When the COVID-19 pandemic brought the world under lockdown, greenhouse gas (GHG) emissions decreased significantly – but we always knew that was temporary. And even though the virus is far from gone, global corporations are continuing to open up and we need to bring the E, the environment, back into the ESG conversation.
As we prepare our upcoming annual rankings of America’s most just companies, we are considering a new way that companies can commit to reducing their environmental impact – the reduction of air travel, a major source of a company’s emissions. Not only has our polling shown that most Americans believe companies should reduce their impact on climate change, but we have shown recently that there is a clear business case to make for cutting back on GHG, through reducing both costs and risk.
To take a closer look at how companies view their environmental impact, and why we are focusing on air travel, we can consider the widely used GHG Protocol framework – which established standards to measure scope 1, 2, and 3 emissions.
Scope 1 emissions are direct emissions, like those from burning fossil fuels, while scope 2 emissions are indirect emissions, like those from electricity generated through other energy sources. Many companies report these categories in depth in their corporate social responsibility reports, and have for years. This is not yet the case with scope 3 emissions, which represent all remaining emissions from a company’s value chain, like employee travel or the use of the company’s products. Depending on the business model, scope 3 emissions can make up more than 90% of a company’s overall GHG emissions. These three categories mirror the main sources of GHG emissions — industry, electricity, and transportation.
The coronavirus crisis provided an unwelcome but useful consideration of that last category. With commercial air travel accounting for approximately 2.4% of global GHG emissions, a sizable chunk of emissions ceased practically overnight. And with the near-universal uptake of virtual meetings for professionals, it is fair to question whether many of these flights were needed in the first place.
In our upcoming ranking, we are incorporating this question as part of a new industry-specific metric on clean and sustainable products and services. Based on our research, the American public believes that good corporate governance tries to minimize a company’s negative impact on the environment — here this means to limit unnecessary flights and to offset unavoidable emissions. Leaders in this space, like Capital One, recognize this and actively work on reducing their carbon footprint across their entire value chain.
Benefits of reducing one’s carbon footprint are not limited to the gains from reducing climate change. As we have shown in our Chart of the Week series, companies that reduce their scope 1 and 2 emissions outperform those that don’t. However, we also found that disclosure in itself does not lead to the same result. This is most likely the consequence of increasing regulation demanding disclosure of scope 1 and 2 emissions for large polluters in certain sectors. Scope 3 emissions from business travel do not yet face similar regulatory scrutiny. Here we find a different picture: disclosure in itself is associated with outperformance as shown in the chart below for the consumer and diversified finance sector where roughly 50% of companies reported on their scope 3 emissions.
Our research indicates that companies disclosing scope 3 emissions do so with intent — many aim at optimizing across their whole value chain with their environmental impact being only one aspect. As a result, disclosure on scope 3 emissions from business travel can serve as a proxy for good supply chain management. This becomes apparent when looking at the recent downturn, as the impacts were far less severe for those companies that disclosed their scope 3 emissions than for those that didn’t.
That, in turn, substantiates a core finding we have made numerous times: Good corporate governance across the whole ESG spectrum can provide protection from downside risk. Hence, ESG is a true win-win for companies, investors, communities, and the environment. And as corporations around the world consider what their strategies will look like on the other side of this pandemic, they can consider taking a big step and reducing unnecessary air travel.