Why are companies unlikely to hit net zero?

Currently, less than 60% of companies are on track to cut their carbon emissions to net zero by the UN agreed target of 2050, according to our analysts’ assessments of the companies they cover. And only one in four will do so by the more ambitious target of 2030.

That shouldn’t detract from the progress that has been made. The world’s big companies have, and are, listening, and the survey shows that most developed-world multinationals have committed to net zero targets, with 69% of European companies allocating the funds needed to hit those targets by 2050.

But the survey tells us that the big multinationals that we invest in must up their game, and much of the impetus must come from governments.

“Although companies will get a return on their investment, they may not want to do the upfront spending,” says Velislava Dimitrova, a portfolio manager who focuses on climate. “If we want to get to 100% within the timeframe scientists say we have, we will need a regulatory push.”

Chart 1: Most companies aren’t spending enough to hit net zero

^{Question: “What proportion of your companies do you believe are allocating enough capex to achieve net zero by the following dates?” Source: Fidelity International ESG Analyst Survey 2023.}

As Chart 2 shows, we are one year closer to 2030 and our analysts’ expectations for how many companies will hit net zero by that date has fallen slightly compared to last year on a global basis, although there appears to be more optimism around China.

Chart 2: Net zero by 2030 looks unrealistic for most companies

^{Question:’ What proportion of your companies do you believe are allocating enough capex to achieve net zero by 2030?’ Source: Fidelity International ESG Analyst Survey 2023. [Please note, this chart corrects previously published numbers. In our 2022 survey, a data error led to an overstatement of the results, for example the global figure was put at 35% this has now been corrected to 25%]} 

“In many cases the technology is not yet there,” says Laura Stafford, an equity analyst who covers Latin America and Eastern Europe, Middle East and Africa (LatAm/EMEA) mining and commodities companies. “For those targeting net zero by 2050 they still don’t have a clear roadmap of how to get there so it’s impossible to say how much capital will even be needed.”

Utilities stands out as a success story, with the opportunities in renewable power drawing huge investment. Our analysts judge that almost four out of five companies will reach the net zero target by 2050. In the energy sector, there is a clear split between European companies, which are pivoting towards renewables, and those covering North American energy firms.

ESG now embedded in some sectors

Opportunities created by the energy transition continue to outnumber the threats to corporate businesses, however, and in a number of sectors ESG issues have become an unavoidable factor in day-to-day operations and business strategy.

“In areas like building materials distribution, smaller players can’t invest as much as their big peers in their ESG credentials, which are becoming increasingly more important in tender processes,” says Serhat Birbilen, who covers European consumer discretionary firms. “Big companies like Travis Perkins, which can afford ESG investments, have already started taking share from those smaller players. So ESG might already be consolidating some markets.”

Chart 3: ESG on the agenda at many company meetings

^{Question: ‘What percentage of your company meeting have included engagement on an ESG topic in the last 12 months?’ Source: Fidelity International ESG Analyst Survey 2023.}

Analysts are also realistic about where they are having an impact, with investor engagement ranked as the top factor influencing changes to governance, but further down the list on social and environmental issues. Regulation and government policy are seen as the main factors driving change as we head deeper into the transition.

Overpolished credentials

The proportion of meetings with c-suite executives has dipped slightly for the third year running¹ as companies build out sustainability teams. But 73% of analysts say companies are responsive on ESG issues, a figure that has been steadily climbing since we started this survey two years ago. More than half of respondents say management remuneration is now linked to emission targets.

At the same time, however, there is some cynical behaviour: almost 60% of our analysts estimate that their companies promote ESG credentials not backed up by their actions. 

“Usually, the mismatch is in promoting or emphasising only the clean aspect of a company’s business, when most of what they do remains in non-sustainable categories,” says Paul Milon, a sustainable investing analyst who covers Asia Pacific (ex China, ex Japan, ex Australia). “There's a mismatch due to selective communication.”

Chart 4: What they say and what they do

^{Question: ‘Thinking about your companies’ efforts to promote their ESG credentials, which of the following would you say companies typically do?}

^{Chart shows percentage of analysts. Source: Fidelity International ESG Analyst Survey 2023.}

Typically, it is the sectors where companies are performing poorly where this is more visible. In the energy sector, 83% of analysts say their companies moderately or significantly overstate their credentials.

Trade-offs abound

These problems and contradictions are emerging with time and resolving them is part of the maturing of the transition. But it is maturing. When companies first started making pledges, they were just that: vague promises that we had no way of testing. We have some data now and the discussion is becoming more concrete. The devil will be in the detail. What is crystal clear, as our survey shows, is that much more needs to be done than is currently the case.

Fiona O’Neill, Head of Global Cross-Asset Research Capabilities, Fidelity International

¹NB A data error last year meant we erroneously reported the proportion had grown slightly.

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Important information

This content is for investment professionals only and should not be relied upon by private investors.

The value of investments can go down as well as up and clients may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. 

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