“As global weather becomes more extreme, the threat that climate change poses for companies is no longer theoretical. Businesses are working to protect their assets and supply chains from increasingly severe hurricanes, heat waves, fires, and droughts. More and more companies are figuring such ‘climate risk’ into their calculations, and investors are paying close attention.” –Future-Proof Your Climate Strategy, Harvard Business Review
The Why: Investors Desire Carbon Reduction Plans
The good news is that investors are increasingly aware of the importance of carbon reduction, or decarbonization. In fact, the new business as usual for listed companies is evolving to include a carbon reduction plan. In addition to motivations like good governance and strong evidence of firms that embrace a decarbonization journey materially outperforming those that do not, the investment community (both retail and institutional) increasingly demands that companies communicate and act on carbon reduction plans.
Thus, it’s a question of how to communicate the plan versus whether such a path is desired by a majority of investors.
Investor Education at All-Time High
Businesses’ challenge in investor communications is always two-fold, communicating and retaining existing shareholders and attracting new ones to the register.
Typically, listed entity leadership can communicate their carbon reduction plan to investors through either the Annual Report or in a standalone Sustainability Report. These high-level reports have been the standard for the last several years.
However, shareholders are increasingly scrutinizing not only the carbon reduction target but how the target will tactically be achieved. We are seeing a dramatic increase in the sophistication of investors’ ability to review, understand, and form opinions on how and if a company is likely to achieve its carbon reduction agenda. Previous sustainability plans often set lofty goals, with long timeframes and no real delivery pathway.
That is no longer acceptable from an investor perspective.
Words Backed By Action
Instead, it is important for companies to clearly articulate not only the carbon reduction target (often expressed as a percentage) and the timeframe associated with it, but also how this will be achieved at an asset level. The most progressive firms are increasingly setting targets across scope 1 and 2 emissions and making commitments to work with their supply chain to reduce scope 3 emissions.
In the past, lofty goals of carbon reduction many decades into the future have generally been accepted by investors. As more and more companies push increasingly aggressive timeframes for a more sustainable operating model and even total decarbonization, these hero statements have been seen for what they are: Pandering to the investment community rather than a real drive to achieve meaningful change with respect to decarbonization.
In 2021 and beyond, the driving force behind a carbon reduction plan must be an actual desire to improve sustainability versus empty promises to impress investors.
Sharing an Energy Transition Plan with Investors
We have observed several companies as they successfully reveal a carbon reduction plan to investors. They often include regular market updates illustrating how they are working through the key milestones to achieve the plan. Ongoing updates attached to meaningful action are welcomed by the investor community.
For example, we first saw performance improvements among tier one mining companies that pushed zero carbon mandates with increasingly aggressive timeframes. Now, smaller companies are benefiting, even securing off-takes based on their ability to clearly and credibly deliver their carbon reduction plans to the market.
This shows that, aside from decarbonization generally being perceived as the right thing to do, there is substantial evidence that when companies bake ESG into their corporate strategies, they materially and consistently outperform those that don’t.
Environmental, Social, and Corporate Governance, or ESG, is a collective view of a company’s conscientiousness for social and environmental factors. It’s often compiled into a score that weighs numerous intangible assets, such as climate change issues, natural capital issues, environmental opportunities, pollution and waste. One of the most widely referenced ESG rating systems is the MSCI ESG score. MSCI scores roughly 8,500 companies and more than 680,000 fixed income and equity securities globally.
Communication to the market must be clear, consistent, and frequent. Include rating systems like ESG in investor updates to help measure and prove action on carbon reduction plans. Investor relation teams must quickly increase their understanding on the decarbonization that capital markets are seeking and also go deeper into the technologies for implementation along with associated risks and benefits.
Give Investors What They Want Now
Investor insight into carbon reduction commitments and the strategy behind them is no longer “nice to have.” It’s a business imperative.
If you’re feeling less than confident about your team’s ability to design and communicate a plan to achieve carbon reduction commitments, VECKTA can help. Our platform is the only one in the world capable of delivering a detailed and comprehensive plan for onsite energy accounting for all the unique factors of your business, industry, and specific goals. What takes consultants 3-6 or more months, our software and expert team can accomplish in a week.
You don’t have to keep your investors waiting to hear your plan nor delay the energy project that could save money, improve sustainability, increase energy reliability, and attract investors for your company now.