Emissions Link to Profitability Drives New Era of Investor Activism

Emissions Link to Profitability Drives New Era of Investor Activism

This week the Carbon Disclosure Project (CDP) launched a new investor led initiative where 35 investors holding $7.6 trillion in assets issued a request to the largest 500 public companies in the world to take concrete action to reduce their emissions.

This goes beyond asking companies solely for disclosure, for good reason.

"We believe that the external costs of greenhouse gas emissions will become internalized into company cash flows and profitability," said Steve Waygood, head of sustainability, research and engagement at Aviva Investors and a founding supporter of the Carbon Action initiative. "We encourage companies to consider what action that they can take now to reduce emissions."

As this perspective shows, there is a growing awareness amongst the investment community that there are significant business benefits for companies from reducing their emissions. This is the driving force behind the initiative. By managing carbon effectively, companies make a large contribution to reducing the major long-term threat to the global economy, which climate change represents.

"Often companies do not need to make a choice between ethical goals or higher financial returns -- that's the great attraction," said Craig Mackenzie of Scottish Widows Investment Partnership (SWIP). "There is frequently a clear business case. In the face of rising energy costs, reducing emissions means making more money." 

As SWIP points out, research by McKinsey and others finds that most companies have options to reduce carbon emissions at a negative cost: Across the overall economy, there is the potential to save as much as 12Gt CO2e, 25 percent of the global total annual emissions in this way by 2030.

As well as driving investor benefits, companies are also reaping the rewards. News Corporation, for example, has undertaken a series of emissions reducing projects that have generated a good return on investment.

"Some projects have on average a carbon cost avoidance of $180 per metric ton … we look at how carbon and money tie together," said Vijay Sudan, News Corporation's Global Energy Initiative manager in New York City. "It costs us $250 to produce a metric ton of carbon. Since 80 percent of our GHG emissions are from electricity, considerable savings can be made."

The Request

Some of the participating investors include Aviva Investors, Boston Common Asset Management, Calvert Asset Management Company, CCLA Investment Management and SWIP.

As they focus more on how emissions reductions activities can help protect and grow their investments, they are asking Global 500 companies to do three things:

1. Set targets: 70 percent of the Global 500 already have some form of target, but 30 percent do not. Investors will be asking those 30 percent to set targets.
2. Make year on year reductions: these may be absolute or intensity based.
3. Identify and implement emissions reduction activities with a satisfactory return on investment.

 

CDP has been working with investors for more than 10 years to encourage carbon disclosure. Five hundred and fifty-one institutional investors, holding $71 trillion in assets, have made carbon disclosure a mainstream business issue over the last decade. 

There is ample evidence that disclosure has already helped encourage companies to set emissions reduction targets.

"It does take time to understand what is required in the reporting process and to collect answers from across the organisation but it helps to set targets and maximise reductions," Vestas, one of the founding supporters of Carbon Action, told us.

Carbon Action goes a step further. Investors want companies to go beyond disclosure and commit to and undertake concrete action to reduce greenhouse gas emissions. This is a natural evolution, as many companies have already set targets through the disclosure and reporting process but it also represents a new era in investor focus on the benefits of carbon reductions. It represents a clear message from a leading group of investors that undertaking emissions reduction activities is now expected.

As a result, this initiative has the potential to be transformational on a global scale in highlighting the business benefits of emissions reductions and accelerating them.