“we still have a long way to go on transparency…..”
In this interview with Paul Simpson, CEO of CDP, we explore the foundational role of transparency in the journey towards decarbonization. As Reuters will explore in an upcoming report, publishing February 25th, transparency is both crucial for transformation of carbon intensive business models, and unfortunately all too rare in the companies which matter most for reducing emissions. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: Why is transparency important? What are the benefits?
Paul: Transparency is the foundation of any solution to the climate change crisis. Once companies know where their key impacts, risks and opportunities lie, only then can they focus their resources effectively.
You can’t manage what you don’t measure – and disclosure allows companies to understand and manage their own emissions and reduce them towards a target. It also allows external stakeholders – such as investors, customers, and governments – to understand a company’s readiness to compete in a carbon-constrained world, and gives them the information they need to support more sustainable businesses.
And the benefits of transparency are only increasing. Preparing for new regulations like mandatory disclosure and carbon pricing, meeting the evolving needs of investors and customers, attracting the best talent, maintaining the trust of consumers and enhancing brand value – all these points combine to create an ever-stronger business case for disclosure.
And of course, the converse is also true. As costly climate impacts increase and the economic trends towards low-carbon continue apace, those companies not adapting will face increasing financial risks.
Tim: How is CDP’s data actually used?
Paul: Our data is made available on a number of investor research platforms, and is used by the whole market – by companies themselves when assessing their own environmental impacts, by big purchasers when choosing which suppliers to work with, and crucially by investors when informing their engagement strategies, investment research and stock selection. Our data is at the heart of the growing ESG investment market – many investors wouldn’t be able to offer the products and services they do, without the data we collect on their behalf.
One trend we are increasingly seeing is investors using our data to create tailored financial products. For example, our climate change data powers the STOXX Low Carbon Indices and the New York State Common Retirement Fund’s low carbon index. And in 2018, the Euronext CDP Environment France index was launched, making it the first index globally to base its selection on how companies perform across not just climate change, but water security and deforestation metrics too.
Tim: How accurate is reporting? Are we at a point where company emissions data is useful for sector level comparisons?
Paul: Reporting methodologies are built on similar tools and reflect guidance from globally accepted protocols. There is also an increasing level of third-party verification on the emissions reported by companies. So, where you have enough large players at the sector level reporting with verified data, sector comparisons are possible.
Over 7,000 companies reported through CDP in 2018 and this provides a comprehensive dataset for comparison. For each of those companies, a complete, verified dataset is important, but it isn’t going to be immediately attainable, and the process of collecting and improving data is itself valuable.
When companies start disclosing through CDP, we tend to find that their reported emissions actually increase year-on-year at first, because they are improving the scope and quality of their data collection. This is a valuable process, as companies start to identify the low hanging fruit of energy efficiency. Of course, once a company has disclosed for a number of years and has a system in place, it is important to get the data verified. External verification demonstrates that the information disclosed is robust while providing an external perspective which can challenge assumptions and help companies improve.
With that being said, we still have a long way to go on transparency in some areas. As is evidenced in CDP’s work, scope 3 emissions reporting is still relatively low, and represents a big part of the emissions profile of some companies – especially in sectors like retail, hospitality and finance, where their direct emissions are relatively low but significant emissions come from what they buy, sell and throw away, or the investments they make. With the Reuters upcoming report showing a shortfall in the quality of emissions reporting by the world’s most carbon-intensive companies, it is clear that more work needs to be done here.
Tim: Given the cost and uncertainties of collecting data and reporting it publicly, some say firms should spend their resources reducing energy or resource consumption and emissions will take care of themselves- what do you think?
Paul: All firms are on a journey when it comes to emissions reduction and they can only do that effectively with data and disclosure. The first part of this journey often starts with reducing energy consumption as it is easy to measure and has a clear cost benefit.
Companies can and do set internal targets, which have the benefit of reducing costs and emissions. And while those steps are very important, they are no longer sufficient for a carbon intensive company to harvest the benefits of leadership. A company can set a target by itself, but it cannot stay on track and be accountable without communication, feedback and engagement with its investors, regulators, customers and other stakeholders. This transparency builds trust and accountability.
Over the last three years we have seen a new norm begin to emerge on target setting amongst leading companies, with around 500 companies setting or committing to set a science-based target within two years.
For companies themselves, the process of disclosure builds up a picture of what progress is being made, enables better peer-to-peer benchmarking and allows them to track which actions have had the greatest impact, so they can meet their targets efficiently. This saves money and time, and can also unlock opportunities. For example, if they look at the data and find most of their emissions are in the use of their products, then efficiency savings in their buildings may not be the best place to focus. Instead, they may want to focus more on product innovation.
Crucially, the 2018 IPCC report tells us that we need wholescale transformation of the global economy to halve emissions by 2030 and reach net-zero by mid-century. This means transforming business models, not just tweaking efficiency savings.
Tim: How real is the regulatory requirement to report? How important is it to our progress?
Paul: Regulatory requirements to disclose are increasing but they are still not real enough in many jurisdictions. At a minimum, we need to mandate reporting on a global basis from the companies that represent a significant portion of global emissions. The current rates of transparency from these firms make it clear we are not where we need to be yet.
That said, where we do see regulation, we also do tend to see much higher rates of transparency. Europe is a good example of this and we now see China developing an ESG disclosure directive, which is a significant development.
Part of the challenge is how quickly this regulatory wave will progress across the rest of the world. From what we see, it is not coming quickly enough for the speed of transition we need.
A welcome boost to the mainstreaming of corporate transparency on environmental risk comes from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), with the recommendations now endorsed by 513 companies and rising. The fact that financial heavyweights like Mark Carney are leading the TCFD is shifting the dialogue on environmental disclosure, moving it from the CSR departments into the Boardroom.
Of course, regulation will be necessary in many cases, but it is not sufficient as a tool in and of itself to accelerate our progress on this existential challenge. We need other levers – particularly investor engagement and leadership from the CEOs of high-emitting companies, which will position them and their value chains for business success in the unprecedented times ahead.