Why Sustainable Investing Makes Good Business Sense

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Paul Simpson has been at the forefront of the Carbon Disclosure Project’s expansion since its inception in 2000. His ambition was to create a global economic system that operates within sustainable environmental boundaries and prevents dangerous climate change.

Prior to creating CDP, Paul Simpson worked with Chesham Amalgamations & Investments, as well as the International Society for Ecology & Culture and is a former director of the Social Venture Network. Paul also sits on the advisory panel of Guardian Sustainable Business and the Global Stranded Assets Advisory Council for the Smith School of Enterprise and the Environment at Oxford University.

We talked to Paul about sustainable investment, leadership on climate action, and the importance for companies to start measuring and understanding their environmental impact.

Thanks a lot for your time today Paul. Can you introduce us to the Carbon Disclosure Project?

We rebranded from Carbon Disclosure Project to CDP in 2013, as our work had grown to become broader than climate change. CDP launched the concept of environmental disclosure in capital markets in 2002, working with institutional investors to motivate companies to measure and disclose environmental information on an annual basis. We wanted to transform capital markets by making climate change reporting and risk management a business norm; the theory being what gets measured gets managed.

At the time CDP had just 35 investors signing its request for climate information, and 245 companies responding. This was the first systemic link between environmental and financial information.

Today, over 6,300 of the world’s largest companies, representing some 55% of global market value, disclose information on climate change, water and deforestation through us, at the request of investors with US$87 trillion in assets.

Why is it so important that companies start measuring and understanding their environmental impact?

Companies leading the way on sustainability tend to perform well financially. According to STOXX, companies on CDP’s Climate A List have outperformed the market by 6% over four years. Unilever and L’Oréal, the only companies to get an A across CDP’s climate, water and forests A Lists, have both seen their share price increase over 50% in the last five years.

Being aware of environmental issues doesn’t just open companies up to financial opportunities, it also allows them to monitor, manage and mitigate risks to corporate performance. For example, a recent CDP report showed that up to US$941 billion of turnover in publicly listed companies is dependent on commodities linked to deforestation.

Furthermore, some 87% of companies reporting to CDP identify risks from deforestation and nearly one third (32%) are already experiencing impacts on their business from those risks.

So just as acting on sustainability issues can improve financial performance, inaction can leave companies open to significant negative financial impacts.

What is the first decision that businesses can take to reduce their impact on the environment?

Measuring their environmental footprint is the first step companies can take towards managing their impact. The easiest way to go about this is by disclosing to CDP and taking a proactive role in one of our initiatives. Once measurement is underway companies should develop a comprehensive strategy to mitigate risk and seize opportunities, including setting clear, time bound targets for improvement. Setting a Science Based Target for greenhouse gas emissions is the leading method of showing tangible commitment to aligning your business with the goals of the Paris Agreement and demonstrating a sufficient transition plan.

Companies worldwide and from many sectors are setting science-based targets, which provide them with a clearly-defined pathway for aligning their emissions reduction strategies with the goals of the Paris Agreement and a 2C pathway. To date, 355 companies have committed to set emissions reduction targets in line with climate science, and our data indicates that several hundreds more intend to do so in the next couple of years.

This is an important shift for companies, from doing what they think they can easily manage, to stepping up to do what’s needed. This is responsible and smart business in the age of climate change.

In which countries do you see businesses making the greatest efforts towards the environment?

China is innovating in both the private and the public arena in many respects — our recent report on the automotive sector  found that China is key to auto sector disruption as it has the largest vehicle market in the world and has aggressive targets for low emissions vehicles such as electric vehicles. This is significant as China accounts for 29% of global passenger vehicle sales.

Our data also shows that carbon pricing is on the rise, on both a national and a corporate scale — not least in China which has launched its carbon trading scheme, set to become the world’s largest.

Our latest joint report  with the Climate Disclosures Standard Board (CDSB) on how prepared companies and countries are for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) also finds that certain regions, such as the UK, France and Germany, have the highest levels of board level oversight on climate risk. As climate risk becomes a more tangible threat in the future, it is promising to see leadership on climate action being driven from the top.

What are the main arguments to encourage investors to turn towards sustainable investment?

Sustainable investing isn’t just about doing good, it is about good business sense. The risk element is a significant factor for investors in terms of the value of their investments. Companies held in investment portfolios can be affected by regulation, technology and consumer shifts and extreme weather events such as floods or water scarcity. Corporations and investors must prepare for these as there are both opportunities and threats at stake.

Much evidence is also suggesting that funds which incorporate environmental standards into their strategies tend to do better than those that don’t. For example, recent analysis by MSCI has found a statistically significant link between ESG information and the valuation and performance of companies.

At the same time, there is increasing demand for sustainable strategies from a new generation of investors. Indeed, research by Morgan Stanley found that millennial investors are twice as likely than the overall population to invest in companies targeting social or environmental goals.

Meanwhile, recent reporting initiatives such as the TCFD are pushing for more disclosure from companies, but also from investors on the environmental impacts of their operations and strategies. Momentum is building and it will not go away.

How does CDP contribute in helping policy-makers to make the right decisions?

CDP provides the data to track the progress of the global economy, and inform smart policy decisions on climate, water and deforestation. Our data powers several tools, including Carbon Pricing Corridors, working with companies and investors to map the carbon pricing signals required to achieve the emissions reductions demanded by science. Our disclosure platform enables global reporting at scale against TCFD recommendations from 2018, with more than 6,000 companies reporting through CDP.

Dolina Olczyska, Zakopane, Poland

Our data last year highlights how cities are stepping up action on climate change with a sharp rise in environmental reporting, emissions reduction targets and climate action plans since 2015. Demonstrating that cities are able to collectively work towards a green economy, there has been a 20-fold increase in the number of green economy actions from disclosing cities over the last six years. Our recent ‘World’s Renewable Energy Cities’ data demonstrated the ability for cities to produce their electricity with renewable energy, mapping over 100 cities now producing the majority of their power with renewable energy. Cities are currently instigating renewable energy developments valued at US$2.3 billion, across nearly 150 projects. This forms part of a wider shift by cities to develop 1,000 clean infrastructure projects, such as electric transport and energy efficiency, worth over US$52 billion.

You have done a lot of research on climate risks and low carbon opportunities from the world’s largest companies. What have been your most interesting findings?

Our investor research series analyses exclusively high emitting sectors, including oil and gas companies and car manufacturers. Our latest research on the automotive sector ‘Driving Disruption’ shows that car manufacturers are facing a double hit of disruption from electric vehicles and autonomous and shared driving, with profits likely to shift to tech giants such as Uber and Google as part of the transition to a low carbon economy. We also found that the zero-emission and plug-in hybrid market is likely to be worth USD$1 trillion by 2030.

Our chemicals research report ‘Catalyst for Change’ found that one of the key outputs of the industry is plastic packaging, accounting for over a quarter of global plastics usage, yet nearly 8 million metric tonnes of waste (the weight of 2,000 Eiffel Towers) ends up polluting oceans each year. Just as carmakers faced a regulatory backlash when the consequences of diesel on air pollution became clear, chemical companies could face a similar ‘diesel moment’ because of their links to plastic packaging.

What would you say is the most challenging aspect of combating climate change for businesses?

Businesses face a number of challenges and pressures in the wake of tangible threats to our environment. Perhaps one of the most challenging aspects for business is driving change not only internally but across their sector and amongst their competitors. There needs to be real systemic change across the board and it requires the voices of many to drive this effectively and to persuade others to follow suit.

Focusing on long term value to businesses by combating climate change is another challenging aspect — however, the research is clear on this. We need to move away from a culture of short term wins to focus on the gains of a long-term business strategy on climate risk.

How confident are you about a future where businesses become greener and more considerate about the environment?

We’re confident about the transition to a low-carbon economy, and we believe that we are approaching a tipping point that will mainstream environmental action. As new businesses and technologies emerge and scale up, billions of dollars of value are waiting to be unlocked, even as many more are at risk. Last year we saw votes at the AGMs of ExxonMobil and Occidental where shareholders, for the first time, demanded more transparency on climate risk from oil majors. This is a sign of what is to come and a signal that climate change is now a mainstream risk which needs to be taken into account by all market players.

What would you say were the biggest achievements of CDP in the last years?

Over more than 15 years of work, CDP has led the development of environmental disclosure in capital markets and been a significant contributor to the ‘mainstreaming’ of environmental impacts within business and investment communities — we now have 6,300 companies and investors representing US$87 trillion behind our work. Our data is powering genuine change in the market and we’re seeing real impact. A recent example is Norway’s sovereign wealth fund (the largest in the world), which this year called for the 9,100 companies it invests in to submit data on issues such as water use and climate effects to CDP, so that it can effectively manage and mitigate the risks that could threaten long-term earnings.

What’s next on your plate?

This year, we are responding to growing market needs for environmental risk and opportunity analysis by optimizing our reporting process and introducing sector-focused, forward looking disclosure, in line with the recommendations of the Task Force on Climate-related Financial Disclosures.

As companies, investors and other data users advance in how they address climate change, water security and deforestation, they require sector-focused, forward looking and comparable data to ensure the provision of the most relevant and meaningful data and insights. This enables easier comparison of progress against peers.

Our newest installment of the investor research on the cement sector and the built environment is coming out in April, which will assess how prepared cement companies are for the low carbon transition. We remain focussed on ensuring the setting of Science Based Targets becomes a business norm.

Interview by The Beam Editor-in-Chief Anne-Sophie Garrigou.

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