Why CDP Reporting is Crucial to Saving Our Planet
We are experiencing the effects of climate change sooner than we expected. In 2021, while continuing through a global pandemic, we witnessed extreme fires in the West, flooding in the East, and continued water insecurity worldwide. Climate change is impacting the world, and there is no denying that companies need to take responsibility for their environmental impacts or risk losing more than just investors.
The economy and the environment can no longer be at odds with one another. Climate change exposes the financial vulnerabilities of companies, as resources, supply chains, and operations feel the impacts of an unstable environment. The risks are front and center, forcing risk assessment of climate impacts and greenhouse gas emissions (GHG) to become crucial to companies’ success.
To take action, companies must track and disclose their carbon emissions. CDP’s CEO, Paul Simpson, has emphasized, what gets measured gets managed. Without measuring emissions, companies cannot attempt to identify hot spots. Like monitoring finances, companies need to track GHGs throughout the year to manage them effectively. Monitoring emissions will also better prepare companies for the future. Many financial investors predict that policy changes may lead to mandatory emission disclosure, similar to financial disclosures. The Task Force on Climate-related Financial Disclosure (TCFD) is developing recommendations on concerns over the instability that climate change may create. With policy change on the horizon, companies will want to have internal tracking and reporting already in place.
CDP reporting can help guide companies in the right direction and prepare for new policies. CDP currently provides companies with the framework needed to prepare for emissions reporting policy. For example, their yearly questionnaire aligns with the TCFD, which is the baseline for future policy. Along with meeting TCFD standards, CDP also provides companies with a high-quality investment reporting framework, equity managers that focus on carbon risk and help enhance their competitive advantage. Companies can gain so much by being more transparent and disclosing environmental impacts to CDP annually.
What is CDP?
CDP is the Carbon Disclosure Project, a not-for-profit organization that started in 2000 to help bring transparency to organizations' environmental impacts. CDP prioritizes transparency in the hopes of reducing risk for companies and the planet through data collection, emissions reporting, and disclosure standards. With over 9,600 companies disclosing to CDP in 2020, and a 14% growth rate from 2019, CDP is the largest dataset of corporate action globally.
Through CDP's annual questionnaires, companies can disclose environmental impacts across different categories, including Climate Change, Water Security, and Forests. The climate change program assesses greenhouse gas emissions and climate mitigation invitations. The water security program emphasizes water use transparency to help promote water resilience and better long-term management plans. The forest program helps companies reduce the risk incurred with land-use change and forest harvesting. Companies are encouraged to disclose and participate in all programs, but the Climate Change questionnaire is the only required and most frequently answered. For example, within the climate change program, 11 of the questions are TCFD recommended disclosures, with over 70% of participants choosing to respond.
Once companies have submitted the CDP questionnaire, they receive a letter grade from A-F. These scores allow companies to benchmark and manage environmental risk from year to year. CDP also assists in setting Science-Based Targets (SBTi) and identifying where emission hotspots and risk reduction should occur. The scores demonstrate a company's willingness to improve its impact on the environment and compare it to its competitors. CDP reporting is a collective movement to help companies take active steps towards reducing their environmental impacts.
Importance of Reporting (Investor Relations)
Financial firms, investors, and banks agree that the economy and the environment can no longer be at odds with one another. For the last two years, BlackRock, the world’s largest investment manager, has made it clear that it views ESG (environmental, social, and governance) as the future of financial success. BlackRock has seen a 96% increase in sustainable asset funds in 2019, with $288 billion invested in sustainable ETF and mutual funds. Not only does BlackRock see an increase in investments, but companies with better ESG portfolios are outperforming their benchmarks. Similarly, Harvard Business Review reported that from 2012-2015 high ESG rated companies outperformed low-rated companies by as much as 40%.
Investors are seeing the financial potential of companies that are preparing and adapting to a changing environment. CDP reported that 590 investors with over $110 trillion in assets request thousands of companies to report environmental data in 2021. Banks like JPMorgan Chase, Bank of America, and Wells Fargo commit to net-zero pledges for both operations and investment portfolios. Bank loan books have more significant impacts than their direct operations, sometimes having 400 times that of a bank's direct emissions. With investors and banks putting enormous financial resources towards a green economy, there is so much to be gained by companies that disclose environmental data and demonstrate progress.
The Next Generation of Investing
Millennials and Gen Z investors view transparency and ESG as a critical function of business practices, many believing it is as essential as financial growth. For example, in a national survey group, over half of respondents of 18+ stated they were more likely to invest in a company that demonstrated ESG performance. More recently, 65% of Millennial and Gen Z investors say ESG has become an essential factor in their investment decisions within the last year. With ESG and transparency becoming more important to the next generation of investors, companies will need to adapt if they hope to see financial success.
As the effects of climate change begin to unravel, companies must prepare for the changes ahead. These changes are not only to the physical environment but the economy itself. Investors are looking at the longevity of their investments and how they will fare in a changing climate and economy. As a result, companies must invest in risk mitigation strategies and prioritize environmental reporting if they hope to adapt to the changing environments. CDP provides companies with the tools and credibility necessary to make effective changes and reduce risk.
How can VitalMetrics help with CDP reporting?
At VitalMetrics, we make CDP reporting easier than ever before. With our Carbon360 tool and analytical team on call, VitalMetrics can help your company achieve its highest CDP score potential. VitalMetrics can help:
Quantify your carbon footprint with ease with Carbon360
Evaluate climate-related risks and opportunities
Report to CDP with confidence and improve your CDP Score
Set Science-Based Targets and learn more
Take steps to reduce your footprint by scheduling a Demo today!
Written By:
Shelby Walsh
