CDP reporting: What it is, how it creates value, and how to start
CDP reporting: What it is, how it creates value, and how to start
Drought, storms, heat waves, rising sea levels, melting glaciers, and warming oceans; the impacts of climate change are already wreaking havoc on companies, livelihoods, and communities around the world. And, according to scientists, it’s only going to get worse unless the world halves greenhouse gas pollution by 2030 and reaches net-zero emissions by midcentury as laid out by the Paris Climate Agreement.
Global emissions need to be reduced by at least 9% each year in order to reach the goal of net-zero by 2050. Yet data from MSCI shows only 3% of the 8,900+ MSCI ACWI IMI constituents have reduced direct and indirect carbon emissions by an average of 8% or more per year over the last five years. Reaching the emissions reduction target will require the concentrated, collective effort of government, companies, and investors alike.
While there are currently no mandates in the United States to do so, this could change. The Biden Administration’s recommitment to the Paris Agreement enforces a net-zero environmental demand that could potentially transform the entire economy. This mandate requires companies to create new business models and develop long-term strategies to meet the net-zero goal.
Investors are also seeking out alternative, environmentally friendly funding opportunities. In turn, companies that prioritize the creation and use of negative-carbon technologies and place a strong emphasis on issues such as biodiversity, water pollution, and ecosystem preservation could experience a rapid inflow of capital.
BlackRock CEO Larry Fink believes climate transition presents a historic investment opportunity. In his 2021 letter to CEOs, Fink stated, “In the past year, people have seen the mounting physical toll of climate change in fires, droughts, flooding, and hurricanes. They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner. No issue ranks higher than climate change on our clients’ lists of priorities.”
Fink believes companies that take a strong stance on climate change will set themselves apart from their peers, inspire stakeholder confidence and, ultimately, see their company valuations grow. As businesses make this shift, one of the best ways companies can showcase their progress is by reporting and disclosing environmental data through CDP, the world’s largest and most comprehensive dataset on environmental action.
What is CDP?
Formerly known as the Carbon Disclosure Project, CDP is an international nonprofit organization based in the United Kingdom, Germany, and the United States that helps companies and cities disclose their environmental impact. CDP’s goal is to make environmental reporting and risk management a business norm that drives disclosures, insights, and action towards a sustainable economy.
When they started in 2002, CDP had just 35 investors signing its request for climate information and 245 companies responding. In 2020, a record-breaking 9,600+ companies disclosed through CDP, 14% more than last year and 70% more than when the Paris Agreement was signed. The collection of self-reported data from the companies is supported by over 800 institutional investors with about US$100 trillion in assets. In fact, nearly a fifth of global greenhouse gas emissions are reported through CDP.
This information helps investors, corporations, and regulators to measure and understand the environmental impact of their decisions and take steps to address and limit their risk to climate change, deforestation, and water security.
How do companies report through CDP?
With over 9,600 companies on board, CDP holds the world’s largest and most comprehensive dataset on environmental action. The insights gathered by CDP are crucial for incentivizing and tracking the global progress toward a zero-carbon, water-secure, and deforestation-free world.
Companies can disclose information through CDP’s three corporate questionnaires on climate change, water security, and forests. This helps companies provide environmental information to their investors, customers, and other stakeholders, including governance and policy, risk and opportunity management, and environmental goals and strategies. Investors and customers may both request environmental information from companies via CDP, and the data is used by these stakeholders to inform decisions and drive action.
Why does CDP matter?
CDP reported that 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 in 2021. For many companies, meeting investor and stakeholder demands for quality ESG (Environmental, Social, Governance) data is challenging given the profusion of reporting platforms, standards, and requirements.
The current lack of standardized reporting means that companies can report different data points within the same sector, ESG information is only partially measured and accounted for, and the data that companies share can vary from year to year.
CDP supports and encourages a reporting system that enables transparency and predictive analysis and risk management. These reporting processes are also helping to create new benchmarks and sustainability standards that organizations need to equalize data, improve their brand reputation, increase operational efficiency, and lower operating costs. Ultimately, this unified reporting system and comprehensive data is providing the information needed to help streamline reporting and support a sustainable economy.
Benefits of CDP reporting
Reporting environmental data can help determine whether your sustainability strategies are effective, provide guidance on closing potential gaps, and assess the business value to be gained by addressing risks and opportunities. The competitive benchmarking process also provides stakeholders, investors, customers, and industry peers with access to meaningful, standardized industry comparisons.
The good news is, responding to stakeholder requests for data and disclosure can lead to tangible business benefits. For example:
- Being transparent about the environmental impacts of your business activities proves you are serious about sustainability and demonstrates credibility.
- Reporting helps identify cost savings strategies and opportunities for both your business and customers.
- Strong, data-backed reporting and communication boosts employee morale, pride, and, most importantly, retention.
- Credible reporting and outcomes make companies more attractive to investors and improves stakeholder confidence.
- Sustainability reporting helps keep your company abreast of regulations and non-financial reporting requirements.
CDP reporting will also prepare organizations for a future with stricter regulations and help companies stay ahead of regulations by fully aligning with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Created by the Financial Stability Board, TCFD provides key guidance on what companies and investors should be focusing on to minimize climate risk, accelerate environmentally friendly governance, and transition to a low-carbon operation.
All of these sustainable benefits also ensure profitability. In 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019 according to GBI Research.
Beyond reporting, data standardization, and regulations, CDP’s ultimate goal is to benefit the environment. Their questionnaires on climate change, water security, and forests help companies identify how to measure their environmental impact and manage risk. These efforts are helping create a climate-safe future and a water-secure future, while removing deforestation and minimizing negative biodiversity impacts.
Getting started with ESG reporting
As investors become centered on understanding and evaluating sustainability performance and consumer spending shifts toward sustainability-focused enterprises, businesses are seeking out solutions to gather and report on metrics that show solid management of ESG efforts and outcomes. However, evaluating sustainability programs and ESG performance can be a complex challenge which requires accurate, relevant, current data that must be collected, analyzed, and disclosed.
There are a large number of sustainability reporting frameworks, such as GRESB, CDP, GRI, and SASB, and it’s important to identify which ones are right for your organization. To get started, many companies are turning to sustainability management platforms that help businesses monitor non-renewable energy sources, minimize harmful emissions and waste, reduce operational costs, and ensure regulatory compliance, as well as support CDP reporting and other reporting platform.
ESG consultants can help your company identify the best approaches for your organization, understand emerging ESG trends, and learn about next steps and best practices for the systematic creation and management of a scalable, cohesive, high-performing, effective ESG strategy.
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.