CPP Investments' Richard Manley on Committing To The Net Zero Marathon
Back in May, Sarah Rundell of Top1000Funds reported on CPP Investments' drive for a new corporate framework for emission abatement:I have committed to running a sub-2-hour marathon by 2025, after all, it has been proven humanly possible. You don’t believe I can do it? Would you be more likely to believe me if I shared my fastest time to date? This decision is not a midlife crisis, just my desire to embrace the ambition of the now thousands of CEOs who have committed to remove 100% of the greenhouse gas emissions from their businesses in the next 28 years.
There is, however, one important difference between these two commitments; while a human (not me) has run a marathon distance in under two hours, I am not aware of any companies that have removed 100% of greenhouse gas emissions from their operations, although some have attained carbon neutrality via offsets.
Whether I deliver on this commitment is of no consequence to humanity, but no one seems to believe I can, and everyone has asked for my personal best. Should the same logic apply to net-zero commitments? Whether or not CEOs deliver on their commitments will determine the future of our climate and the long-term viability of their business. Simply put, those who deliver on their net-zero commitment should preserve access to capital (like ours) and thrive over the long term, those who don’t likely won’t.
CPP Investments has committed to be net-zero of greenhouse gas emissions across all scopes by 2050 — within both our operations and C$539 billion ($414.52 billion) portfolio. Our commitment relies on the successful interplay of five external variables that are shaping the path to net-zero: regulation, technology, consumption habits, market infrastructure and, lastly, the companies in the real economy delivering on their transition plans. To determine the likelihood of the latter, we support enhanced disclosure from the companies in which we invest, to better gauge the feasibility of their commitments. Ambition is a force we must harness, as it is key to delivering the shared goal of a net-zero economy, serving to motivate companies, government and investors to think about their role in the process.
Corporate net-zero commitments, whether they are intended as such or not, are forward-looking statements on the long-term performance of a business. Forward-looking statements that influence securities’ prices in public markets are appropriately subject to regulatory oversight. Unchecked commitments and failure to provide appropriate transparency to support this guidance may yield accusations of being misleading or, worse, securities fraud or market abuse.
There is precedence for such communication about long-term business fundamentals. The oil and mining industries have long provided long-term projections of future production to raise financing, but when it became clear that future production guidance was on occasion overstated, investors, and in turn, regulators demanded independent corroboration that economically recoverable reserves were in place to support their guidance.
If issuers commit to net-zero, they should assume the responsibility to provide supplementary disclosure to support consumers of this guidance, in appraising the feasibility of their claims. Uncertainty regarding the interplay between the five variables shaping the path to net-zero does not make this easier. However, there are only five ways to decarbonize a business: pursuing efficiency measures, greening of power consumption, investment in low-carbon (abatement) technologies, closure of emitting activities and finally the use of (additional, high-quality, permanent, verifiable removal) offsets. For every company, these five options are either economic to do now, likely to become economic in the future (assuming higher shadow carbon prices) or uneconomic, requiring the board to consider closure or offsetting to fulfill its long-term commitments.
While the reporting of climate-related disclosure is advancing, more must be done. The CPP Investments Insights Institute, a platform for generating ideas and spurring action on global challenges, convened peer investors, strategy consultants, auditors and others to discuss how climate-related reporting can better meet the needs of boards, management teams and shareholders. We see an opportunity for companies to conduct a process we call an Abatement Capacity Assessment that identifies which of the five levers outlined above can be applied to their businesses to quantify their Projected Abatement Capacity. This projection provides companies with an overview of the percentage of their overall greenhouse gas emissions “proven” or economic to abate now, “probable” or likely to become economic over time applying a standard shadow carbon price and currently “uneconomic” to abate even assuming a $150/tCO2e carbon price (the price per tonne of carbon dioxide or equivalent greenhouse gas). We have initiated the process of conducting an Abatement Capacity Assessment on our own operations.
We published a report outlining these two concepts on the first day of the 2021 United Nations climate-change conference. Since then, CPP Investments has committed its portfolio and operations to net-zero of greenhouse gas emissions across all scopes by 2050 and, we’ve piloted the ACA/PAC framework. The first pilot took eight weeks to complete and provided the pilot company’s board with a robust emissions baseline and an itemized decarbonization pathway, upon which to develop their greenhouse gas-reduction strategy.
The Abatement Capacity Assessment should not be viewed as another new climate initiative. It is highly complementary process that supports all current climate reporting initiatives like the Task Force on Climate-related Financial Disclosures, International Sustainability Standards Board, and other proposals currently open to public consultation. Our proposed framework provides a common reference scenario that companies can use now to quantify and report: (i) the share of current emissions that is economic to abate today; (ii) the share they can expect, with high confidence, to abate over time; and (iii) the share of emissions for which an economic solution remains out of reach.
The framework, if advanced to a standard, could easily be integrated as a non-GAAP reporting approach into existing frameworks and proposed climate-reporting standards. Quantifying the company’s capacity to abate its greenhouse gas emissions based on current pricing, technology and regulations will embolden boards and management to accelerate their decarbonization plans. Companies reporting the economic feasibility of their transition plans are more likely to be rewarded for making net-zero commitments, as investors will be better placed to price risks and finance opportunities, and in turn, accelerate transition financing and protect their beneficiaries.
This op-ed by Richard Manley, GLT-MD, Head of Sustainable Investing, appeared in Pensions & Investments on July 15, 2022.
The giant Canadian investor, CPP Investments, has drawn up a proposal for projecting the capacity of companies to abate greenhouse gas emissions. The framework offers a standardised template to measure the extent to which organisations can remove or abate their GHG emissions that is applicable across industries and geographies, with common assumptions.
The data from the template will help corporate boards and executives better understand the least and most polluting elements of their business, and steer investor capital to industries with lower emissions, said Richard Manley, managing director, head of sustainable investing at CPP.
“If you want to build a business case, reframe the debate,” said Manley. “We need to allocate capital to companies that can support the transition.”
He said the paper was born from the fact many companies have set ambitious 2050 decarbonisation plans that are not grounded in reality.
“Companies are not providing any insight into how they are going to achieve net zero,” he said, echoing a theme of the conference.
Assessment Steps
The first step proposes companies create a clear, standardised assessment of their emissions across Scopes 1, 2 and 3. Next they conduct an Abatement Capacity Assessment (ACA) to project their capacity to abate them, and finally report their Projected Abatement Capacity (PAC).
When companies assess their current emissions, they can develop an estimate of what portion they can abate using currently available, proven technologies; efficiencies or through greening their power consumption. For example, a cement plant may be able to eliminate all its emissions associated with its electricity consumption by using renewables, but only 10 per cent of emissions from its kilns based on technologies that are economic today.
However, the framework suggests companies don’t factor in cheaper technology costs and new regulation in the future. They should only adjust future projections of abatement capacity in accordance with two standardised carbon price assumptions that exceed current levels.
“We have assumed there is no change in regulation and have not baked in consumer behaviour or dramatic reduction in costs because of technology,” he said.
If companies can’t effectively abate emissions in parts of their business the framework suggests they close or cease the business activity; further technological development or acknowledge that the emissions will likely require offsets.
Investor guide
The framework will lead to new capital allocations: a company with high abatement capacity relative to its industry, will likely have access to more and cheaper capital. Or, if the information provided by these projections reveals that multiple industries are confronting similar regulatory or technical hurdles to lower a specific source of emissions, this framework can help guide policy decisions and prioritise investment in innovation.
Manley noted that the framework isn’t something new, but said effective abatement plans were crucial to test companies net zero commitments. These commitments are changing security prices, but if they prove empty it will lead to the possibility of fraud and market abuse.
“Regulators need to be aware and prepared for false climate claims,” he said. “Issuers need to corroborate their long term guidance with projected abatement capacity.”
Board strength
Away from the framework, Manley highlighted the importance of strong corporate boards.
“We need boards to ensure executives have identified all climate risk and opportunities and integrated this into their reporting,” he said. He added that CPP is prepared to withhold support for re-appointed directors if their climate strategy lacks. It is a process that has spurred some companies to commit to TCFD filing processes lest they lose the investor’s support for their directors, he said.
He said that companies with a boardroom culture to proactively mitigate and capture the business risks and opportunity from climate change will outperform. He also noted that investors have more control in private markets. In public markets, investors count on boards to provide effective oversight and counsel executives to integrate sustainability.
Manley concluded that meeting net zero commitments poses a number of challenges for CPP Investments, and for many investors. The fund is growing fast making reducing emissions more difficult in general. At a macro level, several of the world’s largest economies are not planning to be net zero by 2050 so deploying capital in those economies will result in portfolio emissions beyond this date unless those economies accelerate their NDC’s.
Richard Manley is a really smart guy who understands the complex issues at play here:
Richard leads the team responsible for integrating consideration of environmental, social and governance, including climate risks and opportunities across our investment programs. Prior to joining CPP Investments in 2019, Richard spent 18 years at Goldman Sachs, where he was most recently Global Head of Thematic Equity and ESG Research, and Co-Head of EMEA Equity Research. Previously, he worked at Merrill Lynch, Donaldson, Lufkin and Jenrette, and Paribas Capital Markets as an Integrated Oil & Gas equity analyst. Richard holds a Graduado Superior/BA (Hons) in European Business Administration from ICADE in Madrid.
He joined CPP Investments in 2019 and then worked under Deborah Orida, the former Head of Reals Assets and Chief Sustainability Officer who will soon be heading PSP Investments.
Deb spoke very highly to me about Richard when we spoke in December and there's no doubt he and his team are bolstering CPP Investments' ESG framework and approach.
Richard discusses why more needs to be done on reporting climate-related disclosure and he specifically refers to CPP Investments Insights Institute where you can find two reports and insights from practitioner roundtables:
- The Future of Climate Change Transition Reporting (October 2021)
- Investing in the Potential of Carbon Credits (March, 2022)
- The Future of Climate Change Transition Reporting: Practitioner Roundtables (June, 2022)
These are excellent contributions packed with detailed insights on a complex subject matter which is rapidly evolving.
Below, I provide the Executive Summary on the future of climate change transition reporting roundtables with practitioners:
As the threat of climate change grows more urgent, companies in every sector and region are making commitments to achieve net zero. The ability to abate greenhouse gas (GHG) emissions can affect the valuation of an enterprise; announcing such a commitment can move the stock price. Currently, however, the data is not available for boards and investors to rigorously assess a company’s ability to make a commitment and in the case of companies that have already made commitments, to make good on them.
CPP Investments developed a standardized Framework for companies to report their current level of GHG emissions throughout their operations, as well as their capacity to abate them under different scenarios. This proposed Abatement Capacity Assessment (ACA) will help boards and investors have a greater degree of confidence in a company’s commitment and ability to transition to a low-carbon future. The Framework also includes a Projected Abatement Capacity (PAC).
CPP Investments Insights Institute recently hosted a series of roundtables with institutional investors, ESG/strategy consultants and independent auditors to understand the challenges and concerns with the proposed Framework, to develop steps to refine and improve it. Our goal is to build consensus around a reporting template that can be widely adopted and produce consistent, comparable data that senior management, boards and investors can use to assess the feasibility of GHG emissions reduction commitments.
By providing much-needed information about a company’s current and projected ability to abate its GHG emissions, based on current pricing, technology and regulations, we believe the Abatement Capacity Assessment (ACA) will help boards and investors have a greater degree of confidence in a company’s net-zero commitment. More detail on this ACA/PAC Framework is available in our report, The Future of Climate Change Transition Reporting.
Key takeaways
- Institutional investors confirmed the belief that there is data deficiency both in the boardroom and the market. Participants reported that since the Framework is highly complementary to existing climate-reporting initiatives, like the Task Force for Climate-related Disclosures (TCFD) and SASB Standards, investors believe it can be decision-useful in appraising the feasibility of corporate transition plans. The Framework is a practical tool to help investors fulfill the requirements of existing climate-related disclosures.
- ESG/strategy consultants further reinforced the view that boards and management would benefit from the insights gathered from applying this Framework, enabling them to develop better net-zero strategies. Since the Framework offers a methodical way to assess emissions abatement pathways today and under future scenarios, consultants believe it would provide valuable insight to complement the advice they currently give. Consultants note that while companies may be reluctant to share too much data, the Framework will allow them to disclose abatement capacity without compromising their commercial interests.
- Independent auditors acknowledge that while work needs to be done to take the Framework from concept to standard, the issuers conducting this analysis would be better placed to meet reporting requirements and commit to transition plans. This would make the proposed Framework useful for readiness assessments.
- Participants across each group generally agree that companies making net-zero commitments may not fully appreciate what meeting those commitments would entail. They note that conducting this Abatement Capacity Assessment could help assess the feasibility of a net-zero target and what achieving that target might entail for the business today, and under future scenarios.
- Enhancements to the Framework, as proposed by roundtable participants, include:— utilizing a company’s own shadow carbon price to present scenarios where abatement of overall GHG emissions is “probable” or likely to become economic over time;
— defining the boundaries of what is included in Scope 3, especially in the short-term, is critical (for example, companies could consider only accounting for Scope 3 emissions that they can control, such as business travel);
— emphasizing that the assessment is highly complementary to existing and proposed climate- reporting initiatives [e.g., TCFD, SASB Standards and International Sustainability Standards Board (ISSB)]. It is not an incompatible disparate tool;
— being clear that the Abatement Capacity Assessment is both granular and dynamic and will change as technology and regulation evolve; and,
— taking a sector-specific approach to implementing the ACA/PAC Framework.
Moving Forward
We will refine the ACA/PAC Framework to incorporate these enhancements. CPP Investments has also conducted a successful pilot of the Framework within our portfolio, allowing us to apply the insights from the discussions and glean further learnings. Our experience demonstrates that the Framework can facilitate comparable and consistent disclosure, which is useful to boards, management teams, and investors alike. Join us in moving this concept into a fully implemented standard.
If interested, please contact Richard Manley, Managing Director, Head of Sustainable Investing, Global Leadership Team, CPP Investments and Chair of the SASB Investor Advisory Group, with questions.
As stated above, the goal is to build consensus around a reporting template that can be widely adopted and produce consistent, comparable data that senior management, boards and investors can use to assess the feasibility of GHG emissions reduction commitments.
In his comment, Richard Manley was very specific:
The Abatement Capacity Assessment should not be viewed as another new climate initiative. It is highly complementary process that supports all current climate reporting initiatives like the Task Force on Climate-related Financial Disclosures, International Sustainability Standards Board, and other proposals currently open to public consultation. Our proposed framework provides a common reference scenario that companies can use now to quantify and report: (i) the share of current emissions that is economic to abate today; (ii) the share they can expect, with high confidence, to abate over time; and (iii) the share of emissions for which an economic solution remains out of reach.
Long-term asset managers like CPP Investments and others need to build consensus on reporting climate related disclosure and adopt a common framework that allows them produce consistent, comparable data across their public and private investments.
It's all about enhancing disclosure and assessing the feasibility of companies to achieve their goals on their net-zero commitments.
With the roundtable discussions, CPP Investments is pushing to adopt a common framework and whether or not its ACA/PAC framework is adopted or some variant of it, it will significantly bolster climate related disclosure and help companies and asset owners assess progress on their GHG emissions reduction commitments.
There is a lot at stake here because as Richard Manley notes, meeting net zero commitments poses a number of challenges for CPP Investments and other investors.
The work being done today, the initiatives and frameworks being adopted, will lay the foundations for meeting the net-zero commitments of 2050 and beyond.
Everyone needs to be taking part in these discussions and I believe large asset owners are playing a leadership role explaining the risks and opportunities of climate change.
CPP Investments is already investing in the path to net zero and doing its part to promote important discussions among peers and others to improve climate related disclosure and more.
John Graham, its President and CEO, stated that massive disruption requires collective efforts and he also highlighted the critical importance of sharing knowledge in the process:
The enormous challenges ahead demand that all stakeholders work together to unleash the skills, resources and capital at the scale required. To spur this effort, we are launching the CPP Investments Insights Institute to share our knowledge and engage with fellow investors, CEOs, policy makers and others on ways to overcome obstacles as we mobilize capital to take on broad, global challenges. We believe that a better understanding of the profound effects these disruptive forces will have on the investing landscape, and how we can best adapt, will enable us to create enduring value for current and future generations.
CPP Investments Insights Institute is sharing important knowledge with stakeholders, promoting more collaboration to advance and enhance ongoing initiatives on climate-related disclosure and other important topics.
The path to net zero is a marathon, a long process which will require massive capital, collaboration and commitments from all stakeholders to achieve the required outcome of a carbon neutral world by 2050.
Below, Richard Manley, members of CPP Investments’ Sustainable Energies Group discuss their approach to sustainable investing and how they are working together to enhance the Fund’s performance.
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