Why investors love SBTi and companies less so?
It is undeniable that third-party assessments are crucial in investments. According to the stories I heard, back 20 years ago, while working as a corporate analyst at Moody’s Investors Service, John Moody’s invented the AAA, AA, A to CCC scale in early 20th century, sold it to Standard & Poor’s and then created a new one (Aaa, Baa1, Ba1, etc.).
I can’t here guarantee that these are accurate facts. However, this scale is a universal tool for comparing and assessing credit quality. As an issuer, especially in public capital markets, having one, two, or sometimes three credit ratings from different agencies is often indispensable.
Assessing Climate Strategies and Instruments
Similar to credit ratings, climate assessment is vital for investors managing downside risks (just look at the auto sector over the last three years) or those with a mandate to generate impact. According to Lipper, there are about $3 trillion worth of assets globally with sustainability objectives, with climate being a major driver. This figure underestimates the overall dedicated assets as it doesn’t include separate accounts and dedicated mandates, which are significant growth drivers of climate-related assets under management (AuMs). The bottom-line is that the investor base interested in climate investment is so large that it’s difficult for any CFO to ignore.
The use of SBTi (Science-based target initiative)
At the corporate level, SBTi validation has been highly regarded and is considered the AAA assessment or sometimes called “the gold standard”.
Why is SBTi very popular among investors?
- It partially solves their initial due diligence process as it regards to climate.
- It helps define a bespoke investment universe.
- It shows alignment to the most stringent benchmark, 1.5°C.
- It is free and public.
- It is a public commitment from the company
Therefore, it became an important accreditation for companies aiming to be part of the climate investment universe and be investable for those investors.
However, why companies like it less so?
- It is stringent.
- It is generally difficult for companies to commit beyond a business or budget cycle.
- It is a public commitment, making it hard to withdraw from.
- There is no methodology for every sector.
- It is binary (no shades), which might not consider the idiosyncrasies of companies.
So far, investors have been adamant that their preferred validation method is SBTi. However, we would highlight several limitations:
- Not all sectors have their own methodologies.
- The economy is not moving towards a 1.5°C trajectory. This means that it is not possible for every company to comply.
Therefore, the need for alternatives that can be both credible and helpful in assessing climate strategies across different trajectories is important. Essentially, we need to be able to assess the “A, BBB, BB, and Bs.”
In our next blog, we will delve deeper into the emerging alternatives.
I look forward to your feedback,
Fabrizio
