ESG – Industry view – CDP


Emily Kreps, global director of investor initiatives at CDP


IS CORPORATE BEHAVIOUR GENUINELY CHANGING ON CLIMATE CHANGE?


For climate activists, 2020 is a critical year.


In the midst of extreme weather events around the globe – from bushfires ravag- ing Australia to the hurricanes that devas- tated parts of the US’ East Coast – the world has reached a turning point in its response to climate shocks. While energy- related emissions flattened in 2019, deep cuts, not merely a plateau, are essen- tial if nations are to meet their agreed goal of preventing average global tempera- tures from rising by more than 1.5-de- grees Celsius.


Risk-averse investors should view these trends as not just alarming, but actiona- ble. They must recognise – and reward – those businesses that are effectively managing climate-related risks to infra- structure, supply chains, production con- ditions and human capital. According to the UN, investors should now be planning for an inescapable glob- al policy shift that will force national lead- ers to move in new directions which will, in turn, trigger major financial impacts. Some companies have acknowledged that they need to change the ways they do business. But this apparent shift may be more a matter of style than substance, as demonstrated by Ryanair’s misleading, and withdrawn, advertisements claiming that it produces the “lowest carbon emis- sions of any major airline”.


24 | portfolio institutional April 2020 | issue 92


So to what extent are corporations genu- inely changing their business models – and what does this mean for investors? At CDP we have seen significant growth in the number of companies showing real leadership on climate action. We recently gave an A grade to 179 large listed compa- nies for their substantive efforts to reduce their


contributions to climate change.


These conscientious companies are found across all sectors and include AstraZeneca, BT, H&M, Nestle, Sainsbury’s and Sony. Becoming a climate leader isn’t an exer- cise in altruism; it makes solid business sense. Companies on our A list outper- form their peers on the stock market by 5.5% per annum, according to global index provider STOXX. However, these 179 pace-setting compa- nies account for only 2% of the 8,000 companies we graded from A to D- on climate response. Thousands of addition- al companies have to improve their stand- ing for the corporate world to be seen as taking rightful responsibility for address- ing the climate emergency.


The investment risks and opportunities related to climate change are most evident in high-emission industries, such as oil and gas, cement, steel and shipping. It is especially these sectors that must change course.


The current situation is not encouraging. Our research finds, for example, that the steel sector is failing to reduce emissions sufficiently to keep global warming below the 2°C breakpoint. Leading oil and gas companies are meanwhile spending only about 1% of their 2018 budgets on clean energy.


The current situation is also not hopeless. Some previously non-compliant corpora- tions with high carbon emissions are starting to act more responsibly. Norwe- gian energy giant Equinor plans to spend up to 20% of its budget on renewables by 2030, and Hyundai Steel has targeted an 80% reduction in emissions by 2050. Of course, climate change is only part of the unfolding global environmental crisis.


More than half of Europe’s endemic trees are threatened with extinction and 60% of animal populations have been wiped out since 1970. Corporations must also act far more sus- tainably in regard to highly vulnerable, shrinking and life-sustaining resources such as forests and water. The picture is similar on this biodiversity front with some examples of excellent leadership against a backdrop of slow pro- gress. Our research finds that the leading global consumer goods companies haven’t managed to fulfil industry com- mitments to zero net deforestation by 2020. This failure may indicate global staples are running high risks of climate- related price volatility. Leaders in the consumer-goods sector, however, such as Unilever, L’Oreal and Mars, recognise these risks and are gain- ing competitive advantage through prod- uct innovation and sustainable agricultural practices achieved through their interaction with smallholders. The takeaway is clear.


A small minority of companies are genu- inely taking a gentler approach to envi- ronmental impact and are reaping rewards in the form of share price perfor- mance and new business opportunities. The majority, however, are failing to tran- sition at the pace and scale required. Investors are key players in the global drama; its outcome will powerfully affect the lives of our children and grandchil- dren. As stewards of capital, investors can accelerate urgently needed changes and reap the benefits in the process.


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