Q&A with John Moorhead (JM) and Dr. David Lubin (DL) co-authors of “Global 250 Greenhouse Gas Emitters: A New Business Logic” on the occasion of its launch in Geneva on 31st October 2017

Key Take-Aways

1.       Share of emissions: The Global 250 (G250) are essential partners to emission reduction and decarbonization, since G250 and G15 represent about 1/3 and 10% respectively of anthropogenic GHG (Greenhouse Gas) emissions (at a 60% rate of double counting).

2.       Leadership benchmark: The G250 needs to reduce GHGs by 3%/year linearly (absolutely and with positive decoupling) to show and achieve zero GHG emissions by 2050 latest.

a.       This reduction rate is compatible with UNEP’s 1.5 degree C pathway and Millar et al., 2017 study on carbon budgets (but not CarbonBrief’s analysis of remaining carbon budgets).

b.       About a 1/3 of the G250 have achieved this benchmark from 2014 to 2016 and 12% are in the Science Based Targets initiative

3.       Sustainability premium: There is no evidence of a financial penalty for decarbonization of the G250 and there is emerging evidence of a Sustainability Premium for those that decarbonize in Utilities and Automobiles (moderate correlation with Total Returns)

4.       Decarbonization platform: Due to the dynamic nature of GHG data & performance and as data quality, information and knowledge improves (particularly of Scope 3), this report is insufficient to engage, per se, and is rather a starting point for a decarbonization platform.

BSD: Why launch this report now?

JM:  The report is timely as it comes days before the UNFCCC (United Nations Framework Convention on Climate Change) COP (Conference of Parties) in Bonn in November 2017 and at the same time as UNEP launches its 2017 Gap Report and 1 Gigaton Report. These reports further inform states as they seek to raise the ambition level of their NDCs (Nationally Defined Contributions) at the COP to lower emissions and achieve the low and zero carbon economy.

BSD: How does the report help achieve the low and zero carbon economy?

JM: This report quantifies GHG (Greenhouse Gases) emissions of the 250 largest listed emitters (and their value chains). G250 emissions correspond to about a 1/3 of global anthropogenic emissions and the Top 15 about 10%. States can use this information to further partner with these non-state actors to further reduce emissions. For example, a country with a national utility or the EU with an automobile manufacturer.

BSD: In addition to states and managers who else should be interested by this report?

JM: Investors to decarbonize the economy and to better understand the carbon risk of their portfolios. The information provided on recent performance combined with companies’ decarbonization targets should be the basis on which companies are engaged with, not simple exclusion (except probably coal), as exclusion does not reduce emissions per se. Policy makers, stock exchanges, cities, NGOs, consumers and stakeholders of the G250 can use the report to better inform their decisions and engage with the G250.

BSD: Is there new evidence that decarbonisation either puts a drag on financial performance or on the contrary provides a sustainability premium?

DL: First, we found no evidence that executing decarbonization strategies results in a financial penalty, including reductions in total shareholder returns, reductions in profitability, or other common measure of financial performance.  Second, there is emerging evidence of companies driving business opportunity, competitive differentiation, and brand value through effective execution of climate impact management strategies.  Keep in mind that for about half the G250, the primary GHG impacts are based on use of their very energy intensive products.  Many firms are re-engineering their product offering to drive down energy and natural resource consumption, like Boeing’s new aircraft, or Ingersoll Rand’s newest GHG super-efficient refrigeration. They reduce life cycle costs for end user’s and GHG’s for the planet – and they are driving accelerated growth and profitability for the firms.  Likewise, electric utility companies like Xcel who have years of experience integrating renewables, now report to shareholders that their efforts are delivering cost structure advantages to Xcel, in part from lower fuel and maintenance costs. Xcel states that increasing profit margins no longer requires price increases.   The report attempts to develop new metrics to identify where companies are on a ‘Maturity Curve’ that depicts their ability to drive such strategic benefits.

BSD: How did the G250 perform?

DL: Only 74 (about a 1/3) of the G250 reduced emissions by 3%/year and decoupled growth from emissions (not controlled for inflation). The G250 average decrease was 4% over 2 years (GHG Index = 96) but on average decoupling was negative -2% revenues versus emissions over 2 years (Decoupling Index = 98). Utilities are leading the way in decarbonization (with an average Decoupling Index of 116) whereas Energy is last (Decoupling Index = 77, not controlled for price of fossil fuels) of five sectors.  Only 30 (12%) have a Science Based Target (comparable to CDP’s finding of 14% for their sample of high-impact companies) and none are Energy companies; Energy accounted for nearly half of G250 emissions (47%).

BSD: The GHG emissions reported are for Scope 1, 2 and 3, can you explain more what they mean? Can emissions be double-counted between Scopes? How does double-counting promote state and non-state cooperation?

JM: For each company there are total Scope 1 (direct), 2 (indirect) and 3 (value chains) emissions for 2014, 2015 and 2016. Consider circles for each scope where the size of circle corresponds to size of emissions. For each company there is no overlap between scopes, so the circles are separate (i.e. emissions cannot be part of Scope 1 and 3 for example) so no double counting. 

For an electricity utility that has natural gas-powered plants its Scope 1 circle will be biggest (energy used to produce electricity). For an energy company that sells natural gas to the utility its Scope 3 circle will be biggest (Use of Sold Product) and overlap with the utility’s Scope 1 circle where emissions are double-counted. Both the utility and the energy company have a shared interest to use for example a bio-gas with a lower carbon footprint as both their Scope 1 and Scope 3 will be reduced in size. The nation’s and cities’ footprints where the utility and energy company are located will also benefit from this reduction, thus incentivizing cooperation between all actors.

BSD: Does the report provide performance indicators? What are they, how can they be used and what are their limitations?

JM: The report compares changes in emission levels with changes in revenues levels to also understand decoupling (extent to which companies are growing with lower emissions). The GHG Index gives the rate of absolute decarbonization and the Revenues Index the growth in revenues. Together with the Decoupling Index they help understand a company’s GHG performance. For example, a company’s decrease in emissions could be due to selling off lower carbon parts of its business or an increase due to selling additional higher priced low carbon products. In the former case the Decoupling index would be below 100 and for the latter above 100. These indicators can be used across different countries and industries. However, they do have their limitations, besides the underlying data quality constraints.

Their limitations are that decarbonization does not necessarily follow a straight line and can take years, so you need a long enough time-frame to judge performance. Revenues are influenced by different country inflation rates and by pricing of commodities (for example fossil fuels). This means additional metrics are needed to understand performance more finely.

BSD: What other measures exist?

DL: The report describes new efforts from Constellation Research and Technology to develop strategy centric measure to better depict how companies are formulating and executing on the business opportunities and risks related to climate change.  The approach described in the report focuses on Maturity curves and Momentum scores as two complementary measures that use a well-known approach to benchmarking other core capabilities in business. The CRT team developed a series of sector-based Maturity Curves that describe the typical pathway companies follow from Initial Engagement on Climate Impact to realizing Competitive Differentiation including direct financial benefits, as well as brand and stakeholder engagement.  These measures intend to paint a clearer dynamic picture of who is leading, who is rising fast, who has taken a defensive posture, and who remains disengaged.

BSD: What about data accuracy?

JM: First of all, these values whether self-reported or estimated by others remain estimates. Companies are not counting the actual CO2 being emitted but by and large rely on conversion factors to calculate emissions. Secondly, data quality varies by Scope and depends on how long guidance has been available, level of control and complexity. Scope 3 (value chain) for example has consolidated guidance since 2013 and is for corporations’ value chain, so can be highly complex (Scope 3 has 15 categories).  Although companies do not have direct control of their value chains’ emissions they can have huge influence (selling electric or fuel-cell cars instead of fossil fuelled cars) and are often material (over 40% of total emissions) so must be estimated. Thirdly, data quality depends on estimation methodology and existing data availability. Finally, data quality, methodologies used, level of reporting, granularity and amount of data available evolves over time. This gives a very mixed picture of data accuracy with a mix of preliminary estimates and reported values that use different methodologies that vary in terms of data ownership and complexity by Scope and over time.

BSD: The report mentions a 3%/year emissions reduction rate to stay within 2 degrees, whereas the first report in December 2014 mentioned 1.4% why the difference?

JM: As the world puts off cuts in emissions the slope gets steeper to stay within the 2 degrees C carbon budget. There is academic controversy over the remaining Carbon budget with one recent study’s author Professor Myles Allen stating: "For a two in three chance of keeping temperatures within 1.5 C, we'd have to reduce emissions in a straight line to zero from where we are now over the next 40 years”. This would correspond to a 2.5%/year reduction rate (only refers to CO2, ¾ of GHG emissions) from 2017. However, for UNEP, “criticism of this study points to the fact that using different global average temperature data sets in the calculations would not lead to the higher budgets the study uses”. For CarbonBrief there were only 5.2 years left to stay within 1.5 degrees C of the Carbon budget and 20.7 years for 2.0 degrees C from 2015 (4.8 %/year linear reduction rate). According to UNEP 2017 Gap report to stay within 1.5 degrees C the world needs to go from emitting 51.9 GtCO2e/year in 2016 to 8 GtCO2e/year (median) in 2050 which corresponds to a close to 3%/year reduction rate on a linear basis. Given the academic controversy around carbon budgets, the importance of carbon dioxide emissions for the G250 and the uncertainty around particularly non-carbon dioxide GHGs’ performance the report recommends a 3% linear reduction rate so that the G250 reach zero GHG emissions by 2050 at the latest. This rate may change with better information on GHG emissions and carbon budgets.

BSD: So, what next?

JM: Our knowledge, information and data about GHG emissions is constantly improving. Reports every few months are helpful but are too static and don’t enable true engagement between corporations and stakeholders. This is the idea of developing a decarbonization platform for the G250 and its stakeholders. Data and analyses can be updated much more dynamically and comprehensively. The idea is to create a “one-stop-shop” on GHG emissions for the G250 and its stakeholders, to promote engagement and partnership to decarbonize the economy and stay well within 2 degrees warming, even 1.5 degrees C. A decarbonization platform would also more easily enable integration of SDG (Sustainable Development Goals) performance for the G250 as well.