Transition to a Low-Carbon Economy: How Are High-Impact Firms Doing?

Industrial Site
June 11, 2020

From a management perspective, almost 40% of companies (with a high impact on climate change) are demonstrably unprepared for the transition to a low-carbon economy.

Such was one of the findings of the Transition Pathway Initiative (TPI). Established in 2017, TPI defines what the transition to a low-carbon economy looks like for companies in high-impact sectors such as oil and gas, mining, and electricity generation. TPI then relays the information to asset owners and other stakeholders.

In just three years, TPI has done well. Sixty-seven funds representing nearly US$19 trillion in Assets Under Management, are now using TPI’s insights.

In their State of Transition Report 2020, TPI assessed 332 companies on their Management Quality and 238 of these on their Carbon Performance.

Management Quality tracks a company’s management of greenhouse gas emissions, as well as the risks and opportunities arising for that company from a low-carbon transition.

Carbon Performance measures a company’s emissions intensity, and benchmarks the extent to which the company is, or will be, aligned with the global temperature goals set out in the 2015 UN Paris Agreement on climate change.

Below are some of the findings.

Management Quality

TPI ranked companies on a five-level system with Level 0 being totally unaware or not acknowledging climate change as a business issue, to Level 4 where a company understands the risks and opportunities of climate change and has a strategic plan in place.

According to the report, the average Management Quality level of all companies in the TPI database is, well — average.

As a whole, companies ranked a level of 2.7. This is more than halfway between “building capacity on climate change” (Level 2) and “integrating climate change into operational decision-making” (Level 3).

Out of the 268 companies for which there is trend data, 62% stayed on the same level that they were when assessed in 2019; 29% moved up at least one level; and 9% moved down at least one level.

Conclusion: the majority of high-impact companies are staying put.

Carbon Performance

For carbon emissions, the shipping sector is most closely aligned with the Paris Agreement guidelines, followed by paper, electricity utilities, and automotive.

According to the report, shipping fairs so well, mainly because “the largest publicly owned shipping companies operate relatively young fleets of large, fuel-efficient vessels.”

Electricity is high in the standings primarily due to the EU and its strict standards. European electric utilities “typically have a low emissions intensity and ambitious targets…Outside the EU, the picture in the electricity sector is less positive.”

Fifty-four percent, or slightly more than half of the companies, are not aligned with the Paris Agreement guidelines at all.

Of these, the oil and gas sector lags the farthest behind.

By Geography

As seen with utilities, European companies are leading the way to a low-carbon economy in terms of management and carbon performance.

The average Management Quality score of European companies across all assessed sectors is 3.4 and 63% of European companies are on Level 4. There are no Level 0 companies listed in Europe.

After Europe comes Australia with an average Management Quality score of 3.0, while North American companies lag slightly behind, averaging 2.9.

The average Chinese company across all assessed sectors has a Management Quality score of just 1.1, meaning they are just beginning to acknowledge climate change as a business impactor.

In terms of Carbon Performance, the share of companies aligned with the Paris Agreement benchmarks is higher in Europe than it is in other geographies. This is partly due to the relatively tough regulatory regime for carbon emissions in Europe compared to other regions, which has driven emissions intensity improvements in electricity and autos, for instance, the report says.

It should be noted, however, that numbers are based only on the companies who furnished information. Many companies across all sectors withheld data.

What Should Companies Focus On?

The authors of the report highlighted what they think should be the leading priorities for investors in each of the assessed sectors, based on TPI’s analysis of Management Quality and Carbon Performance. They are shown in Figure 5.1 of the report:

Key sectoral engagement recommendations

Also, to make a successful transition to a low-carbon economy, the authors suggest that a new kind of partnership is needed. They echo what many are saying: investors, companies, regulators, civil society and other actors must “work together to develop and then deliver the systemic, economy-wide changes needed for us to successfully transition to a low-carbon economy and to adapt effectively to the physical impacts of climate change.”

Companies are making progress, however slow, and investors are helping. But we need to do better.

Click here for the full report.

Author

Laurie Toupin