Looking beyond corporate climate change reporting: the performance target question for investors

The investment case is making CO2 reduction programmes compelling.

The debate on corporate responses to climate change has evolved from whether or not companies should report on their greenhouse gas emissions to whether or not they should set targets for their greenhouse gas emissions? With 190 investors now supporting the CDP Carbon Action’s call for companies to publicly disclose their emission reduction targets, it is clear that there is growing momentum behind the idea that companies should set and deliver on greenhouse gas emission reduction targets. The evidence to date from Carbon Action suggests that companies that set greenhouse gas emission reduction targets dedicate significantly more capital to investments in these areas and that these investments can provide attractive returns on capital invested. While the investment case for targets is increasingly compelling, the key question for policymakers is what outcomes, in terms of greenhouse gas emissions abatement, will result from these actions. As part of a wider project analysing the drivers for corporate action on climate change, we have analysed the greenhouse gas emission reduction targets that companies set for themselves. Our research suggests that companies tend to have a good record of delivering on their targets, providing that the right internal and external oversight and accountability mechanisms are in place. However, our research also shows that while some leading companies have managed to achieve significant reductions in their absolute level of emissions, many have continued to see their emissions rise year on year. In many cases, this is not because they have failed to meet their targets but actually reflects the nature and characteristics of the targets themselves.There are a number of common issues. First, many of the targets cover only a subset of the emissions that are relevant to the organisation. For example, companies often set targets for a geographic region but not for the business as a whole, or they set targets for some activities but not all (e.g. they may set targets for electricity use but not for emissions from refrigeration). Of perhaps greater concern is that companies – unsurprisingly – focus most of their attention on their own operations but not on their supply chains or value chains. While acknowledging the practical difficulties associated with reducing these emissions, the consequence is that many companies end up focusing most of their attention on a relatively small part of their overall carbon footprint. The second is that many of the targets set are expressed in relative rather than absolute terms. That is, the goal is to improve energy efficiency and/or greenhouse gas emissions intensity, rather than total emissions. From a climate change perspective, the central question is whether and how these relative targets translate into absolute (or total) greenhouse gas emission reductions. One of the recurring themes in the literature on corporate responses to climate change is the very real tension between business growth and absolute greenhouse gas emissions. Indeed, when we look at the company responses to the Carbon Disclosure Project, it is striking how many of the companies expect their efficiency gains to be swamped by business growth. The third is that company targets are, in many cases, relatively short term with a typical duration of one to three years. While this sort of timeframe makes sense from an operational management perspective, it means that companies tends to focus their attention on relatively easy, short term changes with relatively short

payback periods rather than on longer-term strategy and capital investment decisions. It means that companies may take actions that, while delivering some efficiency gains, lock them into business models and strategies that are less sustainable over the longer term. The fourth is that the baseline is important, both in terms of companies’ accountability to their investors and in terms of understanding the actual contribution that the company’s targets will deliver. The problem here is that companies regularly restate their emissions. While there are often good reasons for this (e.g. the evolution of their data gathering and acquisition processes, new emission factors and calculation protocols, changes in the scope of reporting, business changes), companies tend to do a poor job of explaining how these changes have altered the baseline (or starting point) for their targets, and the implications for the delivery of these targets. Baselines are also important for understanding the actual contribution that a company’s targets will make. For example, for a company whose emissions have increased by five per cent per annum, a five year difference in the baseline (e.g. if 2012 rather than 2007 is used) could result in the company using a reference baseline that is 28% higher.What these issues point to is the importance of investors paying much closer attention to the quality of the targets that companies are setting for themselves. Specifically, it suggests that investors – individually and as participants in initiatives such as CDP Carbon Action – need to look beyond the question of whether or not companies have targets and pay much more attention to whether these targets will result in companies achieving absolute reductions in their greenhouse gas emissions. It also means that investors will need to dig much more deeply into the data and information provided by companies.
This is, of course, a demanding agenda and one that demands more of investor engagement. However, it is an agenda that is both important and realistic. There is evidence that companies can deliver significant reductions in their absolute greenhouse gas emissions and that these can be economically attractive. The challenge for investors is to ensure that their engagement delivers both of these outcomes.

Dr Rory Sullivan is a Senior Research Fellow at the University of Leeds and Professor Andy Gouldson is Director of the Centre for Climate Change Economics and Policy at the University of Leeds.

This article is based on Andy Gouldson and Rory Sullivan (2013), ‘Long-term Corporate Climate Change Targets: What Could they Deliver?’, Environmental Science & Policy, 27 (March 2013), pp. 1-10 Link