The CDP recently launched the first disclosure framework for banks to report on climate and forest lending.
In its report, the organization said that banks in the sample set are aware of how climate change and deforestation could affect their businesses, which is great, but the report also found that forest risk commodity disclosures were few and far between. Only one bank analyzed how their portfolios affect forests.
This news comes on the heels of BlackRock CEO Larry Fink’s 2021 letter to CEOs earlier this year that said his firm would make investment decisions with environmental Sustainability as a core goal and would avoid investing in companies that “present a high sustainability-related risk.”
The United States officially rejoined the Paris Agreement and the Biden administration has bold plans to find ways to decarbonize the atmosphere by 2050. The European Union has a head start in its goal of being climate-neutral by 2050. It’s a new era of accountability for companies and their business partners.
As he noted in his letter, Fink urges companies to abide by a voluntary global standard of disclosure to quantify their carbon footprints, plan for more environmentally sustainable operations, and brace for potential financial losses from climate-related risks.
Investment experts like Fink say that companies that are voluntarily releasing more climate-related data and embracing the growing role in climate policy are on the right track. They can stay ahead of regulatory and policy changes with CDP reporting and be a poster child for investors.
What Is CDP Reporting?
With over 9,600 companies on board, representing some 50% of global market capitalization disclosing through CDP in 2020, the not-for-profit organization holds the world’s largest and most comprehensive dataset on environmental action. The insights gathered by CDP are vital for fueling—and tracking—the global economy’s progress toward a zero-carbon, water-secure, and deforestation-free world.
The 2020 saw a 14% increase in disclosures from the year before and a 70% increase since the Paris Agreement was signed in 2015. The record-breaking disclosure numbers reflect the importance and growing environmental awareness among the business world.
The Importance of CDP Reporting
According to the CDP website,
“590 investors with over US$110 trillion in assets and 150+ large purchasers with over US$4 trillion in procurement spend are requesting thousands of companies to disclose their environmental data through CDP.”
Companies that don’t provide transparent data may be at risk of losing their investments.
Although not yet mandatory, CDP Reporting is becoming more important for large global companies and their suppliers as a voluntary vehicle for greater transparency. CDP Reporting not only helps companies identify and tackle growing risks, but also aligns with regulatory and policy changes and meets investor and customer demand for organizations to be more sustainable.
The CDP’s rich and comprehensive data is paving the way toward building a sustainable economy. Companies opting to disclose through the CDP are setting up new benchmarks and sustainability standards. The process involves completing the CDP’s questionnaires on climate change, forests, and water security, which helps companies identify ways to measure and manage their environmental risks. They also add valuable insights to the market and the vital information required by their customers and investors.
A climate-safe future also means a water-secure future. We see a lot of momentum from companies regarding climate change, but water security is still not a top priority for them even though the issues are inextricably linked. When it comes to water security, which the CDP says is “essential to tackling climate change,” businesses cannot afford to wait. Water security is essential to tackling climate change and protecting an organization’s bottom line.
The CDP’s focus on water security is instrumental in helping companies focus on this critical issue. The organization motivates companies to disclose and reduce their environmental impacts. The water questionnaire helps decision-makers identify and minimize risk, tackle water insecurity for a climate-safe future, capitalize on opportunities, and drive action toward a more sustainable world.
The CDP’s 2020 Global Water Report shows the cost of inaction on water risks is up to five times the cost of action. Companies need to rethink their strategies and transform their business models to build a water-secure world.
Deforestation presents real business risks. The CDP Forests division provides companies with a framework of action to measure and manage forest-related risks and opportunities. They can then take meaningful action, transparently report on progress, and commit to proactive steps to restore forests and ecosystems. Companies are encouraged to engage and help in removing deforestation and minimize negative biodiversity impacts.
Global supply chains can drive deforestation, water insecurity, and climate change. The CDP guides companies to uncover the power of their supply chains to drive environmental action at scale. They learn to take effective action, achieve Sustainability goals, and mitigate business risks. Investors, consumers and policymakers want to see resiliency in supply chains and business models, which will go a long way in tackling environmental risks.
How Does TCFD Connect to CDP Reporting?
The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase climate-related financial information reporting. Data gathered from disclosures leads to results-oriented actions and aims to stem the damage already done to the environment. The risk questions in CDP questionnaires align with TCFD methodology.
What’s Compelling Companies to Report to CDP?
CDP reporting encourages a system of transparency and Sustainability disclosure. The process enables predictive analysis and risk management and helps organizations improve their brand reputation, increase operational efficiency and lower operating costs. Sustainability and profitability go hand in hand. As organizations comprehensively measure their sustainability performance and manage their risks, the executive management team is empowered with the right information, putting them in a better position to improving financial performance.
Benefits of CDP Reporting
The CDP is the gold standard for corporate environmental reporting, one that is increasingly a requirement from investors. Responding to stakeholders’ requests for disclosure can lead to tangible business benefits.
- It helps companies gain a competitive edge, gain access to winning capital tenders, and improve performance on the stock market.
- It allows companies to be proactive about their environmental disclosures while enhancing their brand’s reputation. They build trust through transparency and, in the process, protect the company’s future as well.
With the help of an informed data-driven strategy, companies can identify emerging environmental risks and opportunities that would otherwise be overlooked.
As mentioned earlier, CDP reporting is not yet mandatory. But we believe mandatory environmental reporting rules could be the norm in the not-so-distant future. CDP reporting today will prepare organizations for a future with stricter regulations. Unlike their peers, they will be fully aligned with the best-practice TCFD recommendations and stay ahead of regulations.
At the end of 2020, there were 313 companies that made the CDP A List, which focuses on environmental transparency and action. Making it to the CDP A List means better financial performance and a more sustainable world for all.
There are indicators that long-term planning, good corporate governance, and board oversight can help increase revenue. STOXX Global Climate Change Leaders (based on the CDP A List database) have consistently outperformed other top global companies since 2012. The top performers include companies that are publicly committed to reducing their carbon footprint. These companies make more attractive investments for the capital markets.
What are the Roadblocks to CDP Reporting?
Silos make CDP reporting difficult and complex: Organizations are split up across the globe and within various business and operating structures. Overcoming siloed risk-management processes and securing leadership support for a broader climate risk approach can be challenging.
Capability gap: Most companies have limited experience with climate change scenario analyses and greenhouse gas (GHG) emissions accounting across all three emission scopes and science-based target settings. They lack the skills, tools, and relevant capabilities to disclose their current Sustainability performance.
How Can Companies Overcome These Roadblocks?
- Start by setting a GHG emissions baseline using openly available GHG emission factor libraries like the ones provided by the United Kingdom’s Department for Environment, Food and Rural Affairs (DEFRA) or the German Federal Agency for Nature Conservation and the Association for Environmental Management and Sustainability in Financial Institutions (VfU). Then proceed with industry average emission factors from Life Cycle Assessment (LCA) databases.
- Use Science-Based Targets initiative (SBTi) sector methodologies to calculate science-based targets for your Scope 1 and Scope 2 emissions and your Scope 3 emissions if they are more than 40% of your overall footprint.
Focusing on SBTi has already led to the following results: 79% experienced a brand reputation boost, 63% saw an increase in innovation, 55% reported that preparing for a low-carbon transition led to a newly earned competitive advantage. Target settings are often a roadblock for many companies, especially Scope 3 targets that look beyond operations to the upstream and downstream emissions from their value chains. Only 19% of CDP respondents had a Scope 3 target in their plans. That number drops to just 10% in apparel and manufacturing, in which addressing Scope 3 emissions is critical because of how much those industries tax our natural resources and send emissions into the air and water. Even among those with Scope 3 targets, few cover the most relevant emissions categories. It is time to revisit your Scope 3 targets and review where you stand.
How Can Sphera Help?
Companies will be able to:
- Improve their qualitative response to the CDP questionnaire based on CDP guidance scoring methodology documents.
- Enhance their overall CDP scoring.
- Quantify their current corporate GHG emissions using publicly available emissions datasets as well as emission factor libraries.
- Make data management and CDP disclosures more efficient through SpheraCloud Corporate Sustainability software.
- Prepare a full CDP response using internal documents on risk assessment, a Sustainability report and other available data sources.
- Set Science Based Targets.
Disclosure is the essential first step toward environmental action and, as we’ve seen, a better pathway to a better financial future as well.
Get in touch with an industry expert to learn more about CDP reporting.