SUSTAINABILITY REPORTING PERFORMANCE OF THE IBEX 35 · 2017. 10. 9. · 1 Acciona 73% 2 Ferrovial...

SUSTAINABILITY REPORTING PERFORMANCE OF THE IBEX 35

September 2016

2 Carbon Clear Sustainability Reporting Performance of the IBEX 35

Contents

Welcome 4

Introduction 5

Methodology 6

2016 Results 6

2016 Key Findings 7

2016 Themes 8

The Path to Best Practice 9

Industry Sector Performance 10

Sector Analysis 11

IBEX 35 and FTSE 100 Performance 13

Conclusion 14

Companies must prepare for the transition to a low-carbon economy by bringing sustainability to the heart of their business model.

Sustainability Reporting Performance of the IBEX 35

Carbon Clear Sustainability Reporting Performance of the IBEX 35 3

Welcome

We have already seen evidence of the harsh realities of climate change this year. The average global temperatures in July 2016 were the highest since records began. Global extreme weather events such as heatwaves, flash floods and hurricanes are becoming almost a weekly phenomenon. The Intergovernmental Panel on Climate Change (IPCC) has forecast this trend to continue1, with significant implications for communities, financial systems and business across the world.

The political landscape is evolving in line with these physical changes. In December 2015, COP 21 brought together 195 countries to negotiate the terms of a global climate change agreement. This resulted in the Paris Agreement, a legally binding document in which countries pledged to limit global warming to 2 degrees Celsius above pre-industrial levels. According to the IPCC to achieve this target, global emissions need to be reduced by 80% by 2050 compared to 1990 levels.

So what does this mean for the business community? Many companies already acknowledge the need to take climate change seriously. In fact, the CEOs of 79 companies, including Unilever, Acciona, IKEA and Iberdrola, have signed an open letter calling for bold political action to tackle climate change2. Their requests include carbon pricing, transparency in energy-related investments and national science based targets (SBT) in order to accelerate the shift to a low-carbon economy. The perspective of institutional investors and asset managers is also changing, as the financial risk associated with high carbon investments becomes more visible and shareholder activism continues to demand fossil fuel divestment.

While progress is underway, the pace of action remains inadequate given the colossal challenge we face.

What we mean by sustainabilitySustainability incorporates a number of social, environmental, economic and ethical issues. For the purposes of this report we are focusing on sustainability solely from an environmental perspective.

While progress is underway, the pace of action remains inadequate given the colossal challenge we face. The private sector will play a leading role in driving the required emission reductions, balancing the pressing need of adapting to climate change with the long term challenge of mitigation. This involves a comprehensive sustainability strategy that goes far beyond reporting emissions and complying with legislation. Whether this constitutes setting ambitious emission reduction targets or fully engaging with the supply chain to address shared climate change related challenges, companies must prepare for the transition to a low-carbon economy by bringing sustainability to the heart of their business model.

Mark Chadwick, CEO, Carbon Clear

1 www.ipcc-wg2.gov/SREX/images/uploads/SREX-SPMbrochure_FINAL.pdf2 www.weforum.org/agenda/2015/11/open-letter-from-ceos-to-world-leaders-urging-climate-action


Introduction

Welcome to the first edition of Carbon Clear’s IBEX 35 Research, highlighting best practice and innovative sustainability performance by Spain’s largest public companies. Carbon Clear is a carbon, energy and sustainability consultancy based in Barcelona and London. For six consecutive years, we have published the FTSE 100 research exploring to what extent the 100 biggest companies in the United Kingdom are reporting their carbon performance. As our Spanish office continues to grow, this year we are excited to extend our research to the IBEX 35.

The aim of the IBEX 35 research is to identify best business practice in sustainability reporting, as well as to highlight areas that require more focus. We aim to provide an overview of sustainability reporting within the IBEX 35, to draw out trends in various sectors and to illustrate examples of leadership. As global companies operate and compete outside their home countries, the final section will look beyond national borders by comparing the performance of the IBEX 35 with the FTSE 100.

Carbon Clear has over ten years of experience working in partnership with our clients to provide solutions to business and sustainability challenges. The sustainability sphere has progressed a lot during this time, with many companies moving from reporting emissions and complying with legislation to using sustainability as a key business driver.

We call our all-encompassing approach Intelligent Sustainability; challenging companies to think about long-term value and success, rather than focussing on short-term profit. As issues such as resource scarcity, a reliable energy supply and changing consumer demand become increasingly pressing, innovative and holistic approaches to sustainability become essential rather than optional. In order to meet the complex business challenges that lie ahead, strategic business decisions and core company values must be guided by Intelligent Sustainability.

We hope that this research will inspire companies to think deeply about driving business value through sustainability, pushing the boundaries of best practice and proactively tackling this global challenge.


Methodology

The IBEX 353 research is based solely upon publicly available information, which is readily accessible to an interested third party. This includes 2015/2016 corporate sustainability reports, annual reports and the sustainability sections of company websites. We have decided to base our research on publicly available information in the interests of transparency and to ensure that companies are clearly communicating all sustainability initiatives to stakeholders. Each company is scored against 75 criteria across the five research sections (Measurement, Reporting & Verification; Strategy; Reduction & Offsetting; Engagement; and, Innovation), leading to a percentage score for each section and an overall score.

3 The list of IBEX 35 companies used in this research was taken on the 1st June 2016.4 The full methodological breakdown detailing each scoring section can be found online.

Rank Company Score

1 Acciona 73%

2 Ferrovial 71%

=3 Iberdrola 70%

=3 Telefónica 70%

5 Obrascón Huarte Lain 69%

Rank Company Score

6 Gas Natural SDG 67%

7 Banco Popular Español 66%

=8 Enagás 63%

=8 Endesa 63%

10 Red Eléctrica Corporación 59%

Average 2016 scores across the scoring sections4

2016 Results

Overall Average

Average of Top 5

Average of Bottom 5

Measurement, Reporting & Verification

Strategy

Reduction & OffsettingEngagement

Innovation

100%

80%

60%

40%

20%

0%


http://info.carbon-clear.com/sustainability-reporting-performance-methodology

Key Findings

33 companies report using the GRI framework

22 companies set a carbon reduction target

1 company has set a SBT and a further 4 companies have committed to setting one in the next 2 years

25 companies make a reference to the risks climate change poses to their business but only 8 have an extensive assessment

24 companies have assessed the business opportunities associated with climate change

14 companies demonstrated a reduction in relative/absolute emissions compared to the previous year

15 companies purchase good quality renewable electricity

8 companies set a water reduction target

11 companies make reference to a circular economy

9 companies make reference to their use of natural capital

Overall, the private sector is making progress in measuring and reducing environmental impacts, whilst taking steps to adapt to a low-carbon future.


Themes in 2016 This year’s research has revealed five key themes in the sustainability reporting performance of the IBEX 35.

1. Choosing renewable electricityOur research found that 15 IBEX 35 companies purchased renewable electricity that meets the “good quality” criteria required by reporting frameworks such as the GHG Protocol5 and CDP6. Furthermore, 11 companies generated renewable electricity on-site. Given that the Spanish target is for 20% of energy to be generated from renewable resources by 20207, which translates into 40% of electricity being generated from renewable sources, these findings show a movement in the right direction. The shift towards a low-carbon energy model is in part driven by uncertainty in energy supply, but also by global initiatives such as the RE 1008. This initiative, which several IBEX 35 companies have committed to, encourages large companies to commit to procuring 100% renewable electricity. Companies are increasingly opting for renewable energy, and are likely to benefit from doing so.

2. Engaging with the supply chainWhile most companies understand emissions from their business travel, only six IBEX 35 companies calculated emissions from five or more of the 15 Scope 3 categories, as defined by the GHG Protocol9. As not all categories are relevant to all companies, a Scope 3 materiality assessment helps companies to identify where their most material impacts are and thus where their focus should be. For many companies, the most significant environmental risks and opportunities lie in the supply chain, but this is not always reflected in the degree of supply chain engagement companies demonstrate. Although 30 companies from the IBEX 35 assessed their suppliers based on a questionnaire that includes environmental criteria, only four companies scored full marks for engagement beyond the questionnaire. Integrating the supply chain into the sustainability agenda and working to reduce Scope 3 emissions can be difficult, but companies that have taken on this challenge have gained significant value from doing so.

3. Setting targets grounded in climate scienceIt is becoming the norm for companies to set emission reduction targets, with 22 IBEX 35 companies having an absolute or intensity target to reduce their carbon emissions. The current best practice in target setting is driven by the Science Based Targets Initiative10. Following this methodology, emission reduction targets are set in line with the required emissions decrease to limit global warming to 2 degrees Celsius above pre-industrial levels. One company in the IBEX 35 (Gas Natural) has adopted this approach, while a further four companies have committed to setting SBTs within the next two years. By setting ambitious emission reduction targets and formulating clear plans as to how these will be met, companies become well prepared to operate in a low-carbon economy, align themselves with the Paris Agreement ahead of legislation and play their part in mitigating catastrophic climate change.

4. Understanding the risks, embracing the opportunities25 IBEX 35 companies mention the environmental risks faced by their business but only eight companies scored full marks for their assessment of climate change risks. Climate change poses a risk to businesses, whether directly through physical damage or indirectly through new environmental legislation, changes in demand for products and services or reputational damage from not acting as quickly or boldly as required. Climate change also presents a number of opportunities for businesses, which companies from the IBEX 35 are starting to recognise. 24 companies made reference to climate change opportunities, for instance through stimulating innovation and increasing demand for new low-carbon products. In fact, 32 companies are already developing low-carbon products or services. Without a rigorous risks and opportunities assessment in place to inform adaptation and mitigation activities, businesses may jeopardise future growth and success.

5. Designing a winning sustainability strategyCompanies within the IBEX 35 performed strongly in Measurement, Reporting & Verification, with an average score of 75%. This result is largely explained by the fact that 33 companies voluntarily align their reporting with the Global Reporting Initiative (GRI)11. This integrated form of corporate social responsibility reporting helps organisations to understand and communicate their impact on climate change, biodiversity and resource scarcity, amongst other sustainability challenges. However, to effectively tackle the challenge of climate change, sustainability strategies should go beyond measurement. This is the case for some IBEX 35 companies, such as the five companies embedding performance against sustainability criteria in the compensation structures for employees. For other companies, as the average score of 40% for the Strategy section suggests, this area requires further attention. Companies need to ask themselves: is the sustainability strategy aligned with a business need or opportunity, effective in stimulating change and inspiring to stakeholders? To meet these criteria, a sustainability strategy should be embedded in the overall business plan and be seen, both internally and externally, to be driving key business decisions.

5 www.ghgprotocol.org/scope_2_guidance6 www.cdp.net/en7 www.idae.es/uploads/documentos/documentos_11227_PER_2011-2020_def_93c624ab.pdf8 www.there100.org9 www.ghgprotocol.org/feature/scope-3-calculation-guidance10 www.sciencebasedtargets.org11 www.globalreporting.org


The Path to Best PracticeThe two top performers for 2016 are Acciona and Ferrovial. By setting carbon reduction targets, developing low-carbon products and services, purchasing renewable electricity and implementing a range of other initiatives, both companies demonstrate a clear commitment to tackling climate change. They actively engage with customers, suppliers, NGOs, policy makers and industry peers to embed sustainability into their core business strategies.

Acciona - Where sustainability strategy and business strategy meetAcciona ranks first in this year’s IBEX 35 research due to extensive sustainability practices, both internally and within the supply chain. The Chairman and CEO José Manuel Entrecanales actively participated in COP21, where he announced Acciona’s pledge to be carbon neutral by 2016 and laid out the plans for continuous investment in renewable energy and sustainable infrastructure.

Having exceeded the carbon reduction targets for 2015, Acciona has committed to setting a SBT and launched the Sustainability Master Plan 2020, which builds upon existing initiatives and challenges. The sustainability strategy expands beyond carbon to also focus on the company’s water footprint. As explained in Acciona’s sustainability report, measuring water consumption, setting reduction targets and monitoring progress is important for a company’s operational efficiency and reputation, as well as for the environment.

Whilst embedding sustainability across its operations and products, Acciona also sets an example in supply chain engagement. For the second consecutive year, Acciona has calculated the emissions of 28,000 suppliers. The company has also launched ‘SCO2PE_by ACCIONA’, a collaborative programme with suppliers to drive Scope 3 emissions reductions.

Ferrovial - Ambition, innovation and results across sustainability initiativesScoring only just behind Acciona, Ferrovial has also demonstrated outstanding sustainability performance. One area where Ferrovial excels is the assessment of risks and opportunities of climate change. As part of the Ferrovial 2015-20 Project, 79 risks and opportunities were analysed and used to inform business strategy. This sort of analysis enables companies to understand how climate change affects their business and how to adapt their business model to harness the opportunities of a transition to a low-carbon economy.

Ferrovial has set an ambitious intensity target for 2020 and has demonstrated progress towards this target, as well as committing to setting a SBT. This is accompanied by a clear action plan for how the target will be met, including a Sustainable Mobility Strategy for employees, using energy efficiency criteria in subcontracting and developing technology and processes to avoid emissions where possible.

By incorporating concepts such as natural capital into its processes, Ferrovial demonstrates innovation. In 2015 the company collaborated with Massachusetts Institute of Technology and Rey Juan Carlos University in Madrid to develop a corporate methodology to measure the company’s impact on biodiversity. Through the ‘Ferrovial, Natural Capital’ program, the company carries out projects to assess and mitigate the impact of its activities on natural systems.

Telefonica - Embracing the opportunities of a circular economyA circular economy is restorative and regenerative: the economy is seen as an ecosystem of interlinked actors and processes, rather than a linear flow. There is a very strong business case for the circular economy. By generating less waste and re-using materials where possible, operational efficiency is likely to increase and costs are likely to decrease.

In Telefonica’s materiality analysis, the circular economy is identified as a ‘high priority’ area for their internal processes. As such, Telefonica has incorporated the concept into everyday business practice. The company aims to optimise the use of resources throughout the value chain and to return used goods into the production cycle where possible. A preference for low-carbon purchasing and giving suppliers an eco-rating means that Telefonica’s circular economy extends beyond its operations to the supply chain. Furthermore, the company is developing new digital services, such as Smart Waste and Cloud Computing, to make the circular economy a possibility on a larger scale.


Industry Sector PerformanceA sectoral analysis is vital in understanding the sustainability performance of IBEX 35 companies because individual sectors can exert a significant degree of power in shaping climate change policy and practice.

• Within the IBEX 35, companies in the Electricity, Gas Supply, Oil Supply sector on average scored the highest, with an average score of 63%. Performance was more consistent across the sector compared to other sectors, with one company making the top five (Iberdrola).

• Although three out of the top five performing companies are in the Industry and Construction sector (Acciona, Ferrovial, Obrascón Huarte Lain) the sector average was 52%. This value is skewed by the large gulf in sustainability reporting performance between the top three companies and the rest.

• A similar pattern is visible in the Technology and Telecommunications sector, with one company in the top three (Telefonica) while the others lag behind in sustainability practices, bringing the sector average down to 48%.

• For Financial Services and Real Estate, the scores are more clustered than other sectors but with a lower average score of 47%.

• The lowest average sector scores were received by Consumer Goods and Consumer Services sectors, for which the scores were 44% and 37% respectively.

The largest sectors in the IBEX 35 index are Financial Services and Real Estate, and Industry and Construction. We take a more in-depth look at these sectors below.

Consumer GoodsElectricity, Gas Supply, Oil Supply

Financial Services and Real Estate

Industry and Construction

Technology and Telecommunications

Consumer Services

80%

70%

60%

50%

40%

30%

20%

10%

0%

Sector Average Minimum Sector Score Maximum Sector Score IBEX 35 Average Score


Sector AnalysisFinancial Services and Real Estate

Focus areas for the sector

• Scope 3 ‘hotspot’ assessment and supply chain engagement

• Climate change risks and opportunities analysis

• Carbon footprint of investment portfolio

• Development of low-carbon products and services

• Science based targets

Financial Services and Real Estate companies scored highly in the Measurement, Reporting & Verification section. Companies calculated their Scope 1 and 2 emissions, followed GRI reporting and generally had their carbon footprints verified. Engagement practices were relatively strong, although more work is required to engage customers and suppliers in sustainability strategies.

The Innovation score for Financial Services and Real Estate companies is one of the lowest across all sectors, suggesting that the sector does not currently demonstrate sustainability leadership. Likewise, scores for Strategy and Reduction & Offsetting were

relatively low, with notable gaps arising from not calculating all material Scope 3 emissions, not driving emission reduction activities in the supply chain and the absence of SBTs. For companies from the Financial Services and Real Estate sector, the greatest impact lies in their investments. As such, their focus should be to facilitate the shift to a low-carbon economy by assessing the risks associated with fossil fuel investment and to develop low-carbon investment portfolios.


Strategy


Innovation

Financial Services and Real Estate

IBEX 35 Average

80%

60%

40%

20%

0%


Sector AnalysisIndustry and Construction

Focus areas for the sector

• Scope 3 reduction targets and supply chain engagement• Understand and reduce water impact • Medium and long term emission reduction targets, with clear plans to achieve them• Internal behaviour change initiatives• Purchase good quality renewable electricity

As with the Financial Services and Real Estate sector, the Industry and Construction sector scored strongest in Measurement, Reporting & Verification. While Scope 1 and 2 emissions, GRI reporting and verification are in place, not all companies showed evidence of a Scope 3 materiality assessment or calculated Scope 3 emissions following the GHG Protocol Corporate Value Chain Standard12. The Engagement score in the sector was relatively high. However, as with other sectors, customers and suppliers must be better integrated into the company’s sustainability strategy. The Industry and Construction sector scored highly in Innovation compared to other sectors, although not all companies are measuring and reducing their water footprints.

Average scores for Strategy and Reduction & Ofsetting were relatively low, with clearer plans required for how emissions reductions will be achieved. Opportunities for improvement also exist in gaining a deeper understanding of climate change risks and designing behaviour change initiatives to drive improvements in operational efficiency. As the supply chain is likely to form a significant part of the Industry and Construction sector’s footprint, Scope 3 targets and evidence of reduction in supply chain emissions are also vital.

12 www.ghgprotocol.org/feature/scope-3-calculation-guidance


Strategy


Innovation

Industry and Construction

IBEX 35 Average

80%

60%

40%

20%

0%


IBEX 35 and FTSE 100 PerformanceAs 2016 is the first year of the IBEX 35 Research, it is useful to compare the results with the FTSE 100.

Technology and Telecommunications - BT 89% / Telefonica 70%Both BT and Telefonica have a well-defined and holistic approach to environmental management. There is deep understanding of what is required for them to mitigate the impacts of climate change, with a strong focus on a circular economy. The main differences between the two companies came down to BT’s commitment to reducing carbon emissions through the implementation of a SBT. BT also placed a greater emphasis on renewable energy. In 2015 both companies purchased green electricity or had on-site renewable energy, but 95% of BT’s worldwide electricity was from renewable resources, compared to 16% for Telefonica.

Electricity, Gas Supply, Oil Supply - Centrica 70% / Iberdrola 70% As customer demand for green energy increases, both Centrica and Iberdrola are considering how low-carbon products could benefit their business. Iberdrola is further along this journey, with the company’s main focus being renewable energy generation, primarily through wind power. Centrica’s approach is to prioritise efficient thermal production technologies, which are generating emission reductions. Both companies have detailed carbon reduction plans, solid climate change risks and opportunities assessments and a high degree of engagement. While both companies have set water and emission reduction targets, Iberdrola has also committed to setting a SBT. However, Scope 3 targets and evidence of supply chain emissions reductions remain gaps in both companies’ sustainability reporting performance.

Overall, the IBEX 35 have demonstrated a stronger performance in sustainability reporting. Just 23% of the IBEX 35 scored below 40%, compared to 42% of the FTSE 100. There is also a greater gulf between the leaders and the laggards in the FTSE 100 compared to the IBEX 35. The lowest score in the FTSE 100 is 3% and the highest is 89%. For the IBEX 35, the respective scores are 12% and 73%. This may be partly due to the vast majority of IBEX 35 companies adhering to the GRI framework, which requires strategic reporting beyond compliance, whereas less than half of FTSE 100 companies do so.

However, the top scoring companies are from the FTSE 100. While 6% of FTSE 100 scored over 80%, no companies from the IBEX 35 scored as high. This highlights that although IBEX 35 companies may be

performing higher on average, some FTSE 100 companies are pushing the boundaries further to demonstrate sustainability leadership.

A sectoral comparison can help companies to align their sustainability strategies and initiatives with best practice in their industry, not just in their country. As BT was the FTSE 100 top scorer, we have compared BT with the IBEX 35 top scorer from the Technology and Telecommunications sector, Telefonica. Although three of the top five companies from the IBEX 35 are from the Industry and Construction sector, no FTSE 100 companies from this sector ranked in the top 20. As such, we have also chosen to compare the top scorers from the Electricity, Gas Supply and Oil Supply sectors, Centrica and Iberdrola.

FTSE 100 IBEX 35

Score Distribution IBEX 35 vs FTSE 100

% Score

% C

ompa

nies

30%

25%

20%

15%

10%

5%

0%

0-10%

10-20%

20-30%

30-40%

40-50%

50-60%

60-70%

70-80%

80-90%0

90-100%


The first year of the IBEX 35 research has been eye opening in many ways. We have seen that some Spanish companies are successfully incorporating sustainability into their business models to generate meaningful commercial and environmental benefits. Actions that deserve particular commendation include setting SBTs, purchasing renewable electricity and conducting an in-depth climate change risks and opportunities assessment. Overall, the private sector is making progress in measuring and reducing environmental impacts, whilst taking steps to adapt to a low-carbon future.

Conclusion

Having said this, the pace of change and the level of ambition falls short in the majority of companies. A number of IBEX 35 companies are yet to set emission reduction targets and lay out a detailed strategy for how these will be met. These companies, and others at the start of their sustainability journey, should not be discouraged. On the contrary, some early stage interventions have quick returns and should be actioned, whilst laying the foundations for a long-term sustainability strategy.

Throughout this report, we have showcased examples of leadership, which we hope will inspire other companies to create their own value adding sustainability programmes. We have also pointed to trends in various industry sectors, as well as the areas that require more attention going forwards.

In the present day, companies have no choice but to take climate change and resource scarcity seriously. While they present a series of risks to business operations, they also offer a number of opportunities for stimulating innovation, reducing costs and driving long-term business growth. As such, companies have a duty to their shareholders, and a responsibility to employees, customers and wider society to incorporate sustainability considerations into business decisions at all levels.

Finally, we would like to congratulate Acciona, and the other high performing IBEX 35 companies. By demonstrating the value of using sustainability to drive business values and visions, these companies provide evidence that business and environmental sustainability can go hand in hand. As we move towards a low-carbon future, the companies that can intelligently embed sustainability into their business models will be set to thrive.

Companies have a duty to their shareholders, and a responsibility to employees, customers and wider society to incorporate sustainability considerations into business decisions at all levels.


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SUSTAINABILITY REPORTING PERFORMANCE OF THE IBEX 35 · 2017. 10. 9. · 1 Acciona 73% 2 Ferrovial...

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