FOREWORD

Corporate Knights and As You Sow have released the annual update of the Clean200 global list of publicly traded companies that are leading the way with solutions for the transition to a clean energy future.

Since our first report was launched in the summer of 2016, a great deal has changed in the world.

Larry Fink, the CEO of the largest investment firm in the world, wrote in his 2022 letter to CEOs:

“It’s been two years since I wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions towards decarbonization have also increased. This is just the beginning – the tectonic shift towards sustainable investing is still accelerating. Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customized portfolios and products, we will see more money in motion. Every company and every industry will be transformed by the transition to a net zero world.”

It is these very companies in 35 countries that make up the Carbon Clean 200.

More than 1,000 companies have now committed to a net-zero-emission target in line with a 1.5°C future, representing US$23 trillion in market capitalization, more than the GDP of the United States.

The Clean200 companies are leading the way by putting sustainability at the heart of their products, services, business models, and investments, helping to move the world onto a more sustainable trajectory.

This year’s Clean200 companies rose to the top of a pool of 8,480 global firms based on rigorous assessment of the amount of revenue each company earns from products and services aligned with the Corporate Knights Clean Economy Taxonomy. They did so while ensuring that their businesses are not fundamentally offside important criteria for socially responsible investors, including being a company flagged by As You Sow’s Invest Your Values platform, which identifies fossil fuels, weapons, private prisons, thermal coal, or having a record of systemically obstructing climate policy.

Key Findings:

Geographically, Europe and the Americas each account for 37.5% of this year’s Clean200, while the remaining 50 companies are headquartered in the Asia Pacific region. The United States dominated the 2022 list, with 52 companies on the Clean200, while Canada had the second largest share with 18, closely followed by China, which 16 Clean200 companies are headquartered in.

On average, 58% of revenues earned by Clean200 companies are classified as clean, which is up from 39% in 2021 and significantly above the 20% average clean revenue for their MSCI ACWI peers.

But none of this would have legs if the Clean200 weren’t also faring well financially. On this score, as of January 31, 2022, the Clean200 has outperformed its MSCI ACWI peers by 3.94% since the Clean200 was launched in July of 2016.

Clean200 companies generated a total return of 107.09%, beating the MSCI ACWI broad market index (103.15%) and MSCI ACWI/Energy Index of fossil fuel companies (31.67%) on Total Return Gross — USD Basis from the Clean200 inception of July 1, 2016, to January 31, 2022.

To put that in context: $10,000 invested in the Clean200 on July 1, 2016, would have grown to $20,709 by January 31, 2022, versus $20,315 for the MSCI ACWI broad market benchmark and $13,167 for the MSCI ACWI/Energy benchmark for fossil fuel companies.

Looking Ahead:

What is needed now is for the rest of the business world, most importantly the big-money investors who have been sitting on the sidelines, to also lean into this form of clean capitalism.

Now that BlackRock, the largest investor in the world, with a whopping US$8.7 trillion under management, has jumped on the net-zero-emissions bandwagon, it is only a matter of time before it becomes the standard, placing a 100% sustainable and zero-carbon economy within our grasp. To date, financial firms have pledged that more than US$130 trillion of assets will be net-zero by 2050.

The good news for our species is that the forces of pride and profit have shifted to support the emerging regenerative economy based on justice and sustainability, leaving the extractive economy to wind down. We will see this escalate as the transition kicks in and every company on the planet reduces emissions by 5% per year over the next decade.

With the sun shining on climate solutions, companies are free at last to shed their carbon cloaks.

With all this action, we hope that the Clean200 can do two things:

1. Provide a useful north star for investors looking to pinpoint the companies leading the way to a clean energy future.
2. Dispel the myth that clean investing is about sacrificing returns.

To make things easier, Corporate Knights and As You Sow are proud to present the latest edition of the Clean200.

While we’re not promising any home runs, we are happy to report that the Clean200 now has more than a five-year track record and is outperforming both the broad-based benchmark and its high-carbon global counterparts.

CLEAN200 PERFORMANCE VS. BENCHMARK

CLEAN200 COMPANIES BY COUNTRY

The post Report: Meet the top 200 companies investing in a clean energy future appeared first on Corporate Knights.

The analysis of more than 4,300 companies listed on 35 stock exchanges provides a snapshot of disclosure practices for seven sustainability-related indicators including greenhouse gases (GHGs), payroll and water use.

The results found comparatively good disclosure practices at a number of exchanges, with Nasdaq Helsinki topping the ranking for overall disclosure rates, the Hong Kong Stock Exchange for growth in disclosure, and Nasdaq Copenhagen for timeliness of disclosure. While Europe has often been seen as the leader in sustainability reporting, this analysis indicates that sustainability disclosure is picking up in areas outside of Europe: with two emerging markets (Johannesburg Stock Exchange and Stock Exchange of Thailand) in the top 10 for overall disclosure rates and four of the top 10 by disclosure growth rate were from emerging markets.

A common thread among many of the top exchanges for disclosure, and particularly for GHG disclosure, is the presence of regulation regarding one or more indicator evaluated. In all of the top 10 exchanges, in both developed and emerging markets, some form of regulation mandates disclosure of one or more of the indicators evaluated from all, or a portion of, listed companies.

GHG disclosure was the most reported indicator, which also may be related to regulatory action in certain jurisdictions such as France’s Grenelle II Law and the United Kingdom’s 2013 update to the UK Companies Act. These two pieces of regulation have elements that make them particularly effective: they are mandatory, specific in terms of which disclosures are required, and they are applicable to a majority of listed companies in their respective jurisdictions.

While high growth in disclosure rates has been seen in a number of markets, this analysis highlights that much more is still needed. Despite the Paris Agreement, no growth was seen in GHG disclosure between the 2015 and 2016 reporting periods, and more than half of the companies evaluated provide no data on GHG emissions.

The London Stock Exchange, which placed 12^th overall and was called out for achieving the highest disclosure rate for GHGs with a near-perfect 97% disclosure rate for GHGs. The strong display of performance on GHG disclosure can in part be attributed to the 2013 update to the UK Companies Act of 2006, which requires large U.K.-incorporated companies listed on the London Stock Exchange main market, a European Economic Area market, Nasdaq or NYSE to report their GHGs. This instrument remains one of the most successful instruments in spurring environmental and social performance disclosures.

Across the 35 stock exchanges assessed the most widely disclosed indicator was GHGs, disclosed by 48% of large companies with more than US$1 billion in annual revenue, followed by water (47% and energy (41%).

* Could not be assessed due to a lack of observations

**These metrics are for illustrative purposes and did not factor into the rank in 2018.

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For every dollar corporations pay to the Canadian government in income tax, people pay $3.50. The proportion of the public budget funded by personal income taxes has never been greater.

At a time when Prime Minister Justin Trudeau has made tax fairness a centrepiece of his government, the Toronto Star and Corporate Knights magazine spent six months poring over tax data to determine how much income tax corporations are really paying.

We found the amount of tax most big companies pay has been dropping as a proportion of their profits for years, and not only because the corporate tax rate has been cut repeatedly. Canada’s largest corporations use complex techniques and tax loopholes to reduce their taxes significantly below the official corporate tax rate set by the government.

Our analysis of the financial filings of Canada’s 102 biggest corporations shows these companies have avoided paying $62.9 billion in income taxes over the past six years.

The 2011-2016 audited financial statements of all large Canadian corporations (those worth more than $2 billion) reveal they paid an average of 17.7 per cent tax.

During that time, the average official corporate tax rate in Canada for this group of companies was 26.6 per cent.

That 8.9 per cent gap translates into tens of billions of dollars that could have been used to pay for the schools, roads, hospitals, police and paramedics we all rely on.

***

TD Canada Trust

Average tax rate: 14.2%

Pre-tax Profit: $50.8B

Income tax paid: $7.2B

Royal Bank of Canada

 

Average tax rate: 17.8%

Pre-tax Profit: $66.3B

Income tax paid: $11.8B

Brookfield Asset Management Inc

Average tax rate: 6.1%

Pre-tax Profit: $26.5B

Income tax paid: $1.6B

Scotiabank

Average tax rate: 17.1%

Pre-tax Profit: $51B

Income tax paid: $8.7B

Bank of Montreal

Average tax rate: 13.4%

Pre-tax Profit: $30.7B

Income tax paid: $4.1B

Average tax rate: 10.6%

Pre-tax Profit: $23.6B

Income tax paid: $2.5B

Great West Life

Average tax rate: 9.7%

Pre-tax Profit: $18.3B

Income tax paid: $1.8B

Canadian National Railway Company

Average tax rate: 15.2%

Pre-tax Profit: $24.8B

Income tax paid: $3.8B

BCE Inc

Average tax rate: 13.1%

Pre-tax Profit: $21.9B

Income tax paid: $2.9B

Imperial Oil

 

Average tax rate: 16.1%

Pre-tax Profit: $22.5B

Income tax paid: $3.6B

Reporters

Toby A.A. Heaps and Marco Chown Oved

Data Analysis

Michael Yow

Editors

Lynn McAuley and Ed Tubb

Project Producers

Tania Pereira and Brian Liu

Web Development and Design

Cameron Tulk and David Schnitman

Executive Creative Director, Digital

Fadi Yaacoub

Marco Chown Oved is an investigative reporter with the Toronto Star.
Toby A.A. Heaps is the CEO of Corporate Knights.
Michael Yow is a data analyst with Corporate Knights.

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The Clean200 is intended as the clean energy inverse of the Carbon Underground 200TM. Where the Carbon Underground 200TM (which evolved from the seminal Carbon Tracker Initiative report, Unburnable Carbon: Are the World’s Financial Markets Carrying a Carbon Bubble?), ranks the largest publicly listed companies by the carbon intensity of their coal, oil, and gas reserves; the Clean200 ranks the largest publicly listed companies by their total clean energy revenues, with a few additional screens to help ensure the companies are indeed building the infrastructure and services needed for what Lester Brown and many others have called “The Great Energy Transition” in a just and equitable way.

The moral case for divesting fuels has been well argued, but for many, the economic case is less clear. However, as clean energy growth rates take off and demand growth for fossil fuels flatlines, it is probable that divesting fossil fuels in favour of a clean energy future does not have to come at a sacrifice to long-term investment returns.

On the risk side, divesting is about not getting stuck holding stranded fossil fuel assets that cannot be burnt if the world is to adhere to a given carbon budget, a topic on which Mark Carney, governor of the Bank of England, has expressed concerns in a landmark speech to global insurer Lloyd’s of London. On the opportunity side, investing in the transition from a high-carbon to a low-carbon economy represents “the largest economic opportunity of the 21st century” according to John Doerr a major venture capitalist at Kleiner-Perkins in Silicon valley.

It might seem counter-intuitive for an investor to sell their fossil fuel stocks when most people are still driving internal combustion cars and burning fossil fuels every day. However, the point and the power dynamic of investing is that, as an investor, you have the power to bet on and capitalize the creation of the world that you want to see.

If you are wrong, you will lose money. If you are right, you will profit from and add momentum to the change you believe in. While many mission-driven investors believe that the arc of history bends towards justice – that companies which create positive rather than negative externalities will prevail – in the case of climate friendly investing, it may actually be true. Many investors have found this out the hard way. Indeed, in a world of limited capital every investment has opportunity cost. When people vote with their investment dollars in favour of clean energy over dirty it sends a message as powerful as any ballot box that the time has come to stop using the atmosphere as a free dumping ground.

Take coal, which accounts for over 40 per cent of global greenhouse gas emissions. The industry is declining rapidly in value, especially in the United States, Peabody Energy, the largest private-sector coal company in the world, filed for Chapter 11 bankruptcy protection this April, following Arch and Alpha. The Dow Jones Coal Index dropped 93 per cent over the past five years. Oil companies are facing similar problems. Fifty-two have filed for bankruptcy since 2015, and over a third of the world’s biggest oil and gas companies have crushing debt loads (over $150 billion) and cash flows depressed by low oil prices, according to the Deloitte Center for Energy Solutions and a recent study by As You Sow. Major investment indices are now only half as exposed to the fossil fuel sector (1.5 per cent to coal, 7 per cent to oil and gas) as they were five years ago. This is not due to any active decision to divest, but rather because fossil fuel stocks have lagged while other sectors have produced healthy returns.

While fossil fuel stock performance stagnates, clean energy is taking off. The world is currently adding twice as much clean power capacity as coal, oil, and gas combined, according to Bloomberg New Energy Finance (BNEF). Wind’s market share of power generation has doubled four times in the past 15 years, and solar has doubled seven times. It’s also getting cheaper to make power from wind and solar, thanks to technology, better financing and economies of scale. Increased demand for a technology generally reduces prices, whereas increased demand for a commodity increases prices. This basic calculus has driven the price of a renewable kilowatt of energy ever downward, making the choice of energy an economic one. Companies which make a significant amount of their revenue from environmental solutions now make up 5% of global investment indices; the Clean200 list of companies have a collective value over $1 trillion.

In the next 10 years, McKinsey expects oil demand growth to flatten due to growing fuel efficiencies and competitive technologies such as the electric car. Battery prices fell 35 per cent last year, and electric car sales rose by 60 per cent. By 2022, BNEF estimates electric vehicles will cost the same as their internal combustion counterparts, and if growth continues at the current pace, oil displacement by electric cars will reach 2 million barrels per day by 2023 – the size of the current oil glut and enough to drive global oil prices to record lows. Factoring in autonomous cars and ride-sharing services, electric cars could reach 50 per cent of new car sales by 2040, according to BNEF, 50 times higher than what OPEC is projecting.

None of this portends an imminent conclusion to our fossil fuel age, but it does suggest an end to fossil fuels as a long-term growth market and the beginning of a long run expansion of clean energy demand. This sentiment has been ratified, sanctified, and tallied by the political, moral, and financial bellwethers of our time, from the Paris climate talks (195 countries committed to phase out fossil fuels this century) to the vatican (Pope Francis has made moral invocations to drastically reduce use of fossil fuels in the encyclical Laudato Si’) to the Bank of England (the bank’s governor Mark Carney has warned not to get stuck holding a bag of stranded fossil fuel assets).

Some big investors are already adapting:

• PFZW, the $183 billion Dutch pension fund, has pledged to halve its carbon footprint by 2020 while increasing its investments in climate solutions fourfold.
• CalSTRS recently committed $2.5 billion to a Low-Carbon Index as part of a multifaceted approach to align its portfolio with the market realities emerging from climate change.
• ABP introduced an internal carbon budget for its asset managers in 2015, designed to reduce the CO2 footprint of its portfolio equity holdings by 25 per cent, as well as doubling its €29bn equity holdings in equities providing environmental and social solutions over the next five years.
• AXA divested from all coal holdings (mining companies and electric utilities deriving over 50 per cent of their turnover from coal) in 2015 and committed to triple its green investments by 2020.

Corporate Knights and As You Sow are committed to updating this list on a quarterly basis and ensuring that it remains in the Creative Commons as a public good. We invite anyone to make it better and share any new ideas to improve the methodology for the next quarter. It can be downloaded at www.clean200.org.

The post The Carbon Clean 200 appeared first on Corporate Knights.

This spectacular rise is in part due to higher societal expectations of systemically important financial institutions, a broadening awareness of sound risk management and mounting evidence that sustainability-focused investing not only is good for the planet but also leads to superior returns. A recent study at the Harvard Business School found that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing:

Further, firms with good performance on sustainability issues not classified as material do not underperform firms with poor performance on these same issues, suggesting investments in sustainability issues are at a minimum not value-destroying. Finally, firms with good performance on material issues and concurrently poor performance on immaterial issues perform the best. These results speak to the efficiency of firms’ sustainability investments, and also have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

Making such informed, value-enhancing investment decisions greatly depends on the availability of sustainability data. However, a majority of the world’s large listings are still not reporting their performance, according to the 2015 Sustainable Stock Exchange report. In the case of greenhouse gas emissions (GHGs), for instance, it was reported by only 37 per cent or 1,847 of the world’s 4,969 large listings for the year 2013.

In terms of market capitalization, the picture is not much better. As of April 1, 2015, the market capitalization of all large listed companies amounted to US$62.2 trillion; 39 per cent of this amount or close to US$24 trillion worth of publicly-listed equities did not report on their GHGs for the year 2013. This figure climbs to US$35.3 trillion or 57 per cent in the case of water.

GHGs or carbon is arguably the most widely tracked and broadly relevant sustainability indicator. It is significant to the point of being the focus of the investor-backed Montreal Carbon Pledge (MCP) and the Portfolio Decarbonization Coalition (PDC), whose primary purposes are, respec­tively, to publicly disclose portfolio GHG emissions and reduce portfolio GHG emissions. The MCP is targeting investors with $3 trillion to publicly disclose their portfolio carbon emis­sions by the UN Climate Summit in Paris this December, while the PDC is aiming to decarbonize $100 billion of investments by the same date. As of June 22, the MCP was at $4.6 trillion, and the PDC was at $45 billion. Given the growing depth and pitch of investor interest in carbon metrics, this is clearly a case where policy-makers and companies are not keeping up with investor demand. Some low-carbon indexes, such as the Solactive CK Low Carbon versions, now exclude any company who does not disclose carbon emissions if it is in a GHG-intensive sector. It is astonishing that so many companies in the three highest GHG-intensive sectors do not report: 44 per cent of the world’s market capitalization of energy companies did not report on GHGs for 2013. The corresponding figures for utilities and materials are 38 per cent and 33 per cent respectively.

Reporting on sustainability factors has grown substantially, and this has helped propel an increasingly higher amount of investment capital toward sustainability investment strategies. However, a significant portion of the world’s equity markets still lack the necessary transparency. It might be time to start compelling companies to disclose their carbon emissions.

The post Integrating sustainability performance into investment strategies and decision-making appeared first on Corporate Knights.

Add to the above fact that there is currently about $45 trillion of assets under management by 1,314 United Nations Principles for Responsible Investment (UNPRI) signatories – up from only $4 trillion back in 2006. UNPRI signatories commit to integrate six principals covering environmental, social and governance issues into their investment decision making and ownership practices.

Clearly, responsible investing is growing in importance – not only because it is good for our planet’s long-term prosperity but also because there is mounting evidence that it can lead to superior investment returns. For instance by subjecting equities from the high-carbon sectors in a given index to a performance test, related to normalised greenhouse gas emissions, and removing the ones with a below average performance relative to sector peers, it is possible to obtain a portfolio of securities with a lower carbon footprint while achieving superior total returns compared to the original index.

The low carbon U.S.

In the simulated case below, the “Low Carbon US” achieves a 56.7 per cent reduction in normalized greenhouse gas emissions with the bonus of an extra 7.8 per cent in total returns compared to the original index over the time period January 1, 2008 to August 31 2014.

The increased investor appetite for responsible investing has been made possible in part by the remarkable rise in the availability of sustainability data. Over the past decade, the number of corporate sustainability reports – the most common format for corporations to disclose their periodic environmental social and governance performance – has grown to 7,445 in 2013 from a mere 644 in 1999. A combination of heightened investor demand, activism and mostly regulatory intervention, coupled with a move towards greater transparency initiated by leading corporations, have all combined to drive increased sustainability disclosures.

For instance, on October 17, 2014, the Singapore Stock Exchange announced its intention to adopt a comply-or-explain mechanism for sustainability reporting for all of its listed companies. When implemented, this piece of regulation will add to the inventory of close to 170 policies in force around the world that are meant to encourage or mandate corporate sustainability reporting.

More, not better

While the number of sustainability reports has increased substantially, a closer look reveals some important findings. In its latest analysis of sustainability disclosure trends among the world’s stock exchanges, Corporate Knights Capital found that a sizeable chunk of the world’s large listed companies are failing to disclose their performance on the seven basic sustainability metrics – employee turnover, energy, greenhouse gas emissions (GHGs), injury rate, payroll (total employee compensation), waste and water. These seven basic indicators are objective measures of corporate sustainability performance that are broadly relevant for companies in all industries. Moreover, they are generally accepted as being the most widely tracked core sustainability metrics by various stakeholder groups including investors.

Click to enlarge.

For instance, only 39 per cent of the world’s 4,609 large listed companies disclosed their GHGs for the year 2012. For water, that percentage is 25 per cent. As for employee turnover rate, it is a paltry 12 per cent. While disclosure rates vary by sector, it means that a majority of the world’s large companies are not still not disclosing these seven basic sustainability metrics – in the case of GHGs, arguably the most universally recognized strategic sustainability issue, it has not been reported by more than 61 per cent of the world’s large listed companies. Even more disconcerting is the finding that only 128 (2.8 per cent) of all of the world’s large listed companies disclosed all the seven basic sustainability metrics for the year 2012.

Essentially, the remarkable rise in the number of sustainability reports has not been accompanied by a similar increase in the reporting of the basic sustainability metrics.

Equally troubling is that disclosure rates on the seven basic sustainability indicators appear to be plateauing. As one illustration, the number of large listed companies that disclosed their energy use increased by 88 per cent from 2008 to 2012 but only by 5 per cent from 2011 to 2012. A similar reporting slowdown is occurring on the other six metrics.

Clearly, a majority of companies are still not transparent enough to allow investors to make well-informed decisions over the long-term horizon by integrating foundational sustainability criteria. A point has been reached where virtually all the large companies that would have engaged in the reporting of the basic sustainability metrics have done so already and the remaining large companies likely have little or no intention of doing so under present circumstances.

Investors demand data

This is in stark contrast to investors’ growing interest in building sustainable investment strategies. Despite the notable progress made in corporate sustainability reporting, as shown above, there is still much room for improvement – not only in terms of quantity, but also in terms of consistency and timeliness. While virtually every company has reported on their financial performance six months after their year-end, only 63 per cent of these companies have disclosed their sustainability performance by then.

It is therefore not a surprise that in October 2014, the UNPRI and Ceres’s Investor Network on Climate Risk (INCR) launched an initiative to convey investors demands for more timely comparable and material disclosure of corporate sustainability information to the International Organization of Securities Commissions (IOSCO) in order to inform their investment decisions.

The IOSCO stands in a critical position in this regard through its direct relationship with member stock exchange regulators. Investors of all descriptions are encouraged to demand swift and decisive action from the IOSCO to provide greater clarity around sustainability reporting requirements, ideally to be integrated as part of existing financial disclosures.

The necessary tools are already available. For instance, IOSCO can take inspiration from UNCTAD’s Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives to facilitate a consistent implementation of corporate sustainability reporting requirements among member exchanges. This guidance is a voluntary technical aid to assist stock exchanges and regulators who have responsibility for corporate reporting practice and are contemplating the introduction of a new imitative – or further development of an existing one – to promote corporate sustainability reporting.

Click to enlarge.

Johannesburg model

The relative success of the Johannesburg Stock Exchange in spurring sustainability disclosure amongst listed companies through the implementation of the listing requirement incorporating the King III Code of Corporate Governance stands as a benchmark for inspiring investors and stock exchanges around the world. Ceres’ Investor Listing Standards Proposal, Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, which engages global stock exchanges via the World Federation of Exchanges (WFE) on a possible uniform reporting standard for sustainability reporting by WFE members may also serve as a basis for the implementation of corporate sustainability reporting requirements among member exchanges.

Likewise, governments stand in a pivotal position to influence corporate sustainability reporting and are encouraged to renew their efforts in this direction. Existing policies around the world vary in many respects in terms of whether they are mandatory or voluntary, broad or narrow (i.e., applies to various industries as opposed to only one or a few specific industries) and prescriptive or principles-based (i.e., states which specific items of sustainability performance metrics are to be reported and how).

These wide differences in the type of policies may, in part, explain the differences in disclosure performance by the large listed companies of the seven basic sustainability metrics among the world’s stock exchanges, as shown in Corporate Knights Capital’s latest report on corporate sustainability disclosure trends. However, it was found that there is a strong association between policies that are mandatory, broad and prescriptive and better corporate sustainability disclosure performance. Policy-makers may use this finding as a framework to identify case studies as a framework to identify case studies and benchmarks for implementation in their own jurisdictions.

Disclosure frameworks

The advent of non-governmental standard-setters such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and voluntary disclosure frameworks, such as the CDP and the Climate Change Reporting Framework, have without a doubt, helped to popularize sustainability reporting. However, there exists a proliferation of fragmented and often competing reporting standards and frameworks when it comes to sustainability reporting that may bring confusion to both the reporters and the users.

A rapid and successful conclusion of the work among the participants to the Corporate Reporting Dialogue will bring about much needed clarity and comparability in corporate sustainability reporting, which will encourage more corporations to embrace more coherent and useful disclosures of sustainability performance. The Corporate Reporting Dialogue brings together financial reporting standard-setters and sustainability reporting frameworks to promote greater alignment, consistency and comparability between corporate reporting requirements, standards and frameworks. An endorsement by the major groups of users of corporate disclosures – both financial and non-financial – of the outcome of the work of the Corporate Reporting Dialogue will also help in determining the de facto global standard in corporate reporting.

The explosion in corporate sustainability reporting over the last 10 years or so has certainly helped to fuel the remarkable rise in responsible investing. Responsible investing is a much heralded practice whereby investment decisions consider long-term economic, social and environmental sustainability. However, current corporate sustainability reporting practices are at odds with the needs and level of interest from investors, such that a renewed effort is needed to bring sustainability reporting to the next level. Governments, regulators both public and private, business and non-business organizations, and investors all have an important role to play to make this happen.

The post Empowering responsible investing for long-term prosperity appeared first on Corporate Knights.

We have a pretty good idea of how much carbon large companies emit when they make products because most of them are reporting those emissions regularly. But what about the emissions that are not as easily linked to a company’s activities? Think of, transportation in vehicles not owned by the company, outsourced activities, waste disposal and even the use of the product by the consumer.

These kinds of emissions are difficult for companies to measure, so they generally don’t report them. But they are critical to our understanding of climate change, which is currently suffering from a worrisome knowledge gap.

The GHG Protocol, the world’s most widely used GHG accounting tool, designed its scope 3 reporting standard to capture these emissions and hold large companies accountable for the carbon their products emit from cradle to grave.

Scope 1 and Scope 2 emissions are relatively straightforward and well defined. They consist of direct emissions from production and indirect emissions from the consumption of purchased electricity, heat or steam.

Scope 3 emissions can be referred to as “everything else,” said Dexter Galvin, head of supply chain at CDP, which works with investors, companies and governments on environmental disclosure. This lack of definition was creating confusion and inhibiting companies from reporting their scope 3 emissions, he said.

In 2011, The Protocol created 15 categories for scope 3 emissions that have helped companies focus their efforts, said Galvin. At the same time, governments and investors have become more aware of the importance of having a holistic understanding of GHG emissions and their impact on climate change. Sophisticated measurement tools have also made it easier for companies to collect this hard-to-find data.

As a result, the number of large listed companies disclosing scope 3 emissions increased from 283 in 2008 to 801 in 2012 – an increase of 183 per cent. While only 17 per cent of the world’s large listed companies currently disclose their scope 3 emissions, this number is expected to outpace scope 1 and 2 reporting in the future, Corporate Knights Capital has found.

These numbers are encouraging, but there is still a lot of work to be done.

The 2013 Global 500 report by CDP found that “current reporting of indirect scope 3 emissions does not reveal the full impact of companies’ value chains.” The report concluded, “Current scope 3 reporting does not reflect the full impact of companies’ activities and may mislead as to the full carbon impact of a company.”

One of the main issues is that companies report the categories that are easiest, rather than the ones that are most material, said Galvin.

For example, many companies are reporting emissions from their business travel because most of them use a single supplier for their travel needs, which gives them an easy figure, said Galvin. It helps that they are also motivated from a cost perspective to reduce business travel, he added.

But transportation only makes up a small portion of corporate emissions, said Galvin. For the vast majority of global corporations, about 40 to 60 per cent of their carbon emissions are beneath the surface in their supply chains, he said.

Major western companies have effectively outsourced their emissions to emerging markets, said Galvin. But that doesn’t mean these companies can evade responsibility for the emissions created in their supply chains, he said. Global corporations collect the highest profit margins from this business model, so they are the ones with the resources to do this type of analysis, he said.

“As you move down to manufacturing facilities in emerging market, there may be less reporting capabilities on the ground. There’s an onus on major companies to support them,” he said.

This raises questions about how far down the chain companies should go in reporting their suppliers’ emissions. Corporate Knights wrote in October about the difficulties that companies have in tracking health and safety issues through their global supply chains. While it may be reasonable to expect a company to audit 30 or even 100 suppliers for health and safety, companies with thousands of suppliers are likely to find the task overwhelming or even impossible.

With that said, there is still lots of “low-hanging fruit” in emerging markets, said Galvin. The quick returns on investment that companies saw at the beginning of the sustainability push are still in early days further down in the supply chain, he said. Large companies have an opportunity to pick some of this fruit and use it to fulfill their own scope 3 reporting requirements, he said.

The post Emission impossible appeared first on Corporate Knights.

An often-overlooked problem with sustainability reports is that companies are slow to release them. This is partly because regulators do not enforce strict disclosure timelines, and partly because companies spend a lot of time and money producing reports for public consumption.

“Sustainability reports aren’t primarily designed for investors, they’re designed for a wider stakeholder group with slightly different needs,” said Michelle de Cordova, director of corporate engagement and public policy at NEI Investments, which is home to Canada’s largest team of in-house socially responsible investment specialists.

The Corporate Knights Capital Sustainable Stock Exchange report found that only 63 per cent of qualifying companies had disclosed their sustainability performance a full six months after their financial year-end. By comparison, almost 100 per cent of companies had already released their 2013 financial data by this time. The gap between the two reports ranged from three weeks to 13 months.

“This is not a piece of data that surprises me,” said de Cordova. Unfortunately, there is a consistent problem with companies “leaving us hanging,” she said.

Investors need to be able to analyze sustainability data promptly, alongside operational and financial metrics so that they can assess environmental, social and governance risks, she said.

For this reason, the Shareholder Association for Research and Education favours integrated reporting, where the relevant sustainability and financial data are presented side-by-side, said Kevin Thomas, the organization’s director of shareholder engagement. “Sound investment decisions depend on that panoramic view and not just a snapshot,” he said.

Corporate Knights Capital found that some stock exchanges are better than others at getting their listed companies to disclose sustainability data on time. The Shanghai Stock Exchange and Shenzhen Stock Exchange are home to the world’s quickest sustainability reporters, with 100 per cent of companies reporting their sustainability data six months after their financial year-end. While the scope of sustainability reporting by Chinese companies continues to trail international norms, the timely disclosure of sustainability data by Chinese firms is a promising development.

The five exchanges with the poorest timeliness scores were BM&FBOVESPA in Sao Paulo, Brazil, Korea Exchange, Moscow Exchange and the Taiwan Stock Exchange. The Santiago Stock Exchange took the last position with only 21 per cent of companies reporting within six months.

The absence of prompt sustainability disclosure could imply that companies do not see these issues as material to investors, said de Cordova. It could also imply that these areas of risk are not being monitored on an ongoing basis, she added.

If companies are monitoring their sustainability metrics consistently, it should be possible to disclose the bare bones of the information promptly, she said. “I’m not talking about a singing and dancing online report. They can make it look pretty later.”

But Thomas said the timeliness of sustainability reporting is irrelevant if the data is not good quality. “First and foremost, we need data that is reliable, verifiable, and reported in a consistent manner by all companies in a particular sector,” he said.

He also pointed out that some sustainability data is about longer-term problems and, by its very nature, is not tied to a short-term reporting timeline.

In any case, it’s not enough for a company to identify a risk and then walk away, said de Cordova. “If you have information about what you’re doing to prevent a risk from manifesting, surely investors should [have access] to that information,” she said.

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The past few years have seen a notable rise in the number of companies auditing their sustainability data. This trend is largely a response to increasing pressure from various stakeholder groups for assurance on the reliability of corporate sustainability data. The rules about sustainability auditing are much less stringent than those that govern the auditing of financial data, and, accordingly, the extent and scope of an audit of sustainability data often varies significantly among companies in a given industry. This is because sustainability reporting is still largely a voluntary as opposed to mandatory activity, characterized by a lack of agreed-upon scopes and standards available to assurance providers.

As shown in the above chart, featured in Corporate Knights Capital’s 2014 World Stock Exchange Report, the number of large listed companies that conducted a sustainability audit grew from 237 in 2008 to 1,087 in 2012, an increase of 359%. Still, the 1,087 companies that conducted a sustainability audit in 2012 constitute only 24% (1,087/4,609) of the large listed companies included in this year’s study.

Assuring a sustainability report may be safely deemed a minority practice, but the trend line is clearly on an upward trajectory.

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This high growth is partly explained by the eagerness of Asia’s developing countries to catch up on infrastructure and capacity building. Gross capital formation, which measures the value of additions to an economy’s fixed assets – including land improvements such as fences, ditches, and drains; plant, machinery and equipment purchases; and the construction of roads, railways, and buildings – averaged 30% of the GDP of Asia’s 10 largest economies last year.

In China, for instance, gross capital formation accounted for almost half of the Chinese economy in 2013. For comparison, the gross capital formation of the United Kingdom during the Industrial Revolution was around 12% of GDP.

Bhutan, a country of just over 750,000 inhabitants that are landlocked between India and China, had the largest gross capital formation last year at 69.3% of GDP. In fact, gross capital formation in Bhutan has averaged 52.7% over the 10 years between 2004 and 2013.

Such a rapid build-up, however, is too often achieved at the expense of the natural environment and society. A good example is the extreme conditions suffered in 2013 by the residents of Beijing when a sandstorm and smog hit the city. This was blamed on the massive deforestation that occurred from the 1950s when trees were felled to serve as fuel for the steel-producing furnaces.

So which Asian countries are balancing economic, social and environmental prosperity? The Corporate Knights’ Sustainable Asia Scorecard has assessed 50 countries in the region using 25 quantitative indicators covering economic, social and environmental performance. Of these indicators, 15 measure the size, quality and efficiency of inputs and 10 gauge the quality of outcomes to rank the 50 Asian countries on their sustainable development performance.

Singapore came out on top, with strong performance on most of the 25 equally weighted indicators, obtaining top marks on six categories – water productivity ($GDP per use of one cubic metre of water), rule of law, regulatory quality, preservation of natural resources, gender equality and transparency. Japan, South Korea, Hong Kong and Israel round up the top five. China closes the top 10 with strong performance on national savings but (not surprisingly) among the weakest on GHG Productivity ($GDP per tonne of GHG emitted).

While the scorecard is most useful to inform policymakers as to where areas of strengths and weaknesses lie, it can also be useful for investors with an opportunity to benchmark best practices. Bond investors, for instance, seeking exposure to Asian economies and who at the same time want to “green” their sovereign bond holdings, will pick sovereign bonds issued by countries that have achieved a balance between economic, social and environmental development. Likewise, equity investors concerned with sustainable development would want to invest predominantly in stocks of companies operating in the countries at the top of the scorecard.

The scorecard can also be of use to multinationals to identify areas of opportunities for business growth. For instance, a country with strength in the percentage of energy from renewable sources might be an interesting growth market to a clean technology company. With water becoming an increasingly limited natural resource generally, a country experiencing low water productivity would be a candidate for utilities management companies to set up shop. A healthcare company would be well advised to expand its presence in a country experiencing a low life expectancy and high urban air pollution score as these are leading indicators of chronic need for better health care services. A high rate of gross capital formation represents an opportunity for infrastructure companies to line up for projects in those countries. Yet another application will be in terms of a country’s performance on occupational injury and fatality, which act as an indication of a potential need for workplace safety consultancy services.

With many multinationals seeking to establish a presence in Asia, the Scorecard can also serve to inform a company’s decision for locating their offices. For example, with a high rate of education expenditure, rate of innovation and tertiary enrolment rates in Korea, this country could be a prime target for locating a company’s R&D facilities.

Most will argue that as a country goes through a phase of rapid industrialization, imbalances in economic, social and environmental development are unavoidable. However, as a country becomes wealthier, and its population aspires for higher standards of living, it can evolve towards a more balanced and sustainable growth. The developed world today went through such transformation and it is only a matter of time before Asia has its turn.

In fact, China’s CO2 emissions per US$ of GDP have already gone down from 1.72 kg in 2008 to 1.07 kg in 2012, a sign that economic activities in China are gradually becoming less carbon intensive. It’s a real indication that this transformation has begun. For this, business opportunities ranging from clean energy technologies, low-carbon intensive transportation to sustainability consultancy services are expected to grow significantly.

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