Just six percent of companies in the financial sector are reporting on the greenhouse gas emissions of their investments, in what environmental data organisation the CDP calls a “significant gap” in the way the sector measures its carbon impact.
The financial sector makes up 24% of the respondents to the CDP, the former Carbon Disclosure Project, and is the lowest emitting sector covered in its new Global 500 report. The industry represents only 0.6% of total reported so-called Scope 1 (direct) and Scope 2 (indirect) emissions.
While 67% of finance companies have reduced these emissions since 2012, the CDP says only 6% of them report the carbon impact of their investments, saying: “This is a significant gap in the measurement of the sector’s overall carbon impact.”
CDP argues that Scope 3 emissions (other indirect emissions) should be significant for financial companies. Business travel, employee commuting and waste generation are the three most commonly disclosed Scope 3 categories in financials. But the CDP reckons that most Scope 3 emissions would be expected to come from investments. The low reporting figure suggests the firms “are yet to account fully for the impact of their value chains”. This, the CDP says, will require a “standardized widely-accepted approach” for calculating emissions from investments.
CDP Chief Executive Paul Simpson said there was a “significant lack of understanding” about the issue. Speaking on a webcast to launch the report, he said: “We reckon this is a critical area.”
The body also suggests there is a correlation between companies’ financial performance and good climate change performance and disclosure. Its analysis of companies heading its carbon performance and disclosure leadership indices (known as the CPLI and CDLI) “suggests that companies that achieve leadership positions in climate change generate superior stock performance”.It said that since 2005, top carbon disclosure companies delivered total returns of 82.8%, outperforming the top 500 of the FTSE Global Equity Index, which returned 49.6%.
“Moreover, CPLI companies generated average total returns of 31.9% since 2010, outperforming the Global 500 (24.8%) by more than a quarter.” Although the methodology for this analysis has been changed, CDP says, “the superior financial performance of the leaders still shows through especially in the most recent years”.
While acknowledging that share price performance is influenced by a broad range of factors, the initiative says the analysis “suggests a correlation, although not a causality, between financial performance and good climate change performance and disclosure”.
The findings come in the CDP’s new Global 500 report, which is based on the analysis of 389 company responses received by July 1.
It also revealed that a record number of investors are requesting climate data via CDP. The number has risen to 722 – representing $87trn of assets under management. That’s up from 655 investors representing $78trn in 2012.
The investors break down as 247 of what’s referred to “mainstream” asset managers, 167 pension funds, 160 banks, 51 insurance companies, 39 SRI asset managers and 34 foundations and 27 other institutions.
Henderson Global Investors’ CEO Andrew Formica, in a foreword to the report, says: “Quantifying a company’s use of ‘natural capital’ enables investors to integrate sustainability issues into investment decision making and company engagement.”
Also speaking on the broadcast, Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC) said that corporate boards needed to make climate change a “business continuation” issue. And she argued that governments’ policy signal on carbon was insufficient: “We don’t have a strong policy determination.”