However, in regions such as Asia Pacific, limited data and disclosure gaps make this task harder. An engagement-led approach to sustainable investing becomes even more important when information is scarce.

How active ownership can help bridge the net-zero credibility gap

abrdn’s approach to active ownership encourages companies to set credible sustainability targets and to enact change in support of climate action, while setting the appropriate level of oversight by the board. This helps manage climate-related risks and allows investors to gain an understanding of sectoral and geographical nuances to decarbonisation.

A standardised approach can be applied across sectors and geographies, and it allows us to measure and compare the effectiveness of a company’s decarbonisation progress against its peers.

This approach provides an in-depth analysis of a company’s climate strategy, rather than relying on third-party data or a principles-based approach on climate issues. Through engagement, we can assess policy support for clean energy, a company’s policy advocacy, low-carbon substitutes, market appetite for low-carbon products, and technology readiness in terms of barriers to entry and stage of development.

Both data-driven and engagement-led approaches are essential for a well-rounded assessment of a company’s progress against its climate targets. In addition to engagement, we can assess quantitative information, such as the proportion of ‘green’ revenue, the scope of a company’s targets, and the disclosure against benchmarks (including the Science-Based Target Initiative, Climate Action 100+ and Transition Pathway Initiative).

abrdn’s investment team can assess progress made by companies against agreed milestones and determine whether the company has made sufficient progress to achieve their climate ambitions. We can escalate concerns in a variety of ways, including revising an assessment of a company, voting at shareholder meetings, and via collaborative engagement.

5 things active ownership has taught us

Our own research and engagement with portfolio companies has revealed these five key observations:

1. Intensity targets hide the absolute truth

Most of the top financed emitters are using intensity targets rather than absolute greenhouse gas emissions reduction targets. Financed emissions track emissions generated as a result of financial services, investments and lending. The emissions intensity metric is often used as it allows comparisons with other companies and reflects a company’s size. However, a lower emission intensity doesn’t always mean that actual emissions are decreasing.

CRH, an international diversified building materials group based in Ireland, has been an early adopter of absolute emissions reduction targets to measure its real-world impact on emissions. The company committed to reduce, by 2030, absolute Scope 1 and 2 emissions by 30% (using 2021 as its base year). CRH achieved an 8% reduction in 2023 and is on track to meet its 2030 target.

2. Targets need to cover direct and indirect emissions

Companies must set comprehensive targets that cover all emissions, with an additional focus on those that are significant and most material. For instance, while many oil and gas firms have set short-term goals for direct emissions, they often ignore the larger impact of indirect emissions. Companies must identify material emissions to address this gap and to support initiatives for standardised reporting and methodology.

In Asia, the Thailand-based Siam Cement Group, a chemical and cement company, has set reduction targets covering the full range of greenhouse gas emissions. These targets have been validated by the Science Based Target Initiative (SBTI). They also include Scope 3 emissions, despite representing less than 40% of total emissions (the threshold set by SBTI for inclusion). We are now working with the company to encourage it to reduce the clinker content (which releases CO2 in production) of its cement.

3. Capital expenditure is a sign of commitment

Companies allocating capital expenditure towards ‘green’ initiatives demonstrate a commitment to a net-zero transition. However, the impact of such investments on reducing emissions will take time. It depends on the company’s competency, expertise, and technological readiness.

Ultratech Cement, India’s largest cement company by capacity and sales, has set ambitious targets to increase the share of wind, solar and waste-heat recovery in its energy mix, as well as to explore new technology to electrify its kilns, in line with our recommendations.

4. Policy support is critical

Policy support is essential for a credible transition to net zero. Governments must enact policies that encourage the shift towards clean energy. This helps reduce long-term emissions and minimise the reliance on fossil fuels.

Using our proprietary Climate Policy Index for example, we can see that APAC countries typically score below European countries. When engaging with companies that operate in unsupportive policy environments, we assess their willingness to go beyond what is merely stipulated by existing regulations.

India’s Ultratech Cement has established partnerships to research and develop new kiln electrification processes (although this is still far from being commercially available), and carbon capture, utilisation and storage (CCUS) technologies.

Given the lack of policy support in India (e.g. no carbon market), Ultratech’s initiatives are crucial to help close the technology gap faced by most cement manufacturers.

5. Aligning pay with delivering climate targets

Company executives should have their remuneration tied to climate performance targets. These targets should be sufficiently ambitious to encourage companies to take strategic action on climate change.

Through our active ownership process, we recommend detailed and long-term climate-related key performance indicators. If these targets aren’t met, we can vote against renumeration recommendations for key executives.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.