Triodos Bank has the ambitious target to reach net zero by 2035 and contribute to limiting global warming to 1.5°C to prevent the worst effects of climate change. Our long-term net zero target covers all financed emissions of Triodos Bank including the complete range of funds managed by Triodos Investment Management and the company’s own operations.

This means we need to work closely together with our clients, investees, co-workers and other stakeholders to reduce emissions. Engagement with companies in our Impact Equities and Bond (IEB) portfolios is part of this effort. In 2023, we stepped up our engagement efforts by setting the target to engage annually with these holdings on GHG management.

Climate engagement

As an active shareholder, we continuously monitor the companies we are invested in and aim to maximise positive impact by having a constructive dialogue with them. Focusing our efforts to meet our main objective, we use two complementary approaches. The first approach is to focus on companies that are still in the early stages of establishing a climate change strategy. These companies can greatly improve their strategy by setting targets that are science-based. In the second approach, we also focus on the highest emitters in our portfolio, as reducing emissions for this group can substantially contribute to our total emissions reduction. We identified the five biggest direct emitters per fund and prioritised them for engagement.

When engaging on GHG emissions with publicly listed companies, several challenges arise. Some of the most common problems include a lack of GHG measurement guidelines (especially scope 3), which results in reported GHG data and targets that are not comparable.

Having companies set a target in line with the SBTi helps in minimising the existing problems with (scope 3) data and target comparability as companies follow a common scientifically recognised methodology to calculate their emissions and to set targets. Notably, the SBTi is currently reviewing its approach on scope 3 target setting as well as developing resources to guide the adoption, implementation, assessment and tracking of scope 3 targets in a robust and consistent way. In 2022, the SBTi reported a sharp rise in the number of companies setting science-based targets (see figure 1), with 87% more companies having their targets validated that year (1,097) compared to 2021. This is a number greater than the entire previous seven years  combined (1,082).

What are scope 1, 2, and 3 emissions?

Company greenhouse gas (GHG) emissions are categorised into scope 1, 2, and 3 emissions. They are used to measure, manage and reduce GHG emissions.

  • Scope 1 emissions are direct emissions, released from the own operations of a business.
  • Scope 2 emissions are indirect emissions, released from the electricity, steam, heating, or cooling, purchased and used by an organisation.
  • Scope 3 emissions are also indirect, accounting for upstream and downstream emissions of a product or service, and emissions released across a business’s value chain.

Reporting scope 1 and 2 emissions is mandatory for many organisations across the globe. Scope 3 emissions are more difficult to measure, but generally have the largest impact on an organisation’s carbon footprint.

Figure 1: Number of companies with approved targets and commitments (source: SBTI)

Yet,solely setting SBTi targets might not be enough. In a recent study, the Massachusetts Institute of Technology (MIT) concludes that firms obtaining assurance for their carbon accounting report on average have a 9.5% higher carbon intensity than their peers. However, when controlling for assurance, firms obtaining assurance for their GHG emission data reduce their future carbon intensity by 3.3%. This suggests that taking reported carbon emissions at face value would lead to penalising firms that are more serious about their carbon reductions.While the authors call for mandatory assurance, we are already pushing our companiesto seek for third party assurance to ensure that the SBTI methodology is applied effectively.

Science Based Targets initiative

The Science Based Targets initiative (SBTi) is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature (WWF). Its main goal is to mobilise the private sector to take the lead in urgent climate action by defining and promoting best practices in emissions reduction and net-zero targets in line with climate science. The SBTi also provides technical assistance and expert resources to companies who set science-based targets. A team of experts is also brought together to provide companies with independent assessment and validation of targets.

In March 2023, the SBTi has validated Triodos Bank’s near-term emission reduction targets to reach net zero by 2035.This applies to a large part of Triodos Bank’s portfolioandtranslated into several targets for the IEB portfolios. Firstly, into a reduction of GHG emissions by the pulp and paper companies in portfolio of 45% per tonne paper and board produced by 2035 from base year 2020. Secondly, into a reduction ofthe transport - vehicle manufacturing (PLDV)’s GHG emissions of 44% per vehicle km by 2035 from base year 2020. Lastly, into a SBTI coverage target ratio of 51% by net asset valueforboth ourlisted equity and bond portfolios and our private equity and debt portfolios by 2025 and 82% by 2035.

Late and unwilling movers

While the recent steep increase in SBTi adoption should be celebrated, we think that it is merely the result of a group of early movers, for whom it was relatively easy to set targets. These early movers are for example companies that can more easily and directly influence their scope 1-3 or that are intrinsically motivated to improve their practices. Now it’s the late movers’ turn and hopefully they will be followed by the unwilling movers (i.e. those companies who see setting such targets as a burden).These last two categories are much harder to convince. For that reason, we expect growth in the number of our portfolio companies setting science-based targets to flatten towards 2035 (see figure 2), diminishing the gap between 2023 and 2035. Notably at the end of 2023, 57% of our IEB portfolios by net asset value had set SBTi validated targets, while 10% was committed to doing so.

Figure 2: SBTi target setting: actual and expected (Source: Triodos)

Deep dive into GHG reduction strategies

In 2023, we also took a deep dive into the GHG reduction strategy of our Top 5 GHG emitters per fund as per year-end 2022 and tailored our analysis to their business models. The long-term goal of this project is not only to encourage companies to set SBTi targets but to also advise them on how to stay aligned with those targets as well as how to improve them. Deep-dive assessment comprises more advanced discussion points such as the consideration of updates from the SBTi (e.g FLAG SBTi), GHG bonus related incentives, the quality of a company’s offsetting program or the level of engagement of a company with third parties to better understand their ability to decrease their scope 3 emissions.

 

95% of the GHG emissions of the top 5 emitters in our portfolios, is the result of their scope 3 operations. This is no surprise, as the highest scope 1 and 2 emitters are often companies within the oil and gas industry, which we do not finance. Also no surprise is the fact that the largest emitters can be found in the Cyclical Consumer Goods industry, with companies such as Toyota, Continental and adidas that require relatively big amounts of energy to operate. Most of the highest emitters - 77% - have set SBTi targets. Notably, almost all our listed equity and bond portfolios scored better than their respective benchmark when it came to setting science-based targets (see figure 3). This is also the result of our investment strategy of building high-quality portfolios when it comes to sustainability practices.

Figure 3: SBTi target setting vs Benchmark (Source: Triodos)

Engagement highlights

Most companies are quite willing to discuss their GHG strategy, even if several indicated that they were still relatively early in the process of GHG measurement. This last argument is often used by non-EU companies, where sustainability reporting requirements are less strict and consumers as well as investors are less demanding on this topic.

Top five polluters per IEB fund
Acuity brandsEvonik
adidasHenkel
ASMLKerry
BridgestoneDSM
SABESPMeidensha
ContinentalProcter & Gamble
DanoneSNCF Reseau
Deutsche PostToyota Motor
DS SmithVestas Wind Systems
East Japan RailwayVodafone
EssityWolfspeed

There is an overlap in the top five emitters per fund.
Hence there are more than five and less than 40 names
in this overview (for a total of eight IEB portfolios).


The engagement examples below providea more concrete flavour of what has been achieved,as well as what we intend to achieve through our engagement. 

Engagement highlights

Wolfspeed– Good intentions

American semiconductor producer Wolfspeed is one of the top emitters in our portfolio. It is the market leader in the worldwide adoption of Silicon Carbide (SiC). This is a new type of highly efficient semiconductor that could potentially allow a significant improvement in energy management. However, the production of SiC semiconductors is energy intensive. As a pure SiC player, Wolfspeed therefore emits more GHG than other non-pure SiC players such as Rhom and ST Microelectronics, which also produce other components that are less energy intensive than SiC material. This difference in business model is important to consider when comparing those companies and engaging with them.

In 2022, the company publicly disclosed its scope 1-3 GHG emissions, while it was still in the process of finalising its scope 3 GHG inventory, which are 98% of total GHG. The company’s scope 1 and 2 targets – 50% reduction by 2030 and net zero by 2050 – are claimed to be in line with the 1.5˚ target of the Paris Climate Agreement.

Meeting with the company in March 2023, we suggested the adoption of SBTi targets. While considering doing so, the main obstacle for the company to adopt science-based targets was the fact that it was still finalising its scope 3 GHG inventory. We also highlighted our concerns regarding the company’s absolute emissions considering the Paris Agreement benchmark. In October 2023, we continued our engagement by raising our voice during the Annual General Meeting, by abstaining to vote on the executive compensation, thus indicating our wish to see executive bonuses linked to targets based on emission intensity reduction and energy efficiency improvement. As a large part of Wolfspeed’s GHG emissions comes from the company’s customers using its SiC units (scope 3), setting an intensity target would allow the company to grow while focusing on decreasing its total absolute GHG emissions. The hope is that soon new, more efficient devices would replace the old ones and reduce the company’s scope 3 to the point of alignment with the 1.5˚ target.

Overall, we appreciate the company’s responsiveness. Wolfspeed is considering setting SBTi targets and intends to include a GHG intensity target in the management compensation as of 2024. We will continue to monitor the company’s progress towards its targets and urge it to get its targets approved by the SBTi. We will also promote the use of GHG offsetting mechanisms of the highest quality (e.g: Goldstandard), where it is not possible to decrease emissions otherwise. Lastly, we will promote the benefits of engaging with other stakeholders to decrease the company’s scope 3 emissions.

DS Smith – Progress, but not enough

Another high emitter in our portfolio is DS Smith, producer of paper and cardboard packaging products. Most of the materials used in DS Smith’s packaging products are recycled. The company does its own recycling of old paper and cardboard products and uses the pulp to manufacture new paper and cardboard. However, this circular business model does not preclude substantial GHG emissions, as the manufacturing process of paper and cardboard requires a lot of energy. DS Smith does report on its scope 1-3 GHG emissions and has set a reduction target that has been validated by the SBTi as in line with the 1.5˚ trajectory. The target is to reduce scope 1, 2 and 3 GHG emissions by 46% by 2030, compared to 2019. DS Smith aims to reach net-zero emissions by 2050, however without outlining a concrete strategy to reach those targets. Besides that, the absolute emissions reduction so far since 2019 is not enough to reach the target. As of 2023, the company reached 15% reduction of total emissions compared to 2019.

Early 2023, we discussed these topics with the company. DS Smith explained that the main pillar of its reduction strategy is to switch from natural gas to waste-to-energy installations in its production process. This requires large investments, so the company is slowly upgrading its manufacturing facilities with these waste-to-energy installations, reducing its carbon footprint and further enhancing the circularity of its business model. Another pillar of its GHG emissions reduction strategy is reducing scope 3 emissions by engaging with suppliers to reduce their GHG emissions. The company targets to have all its strategic suppliers set their own science-based GHG emissions reduction targets by 2027.

We were pleased to hear these concrete strategies to reduce GHG emissions, but we still believe that the company’s GHG emissions should be reduced faster to reach the target.

Ongoing proactive approach

The starting date of our deep dive engagement on GHG management practices in 2023 is our baseline for progress measurement. Focusing on the top 5 emitters was a start and we are planning to increase the coverage in the coming years. Data from new external providers will allow us to better assess if companies have the capital to follow up on their promises. To increase our chances of success in having companies change their practices, we are also looking into the opportunity to partner with other asset managers. For now, we mainly do so by signing engagement initiatives such as the CDP science-based target campaign, which grew 13% last year to represent USD 32 trillion of assets under management, making this collaborative effort one of the largest investor engagement campaigns in the world. Also by voting we will try to move companies to align with the target of the Paris Climate Agreement. Lastly, we are continuously updating our engagement discussion points to ensure that we leverage to the maximum the latest findings on climate change.

All in all, things are moving in the right direction when it comes to engaging with listed companies on climate change. As mentioned, however, we believe that the most difficult part is still to come. We will therefore continue our proactive approach by promoting the best practices as well as by continuously looking for new opportunities to partner with others to further leverage the impact of our engagements and to help companies in reaching the Paris Climate Agreement goals. We believe that, in the end, a company with good GHG management practices will, apart from less harmful to the environment, also be financially more resilient.

Read more about our climate change engagement

Encouraging companies to set science-based emission targets