Companies Planning For Climate Change Have Higher ROE: Study

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A new report released today by Sustainable Insight Capital Management (SICM), an investment management firm that integrates environmental, social and governance factors into its investment process, and CDP highlights the relationship between business leadership on climate action and financial profitability.

A higher return on equity: Relationship between business leadership on climate change and financial profitability

September 23 2014: A new report released by CDP today presents evidence that S&P 500 industry leaders that are actively managing and planning for climate-change:

  • Generate superior profitability: 18% higher ROE than peers and 67% higher than companies who do not disclose on climate change;
  • Ensure more stability: 50% lower volatility of earnings over the past decade than low-ranking peers; and
  • Grow dividends to shareholders: 21% stronger than low-ranking peers.

The report tracks industry-leaders over the last three years against their financial performance. The analysis revealed that those who lead on climate disclosure and performance have generated higher profitability (ROE).

The analysis demonstrates how these companies – some of the most profitable in the world – are planning for the future and protecting their profitability by taking action on climate change including:

  • Disclosing to CDP;
  • Setting ambitious GHG emissions reduction goals;
  • Putting in place strong governance and risk management of climate change; and
  • Using internal carbon pricing.

Each year CDP ranks companies based on their climate-related-disclosures to investors in two indices: the Climate Disclosure Leadership Index (CDLI) – a measure of a company’s transparency; and the Climate Performance Leadership Index (CPLI) – a measure based on that transparency of the company’s actions to address climate change. This year’s report announces CDP’s 2014 CPLI and CDLI leaders from the S&P 500 (listed in full below).

As CDP CEO Paul Simpson put it: “With this comprehensive analysis of S&P 500 companies, the market has new, compelling evidence of the link between industry leadership on climate change and corporate profitability. There is only upside for corporations acting in a prudent way to address the challenges of climate change – for which disclosure through CDP lays the foundation.”

Since 2003, CDP has requested annual climate change disclosures from the world’s largest companies on behalf of its investor signatories. The CDP climate change questionnaire focuses on governance, risks & opportunities, and greenhouse gas (GHG) emissions accounting.5 CDP began scoring company responses to its questionnaire in 2007 to provide a gauge of the transparency of climate change information disseminated to the market. Participating companies receive a CDP disclosure score (from 0 to 100) and performance band (from A to E). The disclosure score reflects the transparency of information provided on emissions measurement; climate-related initiatives; risks & opportunities to the business; and external verification and assurance based solely on the information disclosed in the CDP response.6 Companies who score in the top 10% are included in an annual index known as the Climate Disclosure Leadership Index (CDLI).

Business Leadership Climate change

The bar for admission to the CDLI continues to rise: CDP disclosure scores for the CDLI have narrowed considerably over the past 7 years from a minimum score of 61 in 2008 to 97 in 2014.

Since 2011, CDP has also assigned a performance band from A to E to companies scoring above 50 on disclosure scores. CDP performance bands assess the level of action, as reported by the company, on climate change mitigation, adaptation and transparency. Its intent is to highlight positive climate action as demonstrated by a company’s CDP response.

Business Leadership Climate change 3

For now, the market has not put a price premium on these leaders indicating that an investment opportunity may exist.

See full Positive Relationship Between Business Leadership on Climate Change & Financial Profitability: SICM in PDF format here.

About SICM 

“SICM was launched over a year ago because of our belief that sustainability needs to fuel investment practices in order to mitigate our must critical environmental problems,” stated Bruce. “This continues to drive our company but to go beyond a moral argument, our research with the CDP shows that companies focused on sustainability continue to outperform their peers.”

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