The ‘State of the Transition’ research assessed 274 of the world’s high emitting companies, but found that 46% are failing to adequately integrate climate change into their business decisions with one quarter failing to report emissions at all.
The report, produced for TPI, was compiled by the London School of Economics’ Grantham Research Institute on Climate Change and the Environment with the project backed by the UN Principles for Responsible Investment (PRI) organisation.
Professor Simon Dietz, co-director of the Grantham Research Institute and lead author of the report, says: “Cutting through the noise we can see that barely 12% of companies plan to reduce emissions at the rate required to keep global warming below 2°C.”
The report assesses companies on ‘management quality’ related to climate plus their ‘carbon performance’ in terms of current and planned greenhouse gas emissions, although data was not available from all firms for emissions as many fail to measure it.
The research found that 27% of companies are making improvements amid some very bleak findings for certain sectors.
Manufacturers did very badly on management quality with steel producers as the back markers and aluminium, cement and paper manufacturers also faring poorly.
No airlines were on track to meet the 2°C target and the TPI argues they need to provide clarity in term of much-vaunted plans for offsetting emissions.
No oil and gas company out of 10 examined is on target for 2030 though the research suggests Total and Shell could meet the target by 2040.
The institutional investors backing the initiative and who control $14trn worth of assets globally are calling on all investors to put pressure on these firms.
Pension funds can’t manage financial risks
Adam Matthews, co-chair of TPI and director of ethics and engagement at the Church of England Pensions Board, says: “TPI’s research shows that we need many more investors to engage with big-emitters across all sectors of the economy to ensure companies are setting emissions targets consistent with the goals of the Paris Climate Agreement.
“Engagement is starting to show results but not at the pace needed. A failure to grasp the seriousness of the warning from this TPI report, and to recognise the slow pace of corporate progress, will directly undermine our ability as pension funds to manage the financial risks within our portfolio for our beneficiaries.”
Consistent investor voice
Meryam Omi, head of sustainability and responsible investment strategy, Legal & General Investment Management, says: “All sectors must play a role in meeting the climate challenge. The climate emergency requires a consistent investor voice – we will continue to work alongside TPI partners to push companies to adopt sustainable business models.”
Carola van Lamoen, head of active ownership at Robeco Asset Management says: “As companies leading on the energy transition start to emerge, investors should continue engaging with companies that are yet to integrate climate change in their operations and business strategy.”
What was assessed
The Grantham Research Institute used FTSE Russell data to analyse leading companies in 14 carbon-intensive sectors including oil and gas, electric utilities, automobiles, airlines and steel.
These sectors account for 41% of global emissions from publicly listed companies worldwide.
TPI assessed companies on the following measures:
1. Management quality, ie governance/management of emissions and transition risks/opportunities
2. Carbon rerformance, ie quantitative benchmarking of companies’ emissions pathways against the Paris Agreement
It selected the largest public companies by market cap and highest emitters in 14 sectors, including:
• 116 energy companies (coal mining, electricity utilities, and oil and gas)
• 102 in manufacturing and basic materials (including aluminium, cement, paper, steel, etc.)
• 41 in transportation (autos and airlines)
• 15 in consumer goods and services
Eighty four per cent of companies do not disclose an internal carbon price; and 86% are yet to undertake and disclose climate scenario planning – a critical part of Task Force on Climate-related Financial Disclosures (TCFD) reporting.
Only 16% of companies assessed for their current and planned GHG emissions are aligned with the 2°C benchmark.
Only 12.5% of companies assessed for their current and planned greenhouse gas emissions are aligned with the most ambitious below 2°C benchmark. These include Eon, Iberdrola, Stora Enso and Edison International.
The lack of quality
No fewer than 126 companies remain on Levels 0–2 in terms of action. Such companies are yet to disclose that they have implemented at least one of the following basic practices:
• Explicitly recognising climate change as a relevant business risk or opportunity
• Having a policy commitment to act on climate change
• Disclosing operational emissions
• Setting a quantitative (or, if not, a qualitative) target to reduce emissions
TPI says these limitations are confirmed when it looks into the specifics of company performance against the TCFD requirements.
On strategy, 84% of companies do not disclose an internal carbon price and 86% are yet to undertake and disclose climate scenario planning.
On metrics and targets, 55% of companies do not have a long-term, quantified target to reduce their emissions.
Around 58% of companies in the autos, coal, and oil and gas sectors fail to disclose their critical Scope 3 emissions (indirect emissions in the value chain) from use of sold products.
Manufacturing doing badly
The reports says: “The average level-score in the steel sector is fractionally below two, making it the only sector to fall below this mark.
“In fact, four out of the five worst-performing sectors on management quality are in the manufacturing and other basic materials cluster. After steel, they are, in order of increasing average management quality: paper, cement and aluminium.
“Companies in these sectors tend to be especially weak at acknowledging climate change as a business risk/opportunity, at board oversight and responsibility, and at incorporating environmental, social and governance factors into executive remuneration. Finally, disclosure varies substantially across sectors, except for the governance theme, where it is broadly comparable.”
Energy/transport doing better
The reports says the energy sector cluster outperforms both manufacturing and basic materials, and transport, on strategy.
“Twenty-eight per cent of electricity utilities undertake climate scenario planning, and 24% disclose an internal carbon price.
“The transport sector is particularly good at disclosing metrics and targets. For example, four out of five automobile manufacturers have set a quantified emissions reduction target.”
48 firms making the grade
- Some 48 companies would be aligned with the least ambitious Paris Pledges (NDCs) benchmark. This means they have either already achieved the 2030 Paris Pledges benchmark emissions intensity for their sector, or they will do so by 2030 based on emissions reduction targets they have set.
- Of these 48, 26 companies are aligned with the 2°C benchmark. Of those, 20 companies are aligned with the most ambitious below 2°C benchmark.
- 79 companies are not aligned with any of the benchmarks.
- 33 companies do not provide sufficient disclosure for TPI to calculate their Carbon Performance. Most companies are not aligned. Alignment is most frequently seen in the electricity and paper sectors.
- 54 per cent of utilities assessed are aligned with the Paris Pledges benchmark and almost one-third are aligned with the below 2°C benchmark.
The report adds that, as yet, little alignment with the Paris goals is evident in the airlines, aluminium, cement, or oil and gas sectors.
None of the top 10 oil and gas producers, in terms of the emissions intensity of primary energy supplied, is aligned with the benchmarks, reflecting the “fundamental decarbonisation challenges facing the sector”.
It adds that extending the transition horizon to 2050, that two companies – Shell and Total – are eventually aligned with the Paris Pledges benchmark by 2040. However, neither is doing enough to align with TPI’s 2°C benchmark by 2030.