Should we hold accountable companies that fail to meet their climate commitments?
There is important research by Professor Kelly Shue that shows in some cases, investing in “brown firms”—or firms that are transitioning to lower emissions in greenhouse gas-intense sectors—has a greater benefit to the environment than investing in firms that are already green with low emissions. So we need to be smart about which GHG emissions commitments of net-zero targets are most important to our collective well-being. Holding oil and gas companies or utilities to aggressive GHG reduction targets will have far greater benefit than other companies.
The recent news about AIG backing away from commitments to stop underwriting fossil fuel projects is a good example. A blanket approach to reduce emissions through movement away from a sector can be misguided. So missing that target may not be such a bad thing for global climate change. However, we certainly do want AIG to adhere to a commitment that would move money away from high-emitting oil and gas projects towards projects that significantly improve the emissions portfolios of those companies—for example, shifting away from oil transmission that supports oil sands development towards gas pipeline infrastructure that supports lower emissions fuels or underwriting upstream oil and gas development with demonstrable commitments to eliminate methane.
What should we look for to validate that companies are doing what they said?
The Race to Zero has outlined five Ps for companies considering a net-zero commitment: pledge to take action, create a plan for emissions reduction within 12 months of the commitment, proceed to find immediate reduction opportunities, publish on your performance, and persuade others to take action. However, a company can easily start down this path, and when the financial realities of the commitment start to clarify, back away. At the end of the day, these commitments are still largely voluntary, and so to build confidence that a company will follow through, we are really trying to find alignment of structures and values. When assessing the likelihood that a company will follow through, we look for four characteristics in their reporting:
- Clarity: Clarity refers to the clarity of the language in the target as well as the scope of the target (what is included). A clear statement of methodology is also important to the clarity of the target. Finally, clarity refers to the feasibility that the company will achieve its stated target. Therefore, clarity also provides information to stakeholders on probability of success in abating emissions.
- Coverage: What emissions are included in the net-zero target? A core aspect of comparability, coverage refers to which scopes (1, 2 and 3) are included in the effort to reduce emissions and more specifically, what sources of emissions under each scope are included. For example, scope 3 coverage may or may not include consumer use of the product. Coverage also refers to the entities in the business (regions, operations, divisions) that are included in the emissions within the target. In contrast to clarity, the coverage is assessed based on volume or percent of total rather than transparency.
- Scale: How much carbon would be abated by the net-zero target? For many stakeholders, this is a key question—to understand how many absolute tonnes of CO2 would be removed or prevented by the actions of the company. It is a core component of comparability. This is also company and sector dependent. For example, oil and gas companies, based on the nature of the product, will typically have a larger contribution to greenhouse gas emissions than other sectors. Larger companies likewise will likely have larger impacts.
- Pathway: One key decision criterion for stakeholders is whether the company has a clear pathway to reaching the target. This may include whether the company has interim targets, has identified the key reduction areas, is cognizant of the needed technologies and innovations, etc. It also looks at the reliance on offsets as part of the strategy to achieve the target and whether the company is overly reliant on offsets compared to emissions reductions. Credibility is an important component of the pathway. This is assessed not only by historic performance against the target milestones, but also by the commitment of the company to policy and partnerships aligned to the target.
When companies back away from voluntary commitments, how should customers, investors, and governments respond?
It is inevitable that some companies will hesitate and back away from climate commitments when the going gets tough—either financially, technologically, or from lack of focus. While it is nice to think that customers will hold companies to account, the nuance behind which commitments are worth keeping and the trickiness of greenwashing makes customer action very difficult and sometimes counter productive. It requires time and effort to assess and guide companies in the right direction and investors and governments have the wherewithal to put in that time and effort.
For investors, the primary role is to take a long-term view on de-risking portfolios. This means that investors need to view climate risk as a persistent and significant drag on productivity, revenue, cost, and innovation across the entire portfolio and on fossil fuel-dependent companies in the portfolio in particular. Pushing for emissions reduction in one company will have long-term benefits across the entire portfolio. Investors are the engine that powers companies and so should act to “accelerate” those companies and sectors that will best de-risk their portfolio.
Governments are the “steering wheel” in that they tell the private sector where to go to create the most good for society and the environment. Governments are uniquely positioned to incentivize companies to create social good even where the financial model to do so is weak. Currently, there is reputational benefit for companies to make the initial commitment to reduce emissions, but the financial benefits diminish as those emissions get more and more difficult to avoid. Therefore, the need for policy and incentives from government is to reduce the financial barriers on those more difficult-to-abate emissions. A simple example in the oil and gas sector: The vast majority of methane emissions are vented to the atmosphere because pressure builds up and the infrastructure is not present to send that methane to the pipeline and customer. This is a challenge of permitting, monitoring, and infrastructure; governments can reduce these barriers through permit requirements, incentives, and required monitoring.