Equally obvious is the necessary path to effective action: emissions of carbon dioxide and other greenhouse gases (GHGs) must be rapidly and drastically cut, with overall global emissions approaching net zero by 2050, in order to prevent potentially catastrophic impacts of climate change.

Such rapid decarbonization will require a sweeping transition, transforming every sector in every country. Industrial processes unable to decarbonize may disappear. Business models will irrevocably change across the whole economy, not just within energy systems. Renewably-produced electricity is projected to replace oil and gas as the leading energy source in cars and trucks, buildings, and industrial processes, for example. Without a dramatic reduction in the cost of carbon capture technologies that can offset emissions associated with the continued use of fossil fuels, fossil fuel reserves will become stranded and require a write down in value. At the same time, however, the need to decarbonize is already creating a myriad of new opportunities, stimulating a powerful new wave of innovation that is rapidly bringing down the costs of many low-carbon technologies, while creating new technologies and business.

Ultimately, any corporate decision can be decomposed into the company’s capacity to take action and propensity to undertake it. This is true for decarbonization. Companies need to not only identify their capacity to economically abate emissions but also put it near the top of their most urgent priorities.

As companies face the increasingly severe physical impacts of climate change, such as more extreme floods, droughts, and heatwaves, they also are under growing pressure from retail and other investors, regulators, suppliers, customers and competitors to reduce their emissions, to disclose their climate and financial risks, and to create viable plans to transition to a low-carbon economy. Making their task even harder is the fact they must grapple with technological uncertainties and the challenge of acting when data are incomplete or lacking. That lack of data is hobbling efforts to accelerate the transition to a low-carbon economy. To put data challenge in perspective, imagine a world in which only two out of five companies report their pre-tax earnings, where those that do use different definitions, and where only a fraction of them have used auditors to sign off on the data.

Until companies make detailed disclosures and develop decarbonization plans based on reliable data, investors and markets will find it difficult to accurately value companies or predict their future performance. Equally important, companies are likely to miss key opportunities to maximize long-term returns and gain competitive advantages by finding efficient transition paths ahead of the competition. Thousands of companies globally have already committed to net zero, but in many cases, it is unclear whether these companies have credible plans for achieving their commitments.

Many companies have already taken constructive action, of course, backing up their pledges to cut emissions with investments in renewable energy and other vital steps. Yet, in the CPP Investments Insights Institute’s discussions with various stakeholders, including other asset owners, asset managers, accountants, academics, consultants, and index providers, we found widespread agreement that many companies and boards of directors lack the necessary information to determine a company’s ability to transition to a low-carbon future. Some companies have made commitments to net-zero emissions without clear pathways for achieving those goals, putting them at risk for negative market reactions when investors realize the goals can’t be met. Others have yet to even create a governance framework to address the issue or assess their current GHG emissions, the essential first steps to decarbonization and sustainability according to the Task Force on Climate-related Financial Disclosures (TCFD).

These failures expose companies to a number of risks, including higher energy costs, higher costs of capital, and market share losses to more climate-aware competitors. They also risk impaired future competitiveness as the transition to a low-carbon future progresses, greater potential for being burdened with stranded assets, failure to spot new business opportunities, and potential litigation if their climate guidance is discovered to have been made without appropriate basis.

To address these issues and to encourage more companies to take action, CPP Investments last year at COP26 proposed a broad Abatement Capacity Assessment Framework (‘Framework’) and standardized template for assessing a company’s potential for reducing emissions. The idea is conceptually simple. First, determine a company’s current baseline emissions. Second, identify actions that can cost-effectively cut emissions now (the current “abatement capacity”). And third, assess steps and strategies that can cost-effectively reduce emissions in the future under different carbon price assumptions (the “projected abatement capacity”).

The Framework could serve as a starting point for how companies might develop their transition plans and determine the economic feasibility of those plans. Additionally, the Framework would enable companies to comply with the sustainability reporting standards currently being developed based on recommendations from the TCFD, while also meeting the demands of shareholders and other investors for climate-related disclosures.

Since we proposed the Framework, CPP Investments has committed its portfolio and operations to being net zero by 2050. As part of that effort, we have conducted a successful pilot of the proposed Framework with one of our portfolio companies, with encouraging and informative results. We are in the process of conducting several other pilots and are currently assessing our own internal operations with the Framework. Using the convening power of the CPP Investments Insights Institute, we have also brought together roundtables of asset managers, consultants, and accountants to explore the strengths and possible limitations of the Framework.

Meanwhile, the regulatory landscape is changing. Both the United States’ Securities and Exchange Commission (SEC) and the Canadian Securities Administrations (CSA) have proposed mandatory reporting requirements for GHG emissions, emissions reductions targets, exposure to climate hazards and financial risks, and transition plans, among others. In addition, the International Sustainability Standards Boards is developing a “climate standards” that is expected to become a global baseline for reporting on climate-related issues.

This confirms the role we see for the proposed Framework. As we describe in our comments to the SEC, rather than needing to be used as a stand-alone separate exercise, the Framework can function as a complement and support to the coming regulations by offering a roadmap for the work needed to meet those regulatory requirements. In particular, the Framework provides an approach for reporting on the economic feasibility of delivering on companies’ emissions reductions commitments without giving away any competitive secrets. Supporters of the Framework also believe it can provide a convention that the market can utilize to drive fundamental changes in the economy across industries and countries, and perhaps help guide the regulations themselves. The next step is for market actors, especially capital providers, to advocate for the kind of rigor and transparency this Framework represents. As regulators put rules in place, it is in the best interest of investors and their beneficiaries that these rules provide decision-useful insights both to price risk and to ensure capital is allocated to support the transition.

Our overall message remains the same as it was in our original proposal. Climate change—and the resulting need to rapidly cut emissions and prepare for the coming transition—is an urgent issue that requires immediate attention from boards, CEOs, CSOs, and CFOs. Boards and management will need to ensure they have the necessary resources to develop and share their transition plans. This includes strengthening the company’s internal human capacity by increasing climate literacy, using the Framework to quantify the company’s decarbonization capacity, and prioritizing the removal of as much emissions as economically possible, while simultaneously developing strategies for abating those emissions that are currently more costly to abate. Failure to focus on decarbonization as a core function of management and business strategy means boards and management are not acting in the best interests of their companies, shareholders, and other stakeholders.

Developing and assessing the viability of decarbonization and transition plans should not be viewed as an onerous new exercise. Instead, companies should embrace the process as a key mechanism for identifying major opportunities and gaining competitive advantages. Assessing a company’s abatement capacity enables its management and board to better understand how it can benefit from rapidly falling costs for a wide variety of “greener” and more efficient technologies, and to accelerate the development of new low-carbon technologies. The Framework helps companies build businesses focused on the long term, gain market share over competitors with higher carbon intensities, prove to investors they can survive and thrive in a low-carbon world, maximize their own long-term returns, and help accelerate the economy-wide transition to net zero. In addition, the Framework enables companies to share the underlying assumptions for their net-zero commitments in a transparent manner without compromising commercially sensitive data.

Introduction

A year ago, the CPP Investments Insights Institute proposed a broad Abatement Capacity Assessment Framework (‘Framework’) and standardized template for companies to identify and report all sources of greenhouse gas emissions (GHGs) in their operations and supply chains, and to calculate the economic viability of mitigating those emissions under different carbon-price scenarios. There has been strong public and private sector interest in the Framework as well as concerns raised. Over the intervening months, we have sought feedback from other institutional investors, auditors, academics, private equity general partners, and consultants to better understand those concerns and make refinements. CPP Investments is also conducting ongoing pilot assessments to prove that the approach can successfully identify major opportunities to cost-effectively reduce emissions and provide important data to boards and investors as they allocate their resources

These conversations and pilots have reinforced our belief in the need for a consistent, rigorous, and transparent way for companies to calculate and report their transition risks and more specifically, their ability to meet their net-zero goals. We thus see the Framework as a valuable addition and complement to climate disclosure rules that have recently been proposed by national financial regulatory bodies—and we strongly urge company boards and top executives to use emissions reductions assessments as a core part of their business strategy. Further, we believe that as regulatory frameworks come into focus, market actors, especially capital providers, should advocate for the kind of rigor and transparency this framework represents. As regulators put rules in place, it is in the best interest of investors and their beneficiaries that the transition to a green economy be guided by clear metrics. Our Abatement Capacity Assessment Framework offers a mechanism to develop and present those metrics.

Time for a wake-up call: The whole economy transition to net zero is underway. Is your company ready?

It’s hard to overstate both the urgency of the need to reduce global greenhouse gas emissions—and the sweeping changes that such a transition will bring.

The planet has already warmed more than 1°C since pre-industrial days and, without rapid and substantial cuts in emissions of heat-trapping gases, is set to climb to 1.5°C of warming between 2030 and 2052, with potentially catastrophic consequences. Each year, the toll from the impacts of climate change, such as more severe storms and floods, and searing heatwaves and droughts, adds up to billions of dollars and incalculable human suffering. According to the Intergovernmental Panel on Climate Change (IPCC) we have three years before it is crucial to reach the peak in global GHG emissions and start a rapid decline to limit warming to around 1.5°C (2.7°F). As a result, CEOs should already be planning now for the coming low-carbon global economy.

There’s also no mystery about what needs to be done. Report after report, from organizations like the International Renewable Energy Agency and the Risky Business Project, show that successful decarbonization of the energy system rests on three pillars: electrify everything possible, from transportation to heating and cooling systems in buildings. Produce that electricity from renewable sources, like wind, solar, hydro, and geothermal. And dramatically boost energy efficiency. Viable strategies are also being proposed for sectors and industries that are hard to electrify directly, such as steelmaking, chemicals, cement, and shipping. For those, fuels or feedstocks like hydrogen or ammonia could be produced from renewable electricity, or hydrocarbons could still play important roles if accompanied by carbon capture technologies. In addition, low carbon strategies must be adopted in food systems and other sectors.

Governments around the world have recognized the need to decarbonize and continue to align their economies to net zero through Nationally Determined Contributions (NDCs). As a result, companies operating in this landscape will increasingly be required to decarbonize. Against this backdrop, we believe that boards have a responsibility to see that management teams have appropriately considered and integrated a strategy to decarbonize their business. The abatement capacity assessment allows boards to better understand the levers available to a company to decarbonize and measure progress against them—while avoiding a collision course with future regulation.

As the world transitions to net zero, we believe there will be investment opportunities across sectors, asset classes, and geographies. Those opportunities are likely to come from industry leaders that drive carbon reduction innovations and practices. For example, today’s engine block or fuel injector manufacturers will become tomorrow’s equivalent of buggy whip makers from a century ago, unless they can use their technical expertise to transition to producing electric motors, chargers, or other green economy essentials. Gas-fired boilers will experience plummeting market shares, as they are overtaken by efficient heat pumps. Similarly, there could be declines in a wide variety of factories and facilities supplying the fossil-fuel-based economy. Meanwhile, the value of suppliers of the indispensable components for the coming low-carbon economy, such as materials for batteries, will likely climb.

CPP Investments’ role in the whole economy transition is to fund emissions reductions—investing to deliver returns while supporting the decarbonization of the real economy. We believe that companies driving and demonstrating carbon reduction innovations and practices will generate maximized returns, from increased efficiency and renewable energy to carbon capture and storage technologies, sustainable food, real estate, and transportation. These are companies that are not only supporting their own transitions but also those of the value chains of which they are a part. CPP Investments is catalyzing these transitions by investing in companies at varying stages of the decarbonization spectrum. Through incentivization and capitalization, the Fund’s decarbonization investment approach enhances value to the Fund and transforms businesses.

Navigating this far-reaching transition will be a huge challenge for companies—and their investors. Companies may need to adjust or even exit some businesses and enter new ones, phase out product lines, invest in new technologies, depreciate some assets faster, revamp supply chains, or even relocate facilities closer to sources of renewably-produced energy or low-carbon fuels. The transition will also be a challenge for capital providers. To funnel capital to the highest-return opportunities, investors need a way to assess which companies can profitably mitigate emissions by upgrading to new technologies and fuel sources—and which are incapable of cutting their emissions under any foreseeable scenario.

Yet roundtable discussions, convened by the CPP Investments Insights Institute with asset managers, accountants, and consultants, found that many companies lag in understanding and planning for these changes. As one consultant said: “A lot of sectors are going to fundamentally change. But a lot of companies don’t understand the system shifts.”

In fairness, predicting the future is notoriously difficult, especially during major transitions. The lessons from the past are that many innovations and new technologies—and their impacts—are completely unexpected, and that costs typically decline much faster than originally estimated. In fact, even the most optimistic recent predictions for price drops and investment growth in green technologies like solar PV, wind energy, and battery storage have significantly underestimated the actual pace of change. It’s not surprising then that “companies may not see coming declines in costs, so they do not make possible emissions reductions,” as one consultant told CPP Investments.

Why an Abatement Capacity Assessment Framework is essential

In February 2022, CPP Investments committed its portfolio and operations to being net zero of greenhouse gas (GHG) emissions across all scopes by 2050.

The commitment is made on the basis and with the expectation that the global community’s ability to achieve net-zero is contingent on several advancements. These advancements include the acceleration and fulfilment of commitments made by governments, technological progress, fulfilment of corporate targets, changes in consumer and corporate behaviours, and development of global reporting standards and carbon markets, all of which will be necessary for us to meet our commitment.

While cutting emissions and creating transition plans are difficult tasks, our discussions with asset owners and asset managers (representing a total of over US$18 trillion in assets under management) as well as accountants and consultants show that the majority of companies and their boards of directors have yet to begin grappling with the challenge. As a result, they are putting their companies at risk. They often fail to see the urgency of decarbonization.

In addition, while some companies have made commitments to net-zero emissions, they have done so without clear pathways for achieving those goals. One recent study analyzed sustainability reports and other publicly available documents from 25 prominent businesses that have set net-zero targets. The analysis showed that the plans these companies have in place would actually achieve emissions cuts of only 40%, not 100%. The failure of these companies to back up their commitments with assurable emissions-reductions paths puts them at risk of negative market reactions when the targets are not met. The sustainability-related setbacks companies can experience today highlight the importance of open dialogue and strong partnership. The type of partnership where capital providers are willing and able to take the long-view, and actively create an environment where solutions can take shape in businesses.

We believe the Framework provides one such solution. It is a mechanism for helping companies take the first steps in assessing their capacity for reducing emissions. It also provides important incentives for developing both decarbonization technologies and rigorous methods to ensure the quality of carbon capture projects.

The Framework is analogous to mapping a trip with GPS. It showcases the “routes” to decarbonization, the shortcuts for reaching the destination (by highlighting the most efficient actions and sequence) as well as the tolls and fees along the way (by showing the tradeoffs between speed and costs). It also lets others, such as investors, track progress along the route. This is a different benefit from the Science Based Targets Initiative’s (SBTI) Target Validation Protocol. The SBTI protocol validates the destination, rather than actually charting the route for getting there. While both approaches are important, the purpose of the Framework is to provide actionable guidance at a company level for which actions to take, in which order.

The Framework has three basic steps (for more details and template, please see Appendix):

01

Determine the Current (Proven) Projected Abatement Capacity.

When assessing its capacity to abate GHG emissions, the critical first step for a company is tallying up its current emissions and estimating how much of those emissions are economic to abate (see box for definition) with currently available, proven technologies.

For example, a cement plant may be able to eliminate 100% of emissions associated with its electricity consumption by switching to renewable electricity, but most of the emissions from its kilns can’t be reduced cost-effectively with available technologies that are economic today. The analysis would cover both direct emissions from company operations and assets (so-called Scope 1 emissions) and emissions from the generation of energy the company uses (Scope 2). Similar abatement capacity assessments could be done for other aspects of a company’s operations (including business travel), suppliers, and customers (Scope 3), resulting in an auditable metric that sums up its current capacity to abate. Scope 3 emissions are the most challenging for companies to assess since their inclusion would require suppliers and customers to provide abatement capacity assessments for their own Scope 1 & 2 emissions. The is especially challenging across complex supply chains. Methods for assessing Scope 3 emissions, while avoiding double counting and ensuring the integrity of the data, are still embryonic. Until this is resolved, we believe companies should focus on assessing their Scope 1 and 2 emissions.

Definition of “economic to abate”

There are several methods of determining if investments in emissions reductions are economic now. Our Abatement Capacity Assessment Framework uses the standard concept of “net present value.” Emissions are economic to abate if all costs (including capital, fuel, and operations and maintenance costs) are less than total revenues over the lifetime of the investment. A typical discount rate might be 5-10% (allowing companies to easily compare rates of return for emissions reductions with possible new investments elsewhere), but more important than the actual number is making it transparent. Some efficiency measures can bring particularly high returns, since capital outlays can be small, while uses that require storage to overcome intermittency are often much less economic..

02

Assess the Long-term (Probable) Projected Abatement Capacity.

The large uncertainties associated with technology costs, the pace of innovation, regulatory regimes, and carbon prices make it difficult to standardize methods of assessing future abatement capacity. To cope with this complexity, we propose that companies assume no change to today’s technology costs and regulations, but use standardized carbon prices that are higher than current levels. Our original Framework used US$75 and US$150 per tCO₂e to create two scenarios for determining future abatement capacity. To be meaningful in making real world decisions, the price of carbon in the initial assessment needs to be above the current highest spot price, which reached €99/tCO₂e in the European Union in early August. So, we are updating the carbon price in this Framework to be US$100 and US$150 per tCO₂e. The US$100 per tCo2e carbon price allows companies to report their incremental capacity to abate over the spot price. Meanwhile, a price of US$150/tCO₂e is widely seen as needed to create large enough incentives to decarbonize the whole global economy. The use of a carbon price of US$150/tCO₂e, which currently may seem high, could provide additional visibility on the ability of companies to further abate their emissions. However, in addition to these carbon prices, companies could also consider using internal shadow prices that they would select based on their own unique situations.

The calculated economic abatement capacities using these carbon prices would be subject to revision as regulations advance or technology costs fall. As a result, this future abatement capacity assessment would need to be done periodically, ideally annually.

03

Determine the Uneconomic Projected Abatement Capacity.

CPP Investments believes that the Abatement Capacity Assessment Framework will enable companies to identify major opportunities to cut emissions. Some may even find that the emissions can be cost-effectively brought all the way down to net zero at various prices of carbon. However, others will find that some emissions are uneconomic, or even technologically impossible, to eliminate. Those residual emissions could then be reported along with management’s assumptions on how they will eventually address the issues. Possible strategies could include the managed decline, or shuttering of business activities (such as closing coal mines), relying on further technology development (such as synthetic fuels) or purchasing high quality, permanent removal approaches.

Lessons from Applying the Framework

To determine the feasibility of the Framework and encourage its broader implementation, CPP Investments is testing its use with select holding companies in our active portfolio and in our own operations.
The Framework plays an important role in the Fund’s newly established decarbonization investment approach. This unique approach focuses on financing emissions reduction and partnering with select high emitters to spur meaningful and necessary progress to net zero in the real economy, and in doing so extract the value presented by the transition. The Framework is one of the tools that the Fund will use to employ and scale this approach.
The first pilot assessment was conducted on the Trafford Centre, a shopping center on the outskirts of Manchester, U.K., that has foot traffic of more than 35 million visits a year. The largest mall in the U.K. when it opened in 1998, the Trafford Centre went through several changes in ownership before being acquired by CPP Investments’ Real Assets Credit (RAC) Group in December 2020. It is now part of our Real Estate portfolio.

Hear more from Fraser Pearce, the Trafford Centre’s independent board chair, about the board’s experience utilizing the Framework to help inform the company’s path to net zero.

The Framework helped provide management with the Centre’s baseline emissions. The data revealed significant opportunities to cost-effectively reduce the majority of the Centre’s emissions, with a big chunk coming at a surprisingly low cost (see box). The exercise also charted possible pathways to reducing the remaining emissions and achieving net zero. CPP Investments has provided a description of this case study for inclusion to the 2022 Task Force on Climate-related Disclosures Status Report.

The next five pilots of the Fund’s decarbonization investment approach (employing this Framework) were still ongoing when this report was finalized. These pilots are expected to make the respective companies more competitive as the global whole economy transition proceeds towards a net-zero economy.

Trafford Centre Pilot
The Trafford Centre is a large shopping center on the outskirts of Manchester in the U.K. It has an unusual Rococo and Baroque design, with three domed glass ceilings and broad expanses of marble and granite floors punctuated with classical statues. It contains more than 150 stores and scores of restaurants, cafes, and bars. Visitors can even ski, skydive, and golf.

Wholly owned by CPP Investments, the Centre offered an ideal site for first pilot of the Framework. Management was particularly enthusiastic about the exercise because they firmly believed that making the shopping center “greener” would offer an important competitive advantage in attracting both customers and tenants.

In ten weeks, a team with deep understanding of the business not only tallied up the Centre’s greenhouse emissions for the first time, it also determined that more than two-thirds of those emissions could be eliminated cost effectively. Elimination of about 5% of the overall emissions was already baked into the Centre’s existing £10 million capital improvement plan, which included installing more efficient lighting and replacing old equipment and elevators. The next finding was that another 15% could be immediately achieved at a cost of only £500,000 with smart lighting controls and solar PV systems, representing opportunities to reduce emissions with a minimal additional capital outlay. A further 44% of the reductions would come from the expected decarbonization of the electricity grid supplying the Centre. Eliminating the remaining emissions could be done by shading the glass ceilings, replacing gas furnaces with heat pumps, and other measures, the analysis found, but none of those are currently economically viable.

Utilizing the Framework helped to provide the Trafford Centre’s board with the confidence to commit to becoming net zero in its own operations by 2030. This would be achieved by utilizing existing economically viable measures to reduce emissions by 64%, with the remainder being mitigated through verifiable carbon offsets. While 100% of Scopes 1 and 2 emissions from the Trafford Centre can be abated based on technological measures that exist today, not all of these measures are currently economically viable. The company also is committed to supporting tenants and customers on their decarbonization pathways by providing tenants with the information they need about the decarbonization of shared spaces. Trafford’s plans include providing renewable energy through on-site generation, developing market-leading EV charging capabilities, encouraging employees to switch to low-carbon transportation, continuing to work towards zero waste to landfill, utilizing market-leading Green Leases, and more. Trafford management says the Framework provided a starting point from which the company can now chart its path to net zero. In addition, it gives investors crucial details on how much that path will cost—without revealing any competitive secrets. See Table 1 & 2.

So far, the biggest lesson from the pilots is the high value the exercise offers to boards and management teams in identifying opportunities that otherwise might have been missed. Those opportunities extend beyond finding viable options for reducing emissions to include identification of strategies to cut costs, and gain market share and investor support, while becoming a leader, rather than a follower, in tomorrow’s low-carbon economy. For investors, these pilots show that the Abatement Capacity Assessment Framework can provide crucial guidance about the long-term viability of companies.

The pilots also highlight the importance of periodically updating abatement capacity assessments. Technologies and associated costs are changing so rapidly that the results will change over time, sometimes dramatically. Declining costs for both renewable energy and electrolyzers, which use electricity to split water into oxygen and hydrogen, for example, could drive down the costs of “green” hydrogen to an inflection point, where it suddenly becomes a cost-effective substitute for hydrocarbon fuels and feedstocks in heavy industry, shipping, and aviation, and even in agriculture (in the form of “green” ammonia). For any given company, “by the time 2030 rolls around, a lot more of the emissions reductions will be economic,” says one consultant.

Because of the many benefits of periodic abatement capacity assessments, CPP Investments is aiming to have the approach widely adopted by companies in our portfolio that haven’t yet developed credible transition plans. To help reach that goal, we are making internal and external experts available to select portfolio companies to perform the initial assessments. The expectation is that companies will build their own in-house expertise to conduct these assessments over time. In addition, our work so far has identified considerably more consultants than originally expected that have the interest and capacity to help companies as they perform such abatement capacity assessments. The resulting competition is expected to put downward pressure on prices.

The Developing Regulatory Context

When CPP Investments first proposed the Framework, the reporting of emissions reductions and targets was strictly voluntary.
More than 3,600 companies and organizations around the world have endorsed voluntary guidelines from the Task Force on Climate-related Financial Disclosures (which CPP Investments helped shape as a founding member and one of only two pension funds represented on the TCFD). The value of the work of the TCFD and its recommendations has become increasingly clear to the market, with nearly 900 companies and other organizations that have chosen to become supporters since the TCFD released its 2021 Status Report. Our Framework offered a new complementary approach.

Now, however, the regulatory landscape is changing. On October 18, 2021, the Canadian Securities Administrators (CSA) proposed mandatory rules for climate-related disclosures. The policy would require companies to report short-, medium- and long-term climate-related risks and opportunities, along with their impacts on business operations, strategies, and financial planning. Companies would also have to disclose their greenhouse gas emissions (Scope 1, 2, and 3) or explain why those emissions can’t be reported.

On March 21, 2022, the United States’ Securities and Exchange Commission (SEC) proposed even more detailed mandatory rules. In addition to requiring reporting on emissions, risks from physical climate-related hazards, and risks from the ongoing transition, the proposed SEC rules would require disclosure of emissions reduction targets and plans to achieve those targets. The United Kingdom, New Zealand, Japan, Hong Kong, and the European Union are all moving ahead with similar measures. In addition, the International Financial Reporting Standards (IFRS) has set up the International Sustainability Standards Board (ISSB) with the same Governance as the International Accounting Standards Board (IASB). Just as the IASB provides a global baseline for financial reporting, the ISSB will provide a global baseline for reporting sustainability-related information. Its first standard, on climate, is expected by the end of 2022.

All of these regulations have yet to be finalized. But the proposed rules help accomplish what CPP Investments has long been advocating—getting the full attention of boards of directors and top levels of management about the urgency of decarbonization and energy transition plans. As one consultant told CPP Investments: “The SEC’s proposed rules are a wake-up call to CFOs.”

The changing regulatory environment confirms the role we see for the Abatement Capacity Assessment Framework. Rather than being a stand-alone separate exercise, it can function more effectively as a complement to the recommendations of the TCFD and the expected upcoming regulations, which is why it is featured in the TCFD 2022 Status Report. “This can’t be a separate idea—it has to be framed in a way to meet the requirements,” one consultant explained. CPP Investments believes the Framework can do just that, offering a roadmap to the foundational work needed to meet regulatory requirements and guard portfolios against undue risk. It also provides an approach for reporting on the economic feasibility of meeting the net-zero commitments so many companies have made, something the market currently has no convention for. Used as a standardized procedure, it allows comparisons across companies, and geographies, which is crucial for investors. Inconsistent accounting methodologies among countries can present barriers to international capital mobility. If enough companies adopt the Framework, we believe it can drive fundamental changes in the economy across industries and countries, and perhaps help guide the final regulations themselves. MSCI clearly agrees with us as evidenced by the inclusion of the Framework in its product offerings.

The Time is Now

CPP Investments believes now is the moment for boards of directors and top executives to embrace emissions reductions assessments and transition planning, not as another regulatory requirement, but as a core part of management strategy. As our pilot assessments demonstrate, the benefits of assessing and implementing transition plans can be real and substantial. The transition to a low-carbon future is accelerating. Companies cannot afford to be left behind and investors should not take the risk.

We’d love to hear about your experience implementing the Abatement Capacity Assessment Framework. To share your story, contact us at insightsinstitute@cppib.com

Appendix

Abatement Capacity Assessment: A Template for Reporting Projected Abatement Capacity (PAC)
The goal of this template is to help companies create an actionable roadmap for navigating the transition to net-zero GHG emissions in a consistent manner. The roadmap will help identify specific efficiency initiatives, technology upgrades, and shifts from fossil fuel power and feedstocks to renewables. See more detailed descriptions of these terms in the footnotes below.

We expect that a company’s abatement capacity would be reported for both Scope 1 and Scope 2 emissions, and eventually for Scope 3 emissions. That capacity would be assessed under both the current state of business and under different carbon price assumptions. We acknowledge that reporting Scope 3 is challenging and might take time, since it depends on suppliers and customers reporting their own Scope 1 and 2 Projected Abatement Capacities (PAC), and therefore recommend focusing first on Scopes 1 and 2.

For some companies, current PACs will cover substantially all emissions. But we recognize that many sectors face considerable decarbonization challenges, and for them, much of their current emissions will be deemed Uneconomic to Abate. In this category, we hope to see sub-assessments addressing a continuum of potential transition options, including business segment closures, future transformational technologies on which the company is conducting due diligence, and where unavoidable, the use of high-quality, permanent removal offsets.

Abatement Capacity Assessment: A template for reporting Projected Abatement Capacity

The goal of this template is to aid companies in creating an actionable roadmap for navigating the wider transition to net-zero GHG emissions in a consistent manner as it relates to efficiency initiatives, technology upgrades and a shift from thermally generated power to renewables. See more detailed descriptions of these terms in the footnotes below.

Over time a company’s abatement capacity would ideally be reported across Scopes 1, 2 and 3 vis à vis its current state of business and under different carbon price assumptions. We acknowledge that reporting Scope 3 might require a period of time as it is dependent on suppliers and customers reporting their own Scope 1 and 2 Projected Abatement Capacity (PAC).

For some companies, current PAC will cover substantially all emissions. But we recognize that many sectors face considerable decarbonization challenges, and for them, much of their current emissions will be deemed Uneconomic to Abate. In this category, we hope to see sub-assessments addressing a continuum of potential transition options including business segment closures, future transformational technologies on which the company is conducting due diligence, and where unavoidable, the use of high-quality, permanent removal offsets.

Note: The percentage in the chart above are rounded. To address the consistency and comparability of this Framework, all capacity assessments must be reported as regionally relevant — i.e., the metrics reported are required to account for regional regulation, costs, subsidies, carbon prices, etc.
Gt = Scope 1 + Scope 2 + Scope 3 GHG emissions. To the extent that companies are not yet able to report all three, there exists the ability to start reporting Scope 1 and 2. Many of these data are already reported via CDP and company fillings. Adding Scope 3 data when suppliers and customers report their Scope 1 and 2.
Et = Percentage of Gt projected to be addressable by “Efficiency” initiatives (e.g., stopping methane leaks, building management, using shore power, behavioral change, etc.)
It = Percentage of Gt projected to be addressable by “Investment” in abatement solutions that are economic at current costs, carbon prices and prevailing regulation (e.g., switching to electric vehicles, heat pumps, retrofitting, etc.)
Rt = Percentage of Gt projected to be addressable via a shift to “Renewables” for power generation (i.e., likely to be addressed by greening of the grid). many companies already report indirect emissions from electricity consumption, so some of this data is already available.
Ct = Et + It + Rt = “Current Projected Abatement Capacity” to abate Gt. We expect the reporting convention would default to reporting this as a % of total emissions (i.e., in the example above, the company’s Current Projected Abatement Capacity is 71%).
EC75-t = Percentage of Gt projected to be “Economic to abate at US$75/tCO2e” carbon price. This would allow the company to apply a higher carbon price to current technology costs and regulation to determine the incremental % of abatement that would become economic at this standad carbon price assumption.
EC150-t = Percentage of Gt projected to be “Economic to abate at US$150/tCO2e” carbon price. As above, but for a higher carbon price.
Lt = EC75-t + EC150t = “Long-term Projected Abatement Capacity” attributable to solutions that would become economic at pre-determined future Carbon Prices that are well within the bounds of those deemed necessary to support a ner-zero outcome.
While Current and Long-term Projected Abatement Capacity should be reported independently we expect that market convention would add the two to sum “Projected Abatement Capacity” and refer to that as a percentage of total emissions (i.e., in the example above, the company’s PAC is 91%).
Ut = At + Tt + Ot = Currently “Uneconomic Projected Abatement Capacity”. The percentage of Gt that would require the “Abandonment/Closure of Assets,” deployment of “Transformative Technology,” “Offsetting” using removal credits. This is the residual Gt not projected to be addressable by Ct + Lt and would require closure, innovation in transformative technologies or removal via permanent verifiable solutions.

Richard Manley

Managing Director, Head of Sustainable Investing, Global Leadership Team, CPP Investments

Prior to joining CPP Investments in 2019, Richard spent 18 years at Goldman Sachs, where he was most recently Global Head of Thematic Equity and ESG Research, and Co-Head of EMEA Equity Research. Previously, he worked at Merrill Lynch, Donaldson, Lufkin and Jenrette, and Paribas Capital Markets as an Integrated Oil & Gas equity analyst. Richard holds a Graduado Superior/BA (Hons) in European Business Administration from ICADE in Madrid.

Read an op-ed from Richard Manley on why committing to net zero is like running a two hour marathon.

Tim Barlow

Managing Director, Real Estate, Real Assets,
CPP Investments

Tim is a Managing Director in the Sustainable Investing team responsible for real estate. Prior to 2022, Tim was a Managing Director in CPPIB’s real estate equity team, responsible for origination and portfolio management across Continental Europe (ex. Germany and CEE). Prior to CPPIB, Tim worked at Grosvenor both on their London Estate and Fund Management business, based in Paris. Tim holds a BSc (Hons) from Edinburgh University and a MSc is Real Estate Finance from the University of Reading. Tim is also a Member of the Royal Institute of Chartered Surveyors.

Katrina Beechey

Managing Director, Portfolio Value Creation, Real Assets, CPP Investments

Prior to joining CPP Investments Katrina was Senior Vice President Transformation at Burberry and Principal at Bain & Co., London. She has extensive experience in the retail sector having worked in brands, retailers and real estate. Previously, she worked at Christies and Monitor Deloitte. Katrina holds an MA (Honors) from Cambridge University for History of Art.

A special thanks to the following individuals for their contributions to this report:

Professor Robert Gibson, Hong Kong University
Vinay Shandal, Managing Director and Partner, Boston Consulting Group
Tim Smith, Research Analyst, Climate Change & Energy Transition, Lazard
Fraser Pierce, Independent Board Chair, Trafford Centre