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These days, integrating environmental considerations with everyday operations has moved beyond good corporate citizenship to a critical part of managing both legal obligations and investor relations. Identifying proactive environmental performance is a key part of how investors make their decisions, and more and more they expect standardized environmental disclosures as part of annual financial reports.
Knowing where to start with environmental reporting can be daunting, and the landscape is a tangle of acronyms and competing standards designed for organizations across a multitude of sectors and regions.
Using a framework like the CDP can help streamline your efforts, and provide reporting in an internationally-recognized format that is useful to investors while also creating transparency for other stakeholders, leadership, and customers.
Who Does CDP Work With?
Many climate, sustainability, and ESG standards and frameworks are designed with specific industries in mind. They may support the oil and gas industry, or be designed for carbon emissions reporting in the real estate sector. The CDP works with organizations and groups across private, public, and institutional sectors, including:
- Supply Chains
- States and regions
- Public authorities
- Private markets
This makes it one of the most comprehensive programs out there, with resources and information available regardless of where you’re coming from.
What Is Reported to CDP?
CDP is an environmentally-focused reporting framework. Originally called the Carbon Disclosure Project, the change to the CDP acronym reflects the way the program has shifted to now include reporting under three categories:
Under each of these headings are a variety of questions based on your industry and size. The CDP has customized questionnaires to complete for each category, and these are updated regularly. Below are details on typical information to be included, but these will vary and should be verified before you begin data collection and reporting.
When thinking about climate reporting, many people go immediately to carbon emissions quantification, and while this is an essential part of a CDP report, it’s not the only factor to consider. Other elements to report are:
- Governance – Reporting organizations need to provide details on leadership commitment and competence related to climate-related issues. This includes information on who has expertise and responsibility for climate-related policies and action items, and what incentives are provided to employees to improve climate-related performance.
- Risk and opportunities – Organizations should be prepared to discuss their processes for identifying and addressing climate-related risk and opportunities. This includes identifying the people responsible, as well as the risk to any investments or portfolios, and how these risks are mitigated.
- Business Strategy – World governments and the business community have made pledges under the Paris Agreement to reduce carbon emissions to the point where global temperature increases will not exceed 1.5℃ by 2030. Under the CDP, reports need to include strategy details on how businesses will transition to meet this goal and eventually reach carbon neutrality.
- Targets and performance – Once climate change targets are set, CDP reports will need to include annual updates on how those targets are being met, what is impeding performance, and what changes will need to be made in the coming year to ensure targets are reached.
- Emissions methodology – In order for investors to make informed decisions using emissions data, they need to know they’re comparing apples to apples. CDP reports need to include information on the methodologies used to calculate emissions, any changes from previous years, and how changes to business activity might impact data quality.
- Emissions data – Reporting organizations will need to provide gross numbers for global Scopes 1, 2, and 3 emissions, as well as information on any excluded emissions including a rationale for this exclusion.
Depending on your sector, you may also be required to complete disclosures on topics like energy use, carbon pricing, or biodiversity.
Water quality and water scarcity are critical concerns for businesses, governments, and everyday people around the world. The CDP’s water disclosures help companies understand and reduce their dependence on freshwater sources, including throughout their value chain. These disclosures include:
- Current state – Reporting organizations provide information on the volume of water withdrawn, discharged, and consumed over the year, including how much of that comes from scarce sources and where data gaps exist, including in the value chain.
- Business impacts – If business or organizations have experienced any actual detrimental water-related impacts or been involved in any compliance or legal actions related to water use or discharge, these are reported here.
- Procedures – Under this disclosure, organizations report their procedures for water-related risk assessments both in their operations and within their value chain. Additional questions are asked for water-intensive or higher-risk industries like chemicals, food & beverage, and oil & gas.
- Water risk and opportunities – Since CDP is often used as a decision-making tool for investors, organizations need to report not only real business impacts, but also potential risks and opportunities and how these are identified and managed. Facility-level accounting may be required if risks are identified.
- Governance – As with climate disclosures, water disclosures require documentation on leadership responsibility and competence. This includes information on how C-suite employees or board members are incentivized to address water management, and how water risks are documented in financial reports.
Forests disclosures document an organization’s use and dependence on forest commodities and the risks and opportunities related to this. Disclosures include:
- Current state – Reporting organizations will need to document the forest-related products they buy, produce, use and sell, as well as the percentage of revenue that is dependent on these products. If they own forestry land, this will also need to be documented.
- Procedures – Here, organizations document their procedures for forests-related risk assessments for both their own products as well as within their value chain.
- Risks and opportunities – Under this disclosure, organizations report the identified forests-related risks and opportunities that pose a substantive impact to their operations. If none are identified, a rationale as to why is to be included. In either case, the report defines what is a substantive financial impact.
- Governance – As with climate and water disclosures, the forests disclosure requires details on board-level oversight on forests-related issues, including leadership competence in this area and how executives are incentivized to include forests considerations in their policies and strategies.
- Business strategy – Since the CDP report is meant to be forward looking, under this disclosure, organizations will document how forests-related issues are incorporated into their business strategy going forward.
The level of detail in the forest disclosures will vary significantly by industry or the companies within an investment portfolio.
How Is CDP Reporting Used?
While conscientious and detailed environmental reporting is critical to slowing the effects of global warming and protecting fragile natural resources, the impact of the CDP goes beyond the efforts of the companies that report to it.
CDP data is a tool used by investors and purchasers when making business decisions. Low carbon opportunities and climate risks reported to the CDP are evaluated by 680 institutional investor signatories with a combined US$130 trillion in assets and more than 280 major purchasers with over US$6.4 trillion in procurement spend.
The CDP meets the requirements of the Task Force on Climate-related Financial Disclosures (TCFD). Programs like the CDP and organizations like the TCFD aren’t simply about compliance or good corporate citizenship. They’re actively shaping the future of business and how investment decisions are made.
In addition, reports submitted to the CDP are publicly available through the CDP website. This helps meet transparency requirements within governance disclosures and may also meet further public reporting requirements in broader ESG programs. To view reports, one needs to register an account, but even without one, anyone can search for reports based on geography and view submissions along with CDP Scores.
What Is a CDP Score?
No one likes a failing grade, but the CDP Score is an important part of tracking a reporting organization’s progress to achieving their environmental goals and improving their overall sustainability performance year-over-year.
The CDP assigns a score to each submitted report by category, so an organization’s climate change report may have a different CDP Score than their forests report. And while scores can (and hopefully should) improve over time, the CDP stresses that achieving an A grade does not mean the organization has achieved its environmental goals, only that it has the policies, awareness, and competences in place to achieve them and demonstrate leadership over time.
Scores are given to each disclosure and are, broadly speaking, as follows:
- F – This is a Failing score where the necessary information has not been disclosed.
- D-/D – This is the Disclosure level score. A D- or D score indicates that a disclosure has been made, but that it perhaps doesn’t include the level of detail needed to show a real awareness of the implications of the disclosure on a business’s operations or organizational strategy into the future.
- C-/C – This is the Awareness level score. Here, the organization has moved beyond simple disclosure and shows a better-documented awareness of how the information disclosed has real implications for both the current state of operation and future planning.
- B-/B – This is the Management level score. Moving beyond awareness, now the reporting organization has taken real action to manage its environmental impacts. The company has moved past data gathering and is now actively managing risks and seeking opportunities to improve its environmental performance.
- A-/A – This highest score is the Leadership score. The organization is showing true environmental leadership. Their disclosures show best practices and how environmental considerations are fully integrated into strategy and policy. The definitions for leadership follow the recommendations of the TCFD Accountability Framework.
As mentioned above, CDP scores are publicly available for anyone searching for reports on the CDP website. This is meant to incentivize reporting organizations to strive toward higher grades as new annual reports are filed.
Benefits of Reporting to the CDP
As climate and environmental-related disclosures become an increasingly important consideration in investment decisions, reporting to the CDP and programs like it are a standardized way of documenting your environmental performance for investors and may even be mandated by capital partners and financial institutions.
Beyond investor requirements though, there are a number of additional benefits for organizations submitting public environmental reports. These include:
- Improved reputation – Whether you’re a corporation or government entity, showing conscientious environmental performance and particularly improvement over time improves your reputation with customers, stakeholders, and even your own employees.
- Greater competitive advantage – One of the major benefits of improved reputation and more access to investment is business growth and greater competitive advantage.
- Documented progress and benchmarks – Claims to sustainability are a de facto feature of most corporate and institutional websites these days. Having a well-documented and independently-verified and scored environmental report validates these claims and documents your successes.
- Future-proof your operations – The term “future-proof” comes up in many environmental reporting frameworks, but the truth is completing the CDP’s environmental risk assessments helps uncover previously unknown risks within an organization and in the value chain.
- Proactively manage regulatory obligations – New environmental regulations are emerging all the time, particularly as we approach the 2030 date to limit global temperatures to a 1.5℃ increase. Building a CDP-compliant reporting program proactively reduces the workload when new legal obligations arise.
Fully embracing a program like the CDP takes reporting organizations beyond vague and largely unquantifiable claims of sustainability and moves them toward real documented action that can only benefit them over time.
Reporting to the CDP can be a labor-intensive undertaking. There is a lot of information to collect from multiple parties, departments, offices, and even from customers and suppliers. If your organization is new to environmental reporting and you need to manage your learning curve, or if you want to streamline your data collection, a software partner like FigBytes can help.
FigBytes is a CDP-accredited partner. Our platform will help you keep track of the data you need to compile, use verified methodologies to quantify environmental impacts like carbon emissions and water discharges, and provide a report that is CDP-compliant and can be customized as you need. If you’re ready to get your CDP reporting program off on the right foot, contact a FigBytes team member today.
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