Analyst survey 2021: Race is on to achieve net zero

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Key takeaways 

• Europe is leading in the race to net zero, but other regions could catch up.
• Corporate focus is shifting back towards pre-pandemic priorities, with the surge of interest in employee welfare during the pandemic waning
• Sustainability continues to climb the agenda in North America.

The race to net zero is on. Almost a quarter of all companies will be carbon neutral by the end of this decade, according to Fidelity International analysts. 

To achieve this, companies must slash scope 1, 2 and 3 emissions. These include direct emissions from the company’s own operations and energy use as well as indirect emissions up and down their value chains. Looking further out, analysts believe that 43 per cent of firms will get to net zero by 2040 and 66 per cent by 2050. 

Our forecasts are based on companies’ current plans, so we expect them to be revised higher in the coming years, as regulations tighten, new chief executives take the reins, and robust environmental, social and governance (ESG) practices become a baseline for attracting investor capital.

European companies are currently most advanced, with our analysts estimating that 30 per cent of firms will be carbon neutral by 2030. This highlights how embedded sustainability is in the region. As in last year’s Analyst Survey, Europe once again has the highest proportion of analysts reporting growth in ESG activity at a majority of companies.  

“I don't have a company call anymore where ESG is not mentioned,” says one European materials analyst. “On the odd occasion I don't ask a question about it, they will always bring it up themselves at the end of the meeting.” 

US could close sustainability gap with Europe

Other regions could eventually close the gap with Europe. New US President Joe Biden was elected on an ambitious climate platform that seeks to decarbonise US power generation by 2035. 

Indeed, sustainability issues continue to climb the agenda at North American companies. The proportion of analysts reporting an increased ESG focus at a majority of their companies has risen to 58 per cent, up from 49 per cent last year. President Biden’s changes will give these efforts a boost but there is still some way to go.

“ESG awareness in the US still considerably lags Europe” says one financials analyst covering North America, and “the gap has further widened in 2020.” 

This may reflect a recent US rule change that discourages investment managers from considering non-financial factors, such as ESG, in decision-making. Expectations are high that this will now reverse, and sustainability considerations will form part of a manager’s fiduciary duty.

Of Fidelity analysts covering China, 25 per cent report a growing emphasis on ESG at a majority of their companies, having been stuck at around 15 per cent in the previous three years. This may be an early reflection of China’s 2060 net zero target.

There is work to do. For example, 68 per cent of our China analysts expect no increase in the level of corporate disclosure around the UN Sustainable Development Goals over the next 12 months, compared to an average of 34 per cent of analysts who cover other regions. 

“ESG matters generally aren't front of mind for my companies,” says one China industrials analyst. “Disclosure is limited and it's only when you specifically ask that they engage on it.”  

This ties in with Fidelity’s China Stewardship report from December 2020, which shows that Chinese companies do respond to ESG engagement efforts by investors, but that sustainability reporting is less mainstream than elsewhere.

Corporate focus reverts to pre-Covid priorities

The past year has radically reshaped many things, companies included. Over that time, we have been tracking shifts in corporate priorities. In our November 2020 monthly survey, we asked our analysts to rank their companies’ priorities and compare them to those of January 2020. Their responses revealed that social factors such as employee welfare and external stakeholders had become more important during the pandemic.

In the 2021 annual survey, we asked our analysts to rank the same priorities for their companies over the coming year. The results show corporate focus in 2021 shifting back towards the pre-pandemic priorities of growth investment, shareholder returns, and mergers and acquisitions, while social factors are sliding down the corporate agenda.

This suggests that companies’ ESG strategies are strongly influenced by changes in government policy and investor behaviour, as well as the current discourse. Environmental factors are likely to take centre stage again among ESG considerations as the Covid-19 crisis recedes, but the survey suggests social issues will continue to matter, not least as climate-driven risks start to have a bigger impact on populations and lay bare social divides.

Engaging with companies matters even more after Covid-19

By Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing 

There is a lot to celebrate in the results of this year’s Analyst Survey. And a lot to be concerned about.

Many companies are starting to take their carbon emission targets seriously, with two thirds aiming to become carbon neutral by 2050. Businesses in North America and China are becoming more focused on ESG issues, closing a long-standing sustainability gap with Europe. Our job as active investors will be to engage with our companies to ensure these commitments ripen into outcomes.

Regulatory change is a key driver. The survey shows the real-world impact of China’s 2060 net zero carbon emissions target, and a change of leadership in the US under President Biden. Where the law goes, companies follow.

However, progress is uneven. Regulation differs across jurisdictions and doesn’t always cover the full range of sustainability factors that we look at as investors. Employee welfare, a top priority at the end of last year, is now losing ground to the pre-pandemic concerns of growth investment and mergers and acquisitions.

And so, while some of the results are encouraging, they also show where we will have to hold companies’ feet to the fire on issues of sustainability as the lockdowns ease.