Why are businesses falling short on climate goals?

Despite efforts to improve, large corporations are still playing a major role in the rise in global temperatures. Here, Professor of Finance Marcin Kacperczyk explores why. 

At the beginning of 2024, the world reached a sad milestone, completing an entire year in which average global warming exceeded 1.5C. This was, of course, unwelcome news for the 196 nations and territories who pledged “to limit the temperature increase to 1.5C above pre-industrial levels” in the 2016 Paris Agreement. 

However, to pin the blame purely on states would ignore the parallel impact of business. According to the Carbon Majors Database, the majority of CO2 emissions since the Paris Agreement are directly linked to major corporations. Even if many of those are state-owned, we cannot disregard the key role businesses can play in slowing global temperature rises. 

This is not to say companies are not trying. There is a growing culture of environmental transparency and setting climate goals among businesses. So, why are we still failing to keep global warming under control?

Unrealistic targets

Our research explores some of the reasons behind this. We found that most corporate carbon pledges have a short horizon, with almost 50 per cent specifying a target just five years away, and only six per cent setting a target date of 2050, suggesting that many have limited scope to make a real impact. Additionally, 72 per cent of companies with pledges have been falling behind on those commitments, and will need to accelerate their reductions in order to meet their targets. 

One possible explanation for this is a lack of market penalties for failing to hit milestones. In 2023, for example, in the wake of soaring oil profits, BP announced it was cutting its 2030 target for reducing oil and gas production from 40 per cent to just 25 per cent, and actually saw its share price increase significantly after the announcement.

The majority of CO2 emissions since the Paris Agreement are directly linked to major corporations

However, this is just one example, and doesn’t explain the root cause. Another possible reason we explored is external energy supply shocks, such as those that arose from the Russian invasion of Ukraine. If this were the main cause, we would expect to see similar commitment failures across all companies, but this is not what we observed. 

This suggests that overpromising and unrealistic targets are the real problem for many businesses. Digging deeper into the data, we found that, while no particular industries had a significantly higher rate of failures, there was a link with the length of the carbon pledge, the overall level of emissions, and each company’s sales growth. 

Risk factors

Specifically, we first observed that companies making long-term pledges experience lower rates of failure, on average. This seems counterintuitive, as we might assume longer-term pledges face greater uncertainty. However, our findings suggest that gradual, long-term routes to decarbonisation are more realistic and practical to achieve.

We also found that companies with higher emissions levels are more likely to fail, and by bigger margins, than those starting from a less polluting position. Given that we did not observe a strong link with specific industries, this suggests it’s the already best-in-class companies that are most likely to commit and stick to ambitious decarbonisation goals.

Finally, we found companies with higher sales growth were more likely to fail to meet their own targets. This implies that an unexpected surge in sales – and the corresponding upscaling of production – can derail a decarbonisation pathway, and companies that set targets without accurately predicting their own future growth potential are more likely to fail to meet them.

A new approach to decarbonisation

However, none of these risk factors are inescapable. For a start, businesses can make their decarbonisation commitments more robust by stress-testing them before announcing them. This would mean analysing whether targets could still be met during adverse events, and determine what adjustments would need to be made to avoid falling behind.

Alternatively, companies could simply acknowledge – publicly – that they may fail to meet their commitments in certain circumstances, such as external price shocks, unexpected sales growth, or technological changes that reduce the potential of particular carbon reduction innovations. Being upfront about this would increase credibility, particularly if alternative plans were set out clearly.

Long-term routes to decarbonisation are more realistic and practical to achieve

In support of long-term targets, companies could include measurable interim targets. This reduces the risk of management teams leaving carbon commitments to their successors, particularly if their remuneration is partly tied to meeting the interim targets. Some companies, notably energy giant Enel, have taken financial incentivisation even further, releasing sustainability-linked bonds that pay out more if the company fails to meet a specified decarbonisation target. 

Whatever tactics companies choose, it’s clear a new approach is needed. Our research suggests that we have seen, in the years since the Paris Agreement, the birth of the first generation of commitments, with an emphasis more on signalling than detailed carbon reduction plans. The next generation of commitments must be more robust, impactful and – crucially – achievable, in order to really slow the rate of global warming.

This article draws on findings from "Behind Schedule: The Corporate Effort to Fulfill Climate Obligations", by Joseph E. Aldy (Harvard University), Patrick Bolton (Imperial College London), Marcin Kacperczyk (Imperial College London) and Zachery M. Halem (Director of the Climate Center at Lazard).