Framework Helps Track Environment Footprint

For a human to outrun a cheetah we would need to sustain over 75 miles per hour for at least 30 seconds. There is clearly no point in debating how we would achieve this; the world record is 43.03 seconds for 400 metres. If our ancestors’ strategy had been to learn how to outrun cheetahs to survive, we would all be dead! Instead, they made fire and carried stones and sticks.

Why is this relevant? Because we are obsessed with what needs to be done and have lost focus on what can be done! What can be done at any moment in time in terms of abatement of emissions will, of course, change over time as technology advances, carbon prices increase, and regulation tightens. What matters today is what we can do now and whether we are doing it or not!

Boardrooms and management teams across the globe are being told they need to comprehensively decarbonize by the middle of the century which creates two challenges ‒ it pushes out the time horizon and it often leads them to focus on the hard- to-abate emissions rather than the easy wins hiding in plain sight.

Remember we have a carbon budget. Any and every low-cost saving made today creates capacity to deal with some of the more expensive and harder challenges over time.

Decarbonization Plan

Developing a decarbonization plan is not easy, it’s the boardroom equivalent of eating an elephant ‒ a huge challenge and not easy to determine where to start.

In October 2021, as part of its mission to advance the way the global investing ecosystem addresses climate change, CPP Investments Insights Institute unveiled its ‘Abatement Capacity Assessment Framework’ (the ACA/PAC), a standardized template that any company can use to understand if it is on track to reduce its environmental footprint. The concept is simple:

• identify sources of greenhouse gas emissions
• assess the immediate capacity to reduce those emissions economically
• project the company’s potential for future emission reductions under certain carbon-price scenarios

This will ultimately arm boards of corporations with a clear process to develop decision relevant information to approve decarbonization plans.

Why boards, because thousands of boards are now being asked to approve transition plans and need to demonstrate these are both in the best interests of the company (financially viable) and realistic. Boards don’t want to approve plans that are overly ambitious and need restating that will undermine their ability to retain management and erode market trust. As well, and possibly worse, these plans could be deemed to provide forward looking guidance without appropriate diligence.

Objective Appraisal

However, neither do they want to low ball the plan and have non-governmental organizations (NGOs) accuse them of com- mitting to a fraction of what could be done, undermining their reputation. To determine this, boards need an objective appraisal of what can be delivered now, what is likely with some effort, and which elements require more strategic debate. ACA/PAC aims to arm them with exactly these insights.

The process is simple and the output intuitive. Since its launch, the framework has been stress-tested in a series of roundtables with institutional investor peers, auditors, and other professionals and is being actively deployed in pilot projects with companies in our portfolio. All of the strategy and environmental consultants we have discussed this with believe they can help companies complete this. There are a number of steps to be taken, once the company has accumulated the relevant data:

• Identify the quantity and source of all emissions (Scope 1 and 2 first – Scope 3 once this is done)
• Allocate emissions to the following three buckets, categorizing emissions between those which:
  • Can be abated through efficiency measures – technically feasible with no capital outlay
  • Will be abated through underlying greening of power consumption
  • Can be abated through investments in upgrading processes, machinery, or electrification that is technically feasible and economic today with some capital outlay

The sum of these is defined as proven abatement capacity (the ACA or current projected abatement capacity) as it is all technically feasible and economic today. The opportunity for the company is to bake this into the current business plan now and integrate this emissions reduction into its short-term targets. One important output from this is understanding the pace of greening of the grid and affords the company to engage in a debate about whether to accelerate this through entering into power purchase agreements or investing in captive renewable capacity (e.g., rooftop solar, etc.).

This is unlikely to cover 100 per cent of the required emissions reduction so two further steps are required:

• Recalculate emissions reductions that would be economic if the carbon prices were $100/tCO2e* using technologies that work today.
• Repeats this exercise at $150/ tCO2e.

The sum of these emissions is defined as probable abatement capacity (the PAC or long-term projected abatement capacity). While technically feasible, it is not quite economic, but likely to become economic if costs fall, carbon prices increase (as modelled), or regulation tightens. Importantly this information is decision-useful as the board and executives may conclude that there are ancillary benefits to making these investments including brand value, potential pricing power, or market share gains that they wish to build optionality around.

The last phase is addressing the rest, those emissions that are either technically impossible to abate or those technically feasible, but not economic below a $150/ tCO2e carbon price. We believe the company should have a strategic debate to allocate these to three final buckets:

• Those they plan to stop – e.g., man- aged closure of the process
• Those that are essential to the business process that will require off- setting (with high quality removal offsets)
• Those where they are actively diligencing technical solutions they believe will become economic over time.

These three final categories sum up uneconomic abatement capacity, but disclosure of the three parts of this allows stakeholders to appraise the feasibility of the decarbonization plan put forward by the company (managed decline is clearly in management’s control while future innovation may be more speculative), and the risk of assets ultimately becoming stranded.

Credible Plans

Being able to move beyond ambitions to commitments will deliver stakeholders an objective appraisal of the technical and economic feasibility of a transition plan which will, in turn, transform confidence in these commitments and for those with credible plans make financing them easier. Knowing that proven and probable is 75 per cent and managed decline is 20 per cent leaving only five per cent of the plan dependent on innovation (over the next 28 years) will be viewed very differently to a plan that is 35 per cent proven and probable with five per cent of offsetting and 60 per cent dependent on innovation.

The CPP Investments Insights Institute believes the companies that back up their net-zero pledges with credible plans, such as those enabled by the framework, will be better positioned to compete against peers taking a less transparent approach and demonstrate to investors that they’re equipped to thrive and create value over the long term in a low-carbon world.

Richard Manley is Managing Director and Chief Sustainability Officer at CPP Investments.