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Why committing to net zero is like running a sub-two-hour marathon

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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 fulfil 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.

About the Author

Richard Manley

Richard Manley

Managing Director, Head of Sustainable Investing, Global Leadership Team, CPP Investments

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.

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 fulfil 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. About the Author Richard Manley Managing Director, Head of Sustainable Investing, Global Leadership Team, CPP Investments 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.
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