Harmonizing corporate disclosure on climate change

In this article, KT Michaelson, Director of Analytics, discusses how companies can lead on climate disclosure in 10-Ks with information already reported in a CDP response, and additional overlap with Global Reporting Initiative (GRI) reports. This article first appeared in Compliance Week.

Learn more about CDP from our other resources in this series:

Climate change is reaching a new altitude in the public’s consciousness. Extreme weather such as last year’s Hurricane Patricia, the strongest hurricane ever measured in the Western Hemisphere, the ongoing California drought, or the recent Winter Storm Jonas, while not individually attributable to climatic shifts, has demonstrated the potential consequences of a changing climate. To put numbers to such effects, a project co-chaired by former New York mayor Michael Bloomberg found that, within the next 25 years, temperature changes will increase energy costs up to $12 billion per year, hurricanes and storms will cost $35 billion per year, and crop yields in the Midwest and South will decrease by more than 10 percent.

Right now, business has a significant opportunity to lead on the disclosure of their positions on climate change, and actions to mitigate or adapt. Companies can seize the moment to bolster communication around the significance of the issue to their business and bring consistency to their messaging by utilizing the CDP questionnaire, which many companies already prepare each year.

The non-profit organization Ceres found that 41 percent of S&P 500 companies failed to mention climate change in their 2013 Form 10-K filings, while a majority of those that mentioned climate change did so only briefly and did not quantify impacts or risks. While companies’ reluctance to gather or publish such data may be understandable due to costs or fear of transparency, nearly 70 percent of the S&P 500 have already collected and disclosed such information in their CDP responses.

How your CDP disclosure can serve double-duty
Responses to the CDP Climate Change questionnaire include robust discussions of climate change strategy, risks, and opportunities. These disclosures provide insight into a company’s management approach and business strategy. Thus, they are typically a stronger demonstration of a company’s position and understanding of the issue than only the disclosure of metrics, such as annual greenhouse gas emissions.

The reach of a CDP disclosure is currently limited by the narrow audience that tends to dig into them. Therefore, interesting stories can be missed that could create richer sustainability reports and 10-Ks, both of which are more widely distributed and available to a broader set of readers. A company need only summarize a few relevant aspects and place them in their sustainability report and 10-K to multiply the value of this already existing CDP information.

The Sustainability Accounting Standards Board (SASB), which advocates for improved sustainability disclosure in SEC filings, notes that investors and companies alike realize multiple benefits from a high-level summary of the above topics outside of a CDP response. Advantages include increasing operational performance, awareness and transparency of risk, and ensuring long-term value creation.

The following CDP inquiries, if addressed in a sustainability report and 10-K filing at an abstracted level, will give stakeholders an overview of your approach to the business challenges and opportunities that climate change poses:

Governance:

  • Highest level of direct responsibility for climate change. (CC1.1)
  • Incentives for the management of climate change issues. (CC1.2)

Strategy:

  • Risk management procedures with regard to climate change. (CC2.1)
  • How climate change is integrated into business strategy. (CC2.2)
  • Company use of an internal price of carbon. (CC2.2c)

Public policy:

  • Processes in place to ensure all activities that influence policy are consistent with your climate change strategy? (CC2.3h)
  • Support by your organization’s board of directors for an international agreement between governments on climate change, which seeks to limit global temperature rise to under two degree Celsius. (CC2.4)

Emission reduction:

  • What methods do you use to drive investment in emissions reduction activities? (CC3.3c)

Risks and opportunities:

  • Have you identified any inherent climate change risks and opportunities that have the potential to generate a substantive change in your business operations, revenue or expenditure? (CC5.1 and CC6.1)

CDP disclosures and GRI G4 reports
Those using the Global Reporting Initiative’s (GRI) G4 guidelines will find some overlap with CDP disclosures, which can help to build robust responses for GRI reports. For example, CDP questions on climate risks and opportunities, CC5.1 and CC6.1, can be useful for responding to G4-EC2, the financial implications for your organization due to climate change. The GRI and CDP linkage document provides further guidance on how your CDP response can provide double-duty for a GRI G4 report.

Climate change is a trending and substantial issue, and a company will need to scrutinize its impact before others do and take control of its climate story. By harmonizing reporting around climate change, a company communicates the significance of the issue and realizes the value of improved disclosure. Harmonization signifies an effort not merely to react to regulations, such as the recent E.U. directive on reporting social and environmental issues, but to proactively manage pertinent concerns. Once established as an issue of concern in reports, climate matters gain a higher profile for strategic decision-making, measurement, and management, which will provide greater substance for subsequent disclosures and spur internal action.

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