CDP Climate Change Reporting and Disclosure: The Value of Verification



 

Introduction

Shareholders, stakeholders, and society as a whole expect companies to provide increasing levels of transparency about their businesses and how they operate. Reporting and disclosure of financial and non-financial information is on the rise, with continuing demands related to disclosure of environmental, social, and governance (ESG) information. This is evidenced by development of guidelines and frameworks such as the Global Reporting Initiative, CDP (formerly known as the Carbon Disclosure Project), Climate Disclosure Standards Board, International Integrated Reporting Council, and Sustainability Accounting Standards Board. This emphasis on ESG disclosure is also top of mind for regulating bodies, including the recent U.S. Securities and Exchange Commission Concept Release, the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, and the European Union’s directive on disclosure of non-financial and diversity information.

 

This article focuses on CDP, providing an overview of reporting and disclosure requirements, as well as the role, value proposition, and implications of verification.

CDP Reporting Requirements

CDP 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, it has expanded its purview from investor climate change disclosure to include supply chain disclosure, water and forest footprint disclosure, and development of disclosure and performance leadership indices. CDP is the coordinating secretariat for 827 institutional investors with a combined $100 trillion of assets under management, and has 89 supply chain members representing combined purchasing power of over $2 trillion.

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The two reporting mechanisms on which this article focuses are the annual investor and supply chain questionnaires. CDP reporting and disclosure is performed on an annual cycle. The request for information (RFI) on behalf of investors is issued in February and directed primarily to Chief Executive Officers of Global 500 companies, with responses due to CDP by the end of June. Supply chain members receive their RFI in April, with responses due by the end of July. Companies can respond to either or both requests, and many other participants beyond those targeted through the RFIs have chosen to participate.

The scope of CDP reporting is comprehensive. It covers three core modules including management, risks and opportunities, and emissions for Scope 1, Scope 2, and Scope 3 GHG emission sources, thus providing a thorough disclosure of a respondent’s global climate change strategy and program. Each question within the three core modules is thoroughly evaluated and scored, based on the quality of disclosure and the respondent’s performance. A summary of the disclosure topics for both investor and supply chain questionnaires is presented in the accompanying table.



Company-specific scores are reported through numerous regional and country-specific reports in the Fall. Prior to 2016, a numerical disclosure score (1-100) and letter (A-E) performance band were assigned to each responding company. For the 2016 cycle, the scoring methodology was simplified and reflected in a letter designation, as shown in the following table. Companies demonstrating climate leadership are recognized on CDP’s “A-List.”

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Given the long history of CDP reporting and disclosure, the number and types of topics included in the questionnaire have evolved. Some of the more recent enhancements to these disclosure requirements have included:

  • Continuing emphasis on how respondents address both risks and opportunities associated with climate change
  • Alignment of reported Scope 2, purchased energy GHG emissions with the January 2015 GHG Protocol guidance (i.e., location- and market-based electricity sourcing)
  • Expansion of electricity-related reporting to address both consumption and production, including renewable energy
  • Increased emphasis on renewable energy targets and performance, and reporting on low-carbon products
  • Existence of absolute and activity-based GHG reduction targets, and recognition of whether these targets are science based
  • The extent to which some 17 categories of Scope 3 GHG emissions are relevant to a business are quantified
  • Recognition of integrated reporting as a mechanism for disclosing ESG data and information

While excellence in disclosure and performance is based in part on a respondent’s values and intentions, their accomplishments and how well they set and achieve goals and objectives is emphasized.

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From a verification perspective, the CDP questionnaires specifically address whether a respondent’s GHG emissions inventory has been verified, separately for each of Scope 1, Scope 2 and Scope 3 GHG emissions, which affects a respondent’s performance on their questionnaire. The role of verification in reporting and how it affects a respondent’s performance is discussed next.

Role of Verification 

Performance in the CDP reporting scheme can be influenced by whether a company verifies its GHG emissions. While verification of reported GHG inventories is voluntary under CDP, there are several benefits to obtaining third-party verification:

  • Market Demand – From state/province, to country, to regional schemes, mandatory or voluntary, verification is becoming increasingly valued by stakeholders.
  • External Perceptions – Assurance from an independent third party can boost credibility with external stakeholders.
  • Continual Improvement – The verification process assesses risks and opportunities of reporting processes, management controls and systems, and the ability to improve them over time.
  • Competitive Advantage – Verification of GHG emissions and reduction data can differentiate a business from its competition.

CDP requires that verification be conducted using recognized verification standards, which are evaluated by CDP against a common set of attributes based on the following criteria:

  • Relevance: Relates to a third party audit or verification process, and is specified as part of the program compliance.
  • Competency: Addresses competency of verifiers.
  • Independence: Impartiality is maintained, particularly in cases where the same external organization compiles and verifies a responding company’s inventory.1  
  • Terminology: Terms used for the level of the finding should be clearly defined (e.g., level of assurance).
  • Methodology: The verification methodology includes verification of the process, controls and/or systems, and the data.
  • Availability: The standard should be available for scrutiny.

CDP accepts over three dozen “standards” for performing GHG inventory verification which are comprised of various protocols, methodologies, regulations, standards, and schemes. 2 Additionally, CDP has several very specific requirements that must be fulfilled to garner credit for inventory verification:

  • The verifier/assurance provider must be certified or accredited to provide verification services, which raises the bar on a company’s selection of a verifier.
  • At least 70 percent of a company’s scope-specific emissions must be verified.
  • The type/level of assurance must be specified.
  • The verification/assurance opinion document is attached to the questionnaire response.

Additionally, CDP provides a verification template that can be utilized which contains information on the reporting period and boundaries, reported scope-specific GHG emission data, verification standard, verification provider and associated credentials, and lead verifier name and relevant credentials.

Whether verification is applied only to reported GHG emissions or a company chooses to have their sustainability report verified, several best practices can be embraced by a company seeking verification:

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To accomplish a successful verification, a company should plan ahead and be prepared to provide the documentary, testimonial, and observational evidence required by the verifier. The outcome and effort required to achieve that outcome is squarely in the hands of the company being verified.

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Implications 

CDP has been gradually raising the bar on climate change reporting and disclosure since it began in 2000. Such evolution is expected to continue, with means for disclosure expanding to other venues over time. Key points for companies to consider include:

  • CDP provides a mechanism for increased disclosure and transparency for Global 500 companies, supply chain members, and voluntary reporters.
  • Verification improves the veracity and credibility of a company’s GHG emissions disclosure due to scrutiny from an independent third party.
  • GHG inventory verification improves performance and scoring through CDP’s investor and supply chain disclosures.
  • If your organization has not yet obtained verification of its data, you may consider a pre-verification assessment to determine the veracity of company processes, management controls and systems, and readiness for formal verification.
  • If your organization has been obtaining verification, it is critical that underlying processes, management controls and systems undergo continual improvement so as to derive appropriate cost-benefit.

With the 2017 reporting cycle just around the corner, it is time to take stock now of how 2016 data will be developed, compiled, quality assured, reported, and potentially verified. Trinity is accredited by the California Air Resources Board to perform verification services for GHG emissions data reports and has performed CDP data verification as well. For further information, please contact John Fillo, Principal Consultant, at (724) 996-1946 or jfillo@trinityconsultants.com.

1In most instances, regulatory programs and protocols/reporting schemes have strict conflict of interest criteria that preclude verification of GHG assertions by a party that influenced the assertion’s development.

2 https://www.cdp.net/ja/guidance/verification