Critical reflections on carbon performance in high carbon emitting companies

We must review the assumptions that underpin our efforts on climate change.

It is something of an article of faith among policymakers, investors and companies that good corporate carbon management practices will inevitably lead to better performance outcomes (in terms of greenhouse gas emissions). This assumption has underpinned many of the public policy measures and investor engagement efforts on climate change. Yet, despite all these efforts, greenhouse gas emissions from companies have continued to rise.

In the light of the recent Intergovernmental Panel on Climate Change report, Global Warming of 1.50C, – which highlighted the alarming effects of more than a 1.50C rise in average global temperatures above pre-industrial levels and stressed the need for urgent action to drastically reduce global greenhouse gas emissions – it is therefore critical that we review the assumptions that underpin our efforts on climate change.

We recently published a paper An Assessment of Climate Action by High-Carbon Global Corporations (Dietz et. al., 2018) in Nature Climate Change analysing the carbon management and performance of the 19 or 20 largest listed companies (98 companies in all) across 5 high-emitting sectors (automobile manufacturing, cement, electricity, paper and steel). The paper also analyses the carbon management practices of a further 40 companies in the oil and gas and mining sectors. In total, these 138 companies are estimated to account for 21% of emissions from all listed companies globally.

The paper provides three important insights. The first is that, even for these high impact companies, there is limited availability of comparable emissions data and the availability of these data falls markedly as we look to the future. Twenty eight of the 98 companies do not disclose their historical emissions and activity/production in a comparable form. Moreover, the share of companies with no data (i.e. that have not set targets) rises to 86% in 2030.

Second, perhaps surprisingly, many of the targets that have been set align with the commitments (the Nationally Determined Contributions, NDCs) made by governments under the Paris Agreement) and with a 2°C benchmark. In fact, in 2020, 59% of the 41 companies with data/targets are aligned with the 2°C benchmark and a further 12% are aligned with the NDCs benchmark only. In 2030, the corresponding shares are 50% and 21% respectively, although only 14 companies have targets that extend this far into the future.

This comparatively good performance does not appear to because those companies with 2020/30 targets are starting with an emissions intensity that is below average. In fact, the sample of companies with 2020/30 targets is not biased towards those that perform well today, and hence need to make less effort to stay aligned. The main problem is that not enough companies have set such targets.

The third is that there appears to be no statistical relationship between the carbon management practices implemented by companies and their standardised historical emissions intensity.This confirms previous findings from colleagues at the London School of Economics and the University of Leeds (see Note 3 below).

That study, the first large-scale, quantitative study of the impact of corporate carbon management practices on corporate greenhouse gas emissions, found no statistically significant evidence that any of 23 carbon management practices had influenced corporate greenhouse gas emissions.

This conclusion does not mean that carbon management practices are not important. On the contrary. When we look at future emissions intensity, we see that the companies that are aligned with 2°C in 2020 and 2030 are likely to have implemented more carbon management measures today.

Of course, there is no guarantee that companies will actually deliver the target they have set for themselves. There are, however, grounds for optimism on this point. Our previous research (see Note 4 below) suggests that when companies provide a detailed description of how they intend to deliver their targets (e.g. management plans, actions, resources), when they can explain how they are able to reconcile the costs and benefits of taking action, and when they provide robust and regular updates on progress towards the delivery of these targets, it is possible to have a high degree of confidence that the targets will be met. This confidence is strengthened for companies that have previously set targets and have a track record of delivering against these targets or of explaining why these targets have not been met.

What does this tell us about the priorities for investor engagement? The central conclusion is that investors need to focus much more explicitly on current and future greenhouse gas emissions, rather than assuming that better management practices and processes will inevitably lead to emissions reductions. More specifically, investors should encourage companies to set carbon targets in line with the goals of the Paris Agreement, and they should expect companies to ensure that the management practices and processes being adopted are directed towards the delivery of these targets. That is, there is a need to reorient investor engagement away from the assumption that good processes lead to good outcomes to one where companies are expected to set long-term corporate targets, and to ensure that they have the carbon management practices they need to ensure these targets are delivered.

Dr Rory Sullivan, Co-Founder and Director of Chronos Sustainability, is the Chief Technical Advisor to the Transition Pathway Initiative. Professor Simon Dietz, Professor of Environmental Policy at the London School of Economics, is the Academic Lead for the Transition Pathway Initiative.

Please see Notes overleaf.

1. This article is based on Dietz, S., Fruitiere, C., Garcia-Manas, C., Irwin, W., Rauis, B. & Sullivan, R. (2018), ‘An Assessment of Climate Action by High-carbon Global Corporations’, Nature Climate Change (2018), LINK
2. The Nature Climate Change paper and this article are based on data from the Transition Pathway Initiative (TPI). TPI is an asset owner-led initiative which assesses companies’ progress on the transition to a low-carbon economy, focusing on (a) the quality of companies’ management of their greenhouse gas emissions and of risks and opportunities related to the low-carbon transition, and (b) carbon emissions performance and how this performance compares to the international targets and national pledges made as part of the 2015 UN Paris Agreement. TPI partners with The Grantham Research Institute on Climate Change and the Environment (TPI’s academic partner), the London School of Economics (LSE), FTSE Russell (TPI’s data partner) and the Principles for Responsible Investment (PRI) (which provides a secretariat to the TPI).3. Doda, B., Gennaioli, C., Gouldson, A., Grover, D. & Sullivan, R. (2016), ‘Are Corporate Carbon Management Practices Reducing Corporate Carbon Emissions?’, Corporate Social Responsibility and Environmental Management, Vol. 23, pp. 257-270.
4. See: Sullivan, R. & Gouldson, A. (2017), ‘The Governance of Corporate Responses to Climate Change: An International Comparison’, Business Strategy and the Environment, Volume 26, pp. 413-425; Sullivan, R. & Gouldson, A. (2013), ‘Ten Years of Corporate Action on Climate Change: What Do We Have To Show For It?’, Energy Policy, Vol. 60, pp. 733-740; Gouldson, A. & Sullivan, R. (2013), ‘Long-term Corporate Climate Change Targets: What Could they Deliver?’, Environmental Science & Policy, 27 (March 2013), pp. 1-10.