Friday, 23 September 2011

The stubborn arithmetic of growth

By Stephen Spratt

Last week saw the release of the latest Annual Report by the Carbon Disclosure Project (CDP). As the name suggests, the CDP aims to get companies to disclose their carbon emissions, as well as information on things like policies or targets. The CDP sends an annual survey to leading global companies on behalf of 551 institutional investors, who manage US$71 trillion in assets.

The basic idea is straightforward enough – the more that is known about companies’ performance on carbon emissions, the more discerning investors can be about where they allocate their funds. As companies come to appreciate this, they will be incentivised to reduce their emissions so as to attract investment.

Underpinning all this is the assumption that there is a relationship between financial and ‘carbon’ performance – what’s good for the environment is good for the bottom line. And this year’s report appears to bear this out, with companies that have emission-reduction targets in place performing better on stock exchanges than those without such policies.

A number of other areas of progress are reported. More than half of Global 500 companies have emission reducing policies in place for the first time, for example, and 45 percent saw emissions decline over the year, up from 19 percent in the previous year. The number of companies refusing the answer the survey also continues to fall.

This is all very much to be welcomed...up to a point.
  • The first caveat is the old chestnut of causality – do companies that reduce carbon emissions perform well on stock markets because of this, or are companies that do well on stock markets more likely to have ‘enlightened’ policies on climate change? Intuitively, the latter seems more plausible.
  • Second, we need to distinguish between efficiency and scale. Clearly, using energy more efficiently is good for the bottom line, so we would expect companies to be making efforts in this department. And so they are. 76 percent of Global 500 companies have emission reduction targets in place. Interestingly, however, only 44 percent of these targets relate to ‘absolute’ emissions.
This is where the relationship between environmental and financial performance may start to break down. Any company that improves its productive efficiency can reduce costs and boost profits, but this is not the same as reducing total emissions. It is perfectly possible to increase efficiency year on year, but still generate more absolute emissions. To avoid this, efficiency gains need to be greater than increases in the scale of production. As was compellingly demonstrated in Tim Jackson’s Prosperity Without Growth?, there is no evidence that this is happening.

Globally, it is absolute emissions that matter of course, but if efficiency cannot outstrip scale, the only way to reduce total emissions is to make less stuff. While all companies want to produce goods as efficiently as possible, none seek to reduce the amount of goods they produce. Moreover, it is highly unlikely that the 551 institutional investors supporting the CDP would reward them with increased investments if they were do so.

As developed economies do everything they can to boost growth, the implications of this stubborn arithmetic have been forgotten for now. This doesn’t mean the problem has gone away though.

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