We should not over-rely on corporate self-regulation to deliver the absolute emissions reductions needed to avert the most serious consequences of climate change, argues Rory Sullivan

There is a general assumption in the corporate responsibility literature that if companies adopt progressive policies on environmental and social issues, their performance on these issues inevitably improves.

It is not uncommon for the quality of corporate policies to be used as a proxy for the quality of management of these issues.

While the theoretical arguments are clear (e.g. the existence of a policy suggests that senior management has identified the issue as a corporate priority, policies provides an accountability framework for management), there is actually limited empirical evidence to support the assumption.

In 2007/2008, Insight Investment, as part of its research into the investment implications of climate change for 125 large European companies, analysed the relationship between the climate change policies and performance of these companies.

For the purposes of the research, climate change policies were classed as being of ‘high’, ‘medium’ or ‘low’ quality.

High quality policies were defined as those that had at least five of the following six elements:

(i) They identified climate change as a key business concern;
(ii) They acknowledged the company’s own contribution to climate change;
(iii) They applied to all of the company’s emissions;
(iv) They contained an explicit commitment to emissions reductions;
(v) They explicitly supported governments’ efforts to reduce greenhouse gas emissions; and
(vi) They had an explicit commitment to carbon neutrality or to emissions reductions of at least 60 per cent by 2050.

Conversely, poor quality policies were defined as those that had a maximum of one of these six elements, and medium quality policies were those that contained between two and four of these elements.

Indicators

The analysis provided credence to the view that companies with better or higher quality policies are more likely to set significantly stronger targets for themselves than companies with poor quality policies.

Specifically, while 46% of companies with high quality policies expected their absolute emissions to increase and 48% expected their emissions to reduce, the overwhelming majority (93%) of companies with poor quality policies expected their emissions to increase.

A similar picture emerged in relation to emissions intensity with 89% of companies with high quality policies expecting their emissions intensity to improve, but just 11% of companies with poor quality policies expecting to achieve a similar outcome.

The other companies with poor quality policies either expected their emissions intensity to increase or did not publish targets (suggesting that they were not focusing on emissions intensity as a management priority).

Counting quality

The data also highlighted an interesting gradation, as one moved from high, through medium to low quality policies. Companies with medium ranked policies performed in a similar manner to those with poor quality policies in relation to absolute emissions; just 19% of companies with medium quality polices expected their total greenhouse gas emissions to reduce.

However, with respect to emissions intensity, companies with medium quality policies performed in a similar manner to companies with high quality policies, with 69% of expecting their emissions intensity to improve.

The research offered three additional important insights. The first was that the broad trends identified above also held, albeit less dramatically, for emissions performance over the preceding 3-5 years; companies with high quality policies were systematically stronger performers in relation to both absolute and relative emissions.

The second was that while many companies had set emission reduction targets (whether in absolute or relative terms), most provided limited information on how exactly they intended to achieve these targets or on the resources they had allocated towards the delivery of these targets.

The third was that the scope of emission reduction targets was extremely limited. Most related to direct and indirect (purchased electricity) emissions but rarely extended meaningfully into the supply or value chain, raising the question of whether the targets really related to the key issues for the business or even the key areas of environmental impact.

So, what does this mean?

There are two important conclusions to be drawn from the research.

First, it supports the assumption that companies with higher quality policies are likely to be (relatively) better performers and, therefore, that the quality of corporate policies may have some value as a measure of the quality of overall corporate management.

Second, the existence of high quality policies does not necessarily mean that companies will deliver absolute reductions in their greenhouse gas emissions.

This is a cautionary warning to policy makers against over-relying on corporate self-regulation to deliver the absolute emissions reductions that will be required if we are to avert the most serious consequences of climate change.

Rory Sullivan was previously Head of Responsible Investment at Insight Investment. He is a member of the Ethical Corporation advisory board. rory@rorysullivan.org

This article is based on Rory Sullivan (2010), ‘An Assessment of the Climate Change Policies and Performance of Large European Companies’, Climate Policy, No. 10, pp. 38-50 (published in January 2010).