ESG industry view – CDP
Emily Kreps is global director of capital markets at CDP
THE IMPORTANCE OF COMPARABLE DATA IN FIGHTING CLIMATE CHANGE
The year 2020 delivered many unprece- dented challenges. However, for the big- gest systemic challenge facing the world – climate change – 2020 ended on a more positive note than it started. In November, chancellor Rishi Sunak announced that by 2025 Britain would become the first country in the world to make climate risk assessments mandatory for listed companies, large private compa- nies, pension schemes, insurance compa- nies and banks, in line with the Taskforce on Climate-related Financial Disclosures – a reporting framework. The UK is intro- ducing the requirements as part of a strat- egy to bolster green financial services, and it will encourage other countries to follow suit ahead of the UN climate change conference that it will host in Glasgow this year. Investors have become increasingly con- cerned about the financial risks of climate change to their portfolios, arguing that many companies are failing to fully out- line the risks they face from global warm- ing. A key goal of the UK’s incoming requirements is to provide investors more information about which companies are prepared for the shift to a low-carbon economy, and which are not. As Larry Fink, head of BlackRock, told chief executives last year: “Climate risk is investment risk”. Standardised disclosure of climate risk would mean investors can allocate capital to the best performers,
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and companies can benchmark their cli- mate performance against peers. The result is a “virtuous cycle” in which capital markets become a powerful vehicle driv- ing improved climate outcomes. However, given the scale of the climate crisis, is corporate disclosure enough? It is, simple to label disclosure as a negligi- ble rather than a transformational solu- tion. On their own, disclosure rules may do little to cut emissions, or to help achieve the UK’s goal of net zero emis- sions by 2050. However, we cannot man- age what we do not measure, and so dis- closure must be the natural starting point of any effective corporate environmental action. Transparency is the engine of change. We see that the more companies disclose their environmental data, the more likely they are to take action. Of the suppliers responding to CDP, 38% have emission reduction targets in place for the first time. By their third year of disclosure, some 69% of companies have set a target. Similarly, 28% of first-time water disclos- ers assess the business growth implica- tions of water security, rising to 40% by year three of disclosure.
Another point of concern is that the new rules will not require firms to disclose the emissions generated by the products they sell, or from their supply chain (so-called Scope Three emissions). This is particu- larly concerning for high-impact sectors like financial services that also hold the key to driving huge amounts of capital into low carbon technology and sustaina- ble business. CDP data indicates that if all financial services companies disclosed on the indirect emissions that they finance in the wider economy, the sector’s emissions would be 69 times higher than the cur- rent known level. Of almost 300 financial services companies that disclosed through CDP in 2019, less than a fifth reported a figure for the emissions they finance through their investments. This presents a vital data gap, which needs closer atten- tion. Some work on this front is already
underway, including a recent call to action by COP president, Alok Sharma, and for- mer Bank of England governor Mark Car- ney to financial institutions ahead of COP to set targets and action plans to reduce emissions and build resilience. The lack of historic disclosure regulation, and the very broad terms of the TCFD has meant that, to date, climate-risk reporting across many companies has lacked con- sistency, comparability and reliability – impeding the ability of markets to allocate resources effectively. Standardised disclo- sure is required for effective decision making by investors, purchasers and the wider market, because it is objective, comparable data in the same format that does not require additional analysis to normalise different reporting metrics and make comparisons basis.
on a like-for-like
Although the new UK rules on disclosure may not be a panacea, they are an essen- tial step. The transparent sharing of relia- ble data is vital to managing global chal- lenges effectively. Consistent, comparable and reliable information on how compa- nies manage risks will not only improve capital market efficiency, and unlock sus- tainable, inclusive economic growth. It can help avert a climate catastrophe.
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