Listed companies are the cause of and solution to our climate crisis
New research by Generation Investment Management suggests listed companies are responsible for 40% of emissions, explain Miguel Nogales and Mark Ferguson
The Paris Agreement and upcoming COP26 event are moments in history that will be looked back on through the ages. Hopefully for the right reasons. Climate events have become part of everyday household conversation across the world, and the reality is that humans need to decide which pathway they want to be remembered for.
It is true to say that every single person has a part to play in solving the climate crisis - from the small-plot farmer to the urban city dweller - but it is also important to be realistic: governments and large companies have the size and scale to make the biggest impact.
The direction of travel is clear to see. Net zero commitments have become standard expectations for large companies and investors are increasingly putting their foot down. The Net Zero Asset Managers initiative, for example, was set up last year and comprises 128 asset managers with $48trn under management, who have committed to supporting the goal of net zero greenhouse gases by 2050 or sooner. These investors will engage and/or vote with their feet where necessary.
Why is this important? We have conducted research that finds that listed companies are responsible for 40% of all greenhouse gas emissions. That is significantly larger than first thought - particularly when compared to measures by other organisations that have found listed company emissions to be as much as half of our figure.
We have conducted research that finds that listed companies are responsible for 40% of all greenhouse gas emissions. That is significantly larger than first thought.
Our figure is larger because it takes into account the real elephant in the room: global value chains. It considers the overall extent of emissions, looking beyond direct corporate emissions and taking into account Scope 1, 2 and some types of Scope 3 emissions (while also acknowledging the problem of double-counting).
For instance, food systems account for one third of greenhouse gas emissions, while transport emissions are one fifth. Listed companies play important roles in these sectors: processing and selling the food we eat, and manufacturing the vehicles we drive. But it’s often not their own factories, vehicles or fields that directly produce the emissions.
A huge challenge for all those involved in the climate-impact space is the lack of up-to-date and accurate data. This research is careful to address double counting but it is a complex process. Several organisations often share responsibility for the same emissions and it is not always clear who ‘owns’ the emissions. In the case of a vehicle, this includes the oil company producing fuel, the car manufacturer and the organisation that owns the vehicle.
So what can companies do about it? Listed companies are well positioned to act, as are investors. The corporate governance structures of listed companies provide vital opportunities for accountability, whether to governments, investors or via media scrutiny. Public ownership also comes with stronger rules around the disclosure of information and mechanisms for shareholders to vote for and against management decisions.
What gets counted really matters. Given their outsized resources and focus on developed markets, listed companies must deliver the lion’s share of emissions reductions by businesses in the next few years. To keep the world on track for 1.5 degrees, public companies will need to reach net zero at 2040 at the latest. The vast majority of climate commitments – such as ‘net zero’ emissions goals and ‘science-based targets’ – are made by listed companies. The good news is listed companies have the capacity to be early movers. They are very well-resourced and effective at managing change in short periods of time.
With the right incentives, the 10,000 listed companies can attack emissions reduction from all angles and unleash untold potential for innovation and collaboration. Indeed, this could be an important weapon in driving change in incumbent heavy industries. Many listed companies are more nimble and far less wedded to high-carbon business models.
As COP26 approaches, let’s be clear that mobilising action across the listed company landscape will play a crucial role in halving global emissions by 2030. A figure of 40% should not sit well at boardroom tables across the world. Listed companies will play a key role in a sustainable and equitable transition to net zero. Now is the time for companies – and investors – to prove it.
Miguel Nogales and Mark Ferguson are co-Chief Investment Officers of Generation Investment Management