The impact of science-based targets on GHG emissions and financial performance

Abstract

In line with the Paris Agreement, the science-based targets initiative (SBTi) was proposed and established in 2015. Since then, there are an increasing number of companies that have set up science-based targets (SBTs) and had the targets certified by the SBTi board. Setting up SBTs is an emerging practice which is expected to have a significant impact on the transition towards a net-zero future. However, there is a scarcity of literature on the topic, which seems to have largely ignored the effectiveness of SBTs. As a result, we have very limited knowledge on the impact of SBTs on ecologic and financial outcomes. This gap motivates us to investigate the impact of SBTs on firms' greenhouse gas (GHG) emissions and financial performance. A difference-in-differences (DID) model is used in this study, which shows that firms setting SBTs reduce their absolute GHG emissions by about 5% and their carbon intensity by 8-10%. This result is not found for firms that did not set SBTs. In the meantime, many people are concerned that decarbonisation might reduce profitability. To address this concern, we test and find that firms setting SBTs insignificantly change their gross margins. Our findings state that firms joining the SBTi achieve higher GHG emission reduction without deteriorating financial performance. Our paper offers an important insight, and the evidence is not documented in prior literature.

Date of Award	2022
Original language	English