Environmental Audit CommitteeWritten evidence submitted by CDP
Introduction
CDP is an international, not-for-profit organisation providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information. CDP works with the world’s largest investors to motivate companies to disclose their impacts on the environment and natural resources, and take action to reduce them.
CDP welcomes this opportunity to submit written evidence to the Environmental Audit Committee regarding the issue of Green Finance. With over 4,100 companies in some 60 countries and 110 cities around the world reporting annually, CDP now holds the largest global collection of primary climate change, water and forest-risk information and puts these insights at the heart of strategic business, investment and policy decisions. Disclosure data is made available for use by a wide audience including institutional investors, corporations, policymakers and their advisors, public sector organisations, government bodies, academics and the public. CDP helps investors, companies and governments to minimise risks and identify the cost savings and financial opportunities created by measuring, managing and reducing impacts on the environment and natural resources.
CDP acts on behalf of 722 institutional investors, holding US$87 trillion in assets and 65 purchasing organisations such as Dell, PepsiCo and Walmart. It collects information on three themes: climate change, water and deforestation.
What are the main drivers behind institutional investors’ decisions on the type of investments they include in their portfolios? Where they contemplate supporting energy or environmental projects, what relative weights do they give to questions of possible financial return, environmental/carbon impact, energy security, or other factors?
CDP collects environmental data for 722 global institutional investors from the worlds largest stock listed companies. We call these investors our signatories. We liaise with them on a regular basis with the aim of understanding the needs that they have when they analyse the data that we provide. We need to know what they find valuable, material and what they are able to use for their assessment of businesses for long term sustainable investment. The key drivers that are prevalent in these discussions are risk and return.
AEGON, like many other long-term investors, is exploring opportunities to invest more in renewable energy or more energy efficient projects. For this kind of investment to be viable, investors need a supportive regulatory environment—for example, solvency requirements that do not unjustifiably penalise long-term investments and stable tax incentives that do not change when political circumstances change. It’s clear to me that, in the coming years, investors will have to work more closely than ever with governments and regulators. Public-private partnerships, such as the Green Investment Bank currently being proposed in the Netherlands could be one of the solutions.—Alex Wynaendts, CEO AEGON
In our experience, the themes of risk and return will underpin any decision made. Because of this, CDP has collated a core group of active signatories to form our Carbon Action initiative. This initiative now comprises of 190 signatory investors, representing $18 trillion of assets under management. The aim of this group is to insert risk and return into the analysis of the environmental data that we provide them. The investors are requesting that the largest companies in the world undertake cost effective, value enhancing and energy efficiency measures to help improve the strategic risk management for investors and companies. A special report has been written based on the findings, and acknowledges the returns that investors can see from businesses investing in green projects. The report can be found on the CDP website https://www.cdproject.net/CDPResults/CDP-Carbon-Action-Report-2012.pdf
Our analysis of reported investments in energy efficiency and carbon reduction projects demonstrates that carbon reduction activities are generating positive return on investment (ROI). The average ROI is 33%, equivalent to a payback period of three years. With 63% of projects exceeding 30% ROI and 88% of projects exceeding firm level return on invested capital (ROIC), companies that have yet to invest in carbon reductions are missing high return opportunities to create financial value for their investors—irrespective of the environmental benefits.
A substantial section of the CDP questionnaire also revolves around the risks and opportunities that climate change posses to a business. This represents the need our investor signatories have for robust risk and opportunity data as they seek to understand how regulation, physical effects and other climate based risks may affect the business in the short and long term. They are also seeking to understand whether the company is able to manage this risk effectively, and whether the investment of managing the risk exceeds the potential financial risk to the business.
Growing interest from our signatories shows that a trend is forming among institutional investors who are making sense of large quantities of evolving environmental and related data when choosing whether to finance companies or projects.
How can better information on the environmental impacts of investments and companies be provided to investors? What difference would such information make to investors in practice?
The CDP Process
CDP collates and disseminates standardised climate change, carbon, energy, water and forest information from more than 5,000 of the world’s largest listed companies. This vital environmental data is collected through annual questionnaires, sent on behalf of CDP’s signatory investors.
CDP currently run four programmes specifically associated with the interest of signatory investors. In addition to the CDP Carbon Action Initiative mentioned above, we run three disclosure projects relating specifically to companies’ greenhouse gas emissions, water usage and deforestation exposure.
The CDP Climate Change project is the largest collaboration of investors in the world and generates essential climate change information that helps drive capital flows to a low carbon economy. In 2013, 722 institutional investors with assets of US$87 trillion were signatories to Investor CDP. In 2012, over 4,000 companies in over 60 countries disclose their climate change mitigation and adaptation strategies through CDP.
CDP Water provides critical water-related data from the world’s largest corporations to inform the global market place on investment risk and commercial opportunity. In 2013, over 530 institutional investors representing US$57 trillion in assets were signatories to CDP Water Disclosure. In 2012, 191 of the largest companies in the world responded to the request.
CDP’s Forest Programme assists companies and their investors worldwide to understand and address their exposure to deforestation risks through their use of five agricultural commodities that are responsible for most deforestation—timber products, palm oil, soy, cattle products and biofuels. In 2013, the forests program acts on behalf of 184 signatory investors with more than US$ 13 trillion of assets, who wish to understand the operational, reputational and regulatory risks and opportunities, along with the value creation and erosion resulting from the exposure to deforestation within their portfolios.
All three programmes operate through analogous procedures: an annual questionnaire is sent to reporting companies, usually early in the year, who then have a number of months to collect the required data, and respond to CDP. The collected data is then sent to our global partners such as PwC, Deloitte and Accenture, who compile analytical reports based on either the programme or region. See an example Climate Change questionnaire here, and a final company response here (registration required).
A fundamental aspect of the CDP process is then in the publishing of these reports; All reports compiled through the CDP Climate Change, Water and Forests programmes are made publically available. These reports not only include evidence and insight into companies’ greenhouse gas emissions and water usage, but also their strategies for both managing the risks and exploiting the opportunities associated with climate change, water and deforestation. This gives investors access to a global source of year-on-year information that supports long-term objective analysis. CDP also use these data to compile an annual Global 500 report, analysing the carbon reduction activities and strategies of some of the world’s largest corporations for use by investors.
Transparency of this data throughout the global market place ensures the financial community has access to the best available corporate climate change information to help drive investment flows towards a low carbon and more sustainable economy.
The Climate Disclosure Standards Board
CDP provides the Secretariat to a global organisation, the Climate Disclosure Standards Board (CDSB) who have produced a Reporting Framework which adopts principles and requirements from financial and non-financial reporting to support companies reporting climate change-related risks and opportunities in their mainstream annual reports. CDSB’s work is designed to provide clarity, confidence and trust in information, and greater stability in financial markets.
“Integration of material climate change-related information into mainstream corporate reporting is an important step in helping investors understand the extent to which management of the issue is integrated into a company’s strategy and risk management and therefore the extent to which corporate value is being protected and enhanced in this respect. Hermes EOS therefore welcomes CDSB’s Climate Change Reporting Framework as a catalyst for increasing the focus on valuable corporate reporting on climate change.” Freddie Wolfe Corporate Engagement, Hermes Equity Ownership Services
In 2011 CDSB was commissioned by the UK Department for the Environment, Food and Rural Affairs (DEFRA) to investigate the way in which financial institutions take account of environmental considerations in making investment decisions. The report formed a key piece of evidence in DEFRA’s research into the contribution that greenhouse gas reporting makes to the UK achieving its climate change objectives.
The research covers various themes including:
Investors’ motivations, intended and actual behaviour in relation to environmental investing.
The relationship between investment “style”, “function” and environmental investing.
The relative importance for investors of different sources of information about climate change and what types of information they regard as important.
Investors’ perceptions of the quality of climate change related information and whether there is a correlation between quality and use of information.
The way in which geographic focus influences investors’ attitudes towards and use of climate change related information.
Investors’ processes in using climate change-related information including decision-making approaches and evaluation criteria.
The full report and summary can be downloaded from www.cdsb.net/get-involved/cdsb-investor-engagement-program.
New Information Technology
Technology has a strong role to play in providing markets with accurate, consistent information that is easy to analyse alongside financial data. The international financial reporting community is transitioning to digital reporting using the eXtensible Business Reporting Language (XBRL). XBRL is an electronic method of reporting that tags data so that it can be used consistently, improving analysis and informing capital allocation decisions. The aforementioned tags are structured in taxonomies, which provide the dictionary to reporting on a specific subject. Once information is tagged in XBRL, it can be submitted via the internet and shared with a wide range of stakeholders in whatever way is most appropriate to them. Technologies such as XBRL enable not only the connectivity and comparability of information within a report, but also between other reports across corporations and years.
In the UK XBRL is already mandated for Corporation Tax filing and around 60% of UK incorporated companies reporting voluntarily in XBRL to Companies House. Even though XBRL was only developed less than a decade ago, a recent ACCA survey shows that already 45% of investors use reports in this format and an additional 40% say that they are not yet using XBRL but would find it valuable to do so. It is important that the method chosen for the distribution of climate change information is the same as that for financial reporting. CDP and CDSB have therefore ensured that climate change reporting can be done through XBRL by creating the climate change reporting taxonomy. This method of reporting climate change has been created to help companies present data in the most accessible way and to provide a uniform and consistent way of reporting that results in free and open data for the market, government and society.
About CDP
CDP is an international, not-for-profit organisation providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information. CDP works with market forces, including 722 institutional investors with assets of US$87 trillion, to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them. CDP now holds the largest collection globally of primary climate change, water and forest risk commodities information and puts these insights at the heart of strategic business, investment and policy decisions. Please visit www.cdp.net or follow us @CDP to find out more.
CDP is a UK Registered Charity (no. 1122330).
About CDSB
The Climate Disclosure Standards Board, a CDP special project, was launched at the World Economic Forum in 2007. CDSB’s climate change reporting framework was released in 2010 and provides guidance for use by companies when making disclosures in, or linked to, their mainstream financial reports about the risks and opportunities that climate change presents to their business. CDSB’s framework is “standards ready” for adoption by regulators contemplating the introduction or development of climate change disclosure practices. In 2012 CDSB, in partnership with the OECD and UNCTAD, launched the consistency report which highlighted the need for a greater consistency of approach to the demand and supply of climate change-related information. For more information on CDSB visit www.cdsb.net or follow @CDSBglobal.
19 July 2013