Does Company Quality Improve Carbon Performance?

Stockholm (NordSIP) – The connection between a well run company and its willingness to decrease CO2 is one of the assumptions at the heart of ESG and sustainable finance. After all, a well-managed company is one that takes a long term view of its operations and as a result must internalise its impact on the environment. However, those who disagree with ESG, often question this causal relationship, noting that a company’s fundamental goal is to generate shareholder value, a competing assumption that often leads its proponents to short-term performance metrics.

To address this debate, a new white paper by analysts at Danske Bank considers the meaning of sustainability leadership in the context of the relationship between companies’ management quality and carbon performance using data from ISS ESG data and MSCI.

According to the analysis, improved management quality seems to act as a precursor to reductions in carbon emissions, confirming the researchers’ hypothesis. Moreover, companies aligned to net-zero have significant better intensity reduction performance, and less variance year-overyear than non-aligned companies.

“In absolute terms, there has been a 2% carbon increase for aligned companies in 2018-2022 in MSCI World, while there has been a 43% drop in carbon intensity figures, implying significant revenue expansion from aligned companies over the time period. This suggests that it might be difficult to comply with the SBTi recommendation of only setting intensity targets if it leads to associated absolute reduction over long term. As a comparison, non-aligned companies show a 22% increase in absolute carbon emissions, and a 64% increase in carbon intensity figures, over the same period” the white paper states.

The authors also appear to find evidence in support of the hypothesis of Nordic leadership. “On average, the MSCI World has experienced a drop in carbon intensity in 2018-2023 for aligned companies, while non-aligned companies have seen an increase. For MSCI Nordic, both non-aligned and aligned companies have experienced a drop in carbon intensity during the same period, with aligned companies showing a more substantial drop,” the white paper argues.

The study finds large sector differences between MSCI Nordic & MSCI World in successful carbon intensity reduction. In terms of MSCI World, the highest reduction in average emissions intensity is in Communication Services followed by Information Technology. For MSCI Nordic, the highest reduction is in Health Care followed by Industrials and Communication Services.

Last but not least, study finds that the correlation between management quality and commitment to Net Zero is most evident when focusing on hard-to-abate sectors, such as Air Freight & Logistics, Aluminum, Building Products, Cargo Ground Transportation, Diversified Chemicals, Fertilizers & Agricultural Chemicals, Highways & Railtracks, Marine, Marine Transportation, Passenger Airlines, Rail Transportation, and Steel.

Stockholm (NordSIP) – The connection between a well run company and its willingness to decrease CO2 is one of the assumptions at the heart of ESG and sustainable finance. After all, a well-managed company is one that takes a long term view of its operations and as a result must internalise its impact on the environment. However, those who disagree with ESG, often question this causal relationship, noting that a company’s fundamental goal is to generate shareholder value, a competing assumption that often leads its proponents to short-term performance metrics.

To address this debate, a new white paper by analysts at Danske Bank considers the meaning of sustainability leadership in the context of the relationship between companies’ management quality and carbon performance using data from ISS ESG data and MSCI.

According to the analysis, improved management quality seems to act as a precursor to reductions in carbon emissions, confirming the researchers’ hypothesis. Moreover, companies aligned to net-zero have significant better intensity reduction performance, and less variance year-overyear than non-aligned companies.

“In absolute terms, there has been a 2% carbon increase for aligned companies in 2018-2022 in MSCI World, while there has been a 43% drop in carbon intensity figures, implying significant revenue expansion from aligned companies over the time period. This suggests that it might be difficult to comply with the SBTi recommendation of only setting intensity targets if it leads to associated absolute reduction over long term. As a comparison, non-aligned companies show a 22% increase in absolute carbon emissions, and a 64% increase in carbon intensity figures, over the same period” the white paper states.

The authors also appear to find evidence in support of the hypothesis of Nordic leadership. “On average, the MSCI World has experienced a drop in carbon intensity in 2018-2023 for aligned companies, while non-aligned companies have seen an increase. For MSCI Nordic, both non-aligned and aligned companies have experienced a drop in carbon intensity during the same period, with aligned companies showing a more substantial drop,” the white paper argues.

The study finds large sector differences between MSCI Nordic & MSCI World in successful carbon intensity reduction. In terms of MSCI World, the highest reduction in average emissions intensity is in Communication Services followed by Information Technology. For MSCI Nordic, the highest reduction is in Health Care followed by Industrials and Communication Services.

Last but not least, study finds that the correlation between management quality and commitment to Net Zero is most evident when focusing on hard-to-abate sectors, such as Air Freight & Logistics, Aluminum, Building Products, Cargo Ground Transportation, Diversified Chemicals, Fertilizers & Agricultural Chemicals, Highways & Railtracks, Marine, Marine Transportation, Passenger Airlines, Rail Transportation, and Steel.