The Carbon Disclosure Project has been one of the most successful investor engagement projects of recent years – from almost no companies reporting on their carbon emissions a decade ago, now 80 per cent of the Global 500 disclose their emissions.
But the success of the CDP in gathering data has led a number of investors to think about the next step, which is to put the data to good use.
“It’s time to move beyond transparency,” says Matt Christensen, head of responsible investment at Axa Investment Management. “The CDP has been great at gathering information. The next question is what to do with it?”
In 2011, 35 of the CDP’s 655 investor signatories signed up to a second CDP engagement programme known as Carbon Action, which seeks to engage high-emitting companies and encourage them to go beyond disclosing their emissions by committing to take action to cut those emissions. “Carbon Action shows what can be done with the data, so that behaviour starts to shift,” Mr Christensen says.
The number of signatories has since expanded to 92, representing $10tn in assets, and the CDP wants even more to get involved next year.
In total, 61 companies out of the 205 that were contacted set new emissions reduction targets and companies reported reductions of 497m tonnes of carbon dioxide equivalent (CO2e) as a result of emission reduction activities totalling $11bn in 2012.
Letters were sent to 256 companies in 17 high-emitting industries, including energy, utilities, materials, industrials and automotives, asking them to commit to year-on-year emissions reductions by investing in projects with short payback periods and to publicly disclose their targets.
Examples include AP Moller Maersk, the shipping group, which changed the way many of its vessels operate, applying the principles of “slow steaming”. Cutting speeds on various legs of a route cut around 611,000 tonnes of CO2e in 2011 and saved almost $360m, giving the company a payback period of less than a year.
Meanwhile DuPont, the chemicals group, also got its money back in less than a year when it spent $21.8m on 324 individual energy efficiency projects that saved $55m and 591,000 tonnes of CO2e.
Carbon Action also sent letters to 159 companies in 14 industries with potentially significant supply chain emissions, mainly in the consumer and technology sectors, asking them to show how they were managing emissions in their supply chains. While 63 per cent of companies report management of supply chain emissions and 58 per cent say that they understand long-term climate and energy risks and opportunities in supply chains, only 32 per cent measure and just 8 per cent have set reduction targets for supply chain emissions – mainly consumer companies in the food, beverage and retail industries, according to the CDP.
Yet with a recent PwC report suggesting that even if the world doubles the rate at which the economy is decarbonised we are still on course for an average temperature rise of 6°C by the end of the century, climate change – and efforts to tackle it – are set to have an increasing impact on supply chains.
“Resilience will become a watchword in the boardroom, to policy responses as well as to the climate,” says Jonathan Grant, director of sustainability and climate change at PwC. “Business faces more unpredictable and extreme weather, and disruptions to market and supply chains.”
However, “there is far more sophistication and knowledge around direct emissions,” says Joanna Lee, chief partnerships officer at PwC. “That is an obvious place to start. Measuring supply chain emissions can be very challenging because it is much more complex. Nonetheless, many companies understand that managing supply chain emissions is very important strategically. There are many examples of where things have gone wrong with the supply chain.”
One of the rationales behind Carbon Action is to highlight that investing in emissions-reduction projects such as energy efficiency measures can save companies money.
“There is pretty strong evidence that companies are generally not exploiting the full range of cost-effective energy efficiency opportunities available to them,” says Craig McKenzie, head of sustainability at Scottish Widows Investment Partnership.
There is also a wider issue, he adds. “Climate change is now happening in a significant way and there is a fair bit more in the pipeline because of time lags in the climate system. That is going to affect our portfolio. There is no question that the most important action is for policymakers to establish a carbon price. But in the meantime, no regrets energy efficiency measures are a good thing to encourage.”
The CDP found that the average rate of return on investments in carbon reduction activities was 33 per cent, meaning that the measures on average paid for themselves within three years. “We are focusing on going beyond disclosure to action,” says Marc Fox, director of investor engagement, North America, for the CDP. “But it is important for companies to realise that we are not talking about sacrificing returns. That is a very important message.”
Another key message that emerges from the initiative is that those companies that set targets perform much better than those without.
“Companies with targets invested 1.1 per cent of capital expenditure on emissions reduction activities – more than 10 times that of companies without targets [0.08 per cent] – and achieved year-over-year absolute reductions in CO2e of more than double the rate of companies without targets,” says Mr Fox, with those committing to absolute targets outperforming by 10 per cent those with intensity targets (ie cutting emissions per unit of production).
“We encourage investors to focus company engagement on setting targets as a first step towards both emissions reductions and return on investment above industry average,” he adds.
Carbon Action is a great example of the power of collaborative engagement, says Mr Christensen. “It’s a way for companies to realise that investors take this seriously. And we take it seriously because we think the low-carbon economy will be increasingly important in years to come.”