Tag: #IPCC

Environmentally sound and financially rewarding? Key findings from an exploratory study on the Science Based Targets Initiative (SBTi)

By Milena Bar, Ottilia Henningsson, & Dr. Kristjan Jespersen

◦ 5 min read ◦

The Science-Based Targets initiative aligns firms’ emission reduction targets with a net-zero emissions pathway. Firm commitment yields significant abnormal returns which are larger for firms committed to larger emission reductions and for high-emitting firms. 

The IPCC’s sixth assessment established a code red for humanity and provided mounting evidence of widespread, rapid, and intensifying climate change. The Paris Agreement, ratified by over 190 states and non-state actors in 2015, formally stipulated the goals of limiting global warming to ideally 1.5°C and at a minimum well below 2°C with the aim of reducing the most catastrophic damages related to climate change onto the natural environment, human health and global financial market. The need for climate action is urgent and requires engagement from governments, individuals as well as corporate and investor participation.

Combatting climate change requires voluntary private sector engagement

Incentivizing corporations and investors to act voluntarily on climate change is critical to redirect private capital towards environmentally responsible business practices. The Science Based Targets initiative (SBTi) is becoming the global standard for firms seeking to set emission reduction targets aligned with the required global decarbonization targets established in the Paris Agreement. By encouraging voluntary corporate carbon emission reductions, the SBTi is a critical tool to reduce the private sector’s reliance on fossil fuels. 

2021 record year for new approved targets and committing firms for SBTi

Since its founding, just seven years ago, SBTi has experienced exponential growth in the number of committing firms and has mobilized firms representing more than a third of global market capitalization to reduce their carbon emissions. In 2021 the initiative took steps to increase the ambition level of firms’ emission reduction targets. When first established, firms could commit to reduce their emissions either aligned with the reduction targets of 1.5°C or 2°C. However, from summer 2022, the initiative will only be accepting the more ambitious emission reduction target, as set out in their campaign Business Ambition for 1.5°C.

Since company engagement ultimately comes down to whether committing to SBTi will drive wealth for shareholders, understanding the stock market response to firm commitment to the SBTi is essential not only for businesses looking to commit, but also for investors. To justify the integration of a climate credential such as the SBTi in investment management, it needs to be able to provide excess returns. To understand the stock market reaction to firms’ announcement of SBTi commitment, we conducted a short-horizon event study on a portfolio of 1.535 firms.

Firm commitment to the Science Based Targets initiative aligns environmentally sound practices with financial viability 

Firm commitment to the SBTi indeed yields a positive announcement abnormal return and thus speaks to the credibility of SBTi in constituting a credible signal of firm commitment to sustainable business practices. Even more encouraging is the finding that firms committed to the 1.5°C target experienced substantially higher returns, indicating a stronger positive market reaction when exhibiting a higher cost of commitment and higher target ambition level. The market evidently differentiates between ambition levels by rewarding businesses that are pledging themselves to more demanding emission reductions and a more climate-friendly business strategy. These findings are particularly relevant in light of the SBTi making the more stringent emission reduction target the new standard for all firms via their campaign Business Ambition for 1.5°C and may encourage more firms to increase their efforts in reducing their greenhouse gas emissions.

Stock price reaction in response to commitment to the Science Based Target initiative

In turn, high carbon emitting firms, proxied here by firms identified by the CA100+ list, reaped the largest reward in their stock price following commitment. This finding further confirms the market’s more sensitive reaction to costlier commitments, but also creates concern about whether the SBTi may have to rethink a recent strategic decision. The SBTi announced that they will not be accepting targets set by firms operating in the Oil and Gas industry, thus abandoning the industry specific methodology for fossil fuel firms which had been in development for several years. Fossil fuel firms have a key role to play in successfully achieving the goals of the Paris Agreement, thus begging the question of whether the SBTi is not missing out on covering an industry critical to combatting climate change and a sector of firms who are highly rewarded by the market for committing to reduce their emissions. 

As climate disasters become more prevalent and more severe, firms who fail to transition to a low, or zero, carbon business model can be expected to become more vulnerable in the long run. To expand the analysis, we further tested the performance of a portfolio strategy screened for firms committed to the SBTi. Despite the underperformance of an SBTi screened portfolio against a portfolio consisting of only non-committed firms in the medium-term, there is reason to believe that a portfolio with SBTi committed firms may provide higher returns in the future. Given that SBTi commitment represents a commitment to aligning the firm’s operations with the net-zero emissions pathway, it can be perceived as a safer bet in the long run. Moreover, portfolios consisting of SBTi firms were shown to be characterized by lower volatility. The objective of investors is shifting to increasingly sustainable and impact focused investment profiles, hence portfolio and asset managers may use SBTi commitment as a filter in security selection to achieve their client’s demand.

Looking Ahead

Financial institutions have a key role to play in driving systematic economic transformation towards a global net-zero carbon emissions economy in their power to lend and invest. As evidenced, firm commitment, ambition level and cost of commitment are reflected in the stock’s pricing mechanism, making the business case for the firm to set ambitious targets for decarbonization, and providing rationale for investors to in the short run utilize the market’s reaction to firm commitment in investment processes and strategies. 

About the Authors

Milena Bär is a recent graduate in MSc Applied Economics and Finance and is working as a student researcher in ESG and Sustainable Investments at Copenhagen Business School. Her research projects are mainly within the field of ESG metrics and regulation, with a focus on the investor’s side.

Ottilia Henningsson recently graduated with a MSc in Applied Economics and Finance from Copenhagen Business School with a keen interest in the transition towards a more sustainable financial industry. 

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Matthias Heyde on Unsplash

Connecting, Cohering, and Amplifying: The Work of Transformation Catalysts

By Sandra Waddock and Steve Waddell

◦ 4 min read ◦

The shocking 2021 IPCC report on the climate emergency makes clearer than ever that many human systems are in dire need of significant change. Today’s harsh growth-oriented economic systems are particularly implicated in the growing chorus of demands for purposeful system transformation towards a flourishing world for all. Significant systemic transformation is needed to bring human activities in line with both social and planetary boundaries now being breached. That means that the way we think about economics, how our businesses operate, and even how communities and whole societies operate likely need to change – and radically.  

But transforming such whole systems – economies, societies, communities, even organizations – is incredibly hard. Transformation inherently involves fundamental changes to core aspects of a given system. Things like purposes, values, goals, important assessment metrics, and even the mindsets or paradigms of people in the system must change, whether the system to be transformed is an organization, economy, or society. Our research suggests that a new type of entity – transformation catalysts – may be able to help.

What is a Transformation Catalyst?

A chemical catalyst brings about a chemical reaction without necessarily changing itself. Used in a social sense, a catalyst is a person or thing that makes something new happen or precipitates change. In the spirit of any catalyst, a transformation catalyst works with the mix of different efforts and activities that already exist and that are geared towards significantly changing a system – transformation. When this mix of change efforts, which is usually fragmented with different activities operating in separate silos, is organized, it can become a transformation system. Organized as a transformation system, these activities can be much more effective at producing desired change.

The transformation catalyst’s role is to bring together an array of efforts so that together they can emerge or develop new ways to do their work more effectively – that is, operationalize the transformation system.

We like to say that transformation catalysts connect, cohere, and amplify transformation efforts that are already underway. Four catalytic actions make this coherence and amplification of efforts possible: seeing, sensemaking, connecting, and radical action and learning.

The Four Catalytic Actions

Seeing means helping change agents figure out what their emerging transformation system is all about and who is doing what, where, and how. Seeing involves various forms of stakeholder analysis – figuring out who is in the system, which can use a variety of approaches, including interviews and mapping tools to identify key participants, resources, and system dynamics. Doing so helps participants identify where gaps and possibilities exist to create more effective action.

Sensemaking means creating a shared and coherent vision among various participants to, quite literally, make new sense of their actions and system, and tell new stories about it. These new, more powerful framings can have broad appeal to draw in other participants, raise funds, and create energy moving forward. Sensemaking also means helping participants understand how to pull together into a coherent transformation system so they can act in new ways to take more effective action.

Connecting is the process by which actors learn about each other and begin to devise new ways of acting more coherently together. Connecting involves aggregating, cohering, and, ultimately, amplifying efforts that may already be underway, but have not been as effective as desired to date. Connecting can mean creating a shared set of aspirations and identity and awareness of their own efforts as part of a broader transformation system. Then they can learn from those actions – the radical action and learning process.

Radical action and learning needs a safe space, so that participants in a transformation system can question, explore, analyze assumptions, and experiment with new ways of doing things that are transformative. Experimentation is crucial, since transformation is unpredictable by its very nature. Mistakes will be made, and things will not always work out as planned. Sometimes creating prototypes can be helpful, too, as a kind of testing ground for further action.

Catalyzing Change through 1000 Landscapes for 1 Billion People

One example that we describe in our paper is that of 1000 Landscapes for 1 Billion People. 1000 Landscapes is an initiative creating sustainable solutions by recognizing that long-term sustainability means emerging a shared foundation of land and water resources for all.

In its early stages, 1000 Landscapes consulted with more than two dozen landscape partnerships globally to figure out who was doing what (seeing). They identified what the barriers were to managing landscapes in new ways were (sensemaking).

1000 Landscapes is now building collaborative capacity for holistic landscape management in many different places, starting with an initial group of 20 and growing the number over time (connecting). Holistic land management means, as the initiative states on its website, “integrating action for food, water and health security, sustainable livelihoods, biodiversity conservation, climate action, and the transition to inclusive green economies” (sensemaking).

1000 Landscapes plans to expand to 50 areas in its second phase (amplifying). Its goal is reaching at least 1000 landscapes “meeting locally defined development and environmental goals, with benefits for over one billion people” by 2030 (amplifying and radical action). 1000 Landscapes even uses the language of catalysis to describe its work: “working in radical collaborations with dozens of organizations to catalyze system change”. It thereby “unlock[s] the transformative potential of inclusive landscape partnerships and to scale their impact”.

The Mantra for Transformation Catalysts

The key to understanding transformation catalysts is knowing that they themselves are not doing the actual transformation work. Instead, they are helping to organize other change agents who are already doing that work in new ways so that they can become more effective. Indeed, they are helping them to become effective transformation systems with the potential to overcome the many inertial forces that hold systems in place.

Small, fragmented, individual efforts cannot achieve that type of scale impact. But the potential that transformation catalysts bring is the ability to bring those actors together in new ways. They can help change agents see and understand new, radical possibilities for transformative change if they can act coherently together. Then they can amplify their own efforts by figuring out where the gaps in their transformation efforts are, filling those, sharing resources when appropriate, and acting more effectively.

Connect, cohere, and amplify. That is the mantra for transformation catalysts.

Further Reading

Waddock, S., and S. Waddell (2021). Transformation Catalysts: Weaving Transformational Change for a Flourishing World for All. Cadmus, 4(4), 165-182.

Lee, J.Y. and S. Waddock (2021). How Transformation Catalysts Take Catalytic Action. Sustainability, 13(17), 9813. 

About the Authors

Sandra Waddock is Galligan Chair of Strategy, Carroll School Scholar of Corporate Responsibility, and Professor of Management at Boston College’s Carroll School of Management.

Steve Waddell is founder and co-lead steward of Bounce Beyond, a transformation catalyst oriented to changing towards transforming towards next economies.

Photo by kalei peek on Unsplash

Unaccounted Risk: The Case of Sulfur Hexafluoride (SF6) in Offshore Wind Energy

By Esben Holst & Dr. Kristjan Jespersen

◦ 5 min read ◦

Carbon accounting provides a science-based measurement of greenhouse gas (GHG) emissions, achieving greater accountability of companies’ emissions causing global warming. GHGs are reported in CO2 equivalents (CO2e), meaning GHGs with widely different chemical qualities and environmental impact can be presented in a single understandable metric. However, the underlying methodology is debatable. This article questions whether the CO2e of Sulfur Hexafluoride (SF6) is misreported.

What is SF6 and why is it a hurdle for a green energy transition?

SF6 is used as an insulator in a wide variety of electrical equipment, mainly to prevent fires in incidents of short circuits. It is found in transformers inside windmills, offshore and onshore substations, and in power cables.

(Illustration to the left shows a sideview of a windmill turbine – Source: CAT-Engines. Right: an offshore wind energy system – Source: Nordsee One GmbH)

SF6 is a synthetic man-made GHG and cannot be reabsorbed naturally like CO2, meaning once emitted, it does irreversible damage. Most GHGs remain in the atmosphere around 100 years – SF6 remains for 3,200 years. These numbers are given by the Greenhouse Gas Protocol (GGP) based on calculations by the Intergovernmental Panel on Climate Change (IPCC). 

The IPCC’s metric Global Warming Potential (GWP), reveals environmental harm of a given GHG in CO2e. What then, makes SF6 problematic when converted into CO2e? SF6 has a GWP 23,500 times higher than CO2 – a value that is difficult to comprehend. The GWP metric is calculated using a 100-year timeframe based on GHG’s environmental harm. Yet, SF6 has an atmospheric lifetime of 3,200 years, essentially leaving 3,100 years of environmental harm unaccounted for. Using a simple logarithmic function incorporating IPCC data accounting for the missing 3,100 years, the GWP almost doubles. As illustrated below, this indicates how SF6 may be misrepresented in terms of environmental harm in CO2e emissions reporting.

As found by AGAGE – MIT & NASA, other worrying trends are observed. The atmospheric concentration of SF6 has more than doubled in the past 20 years. Luckily, its current concentration in the atmosphere remains low relative to other GHGs such as Methane or Nitrous Oxide.

Source: AGAGE

Regardless, the GWP of these two GHGs pales in comparison to the mindboggling detrimental effect of SF6 on the environment. Emitting this gas should therefore be strictly regulated.

Greenhouse Gas Emissions Reporting – Diverging Approaches

It only takes a little digging into offshore wind energy players to uncover diverging conversion methods of SF6 into CO2 equivalents (CO2e). The GHG emissions reporting methodologies of industry leaders use different emissions factors to convert SF6 into CO2e. An example of underreporting is illustrated by Vattenfall in their 2019 sustainability report, reporting SF6 as 15,000 times more potent than CO2. The emissions factor given by the GGP is 23,500. Ørsted uses a GGP emissions factor for the same gas in their 2019 ESG report. Yet, while Energinet also states it uses the GGP reporting framework in their 2020 CSR report, it uses an emissions factor of 22,800. The ownership distribution between Vattenfall and Ørsted in the Danish wind farm Horns Rev 1 of 40% and 60% respectively, thus blurs accountability and severity of reported emissions. As highlighted by the BBC, atmospheric concentration of SF6 is ten times the reported amount by countries. The IPCC and GGP are also aware of this.

During the past decade…actual SF6 emissions from developed countries are at least twice the reported values. (Fifth Assessment Report of the IPPC)

Measuring Impact of SF6 Leaks by Offshore Wind Players

SF6 emissions will rise exponentially alongside expanding electrified energy infrastructure using equipment containing this gas. This, together with repeated SF6 leaks, perpetuates the worryingly steep upward trend in atmospheric content of SF6 shown above. In 2020, Energinet reported a leak of 763.84kg SF6, or 17,950,240kg CO2e. The environmental impact of this leak is about the same as the emissions of 53 SpaceX rocket launches. Energinet has since admitted to years of underreporting of SF6, leading to amended SF6 emissions related to normal operations doubling.

Leaks of SF6 are too common. In Ørsted’s 2020 ESG report, a major leak at Asnæs Power Station was mentioned without disclosing the actual amount – withholding important risk-related data from investors. However, Energinet disclosed an SF6 leak of 527kg at that same facility in their 2020 CSR report. The leak for which Ørsted is responsible, yet feels is not material to disclose, is therefore potentially around 12,384,500kg CO2e. Indicating light at the end of the tunnel, Vestas has included SF6 on their Restricted Materials list since 2017, as well as introducing a take-back scheme for infrastructure containing this gas – setting a better example for business models of our green energy transition leaders.

Strengthening the Global Response to Climate Change Risk

It is vital that we understand SF6 is so detrimental to fighting climate change beyond 2100 that it has no place in sustainable business models today. Even if CO2 emissions are reduced in alignment with 2100 Paris Agreement goals, reporting in a 100-year timeframe will not save a planet billions of years old. GHG reporting must be better regulated and scrutinised in order to deliver a truly green energy transition. Releasing a gas causing irreversible damage cannot be an acceptable trade-off for a short-term “green” transition. While most company reports claim no alternatives exist, this is not true. Therefore, SF6-free equipment must be mandatorily installed.

A green transition goes beyond 2100, yet poor regulation enables energy companies to present SF6-CO2e favourably by using lower emission factors. Offshore wind energy players have not provided comparable, accountable, and transparent reporting – indicating stricter regulations on GHG reporting are necessary.

The Way Forward: Better Regulation

In 2014, an EU regulation banned the use of SF6 in all applications except energy after lobbyists argued no alternatives exist. The EU acknowledges the environmental harm of SF6, yet EU action has been described as inadequate. Asset managers, institutional and retail investors are exposed to hidden environmental risks related to SF6 in terms of double materiality. Double materiality referring to the financial costs related to management of SF6 incurred once completely banned. Non-financial reporting of GHG emissions and CO2e needs to be regulated far more than current global regulations. Investors, society, and most of all our environment deserves better protection.

NOTE: This article is based on a Copenhagen Business School (CBS) research paper in the course ‘ESG, Sustainable & Impact Investment’ taught by Kristjan Jespersen – Associate Professor at CBS – as part of the newly introduced Minor in ESG. The paper questions the greenness of wind energy by using the case of three large offshore wind energy farms in Denmark: Horns Rev 1 & 2 and Kriegers Flak. The findings are based on ESG, sustainability & annual reports from 2015-2019 of all involved OEMs, manufacturers, operators, and energy grid providers. Implications of the findings point to a coming hurdle within the electrification of a global green energy infrastructure transition. 

About the Authors

Esben Holst, an SDG and CSR research intern at Sustainify, is a Danish-Luxembourgish masters student at Copenhagen Business School. Besides attending the newly introduced Minor in ESG at CBS, his past studies focus on international business in Asia and business development studies.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Karyatid on Unsplash