Why low carbon means high profit – eventually
The global companies with climate-smart strategies deliver double the returns of their rivals. But will this wisdom sink in fully before global warming really starts to rage?
Companies identified as “carbon performance leaders” produced twice the financial returns than the global average.
The global companies with the sharpest focus on climate change have rewarded their investors with double the average return of the world’s corporate titans. That’s the startling message from the Carbon Disclosure Project, which released its annual Global 500 report on Wednesday.
On behalf of over 550 investment companies, managing $71 trillion of assets between them, the CDP challenged the 500 biggest companies in the world by market capitalisation to reveal detailed information about their carbon footprints and the action they are taking to tackle and adapt to global warming: 404 (81%) responded.
The CDP then compared the total financial returns between January 2005 and May 2011 of the companies identified as “carbon performance leaders” against the average of all 500. The former generated a return of 86%, the latter 43%.
Jonathan Grant, at PwC, which produced the CDP report, told me: “There is very definitely a strong correlation between good carbon performance and good financial performance. But we are not saying that one definitely caused the other.”
Grant suggests that high quality management will perform well on both financial returns and carbon strategy. But he adds: “Many companies point to the financial benefits of carbon strategy in both energy and resource efficiency.” Good carbon performance was defined as transparent reporting of carbon, setting and meeting carbon reduction targets and intelligent responses to both the risks and opportunities presented by changing climate.
Grant noted a distinctly better performance by European companies, such as Phillips Electronics, BMW and Tesco, compared with companies in the rest of the world. Apple, Amazon, Bank of China and Rosneft, for example, failed to respond at all to the CDP. He puts this contrast down to low carbon policies being more advanced and more high profile in Europe.
Another way to look at how business and climate change are interacting is to track the size of the global environmental market, i.e. green goods and services. A report from HSBC (subscribers only), released on Monday, does just that. In 2010, global green revenues grew 7% over 2009 to an all-time record of $567bn and are now about five times greater than in 2004. As a comparison, $567bn is between the GDP of Switzerland and Indonesia.
HSBC define green revenues in three broad categories with the largest being low-carbon energy, followed by water, waste and pollution control and then energy efficiency. While the US, Canada, Japan and big European nations dominate the green market, Brazil entered the top 10 for the first time this year at number nine, one ahead of the UK. China, which entered the top 10 in 2009, is at eight in 2010.
Also worth noting is that, while the size of the market in Latin America is still relatively small, the growth rate is enormous: it more than doubled in 2010.
Lastly, it’s worth recalling July’s “carbon bubble” report from the Carbon Tracker initiative, which showed that just 20% of the world’s proven fossil fuel reserves can be burned while retaining a decent chance of keeping below a 2C rise in global temperature.
So, summing up, climate-focused companies produce better returns, the market for green goods and services is growing fast and, if the world comes to its senses in time, much of the inventory of the world’s biggest fossil fuel companies will be worthless.
So why isn’t the green economy motoring even faster towards the tipping point that would embed sustainability into the global economy? It’s an important question as the current rate of progress is not going to bring greenhouse gas emissions under control in time to avoid dangerous warming, and the prospects of transformative political intervention on a worldwide scale seems slight at present.
My colleague Duncan Clark, and commenter littlepump, made some suggestions when writing about the carbon bubble report.
The most compelling to me is that most global markets or companies are pursuing short-term profit, which is a rational approach while the damage caused by environmental degradation does not have to be paid for and financial reporting is quarterly.
There are investors with deep pockets who are seeking secure returns over longer time scales, such as pension funds. Many of them are represented by the CDP. Time is on their side, but the question is will the wisdom of climate-smart investing sink in elsewhere in time?