Are businesses on track to reach net zero?

Many companies have become more vocal in communicating about issues such as diversity and net zero, but fewer are actually implementing policies to improve their environmental and social impact

For most businesses, action on sustainability has become non-negotiable. Listed companies in the UK and businesses of a certain size are required to produce ESG-related reports, but even companies that sit outside of the legal requirements are often keen to shout about their ESG credentials. 

Communicating ESG credentials is often presented as something businesses do to appeal to consumers. But it is more often investors’ expectation of sustainability that motivates businesses to advertise their ESG credentials. For a variety of reasons – readiness for future regulation, greater consumer appeal, conscience – investors want to know that the companies they give money to care about ESG and are adopting sustainable practices. Businesses, therefore, have an incentive to outwardly communicate their efforts on ESG.

But, according to research by Fidelity, much of this appears to be greenwashing. ESG analysts at investment managers across the globe agree that while most companies have become increasingly vocal about ESG, fewer are actually implementing policies to improve their environmental or social impact. Net-zero targets, as a result, are unlikely to be reached.

This is a global issues. Companies across every region maintained their emphasis on ESG between 2022 and 2023, with companies in Japan scoring the highest, with 100% of companies maintaining their emphasis on ESG, according to investment analysts asked about their clients. More than nine in 10 companies in North America, Europe, China and the rest of APAC have maintained their emphasis on ESG. The only regions in which companies have significantly decreased their emphasis on ESG over this period are Latin America, the Middle East and Africa.

This is good news on the surface – despite ongoing macroeconomic hardships, the vast majority of firms are still concerned about ESG. But the situation is slightly more nuanced than it may first appear. Maintaining is not the same as progressing. It’s encouraging that firms have not ditched their ESG efforts en masse when faced with economic challenges, but we should still question how much real progress is being made.

Take for instance a company that has an ESG policy in place, but still is not doing quite enough to hit ESG targets. That company may have maintained their emphasis on ESG from 2022 to 2023, but that means that they’re still not doing enough. This is certainly not the situation for every company that has ‘maintained’ its emphasis on ESG, according to the data. But, unfortunately, this does appear to be the situation at far too many companies.

Take Japanese companies, for instance: although investors acknowledge that all their clients in Japan have maintained their emphasis on ESG from 2022 to 2023, investors’ confidence that those companies can reach carbon neutrality by 2030 actually declined over the same period.

Globally, investors’ confidence in their clients’ ability to become carbon neutral by 2030 declined from 2021 to 2023. Investors were most ambitious about European companies – in 2021, 30% believed that those companies could reach carbon neutrality by 2030, but that number dropped to just 24% in 2023.

One major problem is that companies are not spending enough on their efforts to reach net zero. Globally, less than a quarter of companies are investing enough capex to achieve net zero by 2030, according to analysts. Less than half of companies are spending enough to reach net zero by 2040 and fewer than three in five are on target for 2050.

Investment analysts are most confident about companies in Europe and Japan. But even in these regions, more than a third of businesses are not currently spending enough on sustainability to reach net zero by 2050.

There is also a perception that firms are prioritising the communication of ESG goals over the implementation of ESG initiatives. Investors report that only half of companies worldwide have progressed in their implementation of ESG initiatives, but nearly three in five have increased their external communication around ESG initiatives.

There is a notable gap between businesses’ communication of ESG initiatives and their implementation of ESG policies in every region with the exception of Japan. The gap is widest in China, where 48% of companies have upped the communication of their ESG efforts but only 37% are following up with greater implementation of ESG initiatives, according to analysts.

The gap between ESG communication and implementation also exists across most industries. Businesses are promoting better sustainability credentials than their actions warrant in every industry surveyed, with the exceptions of utilities, real estate and IT. Utilities is the only industry in which companies in aggregate are promoting sustainability credentials that broadly match their actions.

Perhaps unsurprisingly, the most significant gap is in the energy industry, where 84% of companies worldwide are promoting moderately or significantly better ESG credentials than their actions justify.