Shift Happens

A climatic tipping point: Environmental disclosure goes mainstream

Bird dipping in the water
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It has already tipped over.

Almost two decades ago, CDP’s founders believed shareholders needed access to corporate environmental data to make sound investment decisions. Backed by just 35 investors and armed with philanthropic capital, CDP — formerly the Carbon Disclosure Project — began requesting the world’s 500 largest corporations to measure and publicly report their greenhouse gas (GHG) emissions.

Over the past 17 years, the not-for-profit has grown to more than 800 investors with combined assets of $100 trillion. Today, more than 6,500 companies, representing greater than 60 percent of the market capitalization of the world’s 30 largest stock exchanges, report nearly a fifth of the world’s GHG emissions through CDP.

Further, CDP has honed its questionnaires to increasingly focus on corporate management of climate change — governance, strategy, risks and opportunities. Shareholders not only wish to know a company’s GHG emissions, they also want to know if a company is insulated from physical climate risk and prepared to transition to a low-carbon economy.

A market correction

In 2015, while the world was focused on the upcoming COP 21 that ultimately would lead to the Paris Agreement, the Financial Stability Board (FSB) quietly launched the Task Force on Climate-related Financial Disclosures (TCFD). The FSB was tasked by the G20 — an international forum of the world’s major economies — with monitoring the global financial system. With that lens, the FSB asked the TCFD to understand how climate change would affect global markets, and what information companies needed to disclose to the investment community to assess climate-related risk and opportunity. 

In June 2017, the TCFD released four broad recommendations, suggesting companies provide the following disclosures in their annual financial filings.

  1. Governance: Disclose the organization’s governance around climate-related risks and opportunities.
  2. Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning where such information is material.
  3. Risk Management: Disclose how the organization identifies, assesses and manages climate-related risks.
  4. Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

Investor interest in climate change has increased significantly since the TCFD recommendations were published. Since December, the number of TCFD supporters has more than doubled to more than 300 organizations, including over 150 financial firms responsible for assets of $82 trillion — more than the combined GDP of the six largest global economies.

Investors also encourage portfolio companies to take action towards implementing the TCFD recommendations. For example, the global head of investment stewardship at BlackRock, the world’s largest asset manager, sent letters to the corporate governance teams at over 120 companies urging them to assess the risks posed by climate change to business operations in line with TCFD recommendations.

In conjunction with this, shareholder resolutions on climate change have taken off and are rapidly gaining ground as the financial community begins to understand the material financial risks climate change poses. To respond, companies are looking to address TCFD in a way that meets the requirements of investors. 

A perfect match

Given the shared objectives of TCFD and CDP, it comes as no surprise that the latter fully has integrated the TCFD recommendations into the 2018 CDP questionnaires, including a focus on sector-specific questions. As companies prepare for the 2018 CDP cycle, they should ensure their climate change management approach adheres to these changing disclosure expectations. 

Many recommendations from TCFD corresponded with the changes that CDP has been making over the last several years, including more emphasis around science-based targets, carbon pricing and Scope 3 emissions. As a result, the largest TCFD-related change to the 2018 CDP questionnaire is the push to use a quantitative scenario analysis process to understand future risks and opportunities. Such analyses lead to understanding how different climate scenarios will affect the business — enabling the incorporation of scientific due diligence into GHG reduction goal development, business continuity planning and R&D strategies.

Connecting the dots

At first glance, CDP’s 2018 changes appear daunting. Responding companies will need to extend their reporting timelines to create new processes, collect new data and draft new responses for this year’s questionnaire.  

However, companies could and should embrace this year’s CDP questionnaire. While the TCFD offers recommended climate-related disclosures, CDP offers companies a roadmap by which to forge these disclosures. Use the climate-related risks and opportunities already identified for your CDP submission as the foundation of your scenario analysis. Close gaps in your CDP reporting of governance and strategy to fill voids in your TCFD disclosure. Continue to measure your emissions and set science-based targets. Request your suppliers fill out the CDP Supply Chain questionnaire and build out your Scope 3 emissions.

As CDP’s new questionnaire matures, the scoring of TCFD-related disclosures will become more stringent. By taking the time and investing the resources to meet CDP’s new and heightened expectations, companies proactively can tackle the TCFD recommendations to take a leadership position on climate change.