This week, we’re sharing expert insights on CDP reporting for organizations that may be just starting their journey or are regular reporters looking to improve their scores and practices. Paul Dickinson, Founder Chair of CDP, sat down with us recently to share his unique perspective on the challenges, opportunities, best practices, and direction of travel for the 18,700 (and counting) organizations that report using CDP questionnaires.
Q. As a first-time submitter, what are the pros and cons of submitting a reduced version of the CDP questionnaire versus a more thorough response?
Paul: To start with a bit of background, CDP is a 23-year-old not-for-profit organization that just completed its 20th annual cycle of reporting as of 2022. That means there are companies that could have reported to us for the 20th year, you could say. 18,700 companies reported to CDP in 2022. 80% of the S&P 500 report through CDP, and we have similar percentages in jurisdictions like China, Japan, India, and Brazil.
Why do people report to CDP? A few reasons. First, we represent their investors. This year we represent 650 investors with $136 trillion. About 3,000 of those 18,000 companies are reporting to their shareholders through CDP because those shareholders have passwords to see the information of the companies. We call this an authority: the “investor” authority. We also represent a “customer” authority. We represent about 300 companies with annual purchasing of $6 trillion a year. They are using CDP to get data from their supply chains.
So, to answer the question, how much do you want to impress your investors and customers? Climate change is like the internet. It gets bigger every year, and we have to learn to prevail in this changing environment. It is always better to go for the longer form of reporting because that shows your investors and customers that you really care and have your head around this.
Q. Based on your experience, what are the common challenges you’ve seen organizations face when reporting to CDP, whether it is the first time or a subsequent reporting year?
Paul: I’m going to make a reference to scopes 1, 2, and 3 of the GHG Protocol. Scope 1 is the fossil fuels your organization purchases, and scope 2 is the electricity your organization purchases. The good news is these scopes are already in your accounts, meaning you already have these invoices. All you have to do is get your invoices and use conversion factors to normalize those to tons of CO2 equivalent. In a sense, scope 1 and 2 are a slam dunk because they’re a thing you kind of have to do. When you put in place the systems to do it, ideally with a good software platform, there is room for opportunity. My fear is that aliens will come in thousands of years and discover that humans didn’t make it and we didn’t make it because we tried to deal with the world’s largest issue using Microsoft Excel. Don’t manage this critical issue using Microsoft Excel. Get yourself a Software as a Service because then you can stop paying fortunes to consultants, and you can start building skills within your organizations.
One challenge with scope 1 and 2 are boundaries. For example, you may have a joint venture, and it will include scope 1 and 2 emissions. You may think to yourself, well, I control that joint venture because I own the majority of rights. The option to report 51% or 100% of scope 1 and 2 emissions boundaries associated with you under that joint venture might be a challenge, but, ultimately, the key point about boundaries is that you explain what they are. It is critical to explain how you are reporting, and you should use the same boundaries year after year so stakeholders can see trends. Are you solving this problem, or is it getting worse?
Scope 3 is where things get rapidly more complex. It has been argued, if you want to talk about it in simple terms, that the scope 1 and 2 emissions of your entire supply chain make up your scope 3 in terms of upstream emissions. While there is less difficulty in scopes 1 and 2, there is a discipline with scope 3 (especially upstream with suppliers), and there are some degrees of complexity with product use and disposal, but it’s a journey, and you want to be on that journey in order to progress. The good news is that once you’ve worked out your calculations, you’ve got that methodology you can use year after year.
Q. According to the CDP’s 2022 supply chain report, fewer than half of the organizations reporting to CDP are reporting their supply chain, also known as scope 3, emissions. Do you see that changing in the coming years, or was this a surprise to you?
Paul: While that is true, almost half are reporting scope 3, and I have seen this percentage rising over the years. I choose to see the glass half full because of the direction of travel, but there is still a long way to go. There is a business case for this. I’ve given talks before at CDP supply chain events, and as of late, energy is expensive. As I’m sitting in a room with these procurement managers, I often ask, ‘Who pays your suppliers' energy bills?’ You do. That money rolls up to the customer, so it makes sense that you would look at the energy efficiency of your supply chain to reduce energy costs that will come back to your bottom line.
Q. For a first-time reporting organization, what are best practices to get started?
Paul: Get your team together. It’s best practice to collect all of your energy data, and you’re going to need your team across the country or world to tease out those accounts for scope 1 and scope 2. Then, start thinking about how you’re going to approach scope 3, perhaps using CDP Supply Chains, for example. Get the internal team together, do your planning for the reporting process, and choose a vendor to support your calculation methodology. I have the good fortune to be a part of the Persefoni Sustainability Advisory Board, which is a great option, but there are other options as well.
The two big problems with having an Excel spreadsheet are you don’t want to have a spreadsheet with 100 tabs. That’s not the way to go about things in the 21st century. Second, you don’t want to be dependent upon a consultancy firm that will charge you money to keep you carbon backward. You want to be carbon forward and build that capacity within your organization.
Q. What’s your advice for organizations looking to improve scores for the following year?
Paul: Read the questionnaire. It is designed to shape behavior. It is comprehensive and represents global best practice in some regards. Each year, CDP receives feedback from users, purchasers, and investors to iteratively improve the questionnaire.
Let’s go back to my reference that climate change is like the internet. I remember in the late ‘90s, corporations were getting their first websites and wondering where the internet stood in their organization. Turns out that these questions would have an enormous impact on the financial performance of companies over the next 20+ years. Climate change is asking us those same questions: who is responsible for this? How are we going to respond to it? How does this show up in our business planning? How does this turn up in consumer research? Where are the risks and opportunities? We have this enormous new thing, and you can make a lot of money from it. Incorporate it into the DNA of what you do because it is not going away!
Climate & ESG News Roundup
ISSB reiterates its focus on climate disclosure and allows an additional year for reporting on other sustainability topics
On April 4, the International Sustainability Standards Board (ISSB) announced that companies reporting in line with its standards will be able to “focus initial efforts on ensuring they meet investor information needs around climate change” and wait an additional year before including disclosures on other sustainability topics.
The ISSB is an international standard-setter that is creating high-quality sustainability disclosure standards with an eye toward better fulfilling investors’ information needs. The ISSB has 2 proposed standards: S1, which focuses on general sustainability-related disclosure, and S2, which focuses on climate-related disclosure. Both standards will be issued towards the end of Q2 2023. Companies can use the standards for voluntary disclosures effective in 2024.
Under the ISSB’s April announcement, companies that report using these standards can decide to only include climate-related information in the first year, then expand to include both general sustainability and climate-related information in the second year. Companies that are ready to move forward with other sustainability topics pursuant to the general requirements may do so.
This option for an implementation delay will allow companies to spend time setting up the right processes and procedures in their first year, before widening the aperture to include a larger set of information once their disclosure systems are in place.
The ISSB’s decision to allow companies to focus on climate-related disclosures first underscores that climate-related information is a priority demand by global investors today. For more information on the ISSB, see Persefoni’s primer here.
EPA proposes new tailpipe regulations
In the continued effort to reduce emissions, the EPA has announced new proposed rules that would effectively reduce car pollution by 50% in the US. The rules would require up to two-thirds of new passenger cars sold to be electric, rolling out in phases beginning with model year 2027 through 2032. If adopted, these new rules would be the Biden Administration's most aggressive move yet to address the climate crisis. Officials are also proposing stricter rules on medium- and heavy-duty vehicles such as delivery trucks, dump trucks, and public transportation.
As the industry grows, electric vehicles (EVs) become more accessible to the average consumer, and some climate experts predict that the transition from gas-powered to electric vehicles will ultimately be more cost-effective for American consumers. Of course, this announcement doesn't come without a sense of wariness amongst consumers. A recent Gallup poll found that out of 1,000 Americans polled, 41% indicated that they are not open to purchasing an EV, and six out of ten indicated that they believe EV's benefit to the environment amounts to little to nothing. However, the Intergovernmental Panel on Climate Change in the UN found that the transportation sector's emissions could be reduced by over 80% with regulations to aggressively cut pollution. This is significant, given the industry is the United States' largest source of pollution.
European regulators issue consultation on amendments to SFDR
Last week, European regulators issued proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR) alongside the launch of a consultation to amend the proposed rules. The European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority, which make up the three European Supervisory Authorities (ESAs), proposed changes that aim to simplify and extend the sustainability disclosures required from financial market participants, to make them more relevant, consistent, and comparable.
To do this, the ESAs propose introducing a more principles-based approach to certain disclosure requirements, extending the scope of SFDR to include all financial products, and clarifying the application of the requirements for non-EU entities. Additionally, they seek to clarify certain concepts and requirements and streamline the disclosure obligations.
Specifically, the ESAs outline the following amendments:
- Extending the list of universal social indicators for the disclosure of the principal adverse impacts of investment decisions on the environment and society.
- Refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, formulae for calculation as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals, or real estate assets.
- Adding product disclosures regarding decarbonization targets, including intermediate targets, the level of ambition, and how the target will be achieved.
They also suggest technical revisions:
- Improving the disclosures on how sustainable investments “do not significantly harm” the environment and society.
- Simplifying pre-contractual and periodic disclosure templates for financial products.
- Making other technical adjustments concerning, among others, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.
The public consultation ends on July 4, 2023. From there, the ESAs aim to deliver the final report by the end of October 2023.
In other SFDR-related news, the European Commission this month released a set of answers to long-standing questions on the SFDR that had been posed by the ESAs (see Annex I and Annex II for details). These answers from the EC will help clarify areas of ambiguity in the application of the SFDR. Tune into the next edition of Climate Decoded for a more detailed discussion of the implications of these answers.
Events You Can't Miss
- Persefoni’s Kristina Wyatt will be speaking at the International Corporate Citizenship Conference, taking place in Minneapolis, MN April 30-May 1. The event provides the opportunity for corporate citizenship practitioners to network and learn about corporate social responsibility. Register here.
- Hear our own Emily Pierce speak at this year’s annual Climate Leadership Conference in Los Angeles, CA. Registration for the May 10-12 event is open until April 21. Attendees will learn about the policy, innovation, and business solutions that are addressing the climate crisis.
- Registration is now open for this year’s Circularity 2023 conference in Seattle, WA, June 5-7. Participants can learn about solutions across industries that are helping to build a circular economy.
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