If the recent net-zero pledges made by countries, including China and the US administration are achieved, analysts predict that this could limit global temperature rise to around 2.1 degrees Celsius by the end of the century. These levels are around a degree lower than the trajectory of current policies and could bring the world within striking distance of the ‘below 1.5 degrees Celsius target set out in the Paris Agreement.
However, the road ahead is long and fraught with challenges. Figures recently released from Brazil’s National Institute for Space Research (INPE) show that deforestation in one of the world’s largest carbon sinks has increased by 9.5% over the past year, with 11,088km2 of Amazonian forest being destroyed.
Despite some encouraging developments, greater action is needed if the world is to avoid the worst effects of catastrophic climate change. The capital markets play a critical role in enabling the real economy to accelerate ambition and action.
Transparency is key to action
Many of the world’s largest investors have already recognized climate change as a defining factor in companies’ long-term prospects for success. Increasingly, investors are looking to understand how to position themselves for this fundamental shift in finance and to better engage with their investee companies on managing climate-related risks and opportunities. Yet you cannot manage what you do not measure, so, measuring and disclosing environmental impact must be the first crucial steps in a company’s environmental action.
CDP runs the global environmental reporting system and annually requests over 7,000 of the world’s largest companies to disclose on their impact and management of climate change, deforestation, and water security. Every year, we also invite investors to engage companies that were asked to disclose but failed to do so. We believe that hearing directly from investors about the demand for enhanced environmental disclosure in a standardized, comparable, TCFD-aligned format encourages companies to measure, disclose and manage their environmental impact.
Since beginning the CDP Non-Disclosure Campaign in 2017, we have seen a 25% year-on-year rise in both the number of investors participating and the number of companies engaged. In 2020, a total of 108 investors representing US$12 trillion in assets from 24 countries signed up to our engagement campaign.
Impact of investor engagement
Of the 1,025 companies, representing US$21 trillion in market capitalization and 5 billion tCO2e in emissions, that were engaged by investors in 2020, 206 disclosed data on their impact across at least one of three areas: climate change, deforestation, and water security. These companies represent US$2.7 trillion in market capitalization (roughly 3% of global market cap) and include names such as Enbridge, Nestlé, and Pernod Ricard. The disclosing companies have combined scope 1 and 2 emissions of 670 million tCO2e – roughly 6% of the MSCI ACWI or almost as much as Germany’s emissions from fuel combustion.
The campaign demonstrates that companies are more than twice as likely to disclose data on their environmental impact when directly engaged by investors to do so. Fossil Fuel sector companies engaged were four times more likely to disclose than their counterparts, while companies in the Biotech & Pharmaceutical and Services industries were almost three times as likely.
Compared to 2019, there was a 23% rise in the number of investors participating in the campaign and a 60% rise in the number of companies engaged.
While we can see that investor engagement has a significant impact on improving corporate environmental transparency and disclosure, there is still a long way to go. Last year, over 4,300 companies failed to disclose to at least one of CDP’s investor requests on climate change, deforestation, or water security.
Importance of disclosure
In addition to finding themselves, and their shareholders, increasingly exposed to risks, these laggard companies are losing ground to their peers who use CDP to further their engagement with investors, secure their transition pathway and identify new business opportunities.
With mandatory reporting requirements on the horizon in many markets, non-disclosing companies will find themselves on the backfoot in both domestic and global capital markets. Investors also are facing increased pressure for their own disclosuresand will require more granular data from their investee companies to do so.
The importance of investor engagement to drive disclosure cannot be overstated. As the growth of the Non-Disclosure Campaign shows, investors require decisive data that is consistent, comparable, and comprehensive.
To make this possible, they expect companies to engage with TCFD-aligned standards on environmental disclosure and reporting. With business resilience and adaptation to unexpected, systemic risks exposed by the recent public health crisis, the tide is rapidly turning against companies ignoring investor demands.
This year’s Non-Disclosure Campaign is now open to CDP investor signatories. For more information, or to get involved, please email [email protected].