“Running hot” due to cooling corporate climate action
March 1, 2021
European companies and banks have the potential to lead the world on ambitious greenhouse gas reductions targets, and leading institutions are already making progress. But, CDP with Oliver Wyman cautions that now is not the time for Europe to rest on its laurels—there remains a significant gaps in emissions reduction between the highest and lowest performers, few companies (less than 35%) are meaningfully disclosing on their Scope 3 emissions and banks could be doing more to incentivise investee companies to accelerate progress. Specifically, 95% of bank lending to European corporates is committed to alignment with the Paris Agreement, but only 8% of European corporates have set targets to match. This is a €4 trillion mismatch. Now, companies together with governments and financial institutions need to push further if Europe wants to retain its climate leadership on the global stage.
The European arm of CDP (CDP Europe), together with Oliver Wyman, analysed progress of European companies towards meeting climate change commitments over the course of 2020. They found that more companies than ever are disclosing their impacts on climate change, forests and water security—a record 10,000+ disclosures—but that the urgency and scale of our climate and environmental crises necessitate quicker, bolder action. One telling finding: “This year’s report shows that under 10% of companies currently have targets to align with well-below 2°C” (the maximum temperature rise to avoid the worst effects of global warming, as agreed in the 2015 Paris Climate Agreement).
“Progress is uneven.” In 2020, the largest European companies showed “strong progress in reducing carbon emissions,” with the top-performing 25% of companies reducing “their absolute emissions by 15% and their emissions efficiency – greenhouse gases per unit of revenue – by 20%.” But, this trend diverges across all European companies: “The carbon efficiency of the top-performing 25% of companies in each sector is double that of the bottom 25%” and at the current rate of target setting we are “on course for a 2.7 °C rise.”
The financial system is “a €4 trillion force” for carbon reduction. “Banks representing 95% of all lending to European corporates” have committed to meet the targets set by the Paris Agreement, though their progress towards this goal is still at different stages. According to the report, “[t]his contrasts with just 8% of European corporates having set targets in line with a well-below 2°C rise. This has created a gap of more than €4 trillion between the lending that banks plan to align with Paris and the current available demand for such financing. This gap has the potential to galvanize industry to greater action, as companies with greater ambition to reduce their emissions are able to raise capital on better terms.”
“Growing momentum.” The report found that 56% of European companies have developed a plan to transition to net-zero GHG emissions, and even more in the highest-impact sectors. These plans show mixed results—some are aligned with ambitious science-based targets, while others still do not meet the minimum targets outlined in the Paris Agreement. According to the report, this gap could serve as a market advantage for the most advanced companies: “Green challengers are showing they can move fast and attract strong investor interest and valuation premia; incumbent companies will be challenged to show that they can keep up.”
Few companies are adequately tracking and disclosing Scope 3 emissions. “A major problem for corporates is the assessment of Scope 3 emissions – those that occur beyond corporate boundaries in their respective value chains,” which are more difficult to calculate than Scope 1 emissions (direct emissions from business activities) and Scope 2 emissions (indirect emissions from the generation of purchased electricity, steam, heating and cooling). Less than 35% of companies in high-impact sectors are disclosing Scope 3 emissions.
Investors need to “re-work the financial plumbing.” “Financial institutions have an important role to play in engaging with companies, to encourage and incentivize them to develop credible transition plans, and deliver against these,” but companies need more pressure and incentives to meet the emission reduction targets of the Paris Agreement. The report estimates “that banks may need to adjust 20 to 30% of their large corporate lending portfolios to be aligned with Paris by 2030” but only half of banks “have to date assessed whether their client and investee strategies are aligned with the Paris agreement.”
“A supportive policy environment will be key” to achieving any of this. According to the report, “Europe is at a critical inflexion point. To have a good chance of meeting the Paris goal of 1.5°C, our economy should shed 50% of emissions over the next decade. This report estimates that at least 65% of companies need to be fully Paris-aligned by then, with many going beyond that ambition level, to succeed.” This means that European governments need to work collectively with not only one another but also with companies and financial institutions to accelerate climate transitions and realise Europe’s potential to “play a leading role” to fight climate change.
“2021 will mark a turning point in the green transition. While the global impact of the Coronavirus pandemic will continue to challenge communities, businesses and policy makers, our recovery work must simultaneously help avert the dual climate and environmental crises. The European Green Deal provides a clear framework for such a recovery, as well as an opportunity for Europe to enhance its climate leadership and become more competitive and resilient.”
“2020 changed the world. In January last year, news broke about a novel virus that was spreading and, within a few months, we witnessed a devastating situation. By April, half of humanity were living under some form of lockdown. Businesses struggled to survive under the weight of the virus, and financial systems showed their fragility. What COVID-19 demonstrated is that our current economic model is not resilient. While coronavirus was a systemic shock, a larger one will undoubtedly be climate change and the depletion and degradation of our global environment. Yet with COVID-19 comes an opportunity – an opportunity to transform our system and do things better. Carbon dioxide emissions in 2020 fell by 7% due to coronavirus-induced lockdowns, and while concerns that a reboot in economic growth may come at the detriment of the environment, the opposite may be happening. We are seeing an increased focus on a green recovery. One that puts sustainability at the heart of the economy.”