Mandatory climate-related financial disclosure is becoming a universal reality, with more governments around the world adopting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board. In parallel, more companies are setting targets and developing strategies to do their part in meeting the global objective of minimizing global warming to 1.5°C by 2050. Climate transition plans and greenhouse gas (GHG) emissions disclosures are challenging for investors to understand and compare across industries and geographies. Investors acknowledge that to meaningfully assess transition risks, it is important to look beyond stated commitments to evaluate the actions companies are taking to manage climate risks and opportunities.
Morningstar Sustainalytics’ Low Carbon Transition Ratings provide investors with a top-level implied temperature rise and value-at-risk, assessing companies’ current alignment to a net-zero pathway. The ratings are supported by robust research and a transparent dataset, including annual expected emissions trajectories for different climate change scenarios.
Leveraging our Low Carbon Transition Ratings, investors can respond to regulatory initiatives, implement net-zero strategies, fulfill client net-zero mandates, conduct scenario analysis, and obtain transparency into company actions by integrating climate research into their investment decision-making processes.
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Big Food’s Broken Promises: The Data Behind the Food Industry’s Rising Emissions
A September 2023 headline from the New York Times read, "For Many Big Food Companies, Emissions Heading in the Wrong Direction” – begging the question: why? And more importantly, how can these companies expect to meet their net-zero targets if this trend continues? Covering seven major food companies, the article cites three main causes for the continuous rise in emissions: 1) supply chain issues caused by the war in Ukraine; 2) extreme weather events affecting supply chains; and 3) continued growth. Using data from Morningstar Sustainalytics’ Low Carbon Transition Ratings (LCTR), we go a step further than the New York Times coverage by identifying the areas where these companies must go beyond targets and implement effective strategies if they hope to meet their stated goals.
Assessing Company Low-Carbon Transition Risk
The graphs below based on the Low Carbon Transition Ratings focus on six of the seven mentioned companies: the American companies PepsiCo Inc., McDonald’s Corp., Starbucks Corp., Tyson Foods Inc., and Chipotle Mexican Grill Inc., plus the Brazilian company JBS SA. Mars, Inc. has not been included due to unavailable data.1 Each company is given three ratings that represent its ability to transition to net zero and its alignment with a 1.5 C temperature rise. The three ratings are:
- The Exposure Score: The amount in degrees Celsius that the planet would warm if every company emitted as much as this company does by 2050, based on its historical performance. Lower is better. See Figure 1.
- The Management Score: A 1-100 rating of how strong a company’s internal management systems are in terms of reducing its emissions by 2050. This value is based on the company’s strategy, governance, metrics, targets, risk management, financial strength, and financial performance. Higher is better. See Figure 2.
- The Implied Temperature Rise Score: The amount in degrees Celsius that the planet would warm if every company on Earth acted as this company does, including its management procedures, by 2050. Lower is better. See Figure 1.
Figure 1. Implied Temperature Rise Score Versus Exposure Score
Source: Morningstar Sustainalytics. For informational purposes only.
Note: The LCTR categorizes companies according to their alignment with a 1.5 C temperature rise scenario based on their exposure score and overall implied temperature rise score.
Figure 2. LCTR Management Score
Source: Morningstar Sustainalytics. For informational purposes only.
Where Does Big Food Stand Today?
For any company to be fully aligned to net zero, its implied temperature rise must not exceed 1.5 C. Despite their pledges to be net zero by 2050, according to the LCTR, none of these six companies is doing nearly enough to reach that goal.
Table 1. Low Carbon Transition Ratings for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
Note: Red indicates poor performance, green indicates best performance and orange and yellow indicate average performance relative to the other companies listed in the table.
Though PepsiCo. has a high exposure score (4.9), its high management score (70.8) corresponds to an implied temperature rise of 3.4 C. With more effective management and reduction of emissions, PepsiCo. could achieve a reduction of 1.5 C. Conversely, JBS’s low management score of 52 only decreases its implied temperature rise by 0.1 C, down to 4.5 C. Notably, Tyson Foods' lower exposure score is due to the company not disclosing its scope 3 emissions. Because the other five companies disclose their scope 3 emissions, Morningstar Sustainalytics is more accurately able to determine their exposure scores.
So, why is PepsiCo’s management score so high, and what lessons can the other Big Food companies take from its approach?
Going Beyond Just Setting Targets: A Closer Look at PepsiCo
Table 2 below lists six of the indicators that go into a company’s LCTR management score, rated from 0 to 100 (higher is better). A score of 0 indicates that the company either does not have a program on that issue, does not disclose the details of its program, or its program is far below the level needed to be considered adequate. A score of 100 represents an industry-leading approach to that issue.
Table 2. LCTR Management Indicators for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
As the New York Times article points out, each of these companies says they “aim to be net zero in their emissions by 2050,”2 often with the help of organizations like the Science Based Targets Initiative (SBTi). The scoring reflects this commitment, with five of the six companies receiving scores of 100 for greenhouse gas (GHG) emissions targets, and each company having linked its senior management’s remuneration to the achievement of GHG emission reductions. However, setting targets or incentivizing pay can be made meaningless without strategies to reduce emissions.
Of this cohort, PepsiCo has the most effective management in place to try to reach net-zero, with some remaining deficiencies. This is seen in how its many implemented strategies result in a high management score, thus leading to a large reduction in the company's implied temperature rise compared to its initial exposure score. Beyond emissions targets, PepsiCo is the only company to utilize and disclose an integrated carbon price in its strategy. PepsiCo also scores higher in GHG risk management due to its comprehensive disclosures around the PepsiCo Risk Committee. This committee reports to the board of directors on the company’s progress on risk mitigation efforts and potential supply and production disruptions due to climate change.
Other highlights of PepsiCo’s management strategies are:
- Conducting climate-related scenario analysis across its entire manufacturing footprint to locate impacts to the business related to physical and transition risks. This allows the company to identify high-risk areas and build resiliency plans.
- Closing a US$1.25 billion 10-year green bond; publishing annual green bond reports since 2019; and allocating US$974 million from the green bond issuance to eligible green projects in sustainable plastics and packaging, decarbonization of operations and supply chain, and water sustainability.
- Monitoring and engaging with suppliers on emissions related to their supply chain.
Despite these steps, PepsiCo is still sitting at an implied temperature rise of 3.4 C. What else can PepsiCo and the other five companies do to reduce their scores to 1.5 C?
Supply Chain Emissions and Other Undermanaged Risks
Supply chain emissions constitute the majority of emissions for these six food companies, and should therefore be a priority when considering how best to decarbonize their businesses. As shown in Table 3 below, many report their scope 3 emissions and have targets to reduce their supply chain emissions, but only PepsiCo currently has a reduction program in place. Still missing for PepsiCo, however, is the establishment of high-level policies and targets for board members and executives to monitor, measure, and achieve. These could help greatly reduce emissions further.
Table 3. Supply Chain Risks for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
Note: SC indicates that these indicators are specifically for a company’s approach around their supply chain.
Companies’ boards and management teams must also consider additional, more drastic options to curtail emissions if their management policies are not enough. Using low carbon fuels like biogas sourced from their own value chains or hydrogen may be required to bring emissions down.
Conclusion
While many Big Food companies are making promises about plans to become net zero by 2050, the data reveals that they are far behind. They are increasing emissions when they should be reducing them and they could do more to manage their risks. Even PepsiCo, which appears to be setting the benchmark for the industry, has glaring blind spots in its approach and thus faces major transition risks and challenges.
With these risks come opportunities. Food companies that are better positioned to reduce their emissions and lower their transition risks are also better suited to be competitive in a net-zero future.
References
- Mars Inc. is a privately held company and is thus not part of the Low Carbon Transition Ratings research universe.
- Cresswell, J. 2023. “For Many Big Food Companies, Emissions Heading in the Wrong Direction.” September 23. 2023. New York Times. https://www.nytimes.com/2023/09/22/business/food-companies-emissions-climate-pledges.html.
Overview of Sustainalytics’ Low Carbon Transition Ratings
Our comprehensive framework measures the degree to which a company’s projected GHG emissions differ from various decarbonization policy scenarios between now and the year 2050. The ratings leverage a two-dimensional framework that measures an issuer’s exposure from their expected emissions, while also accounting for management actions. They assess the company’s progress toward their stated net-zero commitments by evaluating the quality and ambition of their GHG reduction targets, as well as any demonstrated short-term investment plans, policies and programs such as Climate Transition Resilience Program, Product Decarbonization Strategy and a GHG Emissions Reduction Policy – Supply Chain. The ratings also provide a Climate Transition Value-at-Risk signal that demonstrates the potential loss in value that a company may experience from a transition to a low carbon economy, calculated for different decarbonization pathways.
Comprehensive Measure of Low Carbon Transition Alignment
Analyze low carbon transition exposure and management preparedness across a business’ value chain for each scope of emissions. Our assessment delivers more than just an Implied Temperature Rise rating, going beyond by looking at a company’s ambitions and targets. Investors can identify areas where each issuer is performing well and opportunities for improvement.
Analyze Expected Issuer Emissions Against Various Net-Zero Climate Scenario
Our Low Carbon Transition Ratings are driven by a bottom-up scenario analysis, evaluating companies’ emission trajectories against expected regional policy and technology pathways required to meet the Paris Agreement and net-zero ambitions by the year 2050. This currently includes orderly scenarios like the UN PRI IPR Required Policy Scenario (RPS)*, and IEA Net Zero 2050 Scenario (NZE), a disorderly scenario with the IPR Forecast Policy Scenario (FPS), and a hot-house scenario with IEA Stated Policies Scenario (STEPS).
*The 1.5°C Required Policy Scenario (RPS) is from the UN PRI commissioned Inevitable Policy Response (IPR).
Support Investor TCFD Reporting and Assess Issuer Disclosure
Paired with our Physical Climate Risk Metrics and Carbon Emissions Data solutions, our Low Carbon Transition Ratings enable investors to meet most TCFD recommendations. Additionally, investors receive a detailed assessment of issuer TCFD disclosure with respect to their quality of management across each thematic area of the TCFD.
Access our Transparent Methodology and Granular Data
Our Low Carbon Transition Ratings are underpinned by a transparent methodology, multiple levels of data and clear indicator guidance, which allows for validation and customization of the weighted data points to generate unique insights that align to investors’ objectives.
Holistic Integration of Management Preparedness
With more than 85 general and subindustry-specific management indicators – weighted by a company’s distribution of GHG emissions across Scopes 1, 2, 3 upstream, and 3 downstream – investors gain transparency into the credibility of company’s transition plans and management preparedness and can integrate granular climate insights into their company assessments and valuation models.
Ratings Expressed as Implied Temperature Rise
The top-level ratings are expressed as a simple contextualized signal, estimating the Implied Temperature Rise of issuers’ current low carbon transition performance. This expresses what global temperatures could rise to if the whole economy had the same percentage of misaligned emissions between now and the year 2050. This output enables investors to seamlessly categorize and compare different levels of performance across issuers.
Dedicated Module to Assess Issuer Disclosure with TCFD
A TCFD module module is included in the rating to assess and track the completeness of issuer reporting and translate our assessment of issuers’ managerial preparedness across the four thematic areas recommended by the TCFD (governance, strategy, risk management, and metrics and targets).
Integrated Asset Impact Data
More accurately assess how companies are managing their net-zero transition. Estimate the impact of current CapEx on future investment alignment among the 9 highest emitting sectors including utilities, construction materials, and transportation.
8,000+ Companies Covered
Sustainalytics' Low Carbon Transition Ratings span more than 8,000 companies and encompass most major global indices. Future expansion of the company database will align with the coverage of our ESG Risk Ratings.
Flexible Accessibility
The Low Carbon Transition Ratings are available through Global Access with screening and reporting tools, data-feeds, and application programming interface (API). They will be made available for several third-party distribution platforms in the future.
Analysis of Issuer's Transition Value at Risk
Value at Risk (VaR) is a financial metric that demonstrates the expected future impact on a company’s bottom line due to the transition to a low carbon economy. VaR is measured based on the policy costs of expected emissions and the impact of reduced market demand, where applicable. It is a cumulative value based on a discounted cash flow model for the years from now until 2050 that allows users to complete regulatory reporting, stress testing, scenario analysis, and portfolio optimization.
Learn more about our Low Carbon Transition Ratings
To learn more about our Low Carbon Transition Ratings, view the video message from our Senior Vice President of Climate Solutions, Azadeh Sabour.
About Our Framework
We start with a baseline projection, which is based on corporate reporting and estimation modelling across all 3 scopes of emissions, including both the upstream and downstream segments of scope 3.
Next, we consider how the quality of the company's policies and programs, strategy, governance, and financial position affect the baseline emissions.
This emissions projection is based on a company's baseline emissions in combination with their managed emissions.
This is the company's sector- and region-specific budget required to align to a net-zero emissions pathway by 2050.
The expected emissions gap reflects the emissions that are not managed and indicates the severity of misaligned emissions.
The Expected Emissions Gap reflects the emissions that are not managed and indicates the severity of misaligned emissions.
Expected Emissions Gap Calculation
| Cumulative Emissions to 2050 (CO2) | |
|---|---|
| Expected Emissions | 765 Mt |
| Net-Zero Budget | 211 Mt |
| Expected Emissions Gap | 553 Mt (+261%) |
| Implied Temperature Rise Score | 2.4ºC |
| Implied Temperature Rise Category | Significantly Misaligned |
Use Cases
Climate Research Integration
- Measure alignment of companies against a 1.5°C scenario
- Deepen insights into transition risk and opportunities for portfolio management
- Conduct scenario analysis – compare value at risk for different decarbonization pathways
Implement Net-Zero Strategies
- Assess forward-looking carbon emissions of companies, portfolios, funds, and benchmarks with net-zero pathways.
- Meet commitments of global alliances and member groups such as the Net Zero Asset Manager Initiative and the Institutional Investors Group on Climate Change (IIGCC).
Screening and Benchmarking
- Set decarbonization targets and monitor performance.
- Screen investable universe based on company exposure to, and/or management of, transition risks.
- Conduct credibility assessments of company transition plans and assess SBTi Readiness
Reporting & Client Communication
- Support TCFD-aligned regulatory reporting.
- Report to clients on how portfolios are aligned with global climate goals.
- Respond to client net-zero mandates.
Engagement and Voting
- Evaluate company management of transition risks and opportunities.
- Obtain transparency on corporate’s disclosure sufficiency to current TCFD recommendations.
Thematic Investing
- Create climate-aware investment products.
Report Insights
A company’s top-level rating is expressed as an Implied Temperature Rise signifying the expected level of global warming if the global economy had the same proportion of emissions misaligned to the net-zero budget. The absolute emissions gap across each scope of the company’s business activity are summarized through time series graphs, with the underlying components of the assessment illustrated in decomposition charts.
The degree of overall alignment to the net-zero budget is summarized for each scope of emissions across an issuer’s value-chain, providing transparency into how much each scope of emissions is contributing to the overall rating. A separate value-chain analysis for each of the exposure and management components is also provided.
The issuer’s rating is analyzed in context of their peers in global public equity and bond markets, as well as industry and sub-industry specific peers. The issuer’s top peers by market capitalization are summarized with a view of their overall rating, Exposure and Management scores.
An overall management score out of 100 is provided, as well as an analysis identifying where action may be needed across the issuer's business activities. This is communicated through a breakdown of their management scores and contribution of key management indicators for each scope of emissions across the issuer’s value chain.
An overall score of the comprehensiveness of issuers’ climate related disclosures, and a detailed analysis across the key TCFD thematic areas of governance, strategy, risk management and metrics & targets provides transparency into quality of their management.
Low Carbon Transition Value at Risk (VaR) informs investors about potential future losses their portfolio companies may face due to their exposure and management of the transition to a low carbon economy. By taking into account the policy costs of expected emissions, and the impact of reduced market demand for fossil fuels, VaR enables investors to respond to regulatory requirements, perform stress testing, and optimize their portfolio for transition scenarios.
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Related Products
Carbon Emissions Data
Evaluate and analyze companies’ GHG emissions across scope 1, 2, and 3 emissions.
Learn More
Morningstar Low Carbon Transition Leaders Indexes
Gain diversified broad market exposure to companies leading their sector peers in their readiness for — and action towards — climate transition.
Learn More
Physical Climate Risk Metrics
Assess and disclose the direct and indirect physical climate risks of climate change related exposure.
Learn MoreRelated Insights and Resources
Big Food’s Broken Promises: The Data Behind the Food Industry’s Rising Emissions
A September 2023 headline from the New York Times read, "For Many Big Food Companies, Emissions Heading in the Wrong Direction” – begging the question: why? And more importantly, how can these companies expect to meet their net-zero targets if this trend continues? Covering seven major food companies, the article cites three main causes for the continuous rise in emissions: 1) supply chain issues caused by the war in Ukraine; 2) extreme weather events affecting supply chains; and 3) continued growth. Using data from Morningstar Sustainalytics’ Low Carbon Transition Ratings (LCTR), we go a step further than the New York Times coverage by identifying the areas where these companies must go beyond targets and implement effective strategies if they hope to meet their stated goals.
Assessing Company Low-Carbon Transition Risk
The graphs below based on the Low Carbon Transition Ratings focus on six of the seven mentioned companies: the American companies PepsiCo Inc., McDonald’s Corp., Starbucks Corp., Tyson Foods Inc., and Chipotle Mexican Grill Inc., plus the Brazilian company JBS SA. Mars, Inc. has not been included due to unavailable data.1 Each company is given three ratings that represent its ability to transition to net zero and its alignment with a 1.5 C temperature rise. The three ratings are:
- The Exposure Score: The amount in degrees Celsius that the planet would warm if every company emitted as much as this company does by 2050, based on its historical performance. Lower is better. See Figure 1.
- The Management Score: A 1-100 rating of how strong a company’s internal management systems are in terms of reducing its emissions by 2050. This value is based on the company’s strategy, governance, metrics, targets, risk management, financial strength, and financial performance. Higher is better. See Figure 2.
- The Implied Temperature Rise Score: The amount in degrees Celsius that the planet would warm if every company on Earth acted as this company does, including its management procedures, by 2050. Lower is better. See Figure 1.
Figure 1. Implied Temperature Rise Score Versus Exposure Score
Source: Morningstar Sustainalytics. For informational purposes only.
Note: The LCTR categorizes companies according to their alignment with a 1.5 C temperature rise scenario based on their exposure score and overall implied temperature rise score.
Figure 2. LCTR Management Score
Source: Morningstar Sustainalytics. For informational purposes only.
Where Does Big Food Stand Today?
For any company to be fully aligned to net zero, its implied temperature rise must not exceed 1.5 C. Despite their pledges to be net zero by 2050, according to the LCTR, none of these six companies is doing nearly enough to reach that goal.
Table 1. Low Carbon Transition Ratings for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
Note: Red indicates poor performance, green indicates best performance and orange and yellow indicate average performance relative to the other companies listed in the table.
Though PepsiCo. has a high exposure score (4.9), its high management score (70.8) corresponds to an implied temperature rise of 3.4 C. With more effective management and reduction of emissions, PepsiCo. could achieve a reduction of 1.5 C. Conversely, JBS’s low management score of 52 only decreases its implied temperature rise by 0.1 C, down to 4.5 C. Notably, Tyson Foods' lower exposure score is due to the company not disclosing its scope 3 emissions. Because the other five companies disclose their scope 3 emissions, Morningstar Sustainalytics is more accurately able to determine their exposure scores.
So, why is PepsiCo’s management score so high, and what lessons can the other Big Food companies take from its approach?
Going Beyond Just Setting Targets: A Closer Look at PepsiCo
Table 2 below lists six of the indicators that go into a company’s LCTR management score, rated from 0 to 100 (higher is better). A score of 0 indicates that the company either does not have a program on that issue, does not disclose the details of its program, or its program is far below the level needed to be considered adequate. A score of 100 represents an industry-leading approach to that issue.
Table 2. LCTR Management Indicators for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
As the New York Times article points out, each of these companies says they “aim to be net zero in their emissions by 2050,”2 often with the help of organizations like the Science Based Targets Initiative (SBTi). The scoring reflects this commitment, with five of the six companies receiving scores of 100 for greenhouse gas (GHG) emissions targets, and each company having linked its senior management’s remuneration to the achievement of GHG emission reductions. However, setting targets or incentivizing pay can be made meaningless without strategies to reduce emissions.
Of this cohort, PepsiCo has the most effective management in place to try to reach net-zero, with some remaining deficiencies. This is seen in how its many implemented strategies result in a high management score, thus leading to a large reduction in the company's implied temperature rise compared to its initial exposure score. Beyond emissions targets, PepsiCo is the only company to utilize and disclose an integrated carbon price in its strategy. PepsiCo also scores higher in GHG risk management due to its comprehensive disclosures around the PepsiCo Risk Committee. This committee reports to the board of directors on the company’s progress on risk mitigation efforts and potential supply and production disruptions due to climate change.
Other highlights of PepsiCo’s management strategies are:
- Conducting climate-related scenario analysis across its entire manufacturing footprint to locate impacts to the business related to physical and transition risks. This allows the company to identify high-risk areas and build resiliency plans.
- Closing a US$1.25 billion 10-year green bond; publishing annual green bond reports since 2019; and allocating US$974 million from the green bond issuance to eligible green projects in sustainable plastics and packaging, decarbonization of operations and supply chain, and water sustainability.
- Monitoring and engaging with suppliers on emissions related to their supply chain.
Despite these steps, PepsiCo is still sitting at an implied temperature rise of 3.4 C. What else can PepsiCo and the other five companies do to reduce their scores to 1.5 C?
Supply Chain Emissions and Other Undermanaged Risks
Supply chain emissions constitute the majority of emissions for these six food companies, and should therefore be a priority when considering how best to decarbonize their businesses. As shown in Table 3 below, many report their scope 3 emissions and have targets to reduce their supply chain emissions, but only PepsiCo currently has a reduction program in place. Still missing for PepsiCo, however, is the establishment of high-level policies and targets for board members and executives to monitor, measure, and achieve. These could help greatly reduce emissions further.
Table 3. Supply Chain Risks for Select Big Food Companies
Source: Morningstar Sustainalytics. For informational purposes only.
Note: SC indicates that these indicators are specifically for a company’s approach around their supply chain.
Companies’ boards and management teams must also consider additional, more drastic options to curtail emissions if their management policies are not enough. Using low carbon fuels like biogas sourced from their own value chains or hydrogen may be required to bring emissions down.
Conclusion
While many Big Food companies are making promises about plans to become net zero by 2050, the data reveals that they are far behind. They are increasing emissions when they should be reducing them and they could do more to manage their risks. Even PepsiCo, which appears to be setting the benchmark for the industry, has glaring blind spots in its approach and thus faces major transition risks and challenges.
With these risks come opportunities. Food companies that are better positioned to reduce their emissions and lower their transition risks are also better suited to be competitive in a net-zero future.
References
- Mars Inc. is a privately held company and is thus not part of the Low Carbon Transition Ratings research universe.
- Cresswell, J. 2023. “For Many Big Food Companies, Emissions Heading in the Wrong Direction.” September 23. 2023. New York Times. https://www.nytimes.com/2023/09/22/business/food-companies-emissions-climate-pledges.html.
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