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CDP Connects Climate Action and Financial Results

RP Siegel headshotWords by RP Siegel
Investment & Markets

Like it or not, most decisions today are based on economics. It’s the way our system is put together and it has been, in many ways, successful in generating innovation and prosperity, for many if not for all. That fact is not one that is likely to change easily, though the system’s shortfalls are beginning to show up like cracks in a once impenetrable façade. Prominent questions that arise, for anyone when pondering a choice, whether it’s an individual or a large company, tend to fall along the lines of:

  • Can I afford it?

  • Is it a good investment?

  • Will taking this action lead to more prosperity?

When we talk about large-scale change, we can talk about two kinds of change — one that works within this paradigm, or one that challenges it. I’m not here today to argue the respective benefits of each, but instead to acknowledge the fact that working within the system, if possible, has distinct advantages, given the deep interdependencies between the financial world and the world at large.

So, within this context, looking at an issue like climate change and the large-scale actions required to adequately address it, the question of whether these actions can have an economic upside is critical. If we had to rely strictly on a sense of civic duty and social responsibility, that would surely be a harder road.

With that in mind, the CDP S&P 500 Climate Change Report 2014, from the Carbon Disclosure Project (CDP) is good news.

CDP was engaged by a group of 767 major investors representing an enormous amount of money, some $92 trillion, to assess all the companies in the S&P 500 Index based on two things:

  • Their level of disclosure regarding carbon emissions

  • Their performance in responding to the need for action.

If you think that’s a lot of money, you’re right. In fact, if there is no double-counting here, $92 trillion represents over 38 percent of all the money in the world. So if the group of people and institutions representing 38 percent of the world’s wealth want to know, as investors, what the companies in the S&P 500 are doing about climate change, that ought to give some people pause as to how truly important this is.

So what did they find out? After looking at these metrics and correlating them with the financial metrics of the companies that participated, CDP made the following statement.

“We find that U.S. corporate leaders on climate change management, as measured by S&P 500 peer-relative CDP disclosure and performance, have generated superior return on equity, more resilient earnings, and stronger dividend growth than their peers. At a minimum, CDP data suggests that there is no penalty to corporate profitability for establishing climate change reporting, governance and management systems and taking action on climate change.”

In other words, those companies that provided the highest levels of disclosure and took the most aggressive action addressing their climate impacts, demonstrated financial performance that was, in each and every case, equal to or superior than their less responsive peers.

In fact, overall, the 174 companies in the top half of the list for both disclosure and performance had a return on equity (ROE) of 25.1 percent, while those in the bottom half had an ROE of 20.6 percent. Even those in the bottom half fared better than the 152 companies who did not respond at all. Those companies had a collective ROE of 15.4 percent. Those are significant differences. That is why the authors were able to write, “In this report, we answer the No. 1 question U.S. investors ask CDP about climate change data -- ‘is there evidence of a link to financial performance?’ — with a resounding yes.”

Now, we all know that correlation does not prove causality, but it seems clear from these results “that climate change leadership is another strong reflection of superior management quality.”

These management teams that top the list, are clearly looking ahead, are strategic in their thinking and responsive to those factors that will likely impact their businesses down the road.

Both disclosure and performance scores were based on the same factors with different weightings. These were:

  • Emissions methodology and Scope 1 and 2 data

  • Opportunities

  • Risks

  • Governance, strategy and communications

  • Scope 3

  • Emissions performance and trading

  • Targets and initiatives

  • Scope 1 and 2 verification

The report’s results have shown dramatic improvements across the board over the past several years, with 48 percent showing “high performance” this year, compared with only 30 percent back in 2011. Another interesting finding was that the largest companies (by market capitalization), such as Apple, Microsoft, J&J, Walmart and Chevron, received among the highest scores. These companies also generated higher net income and dividends than their lower climate-ranked peers.

These are significant results that should put to rest the notion that taking action on climate change is bad for companies -- or bad for the economy. Of course, major changes are involved that will impact different players differently, but the overall direction of the impact on the economy should be clear from this report. Yes, there will be expenditures. Yes, some prices will go up. Some businesses will falter. That has happened throughout history as the result of changes that we called progress at the time. But, this is one of those times that not taking action will cost far more in the long run.

Image credits: NY Stock Exchange: Balon Greyjoy: Wikimedia Commons

Infographic courtesy of Carbon Disclosure Project

RP Siegel, PE, is an author, inventor and consultant. He has written for numerous publications ranging from Huffington Post to Mechanical Engineering. He and Roger Saillant co-wrote the successful eco-thriller Vapor Trails. RP, who is a regular contributor to Triple Pundit and Justmeans, sees it as his mission to help articulate and clarify the problems and challenges confronting our planet at this time, as well as the steadily emerging list of proposed solutions. His uniquely combined engineering and humanities background help to bring both global perspective and analytical detail to bear on the questions at hand.

Follow RP Siegel on Twitter.

RP Siegel headshotRP Siegel

RP Siegel, author and inventor, shines a powerful light on numerous environmental and technological topics. His work has appeared in Triple Pundit, GreenBiz, Justmeans, CSRWire, Sustainable Brands, Grist, Strategy+Business, Mechanical Engineering,  Design News, PolicyInnovations, Social Earth, Environmental Science, 3BL Media, ThomasNet, Huffington Post, Eniday, and engineering.com among others . He is the co-author, with Roger Saillant, of Vapor Trails, an adventure novel that shows climate change from a human perspective. RP is a professional engineer - a prolific inventor with 53 patents and President of Rain Mountain LLC a an independent product development group. RP was the winner of the 2015 Abu Dhabi Sustainability Week blogging competition. Contact: bobolink52@gmail.com


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