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Knowing how a company’s actions on sustainability stack up against its peers can help laggards turn into leaders. One tool is helping to show the way.

From his office in central London, Valentin Jahn passes his cursor over a brightly coloured graph that pinpoints where each of the biggest carbon emitters in the global steel industry is placed on its decarbonisation journey.

Two clicks later, and Jahn, who is part of a team at the London School of Economics’ Grantham Research Institute, hovers over a page that reveals the latest data tracing future decarbonisation commitments for each of the highest-emitting companies in the oil and gas sector.

The Transition Pathway Initiative (TPI) tool he is using, which his Institute designed, is an asset owner-led initiative providing easily comparable data to assess the preparedness of companies in some of the world’s hardest-to-decarbonise industries for the transition to the low-carbon economy. The tool captures a range of information on companies’ transition pathways, such as how their targeted future carbon performance compares with international targets and national pledges made as part of the Paris Agreement. But it also evaluates and tracks how well companies are managing their greenhouse gas emissions and the risks and opportunities related to the transition.

One of the key elements we set out to address was to create a very transparent and relatively simple framework to understand and quantify a company’s managerial quality on decarbonisation, what they are doing and what they are implementing.”

Investor attention on environmental, social and governance (ESG) factors has made it increasingly important for companies to incorporate sustainability into their managerial practices. But for those operating in high-emitting, hard-to-decarbonise sectors, where the sustainability stakes are at their highest, achieving best-in-class ESG practices is rapidly becoming synonymous with business viability.

Against that backdrop, Tara Schmidt, Sustainability & ESG Finance Director at Lloyds Bank, argues that companies in hard-to-decarbonise sectors need to be more aware than ever of how they compare with their peers in managing ESG factors, including greenhouse gas emissions.

“Which companies are doing well and which are lagging behind in terms of best-in-class practices has a direct impact on shareholder support as well as lending,” she says.

In addition to assessing historical and future carbon performance, the TPI, which was established in 2017 as a joint initiative between the Church of England National Investing Bodies and the Environment Agency Pension Fund, establishes a five-level scale that ranks companies according to their managerial quality in dealing with greenhouse gas emissions.

Level 0 is reserved for companies that show no acknowledgement that climate change is a significant issue for their business. From there, companies are ranked up to level four, entry into which requires compliance with at least 12 parameters. For level four, parameters include whether a company has nominated a board member or board committee with explicit responsibility for oversight of the climate-change policy, and whether it has set quantitative targets for reducing its greenhouse gas emissions.

In the oil and gas sector, the TPI tool compiles data on 58 companies, of which four companies occupy managerial-quality level one of acknowledging that climate change is a significant issue for the business, and 23 companies, or 40 per cent of oil and gas companies covered, occupy level four.

BP, the UK-based oil-and-gas major, is one of just four companies in the sector to have achieved the TPI tool’s exclusive 4* category, which requires companies to comply with six additional parameters.

Schmidt of Lloyds Bank says that by spelling out the sustainability actions at the managerial level that BP and other top performers are taking, the TPI provides a clear set of steps that laggards can and should follow to catch up.

“There are many other reporting mechanisms out there, but they don’t really benchmark you in terms of specific points in your transition journey,” she says. “This tells companies where they are in relation to their peers from a carbon management perspective, how these practices are translating into aligning emissions reductions with the Paris Agreement, and spells out the practical steps they need to take to become a leader.”

Moreover, the tool tracks companies’ category placements over time, giving them — as well as their peers — a clear picture of what it takes to be leaders in their respective sectors. BP, for example, started in the TPI tools ranking of management quality in 2016 when it only occupied level-2 status. However, the tool also shows that there is still more work to be done given that the company’s carbon performance is not yet aligned with national pledges on emissions made in the wake of the Paris Agreement – and a long way off a 1.5-degree-centigrade compatible pathway.

Schmidt of Lloyds Bank argues that while the TPI tool is designed with investors in mind, it forms a powerful benchmarking tool for companies in hard-to-decarbonise sectors to understand and adopt best practices.

“Better data about a company’s transition journey works on two fronts,” she says. “It empowers investors to push for change through portfolio allocation and engagement, but it also shows company management what it should aspire to.”


This content was paid for and produced by Lloyds Bank in partnership with the Commercial Department of the Financial Times.

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