The 2015 Paris Agreement established a framework for signatory countries around the world to collectively address climate change and set an overall goal of limiting the global temperature rise to less than two degrees Celsius over pre-industrial levels. Globally, countries are setting their own reduction goals which are driving a transition to a low carbon economy. At the national level, greenhouse gas (GHG) regulation has slowed and President Trump has announced the US withdrawal from the Paris Agreement (effective November 4, 2020). Under the agreement, the US had set an economy-wide target to reduce GHG emissions by 26-28% below 2005 baseline levels by the year 2025. The announcement of a national withdrawal from this commitment triggered the establishment of the US Climate Alliance, a bipartisan coalition of governors of 25 states. Members of the alliance are committed to implementing policies that support the goals of the Paris Agreement. As a result, there has been recent climate legislation in these states, mainly focused on reducing GHG emissions related to the power and natural gas industrial sectors, transportation, and the use of hydrofluorocarbons (HFCs).
Why Report GHG Emissions Voluntarily?
Along with the evolution of GHG regulation, heightened concerns regarding climate change have caused increased demand from various stakeholders (e.g., investors, customers, and employees) for corporate environmental, social, and governance (ESG) reporting in recent years, according to the US Chamber of Commerce, “Corporate Sustainability Reporting: Past, Present, Future,” from November 2018. Investors in particular are demanding more transparency with respect to a company's risks and opportunities related to climate change. As a result, many companies publish corporate sustainability reports and make ESG information available on their websites. Carbon intensive industrial sectors, in particular, are recognizing the need to assess and disclose their carbon footprints as a result of stakeholder pressure. In November 2018, the Edison Electric Institute (EEI) and the American Gas Association (AGA) issued revised templates for ESG reporting with the goal of providing more uniform and consistent disclosures to the financial community. The templates were updated again in August 2019 to allow for additional reporting elements. In July 2019, the Institutional Investors Group on Climate Change (IIGCC), a European group of investors, went beyond demanding disclosure by calling on cement companies to commit to achieving net zero emissions by no later than 2050.
A key element of corporate ESG reporting and climate related disclosure is quantifying GHG emissions. CDP (formerly known as the Carbon Disclosure Project) provides a platform for companies to voluntarily disclose their carbon footprint and corporate risks associated with climate change to their stakeholders.
What is CDP?
Over the past 15 years, CDP has grown to include disclosure by over 7,000 companies, 600 cities, and 100 states and regions globally. According to CDP's website, reporting companies now represent over 50% of global market capitalization.
While some companies chose to begin disclosing to CDP through self-selected company (SSC) registration, others began disclosure in response to a request received through one of CDP's two programs:
1. The Supply Chain Program allows its 125 members, which include major purchasing organizations, such as Microsoft Corporate, Stanley Black & Decker Inc., and Walmart as premium members, to request CDP disclosures from their suppliers. Responses to these supply chain requests give member companies the data they need to manage the environmental impact of their supply chain. The Supply Chain members sent out over 13,000 disclosure requests to supplier companies in April 2019.
2. Under the Investor Program, over 525 investors globally engage over 6,000 companies, according to Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Responses to investor requests allow investors to analyze their exposure to environmental risk when making investment decisions. Investors sent disclosure requests to this large set of companies in February 2019. Companies which do not disclose in response to an investor request are listed on CDP's website as a “No Response” or “Declined to Participate.”
Climate Change Disclosure Questionnaire Basics
CDP offers three disclosure questionnaires - Climate Change, Water, and Forests - each with a minimum and full version. The majority of companies reporting to CDP disclose on Climate Change alone. All companies may respond to the minimum version when disclosing for the first time. Following the first year, large companies (with a revenue of more than US$250 million) must switch to the full version of the questionnaire, while smaller companies may choose to continue reporting under the minimum version.
The full version of each questionnaire contains general questions which require the reporting entity to assess risks and opportunities related to its footprint, and establish a business strategy for responding. More specifically, entities are asked to describe and then evaluate their processes for identifying, assessing, and managing climate-related risks and opportunities over short-, medium-, and long-term horizons. The questionnaire requests information on an organization's governance structure related to climate change and how climate-related issues are integrated into the organization's business strategy. Entities have the opportunity to provide climate-related targets, including quantitative emission reduction targets, qualitative goals, and the production of low-carbon and climate resilient products. CDP requests reporting of entity-wide, annual GHG emissions, along with details on base year emissions, methodologies used to quantify emissions, documentation of data sources, and data reporting verification. The report allows for the emissions data to be categorized in various ways and provides comparisons to previous reporting years. Entities are also asked to report information on energy consumption.
In addition to the generally applicable questions, in 2018 CDP started including sector-specific questions aimed at the following “high impact” sectors:
- Agriculture: Agriculture Commodities; Food, Beverage & Tobacco; Paper & Forestry
- Energy: Coal; Electric Utilities; Oil & Gas
- Materials: Cement; Chemicals; Metals & Mining; Steel
- Transport: Transport Services; Transport OEMs
CDP scores submissions by reporting entities in an effort to assess the level of detail and comprehensiveness in a response, as well as the reporting entity's awareness of environmental issues, its approach to managing these issues, and its overall progress towards environmental stewardship. The scoring methodology incentivizes measurement and management of environmental impacts. In order to be eligible for scoring, responses are due by July 31 of each year. Responses to the minimum questionnaire are scored only if completed in response to a customer request under CDP's Supply Chain Program.
CDP scores range from A to D-, with a score of F assigned to companies who fail to respond to an investor request for disclosure. Companies are assessed across the following four levels:
- Disclosure - measures completeness of the company's response
- Awareness - measures the comprehensiveness of a company's evaluation of how environmental issues intersect with its business
- Management - measures implementation of actions associated with good environmental management
- Leadership - identifies particular actions that mark companies as leaders, in addition to high scores in all other levels
CDP response scoring is complex and detailed. Transparent scoring methodology is published each year so companies can understand exactly how each response will be scored. While all questions are scored for the disclosure level, only some questions are scored for the awareness, management, and leadership levels. Minimum requirements must be met for each level in order for the response to be scored for the next level.
To Get Started
Companies should begin disclosing as soon as they have sufficient resources to complete the questionnaire. It may be advantageous to initiate CDP disclosure prior to engaging in specific environmental management efforts so that such efforts can be translated into score improvements. Companies can elect to submit the minimum questionnaire and not receive a score during the first disclosure year (unless responding to a supply chain disclosure request). With this “trial year,” companies are able to explore the questionnaire, collect data, brainstorm responses, and get a feel for the Online Response System (ORS).
Following the first disclosure year, the full questionnaire must be submitted in order to receive a disclosure score. Companies which lag behind competitors in environmental management will likely start out with low scores, but will experience a short term advantage during the first few years of reporting, during which the “low hanging fruit” of score improvements can be implemented. For example, companies can implement board-level oversight of climate-related issues, identify climate-related risks and opportunities, establish climate-related targets and goals, and establish a process for the annual quantification of GHG emissions to drive rapid score improvement. More environmentally-oriented companies may have better initial scores but may find score improvements harder to come by. Over time, as companies develop and refine their carbon strategy, longer term efforts will be needed for continual score improvements. For example, a company that has identified risks, opportunities, targets, and goals, will need to disclose steps taken as a result of identified risks and opportunities or impacts of initiatives put in place to meet targets and goals to further improve scores. A company calculating and reporting annual GHG emissions will need to refine and supplement the inventory to garner further score improvements.
Improve Your CDP Score
CDP drives environmental impact by encouraging companies to continually improve their disclosure scores. Following the release of annual scores, CDP provides score feedback charts that serve as a starting point for identifying potential score improvements. Score improvement techniques include refining questionnaire responses, establishing greenhouse reduction targets and initiatives, implementing other environmental management efforts, and refining GHG emission calculations.
Refine Questionnaire Responses
Since questions are weighted and scored differently, disclosure scores can be improved simply by carefully reviewing the scoring methodology for each question when preparing responses. Since each response can be awarded a range of scores, it is important to provide the best possible response. Partial responses are better than no responses. Detailed explanations which contain company-specific information unique to the reporting company's business or operation are awarded more points. For some questions, points are awarded for time-and location-specific examples or case studies. Consistency within and between responses also helps scores. Generally, cross references are not scored, so references to other responses or links to outside sources should be avoided.
Establish GHG Reduction Targets and Initiatives
CDP does not score based on the quantity of overall emissions, but rather encourages emissions reductions. Points are awarded for reduction targets and initiatives, and science-based targets are incentivized through scoring. According to CDP, science-based targets provide companies with a clearly defined pathway that specifies how much and how quickly they need to reduce their greenhouse gas emissions . Targets officially validated as science-based by the Science Based Targets Initiative (SBTI) receive higher scores. Targets are considered “science-based” if they are consistent with what the latest climate science says is necessary to meet the goals of the Paris Agreement, ie, to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 15°C.
Implement Other Environmental Risk-Management Efforts
The disclosure process under CDP encourages reporters to first assess climate-related risks and then address those risks by awarding points for the disclosure of specific risk-management efforts. The climate change questionnaire includes opportunities for reporting entities to provide case studies and examples of how they have made decisions to mitigate, transfer, accept, or control risk related to the transition to a lower carbon economy or the physical impact of climate change. According to the TCFD, transitioning to a lower carbon economy may include:
- Regulatory risks - policy developments that attempt to constrain actions that contribute to adverse effects of climate change or promote adaptation to climate change
- Market risks - policy developments that attempt to constrain actions that contribute to shifts in supply and demand for certain commodities, products, and services
- Physical risks
- Short-term: increased extreme weather events
- Long term: rise in sea level
Refine GHG Emission Calculations
Basic GHG inventories include Scope 1 emissions: direct emissions from owned or controlled sources; and Scope 2 emissions: indirect emissions from the generation of purchased electricity. To improve CDP scores, companies can add Scope 3 emissions, which include all indirect emissions (not already included under Scope 2) that occur in the value chain of the reporting company. Scope 3 emissions can represent huge GHG impacts for companies, so quantifying these emissions is the first step in identifying opportunities for improvement. The list of Scope 3 Category Emissions in Table 1 is provided by The Greenhouse Gas Protocol, Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
|Table 1. Scope 3 Category Emissions|
|Upstream or downstream||Scope 3 category|
|Upstream scope 3 emissions||1. Purchased goods and services|
|2. Capital goods|
|3. Fuel-and energy-related activities |
(not included in scope 1 or scope 2)
|4. Upstream transportation and distribution|
|5. Waste generated in operations|
|6. Business travel|
|7. Employee commuting|
|8. Upstream leased assets|
|Downstream scope 3 emissions||9. Downstream transportation and distribution|
|10. Processing of sold products|
|11. Use of sold products|
|12. End-of-life treatment of sold products|
|13. Downstream leased assets|
|This table was obtained from the Corporate Value Chain (Scope 3) Accounting and Reporting Standard as of October 4, 2019.|
CDP does not verify the accuracy of the emissions data reported in disclosures, but instead awards points towards a reporting entity's score if emissions are reported. CDP awards additional points if a reporting entity elects to have its emissions verified by a third party organization. The verification process requires the reporting entity to supply the verifying organization with the information needed to review the emission calculations and confirm the accuracy of the reported emissions. Verifying organizations will issue a verification statement that can be attached to the reporting entity's CDP response. Independent verification brings objectivity and experience to the reporting process and assists in the continual improvement of the processes used and the accuracy and usefulness of the data reported.
Trinity Consultants helps many organizations with CDP reporting, emissions verification, and many other environmental reporting efforts. For assistance, contact us at (800) 229-6655 or complete the Contact Us form on our website.