The giant Canadian investor, CPP Investments, has drawn up a proposal for projecting the capacity of companies to abate greenhouse gas emissions. The framework offers a standardised template to measure the extent to which organisations can remove or abate their GHG emissions that is applicable across industries and geographies, with common assumptions.
The data from the template will help corporate boards and executives better understand the least and most polluting elements of their business, and steer investor capital to industries with lower emissions, said Richard Manley, managing director, head of sustainable investing at CPP.
“If you want to build a business case, reframe the debate,” said Manley. “We need to allocate capital to companies that can support the transition.”
He said the paper was born from the fact many companies have set ambitious 2050 decarbonisation plans that are not grounded in reality.
“Companies are not providing any insight into how they are going to achieve net zero,” he said, echoing a theme of the conference.
The first step proposes companies create a clear, standardised assessment of their emissions across Scopes 1, 2 and 3. Next they conduct an Abatement Capacity Assessment (ACA) to project their capacity to abate them, and finally report their Projected Abatement Capacity (PAC).
When companies assess their current emissions, they can develop an estimate of what portion they can abate using currently available, proven technologies; efficiencies or through greening their power consumption. For example, a cement plant may be able to eliminate all its emissions associated with its electricity consumption by using renewables, but only 10 per cent of emissions from its kilns based on technologies that are economic today.
However, the framework suggests companies don’t factor in cheaper technology costs and new regulation in the future. They should only adjust future projections of abatement capacity in accordance with two standardised carbon price assumptions that exceed current levels.
“We have assumed there is no change in regulation and have not baked in consumer behaviour or dramatic reduction in costs because of technology,” he said.
If companies can’t effectively abate emissions in parts of their business the framework suggests they close or cease the business activity; further technological development or acknowledge that the emissions will likely require offsets.
The framework will lead to new capital allocations: a company with high abatement capacity relative to its industry, will likely have access to more and cheaper capital. Or, if the information provided by these projections reveals that multiple industries are confronting similar regulatory or technical hurdles to lower a specific source of emissions, this framework can help guide policy decisions and prioritise investment in innovation.
Manley noted that the framework isn’t something new, but said effective abatement plans were crucial to test companies net zero commitments. These commitments are changing security prices, but if they prove empty it will lead to the possibility of fraud and market abuse.
“Regulators need to be aware and prepared for false climate claims,” he said. “Issuers need to corroborate their long term guidance with projected abatement capacity.”
Away from the framework, Manley highlighted the importance of strong corporate boards.
“We need boards to ensure executives have identified all climate risk and opportunities and integrated this into their reporting,” he said. He added that CPP is prepared to withhold support for re-appointed directors if their climate strategy lacks. It is a process that has spurred some companies to commit to TCFD filing processes lest they lose the investor’s support for their directors, he said.
He said that companies with a boardroom culture to proactively mitigate and capture the business risks and opportunity from climate change will outperform. He also noted that investors have more control in private markets. In public markets, investors count on boards to provide effective oversight and counsel executives to integrate sustainability.