The Danger of Rose-Colored Glasses When Interpreting Corporate Climate Strategies

Lots of stakeholders are pushing companies to take action on climate change, and many companies report they are doing just that. But interpreting the significance of those claims gets tricky, not only at the company level but at the level of making real progress on climate change. It’s natural that stakeholders look for good news when it comes to corporate action on climate change, but we need to be careful not to invent good news. We also need to look carefully at what the data suggest about the larger question of whether companies think of climate change as a corporate social responsibility issue or as a legitimate business risk.

Ecosystem Marketplace’s March 2015 report, Taking Stock of Offsets in Corporate Carbon Strategies, provides a useful case study for both questions. The report pulls together data from the Carbon Disclosure Project (CDP) on what companies are doing when it comes to carbon offsets, and how carbon offsets relate to the larger subject of corporate carbon strategies.

With respect to the issue of data interpretation, the report presents an “offsets snapshot” pulled from almost 2,000 CDP filings from 2013. The “snapshot” aggregates information on who’s buying offsets and what kind of offsets they’re buying, noting that CDP-reporting companies purchased 50.3 million offsets in 2013. The report calculates this to being the equivalent of avoiding burning 117 million barrels of oil, or shutting down 13 coal-fired power plants for one year.

The much more significant conclusion suggested by the report, however, is that there is a causal connection between offset purchases and the likelihood that a company will engage in more comprehensive carbon management strategies. The reader is left with the clear impression that getting companies to purchase offsets is one way to encourage adoption of more comprehensive carbon management strategies.

A closer look at the data used in the report throws this conclusion into question. First, the report mixes apples and oranges, since the authors treat compliance and voluntary offsets together. This muddies the suggested conclusion. In reality, these two categories of offsets result from different market structures and tend to have very different roles in corporate carbon strategies.

Moreover, the report relies on a simple correlation between companies that purchase offsets and companies that have more advanced carbon strategies to suggest a causal connection between offsets and strategies. Yet it does not provide evidence that companies’ involvement with offsets actually leads them to develop more comprehensive carbon strategies. In fact, we would argue that the relationship probably goes the other way: that companies with more comprehensive carbon strategies (often due to compliance mandates) are also those that are buying offsets. Almost by definition, companies facing compliance mandates will have more comprehensive carbon strategies than other companies and be more likely to need offsets.

But let’s go beyond this initial issue. Taking Stock of Offsets provides interesting insights into how companies are thinking about climate change, and in particular whether they are thinking about it as a material business risk. The report draws from 1,882 CDP filings in 2013 and assesses the characteristics of companies’ corporate carbon strategies (the differentiation between the 265 offset purchasers and 1,617 non-purchasers isn’t important for this discussion). The first graphic, shown here as Figure 8 (using the report’s numbering system) looks at how many companies are engaged in a range of emissions reduction efforts, concluding that:

• 690 of the total number of 1,882 companies (37%) report energy efficiency efforts, presumably including (and probably dominated by?) “low-hanging fruit” opportunities.
• 276 (15%) report low-carbon energy installations, again presumably including low-hanging fruit options such as LEDs.
• 214 (11%) report emissions reductions involving transportation use and fleets.
• 223 (12%) report emissions reductions through reduced process emissions.
• 91 (5%) report incorporating emissions reductions into product design.

Figure 11 from the report compares corporate perceptions of climate risks, finding that:

• 566 (34%) perceive a risk from future carbon regulation.
• 362 (19%) perceive a risk from other new regulations (presumably related in some way to climate change).
• 666 (35%) perceive risk from climate extremes (flooding and drought).
• 881 (47%) perceive potential reputational risks associated with climate change.
• 655 (35%) perceive risk relating to changing consumer behavior.

Figure 9 compares methods used in reporting companies to drive internal investment in emissions reductions, finding that:

• 803 (43%) were motivated by regulatory requirements and standards
• 744 (40%) use a dedicated energy efficiency budget to drive investments
• 257 (14%) use a dedicated R&D budget for low-carbon product development.
• 109 (6%) use an internal price on carbon.

Some of the numbers are probably not that informative, including the small number of companies reporting a focus on reduced process emissions and product design. Many companies probably don’t have significant process emissions and don’t design products. And the report does not provide some numbers that would be particularly interesting, unfortunately. For example, it does not give the fraction of companies actively engaged in promoting climate policy as part of their carbon strategies (arguably their highest-value carbon strategy).

But many of the included numbers seem remarkably low. Let’s not forget that the reporting population, — the 1,882 companies submitting information to the Carbon Disclosure Project — is somewhat self-selected. We can reasonably assume that these companies are predisposed to pay attention to carbon emissions and climate change in the first place. We can also assume that companies were being relatively liberal in their submissions to the CDP, both in reporting measures being taken and in their perceptions of climate risks and related issues. If 35% of companies identify perceiving risk from extreme climatic events, it is likely that only a modest fraction of that number actually consider the level of risk to be business-material.

For example:

• Only 37% of companies report engaging in energy efficiency efforts. Most of those efforts likely constitute economic “no-brainers.” Let’s face it, how many companies use an internal carbon price to drive more dramatic energy efficiency efforts?
• Since only 6% of companies report an internal carbon price, not many are driving energy efficiency beyond what already makes good economic sense. Most of those companies are pricing carbon internally at a very low level (<$10/ton), as we have seen from other research (see, for example, the CDP’s 2014 Global Corporate Use of Carbon Pricing report).
• Only 11% of companies report any focus on reducing transportation-related emissions.
• Only about one-third of companies reporting perceive climate policy (34%) and climate extremes (35%) as potential risks. Again, probably far fewer would characterize these items as material business risks.

Interestingly, the fraction of companies reporting that existing regulations and standards drive their emissions reduction investments (43%) is the highest percentage reported by this study. This suggests that many carbon strategies being reported are primarily reactive.

One should be careful to not over-analyze the report’s limited dataset, given that these weren’t the questions the report really posed. But the results do generate two interesting questions:

• What fraction of companies would characterize climate change risks as clearly business-material?
• What fraction of corporate carbon strategies suggest they are based on a perception of material business risk?

Given years of efforts to convey such business risk (including most recently the Risky Business report, The Economic Risks of Climate Change in The United States), the numbers reported here are disappointing. Offsets or no offsets, the number of companies seeing material business risks in climate change appears to still be very low.