4.2 Assigning explanatory factors to ambition levels
As shown in Table 2, we have identified ten explanatory factors that can be classified into two primary groups. The first main category, labeled initiating factors, pertains to the driving forces behind a company’s decision to adopt climate-target-setting strategies in the first place. We have detected three initiating factors, including leadership engagement, market-related pressures, and non-market stakeholder influence (such as guidance but also pressure from governments and NGOs). The second main category, referred to as enabling factors, encompasses the factors that emerged over time to facilitate implementation of these targets. Seven enabling factors have been identified, including continual management support, employee involvement, previous experience, climate leadership, cost strategy, participation in climate initiatives (e.g., SBTi), and collaboration with external stakeholders.
An analysis in the second stage was conducted to detect the various explanatory factors in the six aspiration levels, especially to determine the degree to which these factors were present. The following text will highlight the explanatory factors in each aspiration level (A–F).
4.2.1 Level A
Companies with the highest climate target ambition level (A) aim for greater reductions than stipulated by the Paris Agreement and also aim to achieve net zero before 2050. In order to do this, they must achieve a higher than average annual GHG reduction rate (i.e., > 4.2% per annum). Leadership engagement in level A companies is highly present, which is regarded as the key initiating factor for setting climate targets. Surprisingly, both market-related pressures and non-market stakeholder influence were only considered moderately present for companies at this ambition level. Rather, they reported a lack of interest and concern from investors regarding climate issues, although the companies send strong signals to their investor base about their climate-related targets and programs.
Continuous management support is highly prominent among the enabling factors, and it continues throughout the full development of climate targets. Furthermore, all organizations state that employee involvement is greatly present, which enables a company to aim for highly ambitious climate targets. Companies offer a wide range of programs as part of their workforce engagement, particularly to improve environmental awareness and create a sense of urgency to act on decarbonization. Furthermore, these companies provide incentive packages for their staff, as demonstrated by the following quote:
"One of them related to [company's name] is the bonus compensation – since 2009, we have introduced a KPI connected to climate change. Which means that we have at least an awareness that the bonus compensation for the entire company depends upon the performance of the carbon emissions." (BR1)
Furthermore, these companies have been striving to be climate leaders in their respective industries for over twenty years now, as expressed by one company official:
“We're always striving to be a leader. That's why I said 2035, not 2050. We're striving to push the bar higher, but also keep it low enough so that people will join our efforts as well." (HK2)
The companies at this level participate in climate initiatives to varying degrees. For example, three of the five companies at this level currently respond to the annual CDP questionnaire, although the other two companies have done so in the past. Nevertheless, the influence of such climate initiatives was considered only moderately present throughout our interviews. In contrast, stakeholder collaborations are highly prominent, going beyond economic interest exclusively and focusing on socio-environmental and climate advocacy projects. Through these stakeholder collaborations, the companies seek to deliver new technologies and solutions:
“…we collaborated with our yarn supplier to do a small pilot project that showed them a different [carbon-reducing] production method. By doing so, we are able to stand behind our commitment of reducing Scope 3 emissions." (US1)
Cost strategies related to target setting are considered to be only moderately present, and they are associated mostly with the parallel activities of carbon pricing and carbon credits. As one interviewee at this level explained, the cost of offsetting emissions tends to become too expensive over time. Therefore, reducing GHG emissions internally under a company’s own control is the best way to avoid unnecessary future costs of carbon compensation.
4.2.2 Level B
Companies in the second highest ambition level (B) have absolute GHG reduction targets in multiple scopes that are also claimed as net zero in both the near term and long term. All three initiating factors – leadership engagement, market-related pressures, and non-market stakeholder influence – are regarded as being highly present.
"The influence of environmental NGOs is huge. Mainly when it comes to reputation… As long as we continue to use coal, and investment also continues, we receive more and more bashing, and the company reputation goes down." (JP4)
As for enabling factors, continual top management support is highly present in the level B companies, providing a strong mission to mitigate climate change, as indicated by one manager:
“We set climate-related goals based on the [company’s] philosophy, and those goals are included as part of that philosophy. The philosophy embraces the integration of sustainability into our business. The fact that the goals are incorporated in the philosophy is one of the supporting factors to implement climate-related strategies.” (JP6)
The firms at level B have been implementing their carbon strategies for over a decade, and their environmental awareness began several decades ago. Furthermore, these companies have set their climate targets through the SBTi and have responded to the CDP questionnaire for several years. Cost reduction is a supporting factor and is associated with energy saving, thus it is considered highly present in these companies. Furthermore, participation in climate initiatives is extremely important in all companies, which most of them boast having achieved an “A” CDP score, and the participation in the SBTi triggers a high positive impact on these businesses:
"I think a large one is that figures for the contribution can, of course be externally assessed, with getting a so-called objective assessment, and one would be, that for the first time last year, the company was able to get on the CDP climate A list. The previous year was A minus, but having such an external organization assess and rank our activities is, in a sense, one motivation." (JP2)
Employee involvement is considered moderately present in level B firms. Although it is not at the highest level, there are various activities offered to get employees involved, including inter-departmental collaboration on climate targets. Climate leadership was also identified as being moderately present within companies in level B. Top-level management emphasizes the importance of cooperation. Thus, the firms carry out different types of partnerships with several stakeholder groups.
“Our president thinks that we can obtain a greater ability to resolve environmental issues by cooperating with other firms in the industry or with firms across industries instead of tackling these issues alone as an individual firm. He thinks whenever we work on environmental issues, we should collaborate with firms across industries as much as possible." (JP6)
4.2.3 Level C
Companies in level C cover absolute climate targets in both the near term and the long term, and while these targets are aligned with the 1.5° C average per annum GHG reduction of 4.2%, they are not net-zero targets. According to the results, both market-related pressures and non-market stakeholder influences are greatly present in these companies, especially from investors, regulatory bodies, governments, and NGOs. Furthermore, leadership engagement plays a central role and is highly present in target setting, as managers genuinely advocate for climate issues to be integrated into the business and show great passion for facilitating the implementation and the success of the firms’ climate actions.
This strong mission motivates two enabling factors, continual top management support and employee involvement, but both are perceived to be moderately present in level C companies, as exemplified by the following quote:
“And to a certain extent, employees in this organization have been advocates for emissions reductions but mostly compliance. I think, from the structure it's a little bit of both, I think, of "This is your job." (US4)
Participation in climate initiatives is perceived as having a high presence for companies at this ambition level. Adopting guidelines and achieving high rankings from external climate organizations, like CDP and the SBTi, provides an additional motivation for these companies to set more ambitious targets and continually improve their carbon performance, as the following quote demonstrates:
“It appeared in the news release that our firm made the A list (CDP), and the employees share the achievement on the intranet. So I believe it positively impacts them. It’s motivating, making them think like “Now that we made the A list, we don’t want to go down in the ratings, so let’s keep up and do our best.” (JP1)
Collaboration with external stakeholders appears to be moderately present, encompassing several stakeholder groups, including suppliers, customers, and NGOs. Additionally, the concept of shared advocacy provides additional credibility and engages the public to join forces in efforts towards decarbonization. Although climate leadership was not detected in any companies at this ambition level, cost strategy was highlighted as a strong enabling factor, linking money saved through energy efficiency projects to further investment in onsite renewable energy schemes, as explained by one manager:
"We're doing a ton of on-site solar in India right now where it is VERY cost-effective, and the carbon benefits are big. We're just placing high-carbon grid power, and the panels are relatively cost-effective there." (US4)
4.2.4 Level D
Companies in level D present a mid-level of ambition for their climate targets, including setting absolute reduction targets in multiple scopes, specifically Scopes 1 and 2. However, these appear to be below average reduction rates (i.e., they commit to a 2.5% reduction rate as stipulated by the well below 2° C target; SBTi 2021). Leadership engagement has a moderate presence at this level, as companies pursue comprehensive decarbonization plans. The companies do perceive a high presence of external pressure from market-related actors, especially investors, banks, and other financial institutions, which are also observed to be strong initiating factors for undertaking more ambitious target setting:
"So, we do see that those benefits from banks and rating agencies are a driving force that allows us to consider bolder targets, because we're a lot of times cost conscious, and often it costs more than we’ve considered. But if there's benefits, such as a subsidy or a faster track, then I guess people will consider it." (HK1)
Furthermore, governments and NGOs appear to have a strong presence in influencing these companies’ target setting. For example, the encompassing Nationally Determined Contributions (NDCs) established by the Japanese (i.e., net zero by 2050) and German governments (e.g., GHG neutral by 2045) have filtered down via legislation to the companies’ reduction goals, as one German company representative observed:
“So, since there is also a lot of foreseeable regulation coming, or has come in the last few years, such information is also brought [to the company] regarding climate or sustainability issues in general. I would definitely include legislation in this. In other words, the issues that we have just mentioned play a role in our climate strategy.” (DE4)
The companies at ambition level D perceive continual management support to be moderately present as an enabling factor. For instance, the CEO of one company was seen as being somewhat active in promoting decarbonization through awards:
“We have the president of the region providing those awards [for sustainability achievements]. So, that was an additional recognition also because he was visiting the different facilities, and they say: "Okay, you achieved this award." They've made nice photos, and everybody was really, really happy to receive their own award.” (US2)
Furthermore, employee involvement is moderately present in all companies at this level, evidenced by education programs, codes of conduct, and other involvement schemes. However, most of these schemes were discussed but have not yet been implemented, because it seems that employees were not motivated to start bottom-up initiatives without proper incentivizing, as one manager stated:
"The involvement is low up till now. It’s one of our targets to raise the discussion internally. But of course, the employees need to see that the company is really engaged in that." (BR4)
Other enabling factors, including previous experience, climate leadership, and cost strategy are moderately present. For example, the companies in level D have experience with environmental management, including emission reduction schemes, for about five to seven years. The cost strategy is directly associated with key performance indicators, such as energy efficiency, which have been in place for the same amount of time.
Both participation in climate organizations and collaboration with external stakeholders have only a low presence in level D companies, appearing to play little to no role with regard to target setting. Collaborations with various external stakeholders were discussed during the interviews, yet they were presented as planned or early-stage projects, as one manager explains:
"I won't say that [collaboration] is fruitful yet because it's in progress. So, we are working on that and we don't know the result of that. But yeah, we are partnering with a customer in a specific supply chain, in the oil seed supply chain TODAY to understand…to have a long-term partnership, to reduce GHG emissions." (US2)
4.2.5 Level E
The sample companies in level E have formulated climate targets, although these remain associated with relative measures (i.e., intensity targets), and none of them are committed to the SBTi. From the initiating factors, leadership engagement is hardly present in this group of companies. Rather, market-related pressures, especially from investors, appear as the key explanatory factor for this group of companies. More specifically, financial institutions seem to drive companies to set these types of targets, as one company representative stated:
"Three years ago, we launched the green bond. And inside it actually funded like four or five projects, all of them are doing good for climate change, for carbon reduction. And recently, I understand that we are doing other kinds of financial movements. That will also require us to set more aggressive carbon reduction targets in order to discuss with the bank about how they do their loan terms." (HK4)
Furthermore, non-market stakeholder influence, especially from governments, appears to be a strong explanatory factor, as indicated by one corporate official:
"Then the government is actually pushing us to lower carbon emission as well over the last 2 years. The ENB [the Environmental Bureau] has been having meeting with us to discuss about the long-term decarbonization plan of [company's name]. The last meeting was held right before Christmas. That seems to be an increasing demand on how well we perform." (HK4)
Continual management support and employee involvement were observed to have little to no presence at this level. While the companies have responded to the CDP questionnaire, they do not participate with any further climate organizations, such as the SBTi. Further enabling factors, including previous experience, climate leadership, and cost strategy, were not mentioned by these companies. On average, these companies only have two years of experience with environmental and carbon management activities, yet they still express a strong desire to achieve greater climate leadership while formulating an aggressive cost strategy associated with target setting:
"The strategic direction of the company for the next five years is to develop the highly competitive [low] carbon assets that we already have and that we will continue to require. We assess that this will cost our company multiple billion dollars to achieve. We made it very clear that we want to be one of the greatest players for low-carbon production in the world for energy." (BR3)
4.2.6 Level F
The companies in level F have not yet fully established formal climate targets, but rather have only communicated their commitment to acting towards GHG emission reduction. These companies are still in the early stages of formulating their decarbonization strategies, performing tasks such as preparing corporate-wide GHG emission inventories. Leadership engagement currently appears to be at a minimum in these companies, which are motivated instead by an overarching organizational mission, as one manager stated:
“We are doing this [target setting] because that’s important for the company and we want to survive and want to live forever.” (BR2)
Companies in level F have been convinced to take up target setting due to both market-related pressures and non-market stakeholder influences. For the latter, it was noted that NDCs set by government officials can serve as strong external pressure for these companies, as one manager said:
“The Hong Kong government has said by 2050 we want to be carbon neutral. […] As a responsible developer, so what we're trying to do is to tell the government what our targets are, how do we address, you know, all this issue by coming up with our target, maybe." (HK3)
We could not detect any of the enabling factors (e.g., continual management support, employee involvement, participation in climate initiatives) in level F. One reason could be that these companies have not yet fully formulated their targets, even to internal stakeholders such as employees.