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.
- 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.
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.
Actions you can take to help the ACA/PAC Framework become a decision-useful reporting standard:
We are grateful to the participants of our three virtual roundtables for their candid and insightful feedback and plan to publish an update to the ACA/PAC Framework incorporating their insights.
If you have made or are considering making a net-zero commitment, we encourage you to consider using the ACA/ PAC Framework as a practical tool that can help your business prepare to thrive in a net-zero economy.