The impacts of climate-related risks have the attention of companies. You can see this in the increase in companies reporting on their climate-related risks and impacts through a variety of voluntary sustainability frameworks, standards, and questionnaires. These include CDP, the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations, and Global Reporting Initiative (GRI).
Although these standards and frameworks are voluntary, many companies are getting disclosure requests from a range of groups such as investors, creditors, nonprofit organizations. These groups are using climate-related disclosures to assess the companies’ climate risks and related financial impacts. Ignoring these requests for information could be detrimental to a company’s ability to acquire capital, attract new customers or markets, or plan for climate change mitigation.
My primary focus for this post is CDP and climate-related disclosures. I will address the other frameworks and standards in another post.
What is CDP?
CDP, formerly known as the Carbon Disclosure Project, started with a climate change disclosure questionnaire so the name made sense. With its expanded focus on water and forests, the name was changed to just CDP. The name reflects that it is not just about carbon disclosures.
CDP manages a global environmental disclosure system and does so as a not-for-profit organization. Over the past 20 years, it has provided a system of environmental reporting that has focused on organizations’ climate-related disclosures as a mechanism to foster positive action and leadership on environmental issues. In 2023, more than 23,000 companies responded to CDPs climate, water, and forest questionnaires. This is up 24% from 2022. In terms of market capitalization, these companies represented US$67 trillion, which is close to two thirds of the global market capitalization. This is a definite signal disclosing their climate-related risks and impacts is relevant.
(source: CDP https://www.cdp.net/en/companies/cdp-2023-disclosure-data-factsheet#2023trends)
Why are companies disclosing?
Many are requested to submit responses to CDP by investors and customers or they can submit responses without any external requests. Benefits of responding include reducing costs, increasing competitive advantage, and enhancing reputation. Companies can choose to ignore the requests, but they do so at a cost. If your company ignores a request, a grade of “F” will appear next to the company name on CDP’s website. As CDP states:
“Not all companies requested to respond to CDP do so. Companies who are requested to disclose their data and fail to do so, or fail to provide sufficient information to CDP to be evaluated will receive an F. An F does not indicate a failure in environmental stewardship.”
Keep in mind that these requests sometimes go unnoticed by companies. I have encountered several companies that were surprised to discover that they had an F. If you have not responded to CDP previously, I recommend that you do an annual search on CDP’s website.
How does CDP work?
CDP acts as the intermediary between the requestors and the responders. Investors and customers can become CDP investor and supply chain signatories, which allows them to request companies to disclose climate information through CDP. There are fees to become a signatory, which entitles organizations access to various benefits such as CDP’s research reports.
What is in the CDP Climate questionnaire?
The questionnaire has over 130 questions which cover a range of categories such as governance, business strategy, risk and opportunities, emissions data, biodiversity, and verification. It is updated to varying degrees each year.
The questionnaire has both qualitative and quantitative disclosures about how much greenhouse gases (GHG) companies emit, along with how they manage them. Disclosure questions are intended to help companies identify risks and opportunities as they track emissions and gauge their progress on their GHG emissions reduction.
Companies have some choices about what happens to their responses. They can choose to have them scored or not. Scoring is intended to “…motivate companies to disclose their impacts on the environment and natural resources and take action to reduce negative impacts.” It is important to point out that both what a company reports and how it reports the information affect its score. For example, in responding to how climate risks will affect a company’s operations, broad responses that temperature increases will affect costs will not be sufficient. Responses should be about specific locations, types of impacts, and estimates of costs. If a company has plants in Central America, those could be affected by increasing temperatures. To combat these impacts, a company may expect to spend 20% more on cooling, resulting in $XXX in costs.
CDP provides many detailed guidance documents for responders to understand scoring. Here is one. https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/000/233/original/Scoring-Introduction.pdf?1639144388
My next post will look at TCFD disclosures.