently every sector is going to fail to cut carbon emissions in line with a 1.5 degrees Celsius global warming scenario.

The below chart depicts Australian companies' alignment to net zero by sector across the five temperature rise bands.

It may come as a surprise to see the telecommunications and IT sectors as so severely misaligned with net zero however, these low-carbon sectors paradoxically are severely misaligned due to their complex supply chains captured by scope 3 emissions.

For example, TPG Telecom (TPG), the only company represented in the telecom sector, has scope 3 emissions accounting for 85% of its carbon footprint, yet TPG does not have a near term policy on supply chain emissions, nor does it report on these emissions, and the company's near-term net-zero targets do not cover its supply chain. Rather, TPG says it encourages suppliers to set their own emissions targets, which is not a proactive approach or one that we consider best practice.

It is a similar story for the IT sector as most companies have severely misaligned upstream scope 3 emissions.

Sustainalytics data shows the extent of the scope 3 upstream emissions per company: Pexa (PXA) 91.6%, Carsales.com (CAR) 88.5%, Computershare 92.3%, Webjet 81.6%, and REA Group 76.9%.

The type of activity contributing to these emissions can vary between companies but includes the procurement of goods and services and raw materials. For example, hardware component parts sourced from a third-party supplier might use carbon-intensive manufacturing processes contributing to global warming.

Research undertaken by the Australian Council of Superannuation Investors on ASX 200 companies shows that REA Group is the only company in the IT cohort of seven that provides a quantitative target and milestone in relation to its scope 3 emissions.

Those IT companies that operate in the enterprise and infrastructure software and data processing subindustries like Wisetech Global (WTC) and Iress (IRE) tend to have higher scope 2 emissions as they utilise data centers to store and process large volumes of data.

Data centres are high-energy-consuming and high-carbon-emitting, typically powered by electricity. Wisetech Global's annual report states it is seeking to reduce energy consumption and transition to renewable sources of energy. Iress has also committed to transitioning to renewable energy and reducing its greenhouse gas targets in alignment with the Science-Based Targets Initiative.

However, it is important to note some data limitations, as the dataset is still being built out. There are a number of large companies for which we do not yet have data, including CSL Ltd. (CSL), Westpac (WBC), and Telstra (TLS).

The other factor that Morningstar Sustainalytics considers is a company's emissions management preparedness for transitioning to net zero. This is assessed via a five-tier scale.

Webjet, Wisetech Global, Pexa, and Iress are assessed as "very weak," the lowest category, for their emissions management. These companies have poor greenhouse gas emissions targets across all scopes, and greenhouse gas reduction policies and reporting are either very weak or nonexistent.

REA Group and Carsales.com are marginally better at "weak," and Computershare is considered "average."

Where to from here?

While the feasibility of the 1.5-degree Celsius target set by the Paris Agreement has become more uncertain, companies will still need to transition sooner rather than later. Delayed action on climate change has the potential to deliver catastrophic environmental and financial consequences.

As such, investors need to consider whether the companies they hold in their portfolios are well prepared to transition to a low-carbon future and whether they run the risk of future price revision or potentially holding stranded assets. They will also need to understand the measures taken by companies to adapt to a warmer climate.

On a positive note, there is a wave of decarbonisation support coming from multiple stakeholders. Importantly, a crucial gap in government guidance via climate commitments, legislation, reporting, and disclosure regimes is now being addressed.

Coupled with regulatory scrutiny, investor demands for more disclosure and companies supplying more climate-related data mean there is hope, but we are rapidly approaching a tipping point.

The increased availability of climate-related data and ratings like Morningstar Sustainalytics' Low Carbon Transition Rating will help empower investors to make more informed decarbonisation choices and allocate to companies aligned with their values.