Companies are touting their climate credentials in increasing numbers, with many disclosing plans that show their commitments to a green, climate-safe world. In its recent status report, the Task Force on Climate-related Financial Disclosures (TCFD) — the world’s premier climate reporting framework — found that around half of the 1,400 companies it reviewed included information on their climate transition plans in their public filings.
There are sound business reasons for companies to speak loudly on climate change. Organizations that make a lot of noise around their climate commitments could benefit from a “green shielding” effect. This may protect firms from the attention of climate activists and anti-management shareholder proposals, both of which present reputational risks. Businesses that are vocal about their climate commitment may also experience a “green halo” effect, resulting in their debt and/or equity getting included in climate-focused investment funds or indices. This could make companies’ securities more attractive to environmental, social, and governance (ESG) investors, potentially lowering their cost of capital.
The importance of walking the talk
However, if companies fail to back up their big talk on climate with meaningful climate action, they’re setting themselves up for trouble. For starters, this kind of “say-do” gap on climate change could expose companies to physical and transition climate risks.
Consider a bank that sets a sustainable finance target but does not take steps to transition its lending and investing away from fossil fuel companies that aren’t shifting to renewable energy. While the bank may receive praise from investors and commentators for funneling capital into climate-friendly activities, it will remain open to losses from lending to carbon-intensive companies that either can’t or won’t adapt to a low-carbon economy.
There’s also the danger that a company’s climate promises clash with its business fundamentals. Say a steel manufacturer commits to achieving net-zero emissions across its value chain by 2050. To hit this target, the manufacturer would have to decarbonize its steel-making process by phasing out its use of blast furnaces and adopting electric arc furnaces or green hydrogen-powered mills. This would likely require the manufacturer to grow its capital expenditures over time. If it fails to integrate its climate plan with its broader business strategy, the manufacturer may find itself unable to support these expenditures, especially if its clients don’t want to pay a premium for “green” steel. In the worst-case scenario, the manufacturer could find its ambitious net-zero plan eats into its profits and alienates its customer base.
The difficulty for a company’s investors is identifying these kinds of “say-do” gaps. While climate frameworks, like the TCFD, tell companies how to report on their climate risks and opportunities, they don’t pass judgment on the quality of their climate management.
Closing the gap
Investors and other stakeholders are working to extrapolate the missing information on companies’ actual climate management using their public disclosures and tools like climate scenarios — which show how aligned an organization’s business is with global climate goals.
Current efforts generally focus on specific intersections of business and climate strategy that are relevant to certain investor groups and initiatives. For example, Climate Action 100+ — a coalition of over 700 asset managers and owners — has established a Net Zero Company Benchmark that evaluates the climate performance of 166 of the world’s most polluting companies. The benchmark indicators gauge companies’ progress on their net-zero commitments, as well as the credibility of their decarbonization plans. These indicators yield reams of decision-useful information relevant to Climate Action 100+’s objective of getting leading greenhouse gas emitters to decarbonize. Other initiatives focus on surfacing information on companies’ physical risks and transition risks. These are all helpful efforts and add to the existing corpus of information on companies’ climate management.
However, asset owners, asset managers, vendors, and other organizations dealing with lots of different companies require a holistic methodology that can identify climate “say-do” gaps across their portfolios systematically and at scale. This methodology must be able to see beyond organizations’ public climate commitments and determine whether their actual climate actions pass the “sniff test.” This should not only be in terms of the credibility of their decarbonization plans, but also in relation to their climate risk and opportunity profiles and business fundamentals.
By using a thorough methodology, it’s possible to compare and contrast climate management quality across companies and industries, as well as to separate entities with sound climate plans from those indulging in cheap talk. Portfolio-focused firms can then tailor their climate engagement plans accordingly by taking steps to transform “sayers” into “doers.”
How Manifest Climate can help
Manifest Climate embeds intelligence to guide organizations through Climate Risk Planning by helping them manage, understand, and communicate their climate-related financial risks and opportunities. Our powerful software allows users to understand companies’ climate maturity and evaluate their “say-do” gaps through analysis of their public disclosures. Request a demo to learn more.