TODAY’S STUDY: BUSINESSES DISCLOSING AND HIDING THEIR EMISSIONS

Global Climate Change Report 2013

12 September 2013 (Climate Disclosure Project)

Executive Summary

Businesses increasingly face the dual risks of climate and policy shocks. How companies build and demonstrate their resilience to these climate risks has important implications for their reputation with their stakeholders and for the value of their businesses. It is for these reasons that 722 investors representing US$87 trillion of assets this year requested that the 500 largest listed companies measure and report what climate change means for their business through CDP’s climate change program.

This year, 81% (403) of companies in the Global 5001 took part. Demonstrating Corporate understanding of the need for climate transparency, the quality of the information provided by companies has continually improved. To secure a position on CDP’s Climate Disclosure Leadership Index (CDLI), companies must achieve a disclosure score in the top 10% of the Global 500 sample. The minimum score for entering the CDLI has risen to 97% (up from 94% in 2012 and 90% in 2011). The number of performance leaders demonstrating a strong approach to climate strategy and emissions reduction in their CDP responses has increased since last year. This highlights how seriously corporations treat their carbon reporting and that this reporting increasingly translates into action.

This report is written for companies, investors and policy makers that want to understand the climate change related risks and opportunities facing business. It assesses how ten key sectors are addressing these challenges and eliciting competitive advantage from this. It looks at how growing markets for products and services are impacting companies’ responses to climate change. It also outlines trends seen in companies which are reporting barriers to actions.

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1) Big emitters are not doing enough to reduce emissions

Total scope 1 and 2 emissions2 from the Global 500 have fallen steadily from 4.2 billion metric tons CO2e in 2009 to 3.6 billion metric tons CO2e in 2013. However, scope 1 and 2 emissions from the 50 largest emitters3, which emitted 73% of total emissions in 2013, have increased by 1.65% since 2009 (see Table 1). The five largest emitters of each sector have also seen their scope 1 and 2 emissions increase by an average of 2.3% since 20094 (see sector snapshots for details). This suggests that the biggest emitters, who have the largest impact on global emissions and so present the greatest opportunity for large-scale change, need to do more to reduce their emissions. Policy makers could help to accelerate the necessary change by increasing incentives.

The difference in the direction of change between the Global 500 sample and the largest emitters can to some extent be explained by a change in the number and composition of companies within the Global 500 since 2009. However, emissions of the largest emitters remain globally significant.

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Energy, utilities and materials companies, for example, represent less than a quarter of the Global 500 population but are responsible for well over three quarters (87%) of scope 1 and 2 emissions. The proportion of companies from these high emitting sectors has fallen from 26% in 2009 to 23% today.

Had the proportion stayed the same, emissions in 2013 would have been significantly higher. Indeed, the scope 1 and 2 emissions of each of these sectors are individually more than double the combined scope 1 and 2 emissions of all other sectors. The drop in scope 1 and 2 emissions from utility companies alone since last year is equivalent to more than the combined scope 1 and 2 emissions from healthcare, consumer staples, consumer discretionary, telecommunication services, IT and financials.

This year the majority of Global 500 companies report emissions reduction targets (84%) and resulting emissions reductions5 (75%) in some areas of their business. However, with an increase since 2009 in scope 1 and 2 emissions for the highest emitters across the Global 500 and in each sector, there is a disparity between companies’ strategies, targets and the emissions reductions which are required to limit global warming to 2C.

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2) Companies are yet to report emissions from the most relevant parts of their value chains

Most companies (97%) disclose scope 1 and 2 emissions from their operations. However, while companies are able to identify the most carbon intensive activities from their value chains, the emissions of nearly half (47%) of these activities are yet to be quantified.

Instead of measuring carbon-intensive activities in their value chain, companies often focus on relatively insignificant opportunities for carbon reductions. Figure 3 shows the disparity in the proportion of companies reporting the different types of scope 3 activities and the actual scope 3 emissions reported for each of these activities. While ‘use of sold products’ is reported by 25% of companies, it accounts for 76% of reported scope 3 emissions. Meanwhile, 72% of companies report emissions from business travel, which accounts for only 0.2% of total reported scope 3 emissions.

The importance of different scope 3 categories varies between sectors. However, companies do not always report their primary sources of scope 3 emissions.

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For example, while 83% of financial companies report emissions associated with business travel, only 6% of them report emissions from their investment activity, where the significant majority of their scope 3 emissions originate. Similarly, only 22% of industrials report emissions from the use of sold products, which is where the majority of their scope 3 emissions come from.

Overall, this suggests that current scope 3 reporting does not reflect the full impact of companies’ activities, and may mislead as to the full carbon impact of a company.

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3) Money talks: financial incentives are driving emissions reductions

Monetary rewards for employees are powerful tools to drive climate action. Figure 4 shows that companies with monetary rewards are more likely to achieve absolute emissions reductions. With the exception of the energy sector, companies reporting monetary rewards linked to energy or emissions reductions are more likely to report decreases in emissions. 85% of companies that provide monetary incentives to the board, executive team or all employees, report emissions reductions in the past year. By comparison, only 67% of other companies report reductions in emissions.

4) Other findings from the Global 500

Companies find it easier to quantify risks rather than opportunities.

Global 500 companies identify a range of risks and opportunities (see Figures 5 & 6). However, they are more likely to quantify and monetize the impact of risks than opportunities: 54% of companies quantified at least one risk while only 41% quantified at least one opportunity. Companies tend to focus on tangible risks in areas such as carbon taxes or energy prices, whereas the benefits from climaterelated opportunities are often less tangible, such as changing consumer behavior. Companies are consequently less likely to quantify the impact of these opportunities. This suggests that businesses may be missing some significant risks and opportunities because valuation methods are unavailable.

The broad categories of climate risk reported are: regulation (84%), physical impacts (83%), and other related risks such as reputation (77%). Within these, reputation, changes in seasonal rainfall, cap-andtrade schemes and carbon taxes are mentioned by 51%, 43%, 42% and 39% of companies respectively.

The most common climate-related opportunities mentioned by Global 500 companies are the less tangible changing consumer behavior (53%) and reputation (51%).

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Longer payback times linked to strategic advantage

When considering capital investments in emissions reduction activities, companies can face challenges in justifying investments with longer payback periods (three years or more). However, companies that are making longer term investments to reduce their emissions are more likely to report that their climate change strategy affords them a strategic advantage over their competitors. 77% of companies with at least one investment with a payback time of three years or more state that their climate strategy gives them a competitive advantage (65% in 2012). Of the companies which do not have long-term investments in emissions reductions, only 54% report a strategic advantage from their response to climate change (2012: 58%).

Rise in independently verified emissions ensures data quality

71% of responding companies verified their emissions in 2013: a 29% increase from 2012 and almost double the percentage in 2011. Investors and shareholders have always demanded accuracy in a company’s financial information. Increasingly, they are demanding accuracy in non-financial information as well. This positive trend should increase the trust in the data and therefore its use.

Table 2 compares sectors’ climate performance scores with the average score across the Global 500. Across the four categories which were analyzed, utilities significantly outperformed average Global 500 companies while energy under-performed.

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Sector overviews:

Consumer Discretionary

Total scope 1 and 2 emissions in consumer discretionary are not as significant as emissions in other sectors. However, the scope 3 emissions are 19 times higher than the sector’s total scope 1 and 2 emissions. Emissions of the five biggest emitters have not changed significantly since 2009, although a majority of companies in the sector has reported absolute emission reduction targets as well as a decrease in emissions due to emissions reduction activities. Sector leaders have obtained outstanding results in the CPLI and CDLI, with three companies (BMW, Daimler and Royal Philips) achieving the maximum disclosure score of 100 as well as the highest performance band A. Nevertheless, the sector remains average in its overall performance relative to the Global 500 sample. 6 The sector assessment is based on the following areas of the questionnaire: emissions performance - reporting of scopes 1, 2, and 3 emissions data and % operational spend on energy costs, energy use, absolute and/or intensity targets, emission reduction activities, change in emissions from prior year. Governance - level of oversight, incentives/rewards, risk management approach. Verification/stakeholder engagement - verification/assurance, engagement with policy makers, communication of sustainability information to public. Strategy - integrated strategy, identified risks and opportunities, emissions trading.

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Consumer Staples

Consisting of some of the world’s biggest consumer brands, companies in consumer staples are heavily influenced by changing consumer preferences. Although 58% of companies report a decrease in absolute emissions, the sector’s overall scope 1 and 2 emissions have increased by 2.9% since 2012. However, the sector accounts for only 3% of total scope 1 and 2 emissions reported by the Global 500.

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Energy

With one of the highest overall emissions of all sectors – the sector is responsible for 28.3% of total reported Global 500 scope 1 and 2 emissions – efforts to reduce emissions in the energy sector are essential to the global mitigation of climate change. However, 50% of energy companies have a performance band of C or lower. Since 2009, the overall emissions of the ten biggest emitters in the sector have increased by 53%. The sector also has the highest number of companies without emission reduction targets (24%), which companies justify by concerns that targets would constrain growth in their companies and in the wider economy.

Financials

The financial sector makes up 24% of the respondents but is the lowest emitting sector in the Global 500: it represents only 0.6% of total reported scope 1 and 2 emissions. While 67% of companies report reductions in their emissions since 2012, there is a general lack of understanding of the full impact of companies’ value chains. Indeed, only 6% of financials report the carbon impact of their investments, which would be their main area of scope 3 emissions.

Healthcare

Representing only 0.8% of total reported Global 500 scope 1 and 2 emissions, the healthcare sector has a limited impact on global emissions. Nevertheless, 57% of companies report a decrease in absolute emissions since 2012 (total decrease of 4.9%). Consistent drivers for emissions reductions are energy efficiency activities such as green information technology and building efficiency.

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Industrials

Industrial companies will play an important role in the transition to a low carbon economy and 97% of industrial companies report that their products and services help reduce emissions. However, only 22% of companies in the sector report the emissions from the use of sold products, which suggests an incomplete understanding of their full value chains’ impacts.

As companies respond to the demand for more efficient products, many companies have made substantial investments into research and development. Companies are also engaging proactively with policymakers, where regulation plays a central role in the sector’s response to climate change. Changing regulation can present significant opportunities for companies, but equally uncertainty surrounding new regulation can pose threats to business.

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Information Technology

Overall emissions in the information technology sector have decreased by 21.9% since 2012. However, half of this reduction is due to divestments by Samsung. 89% of information technology companies state that their products help reduce emissions, which is important as the sector’s scope 3 emissions are more than four times that of their scope 1 and 2 emissions.

Materials

The materials sector is the third biggest emitting sector, representing 26.2% of total reported scope 1 and 2 emissions. Companies are heavily exposed to regulatory risks such as carbon taxes and cap-andtrade schemes, with 74% of companies reporting regulatory issues as key risks. Mining companies, in particular, are also concerned about losing their licenses to operate and reputation is therefore seen as a significant risk (63% of companies).

Telecommunication Services

Representing 1.1% of total reported scope 1 and 2 emissions, the telecommunication services sector is focusing on avoided emissions for others rather than emissions from own operations. In fact, all companies in the sector state that their products and services help avoid emissions. 91% of companies have emissions reduction targets and the sector’s overall scope 1 and 2 emissions decreased by 0.6% compared to 2012.

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Utilities

With the highest emissions of all the sectors, representing a third of total reported scope 1 and 2 emissions, utility companies will play a critical role in helping customers and businesses avoid emissions. While overall emissions in the sector have decreased by 10.2% since 2012, this is to some extent due to a change in population of respondents. The sector demonstrates a comparatively mature response to climate change, with all companies having emissions reduction targets.

Utilities are acutely aware of the risks and opportunities from climate change. They therefore engage with policymakers to help inform the setting of climate targets more than any other sector and have set up working groups for special programs. Utilities are also looking at their whole value chain and are helping customers avoid emissions through a wide range of products and services that promote energy efficiency and savings.

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