Major companies like Google, Apple, Levi Strauss and Morgan Stanley see climate risk as part of their core business and this helps explains why corporate attention is now focused not on whether to manage climate risk, but how to do it. On the launch of the TCFD recommendations Mark Carney, Governor of the Bank of England talked about companies and the need to be asking why they are not affected? He went on to discuss understanding and engaging with environmental risk and having a disciplined [and consistent] process. Indeed investors will be judging companies on this as part of their wider strategy and focus.
So how are you anticipating environmental risk? What is your process? What metrics and targets will companies be expected to report?
The TCFD recommends that companies should disclose the metrics and targets they are using to assess their corporate progress in managing climate-related risks and opportunities. In practice, the TCFD argues that this will mean reporting on the following areas:
- Disclosing the indicators used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management processes.
- Disclosing Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks.
- Describing the targets or goals used by the organisation to manage climate-related risks and opportunities and performance against these targets.
At recent workshops held by CDP the feedback we heard most often is that it is the challenge of finding clear, measurable targets that can be easily integrated into a company’s mainstream reporting that seems the most overwhelming. However, there are several popular initiatives that can help companies find the right KPIs for them. A good example of this is the science-based targets (SBT) initiative. SBTs are a way to set meaningful reduction programmes that align with the Paris Agreement and therefore also ensure that your company’s efforts fit into the bigger picture of climate change mitigation. SBTs also enable companies to better understand where they are vis-a-vis their competitors.
In the power sector we have seen industry initiatives like Carbon Pricing Corridors emerge. This initiative responds to the fact that current carbon-based price signals in the wider economy are too low to attract the low-carbon investments needed, and brings together industry experts to shape realistic prognoses of the range of investment-grade carbon prices needed to decarbonise electricity generation to align with the Paris Agreement.
Some of the most common metrics used by companies that report to CDP that can help form corporate environmental targets include:
- Total capex in low carbon investment: Providing a relatively easy-to-quantify way to measure progress towards decarbonisation.
- Operational efficiency measures: Improvements in areas such as energy efficiency and water use provide a material and quantifiable way to measure progress.
- Percentage of production in water stressed areas: An important target for companies in water-risk areas, especially in sectors with high-water use such as extractives, apparel or beverages.
What are the benefits of working towards these targets?
The metrics and targets that the TCFD recommends all tend to link closely to clear business benefits including cost savings, better investor and customer relations and a healthier working environment. Most of all, they are about showing how a company is futureproofing its growth ahead of likely future policies and regulations to limit GHG emissions. All this leads to better overall performance; companies on CDP's 'Climate A List' outperformed the market by 6% over four years.
Companies that start to introduce and report on these kinds of metrics will take a first mover advantage. Every company is different, and therefore not everyone will agree on the timing or scale of what should be reported on in this area. However, the importance of assessing environmental risk is expected to increase, and getting disclosure rules right will allow both individual companies and the market as a whole to price risks more accurately and build a more sustainable global economy.
Reimagine with us:
As the founder and driver of global climate change disclosure, we understand the marketplace is changing rapidly. At CDP, we want to ensure that we continue to ask the right questions so that the data we collect and analyze is meaningful for companies in understanding environmental risks and opportunities. As part of our Reimagining disclosure initiative we have now launched the second phase of our consultation on our sector-based questionnaires. We invite you to provide your feedback to shape and evolve our future questionnaires here.
We aim to optimize the reporting process for companies, provide investors and stakeholders with the most relevant information, and focus on high-impact areas for investment decision-making. Your feedback is important as we continue to drive innovation for the future of disclosure in a well-below 2-degree world. Please continue to Reimagine Disclosure with us.
If you have any questions or want to discuss what this means for you, please contact [email protected].
For more information about the Reimagining Disclosure Initiative.