Carbon emissions are a “who”, not a “what”

Climate change might prove that Peter Drucker is a fool. 

Drucker once famously (did not) say, “What gets measured, gets managed.” We’ve known about the impacts of climate change for decades.  When I started in ESG a decade and a half ago, much of the time building ratings at MSCI, even then there was some available carbon data.  And yet, here we are, with a lot of numbers showing us the oncoming apocalypse and lack of real management. 

Drucker’s underlying assumption was that knowing something was enough of incentive that it would be managed. V.F. Ridgway took Drucker further, saying things would be managed even if they shouldn’t be.  To Drucker, exogenous risk was a distraction.  For climate change, the “what” is as much a function of “who” as it is anything else – the (misattributed) quote would be more accurate if it said: “Who we measure and pay to manage it, manages it.”

Incentives here are not solely a matter of compensation.  The more powerful incentive might actually be power itself.  The looming threat of losing power might be a greater motivating factor than money alone.  At this point, regulations and multilateral policy movements don’t (yet) move the needle on personal power loss – but institutional investors absolutely can with their proxies. 

We developed Board Sabermetrics to measure how much influence each individual director has over decisions in each boardroom.  It leverages research on social dynamics to understand how a person’s resume, role, status, and social network factor into the power tensions inside a boardroom.  Once we know who has the power, we can begin to understand how they wield it.  If you want to ruffle the feathers of decision-makers, say they’re bad at their jobs.  In this case, the job of managing carbon emissions which in most instances they would say isn’t their job in the first place.

When you look at individual directors and their carbon performance, the results are startling.  We mapped the scope 1 and 2 carbon emissions  (as disclosed, admitting that scope 3 data is poor and arguably the most important for net zero) of each company to the directors, with “ownership” of those emissions made relative to their influence, over a five-year span.  We then compare that performance against the “average” director peer in a sector and country – was this director’s emissions performance somewhere you’d expect?  Or were they a negative outlier?  In this way we can isolate directors with emissions among the worst in the world over half a decade and target them. 

Out of 8,900 publicly traded companies in our database, 986 have boards where the majority of directors’ influence were consolidated with directors in the worst quartile for carbon emissions in the last five years.  Yes, more than 10% of publicly traded companies have boards where the majority of power is consolidated amongst the most carbon inefficient directors in the world.

The worst offenders are not who you expect.  The biggest overrepresented sector with directors who are the worst carbon performers was Information Technology.  In fact, 17% of global large cap IT sector companies have the majority of their board power consolidated in poor carbon performers.  The irony should not be lost that ESG ratings routinely award IT sector companies top environmental marks while the directors making decisions were routinely amongst the worst performers in the world.  Nowhere is this clearer than looking at a global leader in carbon like Microsoft, which announced a net-negative goal while all of its board members have only overseen rising carbon emissions mostly due to the move to the cloud where emissions are actually worse.

We won’t get to net zero as a globe focusing on IT companies, however.  But we might if we police targets differently.  Globally, of the 986 companies where the boards are power stacked against carbon efficiency, 1 in 5 have committed to science-based carbon targets. Delta Air Lines is a perfect example, having made net zero and science-based commitments, with a board of highly interconnected members, 88% of whom have historically tracked in the bottom quartile for carbon performance against peers.  In fact, fully 14% of companies globally that have committed to a science-based target have boards where the majority of power is held by bottom quartile carbon dwellers. 

So here’s the question: As fiduciaries, when the stewards of your capital make a commitment with no track record of success, should you trust them?

We’re predicting this year could be the first time a director is voted out strictly on carbon bona fides, marking a sea change in carbon due diligence. Drucker was part right when he said what gets measured gets managed – we think when we start measuring who is managing, we might see carbon emissions management taken beyond “commitments” and into action.