Can investors rely on management systems and processes to reduce corporate emissions?

Surprising findings about the relationship between carbon management practices, actions and performance.

Investors, individually and through initiatives such as the CDP, have played an important role in encouraging companies to adopt climate change policies, to monitor and measure greenhouse gas emissions, to set targets and to publicly report on their performance.

The investment case underpinning these efforts has been that the adoption of these management systems and processes should result in companies making better decisions and managing their climate change-related risks more effectively. From an environmental perspective, the argument has been that these management practices and processes should lead to reductions in corporate energy use and/or greenhouse gas emissions. However, even though many companies have showcased their energy and emissions reductions initiatives in their sustainability and other reports, there has not been a systematic analysis of whether better carbon management practices actually do lead to better carbon performance.

A recent study, the first large scale, quantitative study of the impact of corporate carbon management practices on corporate greenhouse gas (GHG) emissions, sheds some light on this important question. Using a database compiled by ENDS Carbon, the study analysed 433 companies that had reported on their carbon management practices and their carbon performance in the 2009 and 2010 CDP questionnaires.

The carbon management practices were broken down into 23 categories (policies, targets, data assurance, risk identification processes, reporting, etc.). For each, an assessment made of whether the specific management practice was present or absent and, if present, of the quality of implementation. For example, emission reduction targets were assessed in terms of the proportion of the company’s total emissions that were covered by the target, as well as whether the target was expressed in relative (i.e. efficiency) or absolute terms.

Carbon performance was analysed in terms of direct and indirect emissions (commonly referred to Scope 1 and Scope 2 emissions) per unit of turnover, thereby facilitating the comparison of performance across corporations and across sectors. The reason for focusing on Scope 1 and 2 emissions was twofold; reporting on supply chain and value chain-related emissions remains very much a work in progress, and most companies have focused most of their effort on reducing their direct and indirect emissions.The headline findings were sobering. The analysis of the entire dataset of 433 corporations found no statistically significant evidence that any of the 23 carbon management practices had influenced corporate greenhouse gas emissions. Refinements to the analysis – such as only including companies that were considered to have better than average quality of emissions measurement, excluding companies in the financial sector, only including heavy industry, analysing absolute emissions rather than emissions relative to output, grouping the carbon management practices in different ways – all produced broadly similar findings. While there were some modest (and less statistically reliable) relationships between lower levels of emissions growth and specific carbon management practices, the overall conclusion was that that there was no statistically significant evidence that any of the carbon management practices analysed had influenced corporate greenhouse gas emissions.

So What Does it Mean?

There are a number of possible explanations for these results, all of which have important implications for policy and practice. One possible explanation is that corporate carbon data and management practice information have not been reported in a standardised way. That is, the absence of evidence may simply be because the data that the corporations supply to CDP is incomplete or inconsistent.

Another possible explanation is that there is a delay between the application of corporate carbon management practices and their impact on emissions performance. This may be particularly the case in companies where easy opportunities (low hanging fruit) have already been taken, and significant effort is required to achieve further reductions.

Another possible explanation is that carbon management practices are not sufficiently impact-oriented, meaning there is no relationship to observe. That is, corporations might be assuming that the adoption of management practices will ‘automatically’ lead to greenhouse gas emission reductions, rather than assessing the extent to which they are actually doing so. Expressed more directly, it could be that more attention should be paid not to the presence but to the impact of corporate management practices on the emissions that they are supposed to be reducing.

Implications for Investors

It is, of course, important not to overstate the findings. The analysis was conducted on a relatively small proportion of the corporations that report to CDP, and for a relatively limited time period. Clearly, this points to the importance of considering larger samples of corporations over longer time periods.

Even so, the central finding is of profound importance as it challenges the assumption of much investor engagement that the adoption of good corporate management practices will inevitably lead to better performance (in terms of greenhouse gas emissions) outcomes.

The analysis points to three important recommendations for investors. The first is that investors need to pay much more attention to the quality and comparability of the data being reported to the CDP. Investors need to encourage companies to align their reporting with the World Business Council’s Greenhouse Gas Reporting Protocol, to clearly define the scope and boundaries of their reporting, to have a consistent approach to calculating and reporting their emissions, to clearly document the assumptions, protocols and emissions factors they use in their reporting, and to have these data independently assured.

The second is that investors need to understand exactly how the adoption of corporate management practices influences corporate greenhouse gas emissions. Investors should expect companies to be able to explain how the carbon management practices that have been adopted have influenced the carbon management actions that they have taken and, in turn, how these actions have influenced the company’s total greenhouse gas emissions. The CDP is moving in this direction and it now encourages companies to provide some high level explanation of overall changes in their greenhouse gas emissions.However, to date, this relationship between carbon management practices, actions and performance is not clearly explained for the vast majority of companies.

The third is that investors need to focus on absolute emissions performance. They should encourage companies to express their carbon targets in terms of the absolute, rather than relative, emission reductions they are looking to achieve, and they should ensure that the management practices and processes being adopted are directed towards this end.

In conclusion, one of the things that we have learnt from the global financial crisis, is that we must be prepared to change our minds and our positions when the evidence changes. The findings from this research fall into that category. If investors really are concerned about absolute levels of greenhouse gas emissions, then that is what they need to focus on. They cannot simply assume that encouraging better corporate carbon management practices on their own will deliver the sort of absolute emission reductions that are required if we are to avert dangerous climate change.

This article is based on a recent article, “Are Corporate Carbon Management Practices Reducing Corporate Carbon Emissions?” by Baran Doda, Caterina Gennaioli, Andy Gouldson, David Grover and Rory Sullivan, published in the journal CSR and Environmental Management. Link.

Rory Sullivan is a Senior Research Fellow ESRC Centre for Climate Change Economics and Policy at the University of Leeds.