Environmentally sound and financially rewarding? Key findings from an exploratory study on the Science Based Targets Initiative (SBTi)

By Milena Bar, Ottilia Henningsson, & Dr. Kristjan Jespersen

◦ 5 min read 

The Science-Based Targets initiative aligns firms’ emission reduction targets with a net-zero emissions pathway. Firm commitment yields significant abnormal returns which are larger for firms committed to larger emission reductions and for high-emitting firms. 

The IPCC’s sixth assessment established a code red for humanity and provided mounting evidence of widespread, rapid, and intensifying climate change. The Paris Agreement, ratified by over 190 states and non-state actors in 2015, formally stipulated the goals of limiting global warming to ideally 1.5°C and at a minimum well below 2°C with the aim of reducing the most catastrophic damages related to climate change onto the natural environment, human health and global financial market. The need for climate action is urgent and requires engagement from governments, individuals as well as corporate and investor participation.

Combatting climate change requires voluntary private sector engagement

Incentivizing corporations and investors to act voluntarily on climate change is critical to redirect private capital towards environmentally responsible business practices. The Science Based Targets initiative (SBTi) is becoming the global standard for firms seeking to set emission reduction targets aligned with the required global decarbonization targets established in the Paris Agreement. By encouraging voluntary corporate carbon emission reductions, the SBTi is a critical tool to reduce the private sector’s reliance on fossil fuels. 

2021 record year for new approved targets and committing firms for SBTi

Since its founding, just seven years ago, SBTi has experienced exponential growth in the number of committing firms and has mobilized firms representing more than a third of global market capitalization to reduce their carbon emissions. In 2021 the initiative took steps to increase the ambition level of firms’ emission reduction targets. When first established, firms could commit to reduce their emissions either aligned with the reduction targets of 1.5°C or 2°C. However, from summer 2022, the initiative will only be accepting the more ambitious emission reduction target, as set out in their campaign Business Ambition for 1.5°C.

Since company engagement ultimately comes down to whether committing to SBTi will drive wealth for shareholders, understanding the stock market response to firm commitment to the SBTi is essential not only for businesses looking to commit, but also for investors. To justify the integration of a climate credential such as the SBTi in investment management, it needs to be able to provide excess returns. To understand the stock market reaction to firms’ announcement of SBTi commitment, we conducted a short-horizon event study on a portfolio of 1.535 firms.

Firm commitment to the Science Based Targets initiative aligns environmentally sound practices with financial viability 

Firm commitment to the SBTi indeed yields a positive announcement abnormal return and thus speaks to the credibility of SBTi in constituting a credible signal of firm commitment to sustainable business practices. Even more encouraging is the finding that firms committed to the 1.5°C target experienced substantially higher returns, indicating a stronger positive market reaction when exhibiting a higher cost of commitment and higher target ambition level. The market evidently differentiates between ambition levels by rewarding businesses that are pledging themselves to more demanding emission reductions and a more climate-friendly business strategy. These findings are particularly relevant in light of the SBTi making the more stringent emission reduction target the new standard for all firms via their campaign Business Ambition for 1.5°C and may encourage more firms to increase their efforts in reducing their greenhouse gas emissions.

Stock price reaction in response to commitment to the Science Based Target initiative

In turn, high carbon emitting firms, proxied here by firms identified by the CA100+ list, reaped the largest reward in their stock price following commitment. This finding further confirms the market’s more sensitive reaction to costlier commitments, but also creates concern about whether the SBTi may have to rethink a recent strategic decision. The SBTi announced that they will not be accepting targets set by firms operating in the Oil and Gas industry, thus abandoning the industry specific methodology for fossil fuel firms which had been in development for several years. Fossil fuel firms have a key role to play in successfully achieving the goals of the Paris Agreement, thus begging the question of whether the SBTi is not missing out on covering an industry critical to combatting climate change and a sector of firms who are highly rewarded by the market for committing to reduce their emissions. 

As climate disasters become more prevalent and more severe, firms who fail to transition to a low, or zero, carbon business model can be expected to become more vulnerable in the long run. To expand the analysis, we further tested the performance of a portfolio strategy screened for firms committed to the SBTi. Despite the underperformance of an SBTi screened portfolio against a portfolio consisting of only non-committed firms in the medium-term, there is reason to believe that a portfolio with SBTi committed firms may provide higher returns in the future. Given that SBTi commitment represents a commitment to aligning the firm’s operations with the net-zero emissions pathway, it can be perceived as a safer bet in the long run. Moreover, portfolios consisting of SBTi firms were shown to be characterized by lower volatility. The objective of investors is shifting to increasingly sustainable and impact focused investment profiles, hence portfolio and asset managers may use SBTi commitment as a filter in security selection to achieve their client’s demand.

Looking Ahead

Financial institutions have a key role to play in driving systematic economic transformation towards a global net-zero carbon emissions economy in their power to lend and invest. As evidenced, firm commitment, ambition level and cost of commitment are reflected in the stock’s pricing mechanism, making the business case for the firm to set ambitious targets for decarbonization, and providing rationale for investors to in the short run utilize the market’s reaction to firm commitment in investment processes and strategies. 


About the Authors

Milena Bär is a recent graduate in MSc Applied Economics and Finance and is working as a student researcher in ESG and Sustainable Investments at Copenhagen Business School. Her research projects are mainly within the field of ESG metrics and regulation, with a focus on the investor’s side.

Ottilia Henningsson recently graduated with a MSc in Applied Economics and Finance from Copenhagen Business School with a keen interest in the transition towards a more sustainable financial industry. 

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.


Photo by Matthias Heyde on Unsplash

Are sustainable and healthy diets always compatible? Needs for an emic-oriented cultural research on sustainable consumption

By Fumiko Kano Glückstad

◦ 6 min read 

It is widely acknowledged that a plant-based diet is healthier than an animal-based diet (Willett, et al. 2019). However, a group of Japanese researchers recently published a thought-provoking article demonstrating that a lower diet-related Greenhouse gas emission (GHGE) has generally resulted in an inadequate nutrient intake among Japanese adults (Sugimoto et al. 2020).

Their results seem to support the fact that the Japanese Government has excluded any dietary-related initiatives from its long-term national strategies concerning the targeted 80% reduction of greenhouse gas emissions by 2050. In other words, Japanese opinion leaders seem to challenge the generally accepted viewpoint of a direct positive correlation between a sustainable diet and a healthy diet, contradicting widely accepted European studies and initiatives (e.g. Sjörs et al. 2017). This apparent controversial observation motivated me to look into the historical development of meat consumption on a global scale. Most importantly, the recently published guiding principles by the Food and Agriculture Organization of the United Nations (FAO) and World Health Organization (WHO) in 2019 state that “Sustainable Healthy Diets” are a trade-off between the two dimensions: sustainability and healthiness of diets. Thus, countries should decide on such trade-offs in consideration with their situation and goals (FAO & WHO, 2019). 

The following figure indicates such a trade-off situation for various geographical regions and it clearly shows that the meat consumption in Western countries is obviously higher than the rest of the world such as compared to e.g., Africa or Asia, although a substantial increase of meat consumption is observed in both China and Japan.

In particular, the main increases observed in China and Japan seem to be well-synchronized with the periods of their respective economic developments that simultaneously triggered their modernization (Westernization) process in their markets. However, the curves of Japanese and Chinese meat consumption also show a noticeable difference. Whereas the meat consumption in China has steeply increased since the 1980es, Japan seems to moderate its increase from the early 1990es and ahead, which is most likely explained by their respective economic developments. However, in this blog, I want to supplement these observations with some personal insights on what has happened in Japan during this period through my work experiences in the related industry.

Meat consumption in this blog refers to the average supply of meat across the population shown in this figure. Food supply is defined as food accessible for human consumption meaning the food remaining for human use after deduction of all non-food utilizations. Source: Our World in Data https://ourworldindata.org/grapher/meat-supply-per-person

During the Japanese bubble economy in the 1980es to the early 1990es, the Japanese middle class had increasingly wider opportunities to be exposed to the Western food culture due to their Westernization. This somewhat alarmed key Japanese health professionals, nutritionists, food experts and industries who considered a ”Western lifestyle and food culture” as a source of lifestyle-related chronic diseases e.g., diabetes 2 and cardiovascular issues, which would gradually impact Japanese consumers.

This subsequently triggered a countless number of initiatives aimed to nudge a wide range of the population towards a healthier diet. The initiatives were eventually formalized as a Health Promotion Act in 2002 and the Basic Law on “Shokuiku (food and nutrition education)” in 2005 by the Japanese government (MAFF, 2019).

Source: Ministry of Agriculture Forestry and Fisheries. 2019. “A Guide to Shokuiku.” https://www.maff.go.jp/j/syokuiku/guide/pdf/00_en_guide.pdf

The Shokuiku act has since become a comprehensive program targeting everyone from school children to the elderly, and its initiatives have involved a broad range of Japanese stakeholders, not only the central and local governments, health professionals and nutritionists but also food and restaurant businesses and their consumers.

The Shokuiku program has promoted the nutritional education from a holistic viewpoint and emphasized the importance of enjoying healthy meals from societal and cultural perspectives through various sensory food experiences. As a consumer researcher in the 1990es in one of Japan’s largest high-tech companies producing various kitchen appliances, I also personally participated in a variety of initiatives involving consumer organizations, health professionals, nutritionists and food and restaurant businesses to nudge consumers towards a healthy diet at that time. 

In a European context, nudging consumers towards a sustainable and healthy diet usually implies the replacement of an animal-based diet with a plant-based diet with emphasis on ingredients. One major difference to the Japanese nudging initiatives is that the Shokuiku promotion has encouraged consumers to learn how to select “nutritionally balanced meals” in their daily life while enjoying variations in sensory food experiences. Consumers have many ways to achieve this by following the “Japanese food guide spinning top” that can be easily followed by a wide range of population groups, i.e. from school children to the elderly (see the below picture). The maintenance of a moderate meat consumption level observed from the Japanese curve in the above figure might be partially attributed to such ‘enjoyable’ Shokuiku initiatives (see Yoneda, 2019).

Japan has been able to moderate its overall meat consumption without specific promotions of plant-based diets also thanks to the traditional Japanese food culture that is originally rooted in a plant-rich diet. Thus, in a Japanese context, it is perceived possible to achieve a well-balanced diet while simultaneously enjoying variations in sensory food experiences, in other words, nudging a healthy diet can be perceived as an enjoyable experience. Interestingly, Kanemoto et al. (2019) recently reported that meat consumption only weakly explains the difference between high- and low food carbon footprints (FCF) among 60,000 Japanese households. This study ponders that Japanese should (also) consider restricting their consumption in other areas than meat consumption with a higher estimated FCF such as restaurant foods, confectionary and alcohol. 

Source: Ministry of Agriculture Forestry and Fisheries. 2019. “A Guide to Shokuiku.” https://www.maff.go.jp/j/syokuiku/guide/pdf/00_en_guide.pdf

These observed trends indicate the importance of fully understanding social, cultural and dietary contexts in various countries and regions when researching on sustainable food consumption because food is inherently deeply rooted in the specific cultures. In other words, sustainable consumption studies should ideally shed more light on an emic approach addressing a specific sample of that region and discuss adaptability of such studies to countries outside of the specific region with due respect of the embedded cultural contexts. 


About the Author:

Fumiko Kano Glückstad is Associate Professor of Cross-Cultural Cognition at the Copenhagen Business School. She works in the area of cross-cultural psychology and her recent project “iBeauty” funded by the third largest Japanese cosmetic company investigates associations between personal values, beauty and well-being in cross-cultural contexts. She previously worked as a consumer researcher and product concept designer of kitchen appliances at Panasonic Corporation, one of the largest Japanese electronics industry enterprises.

Is Pollution the Only Road to Business Prosperity?

Sustainable Visioning as a driver of Corporate Transformation

By Heather Louise Madsen

◦ 4 min read ◦

CO2 reduction is a hot topic for almost every company today. Here the focus is not just on the CO2 generated by the company itself, but also on the carbon emitted along its value chain. The problem is that changing processes, or even products and services, to make them more environmentally friendly can be a daunting and costly task. This can leave CEOs and other top managers wondering what the real cost and impact of CO2 reduction is, where to start, and whether it is even possible to create a prosperous business without generating pollution.

In answer to many of these tough questions, an increasing number of companies are succeeding in reducing carbon and completely transforming their businesses into sustainable and profitable powerhouses, using a combination of strategic vision and sustainability orientation.

A new CEO for a Company Topping the Sustainability Ranking Charts

January 1st, 2021 was Mads Nipper’s first day as CEO of the Sustainable Energy Giant Ørsted. And before the end of his first month in this new position, Ørsted ranked the most sustainable energy company for the third year in a row, and the second most sustainable company in the world after Schneider Electric. This raises the question, what is Nipper’s position on sustainability,  and are these views important for his role as CEO of Ørsted?  

In 2016, as the then CEO of Grundfos, Mads Nipper gave a presentation for the Global Compact Leaders Summit in New York where he stated: “I represent an SDG 6 and 13 company, who also happens to be the biggest water pump company in the world.” The UN Sustainable Development Goals (SDGs), representing a global platform and common language for addressing 17 core sustainability issues and their impact, also figure prominently in Ørsted’s corporate language. From Annual Reports to investor letters, Ørsted identifies SDG 7 (energy) and SDG 13 (climate action) as their primary impact areas. This indicates that there may be some very fundamental alignment between Nipper’s visionary statement and the mindset of his predecessors at Ørsted.

What led Ørsted to up-end their core business and undertake a sustainable transformation?

In 2001, Ørsted (then DONG Energy) hired CEO Anders Eldrup, just as Denmark was going through a liberalization of the electricity and gas sectors, which was putting extreme financial pressure on the company. Eldrup was the former Danish Secretary of State, and as such had extensive experience with both financial and political mechanisms. Seeing an opportunity to take advantage of an emerging political demand for climate action and policies to accelerate the development of offshore wind, Eldrup began increasingly to focus innovation resources on offshore wind and renewable energy, while the primary business of the company remained oil and gas. As renewable energy subsidy schemes increased in Denmark and the EU in the years that followed, Eldrup formulated a new company strategy that was released in 2009 called 85/15: “to transform our company from a situation of 15% renewable energy and 85% of fossil-fuel based energy to the opposite”. Jakob Askou Bøss, Head of Strategy and Communication at Ørsted, identified the strategic analysis of CEO Anders Eldrup as “The driving force behind formulating the new vision of the company,“ referring to the 85/15 objectives.

Despite the sacrifices that would need to be made as the core competencies of the company would have to be completely re-designed and transformed to focus on not-yet price competitive technology, the decision had been made. And this strategy was then further anchored to sustainability with Ørsted’s vision: “creating a world that runs entirely on green energy”. This vision made explicit the desire to reach outside of the organization with their “green” aspirations, connecting not only to ideals of wealth and prosperity, but also to planetary concerns.

These ‘green aspirations’ were then followed up by Eldrup’s successor Henrik Poulsen, who became Ørsted’s CEO in 2012. As stated by Poulsen:

“In the world of energy, the fundamental challenge we face is to transform our energy systems so that more and more of the energy we generate comes from renewable sources such as wind power, biomass and solar energy.”

Ørsted, Our sustainability reports, 2012, DONG Energy’s GRI Reporting 2012  

Poulsen then backed these aspirations by setting very specific targets for the company including “quadrupling our offshore wind capacity, from 1.7 GW in 2012 to 6.5 GW in 2020“. By 2017 Ørsted had completely divested all upstream oil and gas. This was also the year that newly built offshore wind became cheaper than black energy for the first time in history. By the time Ørsted reached 2020, the company was ranked number 1 of more than 7500 international, billion-dollar companies in the Corporate Knights’ 2020 index of the Global 100 Most Sustainable Corporations in the World, making Ørsted the most sustainable energy company in the Global 100 index. As demonstrated by Ørsted, strategic vision and sustainability orientation were used as drivers for innovation, transformation  and growing the company’s sustainable business and investment portfolio. But how can Ørsted’s story help other businesses? The answer lies in sustainable visioning. 

How can sustainable visioning help businesses onto a path of prosperity AND sustainability? 

Sustainable Visioning is a new term defining the management process of combining a strong strategic vision with the acknowledgement of the necessity of committing more profoundly to people, planet and prosperity concerns.

Madsen & Ulhøi, 2021

The following are guiding principals of sustainable visioning that Ørsted can be seen as applying, and which may be able to help other companies onto a similar path. First, in order for businesses to achieve sustainable visioning, they need to practice proactive, extroverted and visionary, rather than introverted approaches to sustainability. When working on sustainable innovations, it can also be wise to engage the Tripple Helix model including industry, universities and government working together. Innovation can also be usefully extended beyond products and services, to include business model innovation. This can help to navigate to a desirable sustainable future through direct planning, decisions, actions and behavior in all aspects of the business. And finally, taking a clear long-term orientation is also seen as important for sustainable visioning to be successful. 

In practice, following these key guiding principals of sustainable visioning may make it more likely to effectively link strategic visioning to long-term sustainability objectives, providing the necessary support for corporate growth and innovation needed to ensure a successful transformation.


Further Reading

Madsen, H.L., Ulhøi, J.P. 2021. Sustainable visioning: Re-framing strategic vision to enable a sustainable corporate transformation. J. Clean. Prod. 228.


About the Author

Heather Louise Madsen, Ph.D. is the PRME Strategy Manager at Copenhagen Business School, and has over ten years of professional experience working with sustainability. As a sustainability expert, she has worked with the organizational implementation of the UN SDGs in the private sector, and has extensive experience working with CSR, the UN Global Compact, carbon footprint reporting and social, environmental and economic sustainability. Heather is dedicated to topics of innovation, strategy, business transformation, organizational learning, business model innovation, renewable energy and sustainability.