Companies which regularly measure, report and reduce their carbon emissions are much more likely to outperform their competitors financially too, according to a new survey from the Carbon Disclosure Project (CDP).
Moreover, the best way to achieve success in this field is to reward employees financially.
The CDP says the link between success in reporting emissions and profit is "because these companies clearly disclose the potential investment implications which climate change may have" on them.
The 2011 Carbon Disclosure Leadership Index (CDLI) and the Carbon Performance Leadership Index (CPLI) cover Global 500 firms - Fortune magazine's annual list of the top 500 global companies, ranked by revenues.
Each year, company responses are reviewed, analysed and scored for the quality of disclosure and performance on actions taken to mitigate climate change. This results in a disclosure score and, where sufficient disclosure exists, a performance score.
This year, 404 firms joined the Project and 68% of these have now embedded climate change into the centre of their business strategies, compared with 48% in 2010, indicating a fast-moving, positive trend.
The results of the survey show that companies included in the CDLI in 2011 had a higher total return - interest, capital gains, dividends and distributions - from January 2005 to May 2011 than non-disclosing Global 500 companies, outperforming them by 40% over these six years and by over 60% over the last three years.
Furthermore, those companies included in the CPLI - which contains the elite of those in the CDLI - outperformed Global 500 companies by a total of 40% over a six year period and by over 50% over the last two years.
This indicates that companies which have an integrated climate change strategy and are successfully managing their greenhouse gas emissions achieve higher financial performance too.
This does not necessarily mean that one causes the other, the report's authors add; both will be influenced by a range of factors, such as the quality of the companies’ management or the companies’ broader approach to identifying and capitalizing on opportunities or managing risks.
Nevertheless, it indicates that investors will look favourably on companies which disclose their emissions management when choosing where to invest, and sends a powerful signal that other companies who are not currently doing so should follow suit.
Boards can choose from a well-established menu of strategies for achieving emission reduction targets, but it is clear from the report that financially rewarding employees works best.
Just as bonuses in the banking industry stimulate winning behaviour in terms of making money, so they do everywhere in terms of saving energy.
The use of monetary incentives is a key factor helping CPLI companies outperform others in the Global 500. All of them use monetary incentives compared to just 65% (259) of the Global 500.
The report says, "linking employee incentives to climate change strategy demonstrates a clear drive towards low carbon growth".
Telefonica is one such company. "Since 2010, it was established that its energy managers should include energy efficiency targets in their performance bonus. They will receive 100% of their annual bonus if they have achieved and justified the targets,” says their disclosure record.
The high achievers
The highest disclosure score in 2011 is 99 out of 100; four companies achieved this impressive result (Philips Electronics, Bayer, Deutsche Post and UPS).
Cisco Systems scored 98, and Siemens, Tesco, Fortum Oyj and Bank of America all scored 97. In 2010, the highest disclosure score was 98 and only one company, Siemens, achieved this.
Criteria for success include the extent to which a company has measured its carbon emissions, and the extent of the internal data management practices for understanding GHG emissions, including energy use.
CDLI companies are more likely to set emissions reduction targets. In 2011, 96% (50) of the CDLI stated that they have emissions reduction targets versus 70% (242) of non-CDLI respondents.
The Carbon Performance Leadership Index (CPLI) includes the companies in the highest performance band and provides a valuable perspective on the range and quality of activities being performed by the Global 500 in response to climate change.
Of the 404 Global 500 companies who responded to the CDP, 29 attained Global 500 Performance Leader status and distinguish themselves through demonstrated integration of their climate-related risks and opportunities into their overall business strategy.
They all reported significant emissions reduction in the past year compared to 45% (178) of the overall Global 500.
Europe and Australia are the strongest performing regions and Europe has the most companies in the CPLI (16, 55% of CPLI) despite only representing 34% of the responding population.
The best performing country was Germany, which made up 14% of the CPLI.
The top performing companies are: BMW, Fiat, Honda Motor Company, Philips Electronics, Tesco;, Bank of America, National Australia Bank, Swiss Re, UBS, Westpac Banking, Bayer, GlaxoSmithKline, Novartis, Schneider Electric, Cisco Systems, Samsung, SAP, Sony Corporation, Air Products & Chemicals, BASF.
In terms of sectors, Utilities is the best performing sector. The Financial sector has the most companies in the CPLI. There was only one company, BG Group, in the Energy sector and one, ENEL in the Utilities sector.
There were none in the IT and Telecommunications sector. This sector is widely acknowledged as being the most recalcitrant in attempting to reduce its growing impact on climate change, especially in its use of energy-guzzling data centres.
Managing supply chains
Managing the impacts of supply chains on overall emissions is an important step in minimising emissions, and the Carbon Disclosure Project has a separate programme to support companies doing this.
Its latest report on the subject says that whereas the ambition of suppliers to reduce carbon emissions "still does not meet global carbon reduction requirements to limit the rise of global surface temperature, there is hope" since companies are "increasingly using their influence and power to drive change."
The National Grid is one company that is a member of this programme. Its Chief Procurement Officer, Ray Schlaff, is on record as saying that National Grid is "working towards incorporating carbon management into our supplier selection criteria in the future."