This past year saw the publication of two startling reports from the Intergovernmental Panel on Climate Change (IPCC), warning of the worsening impacts of climate change threatening food supplies, infrastructure and already fragile global water supplies. At the same time, the United Nations reported that the “emissions gap” – the gap between the greenhouse-gas (GHG) emissions that will limit temperature increases to the 1.5C that climate scientists say is safe and the GHGs that we are actually emitting – is growing.

With nations failing to make progress at the COP25 climate talks in Madrid in December, corporate action on the climate has never been more important.

If the 2010s were the decade when business started to realize the dangers of climate change and the impact it could have on their operations, the 2020s must be the decade when they act to dramatically reduce the emissions that cause it.

The shift is reflected in the growing influence of initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD), which calls on companies to disclose their climate risks and how they intend to tackle them. The physical risks are becoming more obvious, in the form of stronger hurricanes, weeks-long wildfires in locations from California to Australia, record temperatures from the Arctic to Africa, and rising sea levels. TCFD also asks that companies quantify the financial and non-financial impacts of the low-carbon transition (on reputation, policy, technology, etc.).

The COP25 talks in Madrid highlighted the challenges that businesses will face from an uneven and divergent pace of change – countries such as the U.S., Australia and Brazil resisted introducing stricter measures, while the European Union, the world’s largest trading bloc, announced that it planned to become “climate neutral” by 2050, meaning that some 40% of global GDP is now covered by net-zero commitments.

The science tells us that bigger emissions cuts are needed as the impacts of the climate crisis become ever more apparent and alarming. According to KPMG, “Governments that are seen as lagging at the moment may be forced to implement more stringent policies more rapidly in the future.”

The past year has also seen a wave of grassroots protests around the world against climate inaction, including by Extinction Rebellion activists and hundreds of thousands of students inspired by Swedish teenager Greta Thunberg’s “striking for climate.” The world’s future consumers and voters are increasingly intolerant of failure to tackle climate-change and social-justice issues. Business and investors are starting to take notice and come to grips with what the crisis could mean for their future prospects.

It is no accident that the biggest grouping in the Global 100 is financial services companies – investors, insurers and lenders are often ahead of the game when it comes to acknowledging where the risks of failing to deal with sustainability issues lie.

Business and investors are starting to take notice and come to grips with what the crisis could mean for their future prospects.

 

That is why they encourage companies to disclose their emissions and their climate strategies through bodies such as TCFD and CDP (formerly the Carbon Disclosure Project). It’s also why, aided by technology in the form of big data and artificial intelligence, they are increasingly focused in their engagements with companies – for example through the Climate Action 100+ initiative that targets the world’s biggest emitters and those “with significant opportunity to drive the clean energy transition.”

The leader of this year’s Global 100, Ørsted, is a perfect example of a company that has identified the way the world is changing, spotted an opportunity to gain a competitive advantage and reshaped its business strategy accordingly.

Many other businesses are reacting by signing up to initiatives such as Science Based Targets, which calls for companies to set targets in line with the scale of reductions needed to keep average temperature rises below 2C, and RE100, whereby corporations commit to procure all their electricity from renewable sources.

Renewable energy and associated technologies such as batteries and electric vehicles are becoming cheaper and more competitive every day, making it easier for companies to make the sustainable choice.
While relatively few companies have committed to these initiatives, those that have are among the biggest corporations in the world, and their efforts to meet their own targets will encourage their suppliers to become more sustainable in turn.

The drivers for companies to become more sustainable are coming from everywhere – the science, initiatives from governments and regulators, increased consumer pressure and demands from investors. The best-prepared businesses see opportunities as well as risks and are preparing accordingly.

Who made this year’s list? The 2020 Global 100 ranking

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This consensus is starting to crumble as the evidence mounts that considering sustainability issues is not a drain on earnings – and, in fact, improves performance. “The impression among business leaders is that ESG just hasn’t gone mainstream in the investment community,” said the Harvard Business Review last year. “That perception is outdated.”

Investors are increasingly aware of the importance of the climate crisis, water shortages, health and safety in the supply chain, modern slavery, and corruption to their bottom lines. Volkswagen’s Dieselgate and Boeing’s 737 Max scandal are just two incidents that reveal that ESG issues are not only material to a company’s financial performance – they can have a huge effect on it.

Indeed, armed with increasing amounts of high-quality data, investors are becoming ever more assertive in calling for companies to deal with ESG issues. Even the U.S. Business Roundtable, which did much to champion the supremacy of shareholder rights, has changed its position to declare that the purpose of a corporation is not just to serve shareholders but “to create value for all our stakeholders,” including customers, employees and local communities.

The performance of this year’s Global 100 (G100) companies bears out this analysis; since its inception in 2005, up to Dec. 31, 2019, the “index” has outperformed the MSCI ACWI (All Country World Index), returning 7.3% on an annualized basis against the ACWI’s 7.0%.

At the same time, the G100 outperforms on a number of ESG criteria, including average CEO pay ratio (76:1 against 302:1), the number of women on their boards (30% vs 24%) and female executives (20% vs 17%), as well as whether they link executive compensation to targets related to the UN Sustainable Development Goals (SDGs).

Another key area in the list where sustainability and financial performance collide is the carbon-productivity measure of revenue per tonne of CO2 emitted. Carbon productivity is becoming increasingly important as a business issue, and here the G100 members have a clear advantage, earning $384,077/tonne against the ACWI’s $173,600 on a weighted basis. It is also notable that the proportion of the G100’s revenues that derive from “clean” sources has risen to 37%, from 26% last year.

The ultimate measure of sustainability is the ability to endure and thrive in the long term, and here it is striking that the average age of G100 companies – at 83 years – is almost double that of the 49 years for companies in the ACWI.

The ranking was topped by Danish renewable energy provider Ørsted, followed by its compatriot – and last year’s top-ranked company – Chr. Hansen, a biosciences company. In fact, the Danes occupy three of the top six places, rounded out by biotechnology firm Novozymes, in sixth spot (its enzymes enable higher crop yields, renewable fuels and more). You’ve got to wonder what’s in the water in Denmark.
Third was another Nordic company, Finland’s Neste, an oil refiner that is switching from refining crude oil to using cooking waste and other materials as a feedstock. Fourth was U.S. technology conglomerate Cisco, which rose 10 places from 14th, thanks to more than $25 billion in clean revenues from products with environmental core attributes. American software group Autodesk, which came fifth, rose 43 places from its 2019 ranking, now that it uses 99% renewable energy to run its cloud platforms – platforms that help build green buildings, reduce materials in manufacturing life cycles and support better designs for the circular economy.

These were among the European companies that make up almost half (49) of this year’s G100. The U.S. and Canada accounted for 29, while 18 companies in the ranking are from Asia. Latin America boasts just three members of the list, all from Brazil, and South Africa’s Standard Bank was the only representative of the African continent.

The companies included in the G100 represent a wide range of sectors, from aerospace and apparel to wireless telecoms groups and wholesale power companies. The largest sector was financial services, with 18 representatives, including 12 banks, suggesting that investors and lenders are more advanced in their understanding of how taking sustainability issues into account can help their business performance.

The list includes 28 companies that were not on the Global 100 last year; Canada boasted nine of those entrants, suggesting that the business community here is starting to take the issue more seriously. As well, BYD – China’s biggest electric car maker – is a new entrant, along with Hong Kong’s Vitasoy, evidence that while the world’s largest economy lags behind European and North American nations on key sustainability metrics, ESG issues are starting to gain traction where it will matter most.

Who made this year’s list? The 2020 Global 100 ranking

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DONG (Danish Oil and Natural Gas) may have opened what was then the world’s largest offshore wind farm in 2009, but the company was also widely acknowledged – and considered itself – as one of the best developers of coal-fired power plants. Since then, it has undergone one of the business world’s most radical transformations and got itself a new name, Ørsted – after the Danish physicist Hans Christian Ørsted, who discovered electromagnetism in 1820.

“In the past 10 years, we have transformed from a company that had fossil fuels at the core of its business to being essentially a pure-play renewable energy company,” says CEO Henrik Poulsen. “If you look at the transformation of the company, it has been dramatic.”

Asked why he thinks Ørsted topped the Global 100 ranking, he suggests that it could be “the sheer scale of the transformation and the speed – the fact that we have done all this within a decade.” “All this” is having reduced its CO2 emissions by more than 80% since 2006 and earning the title of the most sustainable company on the planet.

The company, which produced 85% of its energy a decade ago from fossil fuels and 15% from renewable energy, has reversed that proportion and has a target to “essentially become carbon neutral” by 2025.

“That was important in terms of being a purpose-driven company,” Poulsen adds, “but it is just as important that we managed to do this while demonstrating good shareholder-value creation and strong return on capital employed. Our return on capital is 300 to 400 basis points higher than the European average. Since Ørsted joined the stock market through the world’s second-biggest initial public offering of 2016, the company’s value has more than doubled to $US 40 billion.

“Running the company just for profit doesn’t make sense, but running it just for a bigger purpose is also not sustainable in the long term. Doing good and doing well must go together.”

The transformation has not been an easy one. “Over the past eight or nine years, we have been gradually disassembling the very core of the company and using the cash from that to accelerate the build-out of our leadership position in offshore wind. It has been a dramatic change. Some people have left when we divested, and others have been part of a huge growth journey.”

While the journey has been challenging at an operational level, the company was at least confident it was heading in the right direction. “We were helped by the underlying trends in society. We need to fundamentally change the global energy system from black to green energy. What we saw as an opportunity is now really required,” Poulsen says.

At the same time, the company can justifiably claim to have played a key role in turning offshore wind from an expensive, unviable but interesting technology to a central part of the mainstream energy mix. “Even five years ago, it was no more than a niche. Now it’s a significant part of the future green-energy system. It’s a transformation not just for our company, but a significant contributor to the broader green energy transformation.”

The industry has developed faster than even those involved thought possible, Poulsen points out. In 2013, the industry set a target of reducing costs for offshore wind by 35 to 40% by 2020, but that was achieved in 2016. “We thought 35 to 40% was an ambitious target, but costs fell much faster than we expected. When we set out to change a decade ago, we thought the transformation to green energy would be complete by 2040. But we will reach that 2040 target 20 years earlier than we originally envisioned.”

Given the scale and speed of its transition, Ørsted has become a poster child for the transition to a low-carbon economy, something that Poulsen embraces. “I hope we can be an inspiration to others, yes. Both in terms of the radical nature of our transition and the speed.”

“When you look at the challenge we face as a global community – to halve our emissions by 2030 even though we have not yet had a single year in which emissions have fallen – it’s clear that all companies must become more ambitious with their timeline for action,” he says. “Companies setting a 2050 target for emissions reductions need to reconsider whether they can do it faster and go further. What we have shown is that you can be much more radical than you might think.”

Who made this year’s list? The 2020 Global 100 ranking

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