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The money in green

Today, the Carbon Disclosure Project launches a report on the emissions of the world’s biggest firms. Paul Simpson, its boss, tells Olivia Boyd how going green boosts profits – and recession isn’t all bad news.

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Every year, the UK-based Carbon Disclosure Project (CDP) asks the world’s biggest companies to disclose details on their greenhouse-gas emissions and the actions they are taking on climate change. It represents 551 investors, with assets of US$71 trillion (454 trillion yuan). Today, CDP launches its tenth annual report on the carbon performance of the FT Global 500 – the world’s largest companies by market capitalisation. Its China-specific report is due to be published in November. 

Olivia Boyd: What is the most significant change in this year’s report?

Paul Simpson: For the first time in our 10-year history, the majority of responding firms have climate-change actions embedded in their business strategy. Historically we’ve seen a lot of companies start to take actions on climate change but do that very much with a piecemeal approach, or through a small CSR team that means two people in a corner of a 100,000-person organisation. But increasingly the big companies are integrating this into their core business strategy – the board is becoming responsible for climate change, and it’s seen as a serious business issue.

We think that’s significant because we haven’t seen it before; we’ve been creeping towards it but haven’t seen results like these: 68% of responding companies [tick this box], compared to 48% last year.

OB: What’s driving that improvement?

PS: Interestingly, a lot of it is about the companies own drivers, particularly commercial interests. Because of higher energy prices, we have seen companies realise they can reduce greenhouse-gas emissions in certain areas quickly and with relatively fast return on investments – about 60% of the emissions-reduction activities companies are undertaking are paying back financially within three years.

Obviously in some areas, particularly Europe, there’s also regulation driving this activity, but a lot of it is coming down to economic drivers. Companies have been forced to look for ways to cut costs in recent years and one of those, particularly with these high and volatile energy prices, is to reduce energy and therefore reduce emissions.

OB: People often assume that, during recessions, attention gets pulled away from action on climate. But it sounds from what you’re saying like the financial crisis has almost had the opposite effect.

PS: I think that’s right. A lot of people ask that question – how has the financial crisis affected disclosure or companies taking climate change seriously – and I think it depends. If the company is just doing it for a branding reason, or communications reason, then it may stop doing it. But greenhouse-gas emissions and energy use are very linked, and I think companies are generally understanding this link.

OB: Your report says that companies in your Carbon Disclosure Leadership Index (CDLI) – the firms leading the way on transparency and carbon reduction – are outperforming others financially. Why is that happening?

PS: It’s hard to say. We think this is a very interesting area that will need further exploration but, clearly from the work we’ve been doing, companies who are prioritising strategic carbon reporting and carbon performance are outperforming the benchmark of the Global 500 companies in terms of total financial return – they provide approximately double the financial return over the last six years.

We think this is an indicator to companies and investors that companies who take climate change seriously and integrate it into their strategy may perform better financially over time. And clearly what investors are looking for is to identify who will be the winners and losers in a world with climate change and – hopefully – a transition to a low carbon economy. This indicates that we are starting to see some of those companies and who they might be.

Good carbon performance and disclosure is a proxy for good management and therefore a well run company that should perform well in all areas.

OB: China has no firms in the CDLI. And Asia generally is lagging. Why?

PS: If we look at Asia generally – and this is making major generalisations – it is a region where the markets are somewhat less used to thorough disclosure. It’s also, specifically in terms of climate change, an area with less advanced regulation. Therefore the regulatory pressure on companies is relatively low and therefore companies are not focusing on climate change and making it a priority. I think also one internal reason to the CDP is that we are less established in Asia than we are in Europe and the United States, and we are working to change that.

China is a tough one because clearly its priority issue is economic growth. Increasingly, the understanding is that climate change may affect economic growth – both negatively and positively – so it needs to embrace that. We saw that with the last Five-Year Plan. More needs to be done, but there’s some positive movement there.

There are 13 Chinese companies in the Global 500, and only two of those reported to CDP this year. These are not really large enough numbers to give us statistics that tell us trends. But two out of 13 is approximately 15%, so 15% of Chinese companies responded, compared to the average in the Global 500 of 81%. I think what is clear is that in China at the moment we don’t have specific transparency from Chinese companies on climate change.

OB: How much of a barrier is that to achieving China’s low-carbon goals do you think?

PS: At the launch of our 2007 report, Bill Clinton said: “The purpose of the CDP is to keep score.” China is going to need a system and a process that allows it to track and measure progress against the Five-Year Plan and against other objectives it has, and without that, any commitments don’t hold an awful lot of credibility. So I think in this case, China will need to develop better systems for transparency and disclosure, so that it can present to the world many of the great things that it’s doing. We know there is increasing activity in China and from Chinese companies and the government on climate change and there will come a point in time where they realise the benefit of doing that.

Chinese companies are growing very fast and it can be difficult to prioritise this when you’re growing fast. It’s interesting that CNOOC, the Chinese oil and gas company, does disclose – it gets a disclosure score of 32, which is not in the top league by any means, but it’s really making progress.

OB: What can you do about the companies – in Asia, the US or anywhere – who don’t move with the tide and improve?

PS: One thing is publishing who does and who doesn’t measure and report. In places like the United States, we’ve seen quite a number of shareholder resolutions by investors against companies who haven’t disclosed and even who haven’t set emissions-reduction targets. So there’s investor pressure.

We’ll also see increasing customer pressure – I don’t just mean consumer to business but also business to business. We have another programme which is our supply chain programme, and we are seeing large multinational firms, regardless of which country they’re from, increasingly asking their suppliers for this kind of information. I think that’s likely to be more of a significant driver in China than the investment community.

OB: Apple has been heavily criticised in China for secrecy over environmental problems in its supply chain, and I see it's also on your list of biggest "non-responders". How do you get companies like this to pay more attention to suppliers?

PS: Partly, it comes back to the good management approach. We would say a company that is well managed would take climate change seriously because it affects business, and would take their supply chain – including its climate impacts – very seriously too.

Apple probably has its own reasons for not responding [to the CDP survey] this year – they have responded previously – and part of that is probably because they are growing very fast, and I would imagine their emissions are also growing very fast. For all companies, it’s challenging if you’re growing very fast to keep your emissions stable. However, companies still need to be disclosing that and reporting on it and we would expect them to do so.

As to how we get more companies to take their supply chains seriously, it is happening naturally over time and there is a trickle down effect that takes significant time. For instance, we started our work on supply chains with Walmart, clearly a very large company with something like 100,000 suppliers. Once they ask some of their tier one suppliers [to make disclosures], that will eventually lead some of those tier one suppliers to ask some of Walmart’s tier two suppliers to do the same. But it takes time. Most of the large multinationals are starting to focus on this. I’m sure Apple is taking action on this, they’re just not reporting on it – and the question is why not.

OB: You’ve got a new project this year that aims to increase the direct role of investors in pressuring companies to change. Can you explain it a bit?

PS: When we formed CDP, it was very much about helping investors best understand the risks and opportunities of climate change. After a number of years, some of our signature investors said, we’re getting much better data but we really need to see certain companies taking firm action. So that’s what led to the launch of Carbon Action. It’s really a way for us to coordinate combined, investor pressure on companies.

A group of investors – 37 of them – are asking all the Global 500 companies to set greenhouse-gas emission reduction targets and saying that, where there are activities that would reduce emissions and where there is satisfactory financial return, the companies should be expected to have undertaken those activities.

This makes sense to the investor: if a company can make an investment, reduce greenhouse-gas emissions and energy use, which is going to reduce risk for the future and have positive financial payback in a short period, then why shouldn’t they do it?

OB: So is appetite for investor activism increasing as the risks of climate change become more visible?

PS: There are a number of leading investors who are very knowledgeable about this area and taking it very seriously. However, there are still a lot of investors who are not in that place. And the real reason for that is we still struggle with the systemic problem in the financial markets, which is that they are very short term. Only when we’re beating this short-term cycle will we see more and more significant acts from investors.

Olivia Boyd is assistant editor at chinadialogue.

Homepage image from the Carbon Disclosure Project shows Paul Simpson.

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