How CDP Drives Corporate Climate Disclosure Flashcards
Paul Dickinson, Founder Chair, CDP, shares how CDP works with investors to drive companies toward greater transparency by disclosing carbon emissions and other environmental indicators. He talks about how CDP is evolving in the face of new disclosure regulation, corporate disclosure trends, including expanding CDP’s reach to include water and forestry.
CDP that was originally called the Carbon Disclosure Project. We got a grant in January 2001, and that’s when this concept we’d been working on actually became real.
The concept of CDP is to work with investors, to get them to ask companies, in which they’re investing, to disclose how they’re thinking about climate change as risks and opportunities, what their actual emissions are, what targets they have and so on. Why did you go through the investor vehicle as opposed to working with a consumer movement or with NGO movement?
Aug 2022
10/03/24
It was very important for us to be able to achieve absolutely gigantic global scale. Now, we couldn’t do that by working with companies like saying to a company, “Hi, we want to work with you.” We actually needed a process that could scale globally. What absolutely defines the global business system is the annual reporting of financial accounts each year. Like in the US, you report them to the EDGAR Database, managed by the SEC. And that data decides what stocks are rising, which stocks are falling in value, how you can access capital in the markets, who’s paying great dividends, who’s got huge growth potential. So our major insight was that corporations should be filing climate change accounts exactly as they file financial accounts.
But why is anyone going to do what we say, right? What authority have we got? So what we recognized was that we could start a not-for-profit organization. And we could represent the authority of investors. And we use the word “authority” inside CDP, because actually we represent basically two authorities now. The authority of institutional investors, and more recently, we’ve been representing the authority of purchasing organizations.
When we’re representing investors, the first line of the letter went to the chair of the board of the biggest companies in the world, originally 500. Now many, many more. But we started with the 500 biggest companies in the world. The first line of the letters said in 2002, when we first sent it, “As investors with 4 trillion US dollars of assets, we require you to provide this information.” And we listed the 35 investors. Fast forward to this year. And the first line of the letter said, “As investors with $130 trillion of assets, we require you to provide this information.” There was 650 investors this year. But either way it’s quite correct the corporations should be reporting their greenhouse gas emission, their strategy on climate change into a public interest organization, in this case, CDP. And then we make that available to the market through things like our website, cdp.net, go and have a look yourself, download the response from McDonald’s or Coca-Cola or Toshiba, whatever you want. But also most importantly, we sell that data to the Bloomberg network. We sell it to MSCI, to Standard and Poor’s. It’s inside every environmental product.
I was intrigued because of the companies that CDP was approaching at the time. Roughly half responded and half didn’t. Perseverance works. So, I mean, I can think of a giant example of this, which is Walmart. They didn’t respond to us for the first couple of years, and then they responded to us and they started discovering amazing things like they were the largest purchase of electricity in the US. And they weren’t negotiating on their electricity prices. Or they discovered they had more emissions from their refrigerators than they did from their truck fleet. And it was actually an intern at Walmart, she had the idea of sharing this extraordinary insightful tool with the supply chain of Walmart, and that led to our whole supply chain activities.
I used to get a very polite letter from the management of the shipping company Maersk saying that they weren’t going to respond to CDP. And then finally, they did respond to CDP. 48 million tons of CO2. More than Denmark. The shipping company Maersk, the Danish shipping company’s emissions are bigger than Denmark. So I met the chief executive at an event and I said, “Look, thank you so much for responding.” And he got some bad press. And I said, “Look, I’m sorry that there was bad press.” And he said, “No, it was exactly the right thing to do to respond to CDP,” because if you actually look now, Maersk is one of the global leaders in terms of decarbonizing the shipping industry.
And we’ve got so much extraordinary political support. So for example, the Secretary General of the United Nations has written introductions to our reports. Both at the beginning of her leadership and at the end, Angela Merkel either wrote the introduction to our German report or spoke at our German events. The last two prime ministers of Japan have spoken at our Tokyo events. Politicians understand that we represent the creation of new norms in society around this absolutely pivotal issue of climate change. And it’s so exciting to be part of that unfolding process.
What is really disturbing is extreme weather. Just before this call, the BBC is warning us that it could be 40 degrees in London. We’ve never had more than 37 degrees in the history of measuring the weather. And of course, this is now going on all over the world. California burns, people drown in their basements in Brooklyn and trains in China. All of that drives us towards focusing on the corporate involvement in this critical issue.
CDP as doing is driving actual measurement, because you have to measure before you can disclose. And so if a company fails to disclose, it might be they’ve got the data and just decide not to reveal it. But as many times I think it’s just, they don’t have the data yet.
Which emissions do you want to focus on? Scope 1, the onsite operations. Scope 2, the purchase of electricity. Or scope 3, everything else in the supply chain upstream and downstream?
One of the things that made CDP possible was pioneering work before we began by the World Resource Institute and the World Business Council for Sustainable Development to develop the GHG protocol. And this scope 1, 2, 3 protocol is absolute genius. Scope one, the fossil fuels you purchase. By the way, that’s in your audited accounts already because you’ve got purchase invoices for it. Your use of electricity. Once again, in your audited accounts, you got purchase invoices for that. And then scope three, the wild west, everything else.
I’m imagining companies start with scope 2. That’s probably the easiest because that’s purchased electricity. You just need to know grid factor to multiply by your kilowatt hours consumed. And then scope 1, not that much harder either. And then eventually they start plucking away at elements of scope 3, the everything else bucket.
One of the easy ones on scope 3 to get your head around is your supply chain emissions. We have 250 major companies, on which we gather data from their supply chains. I was giving a talk at one of our launch events and I said, “Who pays your supplier’s energy costs? You do.” So it’s perfectly legitimate for a company to require data on the greenhouse gas emissions from suppliers.
The EU is going forward with major taxation and regulation of greenhouse gas emissions, feeling very comfortable with carbon border tax adjustments, to protect our industry from paying a carbon penalty. So we’re going to be putting those taxes on US or Chinese goods that have no comparable levy on greenhouse gas emissions. The US is idiosyncratic. It does nothing for a long time, and then it hopes it can follow fast. But the rest of the world is locked in responding to climate change at significant scale. Climate change is like the internet. It is getting bigger every year. It is never going away. And I hope and believe US industry will catch up. But it’s actually the government that decides if industry’s got a chance.
That could easily have a spillover effect to countries that don’t regulate, whether that be China or the US or Brazil.
How do these border adjustments work? Let’s say there’s some reasonably carbon-intensive traded product. Say glass or something like that. European glass manufacturers, which have got to pay a pretty big cost for their greenhouse gas emissions from the energy used, will be protected from imports of glass from, for example, the USA, by having a border tax adjustment put on. And that’s stopping the US glass makers who haven’t got this tax from undercutting EU production. Conversely, EU glass manufacturers who are selling to the US would not expect to receive any kind of penalty when exporting to the US.
If an American glass company is selling glass into the EU. It has to pay some proxy for what the carbon tax of a domestic producer in the EU has to pay. And what’s interesting is that the EU collects that money. If the US had a carbon tax, then the US government would be collecting that money.
So a US company will have to think about whether they can compete on the basis of taxed carbon in the EU. And the big policy question for US policy makers is, who should collect that money? Should we collect it, or should we donate that to the EU government? And it’ll be interesting to see what that does to the political dynamics in the US. And it kind of answers itself. By the way, glass is probably a terrible example to choose, so let’s choose aluminum, which is the perfect one. Very high energy, very transportable, not heavy, super expensive.
I just want to say something about Indian situation. So it has been discussed that India, for example, is a developing economy and it’s pretty rich for the EU to be taxing aluminum coming from India and then keeping that tax. I have heard it said that EU policy makers may be thinking of taxing that aluminum at the point of entry, but then hypothecating all of that tax back to India as grants to assist them in decarbonizing the Indian grid. So to avoid penalizing emerging markets, rich countries may well see those border taxes going back to the country to decarbonize.
We had a very deep relationship with PWC for many years and we said to them, “Look, it should be possible to move from scoring the completeness of disclosure to scoring performance.” We do the best we can to provide a performance score. But I think the most important thing we do is we give data to the market. So a whole bunch of other people can provide performance scores, and then MSCI, S&P will put these data into their credit ratings. The CDP data feeds into the capital markets, and the capital markets can best come to collective judgments of these emerging investment themes. We know about renewable energy, we know about electric vehicles, but there are huge new sectors like food.
We can’t be frivolous and change the CDP questionnaire every year. When you’ve got 13,000 corporations reporting to you, you have to be very careful. But at the same time, I think the great power we have is to be able to iterate towards better and better supply of data as the market increases its sophistication. As we get to understand what the market really wants, we can then feed that into CDP. So we’re constantly moving towards where we need to go.
So you ask directly companies to answer the questionnaire on behalf of investors. And you launched a supply chain project where you’re now similar questionnaire, but asking on behalf of their large buyers. And then you’re also doing the city program.
The only thing that ever constrains us is money. Our income has grown, but it’s still pretty small, we have about US$50 million. We have to use that money to support about more than 500 people out of 8 offices in the most expensive cities in the world. Plus, we have to pay for all of the IT. About half our money comes in philanthropy, and half of our money comes from corporations and investors selling them services and data. But I mean, shout out to the billionaires. If we had some serious money dropped on us, we could do all kinds of things. We’ve built the machine. The problem is that what we deliver is really identical to the utility, for example, by the SEC through the EDGAR database. Or to the UK government through what’s called Company’s House.
You’ve diversified into water. You’re collecting data on water, collecting data on forests. So if you had this extra hundreds of millions of pounds, what would you do?
The story of both water and forests are interesting. I mean, we wanted to do them a long time ago. It was the NBIM, the Norwegian government’s Sovereign Wealth Fund, that funded us to do water originally and continues to do so. Water security as we call it. And on forests there’s an NGO called the Global Canopy Project that kept asking us to do forests. We said, “Look, we simply can’t. But you can license our stuff for free. And if you can build something up big enough, then we can take it over.” And that’s what they did.
You don’t have to be a rocket scientist to know that we have significant problems with biodiversity, oceans, plastic, waste. Actually, as a key sector, potentially, the outputs are turning into the inputs. So we have well-articulated plans to expand into the sectors. That’s the first place the hundred million would go. Further down the line, there are actually S issues, social issues, so to say. There is a kind of social CDP called the Workforce Disclosure Initiative, which is run out of an NGO in the UK called ShareAction. They have 173 big companies reporting through them with 12.5 million workers. That data’s freely available.
There’s a lot of talk of the SEC’s going to mandate some kind of basic disclosure, the EU may well do the same. We, of course, are in a position to remove questions from the CDP questionnaire when they become legal requirements in annual reports. So it’s a kind of a process whereby CDP provides. We provide a massive regulatory impact assessment whereby governments can then have the confidence to regulate. And we will then move on to the next area of data in a constant dialogue with the purchasing organizations and the investors that provide the authority for the CDP system.
And there’s also the evolution of the TCFD in terms of standard setting. You just mentioned you’ll move on, if those become standard, then what will you do beyond the standards as opposed to replicating the standards? I’ll give you an update on 4 things: TCFD, the ISSB, the SEC and the EU.
On the TCFD, the genius of Mark Carney, governor of the Bank of England at the time was to recognize that we were doing a great job. And in his first major speech on this, where he talked about the Tragedy of the Horizons, he referenced what was then 5,000 companies reported through CDP, but he was like, “Come on, government. This is our job.” And of course, he’s right. When the TCFD was formed, CDP was immediately supportive of it, part of it. We put our Climate Disclosure Standards Board, which was our accounting body, fully behind TCFD. We supported them every single way we could. When their findings came out, when the TCFD gave its guidance in 2018, we redesigned the whole of CDP to ensure that we’d included TCFD. So essentially, all those 13,000 corporations that are reporting to CDP are essentially providing TCFD reports.
Outside of the US, the accounting status for most countries in the world are set by something called the IFRS Foundation, or the International Financial Reporting Standards body. And they produce international accounting standards. And what’s amazing about those standards is they’re in the legislation of many countries already. And you can change those accounting standards and it just changes the law in pretty much every country outside of the US. So inside the IFRS foundation, a new body has been formed called the International Sustainability Standards Board, the ISSB. And of course, CDP loves that.
And we showed how much we love it because we transferred our climate disclosure standards board into the ISSB, so they would have all of our experience. We launched that with the World Economic Forum in 2007, and we transferred it into the IFRS in 2021. So we’re very excited about the development in the ISSB. And as soon as they’ve got new standards, CDP wants to introduce them immediately so we can get pretty much most companies in the world reporting to them, most big companies. So then they feel more comfortable to make those into standards.
Just to say a word about the EU and the SEC. They’re both coming forward with strong reporting standards. We’re very excited about that. We support it 100%. There can be quite a bit of pushback in the EU from industry. It can be that the SEC get kind of whacked by, “No, you don’t.” So we are very hopeful that those regulations will be coming in soon, but it can take longer than you might think.
We’re in a situation whereby we’re representing the majority of the capital markets, $130 trillion. All of those pension funds and all the big asset managers, we represent them all. We’ve got like 80% of the S&P 500 reporting on climate change into our databases. And that’s been going on for years. Some of them have been reporting literally for 20 years.
So which part of this does the SEC not get? I mean, it’s true that there’s a lot of money in US politics. And let’s not forget that since the Citizens Reunited ruling in 2010, there is unlimited money in US politics. So corporations can spend without limit to essentially stop the regulatory process. And of course that’s happening. So unfortunately, we’ll just carry on representing a massive consensus of everybody getting on with real life, whilst unfortunately the US Congress tries to work out in the US Securities Exchange Commission and the executive branch, try and work out how to deal with the fact that the biggest threat to national security is actually lobbying by the fossil fuel industry.
We are starting to see shareholder resolutions more and more and more that are increasingly assertive regarding this. If you’re really getting climate change wrong, the name on everyone’s lips was Engine No. 1. Tiny little hedge fund who made such a good presentation they got three directors on the ExxonMobil board. That kind of intervention of the active owner, I think, is the probably more relevant route to the achievement of disclosures and the change in corporate behavior than necessarily saying, “Oh, we’re going to sell the shares. And the cost of capital’s going to fall so much that you’re going to bankrupt.” That’s that’s not very fast or effective route.
We need to think about the relationships between corporate strategy, the social sector, and government.
The problem with the Enlightenment is that we learn more and more about less and less, and now we know everything about nothing, if you see what I mean. We need to grasp these complex interconnected issues. We were producing investor research a while ago, and you get reports on electric utilities, or you get reports on the auto industry, or you get reports on the oil and gas industry. If you want to understand climate change, you need a combined report on all three, because the car industry, the electric utilities and the oil and gas industry are affecting each other with regard to the change from gasoline to electric on vehicles. It’s that kind of integrated thinking that we need. I think the universities, your great institution, deliver this and we need it desperately.
The key here is to understand that it’s not that the environment is separate to social, but they’re actually the same thing. There’s a famous quote by someone called Gus Speth who founded NRDC and WRI and he said, “Thirty years ago, I thought our problems were biodiversity loss, climate change, desertification,” or whatever. I haven’t got quote exactly right. And he said, “But with good science, we’d be able to solve these problems.” And he said, “I was wrong.” He said, “Thirty years later, what I’ve realized is our problems are greed, selfishness, and apathy. And to solve those problems, we need a cultural and spiritual transformation.” And he said, “We scientists don’t know how to do that.”
