Growing numbers of the world's largest companies are putting ambitious strategies in place to slash their greenhouse gas emissions, and data indicates that in addition to addressing climate risks to their business these firms are consistently performing better than their peers on the stock market as a result.
That conclusion comes today from carbon disclosure non-profit CDP, which each year analyses disclosed environmental data from over 8,000 major corporates, scoring each of them on their CO2 reduction, transparency, and climate commitments, before ranking them with an A to D grade. Those providing insufficient information to be evaluated, or which fail to provide adequate levels of disclosure, are marked with an 'F'.
The data is provided by listed companies in response to information requests from CDP, which is backed by a raft of leading investors.
From the 8,000 companies assessed, CDP today confirmed that 179 had made the prestigious A-list this year, representing just two per cent of those assessed. The top tier companies includes a host of familiar names such as Microsoft, Unilever, BT, L'Oreal, H&M, Sainsbury's, Danone, Nestle, Sony, Walmart, Ørsted, and the LEGO Group, among many others.
CDP described these 179 A-list companies as the climate leaders of the corporate world, with many of them demonstrating comprehensive disclosure of climate data, strong awareness and management of risks to their businesses posed by climate change, and best practices to address those risks.
But crucially, it found this cohort of A-list firms had outperformed their competitors on the stock market by an annual average of 5.5 per cent over a seven-year period, according to the STOXX Climate Leaders Index. The analysis provides yet further evidence that - as CDP has consistently been finding for several years now - environmental transparency and ambitious climate action appear to be correlated with greater financial success.
What is more, the benefits of being a corporate climate leader are only set to keep stacking up in the coming years, particularly given growing pressure from consumers and investors, according to Dexter Galvin, global director of corporations and supply chains at CDP.
"I think the rewards will be there in the marketplace, absolutely," he tells BusinessGreen. "And even more so than before."
He points to calls last week from BlackRock CEO Larry Fink - head of the largest asset manager in the world, which boasts around $7tr of investments - who warned every company "must confront climate change", as well as moves from major hedge funds such as TCI and CIF to place more onus on climate transparency and disclosure in their dealings with companies.
Galvin also highlights data from CDP which shows that in 2019 more than 525 investors with $96tr in assets under management, as well as 125 major purchasers with $3.6tr in procurement spend, all requested that companies disclose carbon data through CDP. As such last year as many as 8,400 firms responded to CDP's information requests, up 20 per cent from 2018.
"A lot of organisations' license to operate will depend on their level of transparency and action on climate change over the coming years," he explains. "They're going to see massive impacts from consumer pressure, increased regulation, and increased frequency and severity of extreme weather events now. So, if you're not ready for this, then it's going to bite you. That's where we are."
Moreover, Galvin argues leading firms in CDP's A-list are not just performing better on climate action promises and disclosure because their existing profit margin and stock market performance affords them greater resources for major initiatives to measure and reduce their emissions.
"Performance on this issue [CO2 disclosure and targets] is a lead indicator for good governance and good management practices in other areas - not just sustainability areas, but other areas across the business," Galvin says. "I don't think it would be correct to say these companies would have enjoyed strong stock market performance regardless of their climate efforts. If you look at the size of our sample, we're covering about 80 per cent of the market capitalisation, and only two per cent of those 8,000 companies responding to our questionnaire have made it into the A-list. So there's a hell of a lot of big corporates out there that aren't making the A-list that aren't performing quite as well financially either."
The A-list firms hail from 22 countries around the world, although the list is heavily weighted towards Europe, North America and Asia. The data shows Japan has the most A-list company headquarters with 38 - up from 20 in the list last year - followed by the US with 35, and 22 based in France
But what are the actions they are taking which makes them better climate performers? Broadly speaking, examples of best practice include shifting to renewable energy, investing in low carbon product innovation, using internal carbon pricing mechanisms, and incentivising suppliers to cut their emissions, according to CDP.
Perhaps most importantly, all 179 top performing companies have drawn up detailed emissions reduction strategies backed by ambitious targets, which helps to spur green projects and investments, Galvin explains. That includes 100 companies which have joined the Science-Based Targets (SBT) initiative, in order to measure their emissions in line with independent standards and align their carbon targets and business strategies with the latest climate science.
"I think the biggest thing is to have a science-based target in place, and if not, a company has to have extremely robust targets to reduce emissions," Galvin says of what is takes to make the A-list ranking. "There's a heavy weighting in our assessment in favour of companies that have strong targets to reduce emissions, and we've seen a lot of exciting activities and really ambitious targets come through this year."
As more of the corporate world catches on, too, the number drawing up ambitious greenhouse gas reduction goals looks set to grow significantly in the coming 12to 18 months. At the COP25 global UN climate change summit last month, for example, 117 companies pledged to align their business with 1.5C of global warming through the SBT initiative, while a further 500 pledged to be net zero organisations within a decade. With the pursuit of net zero emissions likely to be one of the dominant issues at the crucial COP26 Summit in Glasgow later this month investors and campaigners are hopeful this year will see a major increase in the ranks of companies with ambitious emissions goals.
Nevertheless, while this growing ambition is welcome and hugely important, at this stage many of these commitments remain just that - commitments, rather than tangible, demonstrable decarbonisation efforts.
That is why the role of CDP remains so important. "The key thing now is to see whether these companies actually meet these targets, so we have to continue to push disclosure and continue to assess their performance against these targets year-on-year," says Galvin.
Moreover, these top-performing companies only account for a fraction of the total assessed by CDP, and that is even before you begin counting the millions of privately held or small and medium enterprises globally, which often lack the investor pressure or the capital required to drive decarbonisation efforts.
"These companies have excellent foundations for improvement in the years to come," Galvin says of the A-list firms. "They have stretching targets, they have the right governance in place, and they are undertaking the right sorts of emission reductions in their own operations. But we need all companies to go further on this. This A-list is only two per cent of the companies that have responded to us. And then of course, there's a huge number of companies that haven't been transparent at all. So we need to hold companies around the world to account and ensure that they provide this information and make informed decisions."
The top performing companies are likely to continue reaping the benefits of being climate leaders over the coming years. But if the 2020s is to be the 'decade of action', as the UN has labelled it, their number has to grow fast. The hope is that efforts praised as leadership today soon become the bare minimum expected of the corporate world as it journeys along the path to net zero emissions.
This article was first published on sister website Business Green