Increased pressure for business transparency is compelling companies to disclose environmental, social, and governance (ESG) information. Whether through sustainability reporting to standards like the Global Reporting Initiative, indices such as the Dow Jones Sustainability Index, disclosure guidelines such as those of the Sustainability Accounting Standards Board, or investor and supply chain disclosure through EcoVadis or CDP, stakeholders are influencing how businesses operate like never before.

CDP, previously known as the Carbon Disclosure Project, is a not-for-profit organization based in the United Kingdom that seeks disclosure on climate change business risks and opportunities, and greenhouse gas (GHG) data from the world's largest companies. Established in 2000, CDP has expanded its disclosure program from investor climate change disclosure only in its early existence, to include water security and forest footprint disclosure, supply chain disclosure, and development of disclosure and performance leadership indices (e.g., the A List). Over 7,000 companies responded to CDP's climate change, water, forests and supply chain questionnaires this past year. Over 525 investors with $96 trillion in assets under management, request information on climate change, water or forests. CDP's influence is spreading through its supply chain program as well, with 115 companies requesting disclosure by their enterprise partners, comprising $3.3 trillion in procurement spending for 5,600 suppliers.

This article provides an overview of the CDP reporting process with a focus on how companies can improve performance through this vehicle for disclosure of climate change related information. The article focuses on the CDP climate change questionnaire, with references to comparable content in the water security and supply chain questionnaires.

CDP REPORTING & DISCLOSURE

CDP reporting and disclosure is performed on an annual cycle. The requests for information (RFI) on behalf of investors are issued in February and directed primarily to Chief Executive Officers of Global 500 companies, as well as companies designated as high impact or voluntary reporters. Supply chain members receive their RFIs in April. Companies can disclose regardless of whether they receive the RFI and can participate in either or both requests under any of the disclosure programs. Questionnaires for both investor and supply chain requests in 2019 are due to CDP by July 31, 2019.

The scope of CDP climate change reporting is comprehensive, thus providing a thorough disclosure of a company's global climate change strategy and program. Each question is thoroughly evaluated and scored by CDP based on the quality of disclosure and the respondent's performance. While most questions apply across all industry sectors, there are additional questions included in the questionnaires specific to designated high-impact sectors (e.g., agriculture, energy, materials, transport). Table 1 provides a summary of the core disclosure topics for climate change investor (and supply chain) questionnaires.

Table 1. Investor Climate Change Core Disclosure Topics

C0 IntroductionC8 Energy
C1 GovernanceC9 Additional Metrics
C2 Risks & OpportunitiesC10 Verification
C3 Business StrategyC11 Carbon Pricing
C4 Targets & PerformanceC12 Engagement
C5 Emissions MethodologyC13 Other Land Management Impacts
C6 Emissions DataC14 Signoff
C7 Emissions BreakdownSC Supply Chain

As of the date of this article, questionnaire and scoring guidance documents have been posted by CDP for climate change, water security and forests questionnaires disclosure. It is important to confirm periodically whether updates may be issued during this reporting cycle to reflect any corrections or changes made by CDP.

Following submittal and evaluation of questionnaires, CDP publishes scores from the investor questionnaires (typically in the Fall of each year) through regional, country-specific and topical reports. For the current reporting cycle, the scoring methodology consists of single letter designations, as shown in Table 2.

Table 2. CDP Scoring Methodology

Progress LevelDescriptionScore
LeadershipSteps taken to represent best practiceA/A-
ManagementImplementation of actions, policies and strategies to address environmental issuesB/B-
AwarenessAssessment of environmental issues, risks and impacts in relation to the businessC/C-
DisclosureCompleteness of company responseD/D-

Progressing through the four performance levels can be considered a journey of continual improvement, much like development and adoption of an environmental or occupational health and safety management system. Companies that receive the annual questionnaire, and choose not to respond or do not provide sufficient information for the questionnaire to be evaluated receive an "F" designation. For supply chain disclosure respondents, CDP's annual reports have included only the names of companies that achieved "A-List" designation.

ACHIEVING PERFORMANCE EXCELLENCE

CDP's scoring approach leverages market forces to encourage disclosure of impacts on the environment and natural resources, and to measure and manage environmental impacts. The scoring methodology is intended to assess a responder's progress towards environmental stewardship as disclosed through their CDP response, and provides a comparison with other companies.

As one basis to raise the bar on performance, key attributes of responses for selected questionnaire categories are discussed below.

Governance

Pursuing excellence in any business endeavor requires leadership and accountability. With respect to climate change, demonstrated responsibility and accountability by the Board of Directors is essential as one basis to drive commitment and performance. Similarly, senior (C-suite) management must have defined roles, responsibilities and accountability at the operational level. It is essential for respondents to clearly explain these expectations, how they are achieved (e.g., EHS/sustainability, climate change, public relations, board committees), who is accountable, and how the tone-at-the-top is established.

Risks & Opportunities

Risk and opportunity management related to climate change is a critical component of a company's carbon management and disclosure. While such a process can be conducted and managed separately, its integration with a company's overarching risk management process (e.g., enterprise risk management) is ideal.

Key considerations include the definition of what constitutes risks (and opportunities) with the potential for substantive financial/strategic impact, and the types of risks/opportunities considered. These elements can influence how subsequent questions need to be answered, as well. For example, does your definition consider more than just financial criteria (e.g., reputation, stakeholder concerns)?

In responding to this question, including multiple risks or opportunities may enhance performance, although there is significant information that is required in a response to achieve full credit (e.g., type, drivers, financial impact (type and magnitude), timeline, likelihood and magnitude, management/leverage).

Business Strategy

Similar to accountability and risk/opportunity management, establishing and integrating a climate change strategy with the business strategy is a core theme, and an area where companies are demonstrating continual improvement. As noted previously, this approach is similar to business integration requirements in the updated management system standards (i.e., ISO 14001, ISO 45001, ISO9001).

Additionally, the questionnaire addresses companies' efforts to conduct climate-related scenario analysis and to develop a low-carbon transition plan. Scenario analysis can be daunting. While the core scenario is that associated with limiting temperature rise to 2 degC (i.e., 2DS, International Energy Agency), there are over a dozen specific scenarios that CDP recognizes. Scenario selection and the method of analysis (e.g., qualitative, quantitative) need to be determined. The low-carbon transition plan question is directed to high-impact sectors, and consists of an open text question that requests transition plan details, including the details to implement climate-related commitments.

Targets & Performance

This segment of the questionnaire has several dimensions, one of which is to provide examples of emission reduction projects/initiatives in various stages of evaluation/implementation. While many companies simply include projects in progress or completed, responses can demonstrate a more thorough project development/implementation lifecycle from year to year. The challenge is that very detailed data are requested (e.g., GHG reductions, investment, payback, return on investment) and some of this information may be viewed as company confidential. Unfortunately, garnering full scoring requires disclosure of all requested information. Note as well, that it may be possible to leverage selected initiatives to be included in responses to the supply chain questionnaire.

Greenhouse gas reduction targets are integral to this segment. The preference for enhanced performance is, in decreasing order, science-based targets (SBT), absolute targets, intensity targets coupled with absolute emission reductions, and intensity targets. For SBTs, a company can submit the targets to the SBT Initiative for validation (by May 15th) prior to questionnaire submittal to CDP, or simply report the un-validated target(s). The SBT methodology, criteria, and tools recently have been updated, targeting a level of de-carbonization required to keep global temperature increase to well below 2 degC compared to pre-industrial temperatures. The new criteria take effect on October 15, 2019.

Note that SBT methodology requires establishing both Scope 1 (direct) and Scope 2 (energy indirect) emissions targets, as well as consideration of Scope 3 (other indirect) emissions, including a target if Scope 3 emissions are 40 percent or more of combined Scope 1, Scope 2 and Scope 3 emissions. As discussed under GHG Emissions, The GHG Protocol provides a resource for determining the potential magnitude of Scope 3 emissions. In any case, performance against cited targets must be demonstrated.

GHG Emissions

There are several ways to improve performance through reporting of GHG emissions. Reporting of Scope 1 direct and Scope 2 energy indirect emissions with minimal exclusions (e.g., changes due to newly acquired assets, less significant emission sources that may not be reported through statutory GHG reporting programs) reduces the potential for CDP to withhold points. For Scope 2 emissions, location- and market-based emissions both can be reported. Emissions breakdowns (e.g., by country, business, facility) are requested, as well. More granular reporting of emissions can garner better performance.

For Scope 3 other indirect emissions, there are 15 different categories of emissions in accordance with The GHG Protocol. While GHG emissions estimation can be a daunting task, better performance can be achieved simply by determining which Scope 3 categories may be relevant to a company's operations, instead of citing a stock "Not Evaluated" response. Additionally, The GHG Protocol website provides free access to a Scope 3 emission calculation tool that uses more general business data (e.g., headcount, revenue, expenditures, space occupied) to estimate these emissions. The tool can be used as an effective means to focus detailed GHG emissions development on the more significant sources.

Additional Metrics

The questionnaire accommodates reporting of additional climate-related metrics from virtually any segment of a company's disclosure. While this segment of the questionnaire already includes additional metrics-related questions specific to designated high-impact sectors (e.g., production/generation, capacity, reserves, low-carbon investments, and others), there is an opportunity for companies that establish/track specific metrics or routinely publish sustainability/corporate responsibility reports to include additional related metrics. These potentially may include data and commitments related to management system implementation, board committee composition, energy efficiency improvements, project development/investment, water use/recycle, waste generation/recycle, carbon offset generation/acquisition, and others.

Additionally, it is possible to leverage data/metrics that may be reported through other CDP questionnaires. One obvious opportunity would be water-related metrics for companies that also participate in water security disclosure.

Verification

Performing verification in accordance with a CDP approved methodology/standard can achieve significant performance improvement. Verification can be performed on any of Scope 1, Scope 2 or Scope 3 emissions. For Scopes 1 and 2, the proportion of total emissions verified must be disclosed, with Scope 2 verification required for only one of reported location- or market-based emissions. For Scope 3, the magnitude of emissions verified must be disclosed. For companies to achieve A-Level performance, at least 70 percent of both Scope 1 and Scope 2 emissions must be verified.

Now that companies can report additional metrics in their disclosure (see above), these can be verified as well.

IMPLICATIONS

CDP continues to raise the bar on climate change related reporting and disclosure, with means for disclosures expanding over time. Key points for companies to develop a substantive disclosure include:

  • Strong tone-at-the-top for climate change responsibility and accountability
  • Comprehensive and integrated business strategy, planning and risk and opportunity management
  • Comprehensive GHG inventories (including Scope 3 emissions) and verification
  • Energy and GHG reduction targets, and demonstrated performance against targets
  • Proactive mitigation, adaptation and transparency (i.e., a key to progressing to advanced levels)
  • Disclosure completeness, consistency and comprehensiveness, including company-specific examples of how various issues are addressed
  • Prior year's reporting trends and areas where other respondents are making headway

With the 2019 reporting cycle in progress, it is time to take stock now of how 2018 data will be developed, compiled, quality-assured, reported, and potentially verified. For further information, please contact John Fillo, Principal Consultant, at (724) 996-1946 or jfillo@trinityconsultants.com.