The latest research shows that a record 13,000+ companies reported environmental data through CDP in 2021. Only 2%, or 200 companies, gained an A grade and nearly 17,000 worth $21 trillion are still failing to disclose. Is this a sign that calls for disclosure aren’t working, or an early signal of a global market shift?
This year, according to the latest figures from CDP, 14 pioneering companies – including L’Oréal, Unilever, HP and Lenzing AG – achieved a triple A for their performance on all three environmental themes in 2021, an increase on last year’s record of 10. There have been improvements in terms of companies recognising their dependencies on nature, with the number of companies on CDP’s Forests A List up from 16 to 24 while those on the Water A List grew from 106 to 118. What also stands out is the number of leading companies who are now disclosing according to science-based targets – 79% of A list companies have targets under the SBTi.
One of the biggest challenges for many corporations is understanding the extent to which they are outsourcing their emissions, and their impact. Tracking Scope 3 emissions is part of the A list approach and for many companies constitute the majority of emissions. Dexter Galvin, Global Director of Corporations & Supply Chains at CDP says that while there are different profiles in different sectors, its common to over 11 times direct emissions in the supply chain – in ICT and telecoms that can be up to 22 times direct emissions. He also highlighted the importance of water and commodity use in the supply chain and said that CDP will be expanding its work to cover more environmental issues. This will include land, oceans, biodiversity, resilience, waste and food.
There were overall improvements in emissions disclosure. In 2021, 509 companies improved their scores from a C or below in 2020 to a B in 2021, meaning they have advanced from merely disclosing and being aware of their environmental impact, to taking action to manage it. But they are only the tip of the iceberg.
There is rising demand for corporate environmental transparency as investors are increasingly committing to net zero targets. COP26 in Glasgow saw the Glasgow Financial Alliance for Net Zero (GFANZ) announce over 450 investors with $130 trillion under management had committed to net zero. Yet companies are still not responding to calls for action. More than 590 investors with over $110 trillion in assets and 200 major buyers with $5.5 trillion in procurement spend requested corporate environmental data through CDP in 2021. CDP recorded over 13,000 corporate disclosures, representing some 64% of global market capitalization in 2021 – an all-time record.
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Yet only 2% of all scored companies made the A List, and 58% scored between C and D-, meaning they are only just beginning to recognize their environmental impact. It is also concerning that 16,870 companies worth $21 trillion in market cap – including Chevron, Exxon Mobil, Glencore and Berkshire Hathaway – failed to respond to the request for information from their investors and clients, or provide sufficient information in their response.
According to Galvin, such non-disclosing companies are going against a tide of change, with a series of environmental disclosure requirements being developed and announced throughout 2021, as well as more companies than ever disclosing environmental information every year. He says, “17,000 corporates failing to even take the first step and report their environmental data is far too many. These companies are not only putting the planet at risk, but themselves. If they continue with business as usual, they will end up on the wrong side of public opinion, regulation and investor sentiment. And scrutiny is rising – empty targets or greenwash simply won’t fly.”
There is support for the positive benefits of disclosure. Companies that publish their environmental data consistently and on an annual basis can protect and improve their reputation, get ahead of regulation, boost their competitive advantage, uncover risks and opportunities, track and benchmark progress and get access to lower costs of capital. There is also evidence to suggest that companies that score highly on environmental metrics perform well financially. The Stoxx Global Climate Change Leaders index, which is based on CDP’s A List, has seen an average annual return that is 5.8% higher than its reference index over the past eight years. But it is still not happening at scale.
Research from Carbon Tracker and the Climate Accounting Project (CAP) recently found that 70% of companies failed to disclose climate risk in their financial reports – meaning there is no way to really understand whether or not corporates pledged to action are actually putting their money where their mouths are. At the same time, 80% of auditors didn’t seem to assess climate risk when auditing companies. Without transparency on net zero targets and how they are to be achieved, there is no way to understand the extent of capital at risk. And that means that corporates and investors are unprepared for changes to come.
There is little question that the market environment is changing. Shell recently pulled out of the UK’s Cambo oilfield development, saying that the economic case was not strong enough. It’s difficult to understand how the project was justified in the first place. The International Energy Agency (IEA) World Energy Outlook 2021 projects that under a net zero scenario – which much of the world has committed to – the price of a barrel of oil will fall to $36 by the end of this decade and $24 by 2050. While today’s oil price might provide sufficient return on investment, if it won’t last the decade there is no economic justification. What we’re seeing is the disconnect between commitments and actions.
Mark Campanale, founder and executive chairman of Carbon Tracker wrote, “the multinational is openly admitting that its core assumptions have not changed to reflect the greatest single threat to our planet, our economy – and its business model. It operates on the premise that oil prices will remain high at $60 a barrel, even though working towards net zero would force them to drop, as industries and consumers shift to alternative sources of energy.”
In the end this boils down to transparency, and investor response. Galvin says, “We should, as a society, demand that these heavy emitters be transparent.” While one of the drivers of corporate action is the potential to access green or ESG funds, it’s the potential for unforeseen risk impacts that is driving investor concern. CDP’s reports matter because their data underpins much of the vast ecosystem of data products supporting investors in their ESG research, including MSCI, S&P Global and Sustainalytics. It’s time to start asking the hard questions – and one of them is whether or not investment in companies which fail to provide credible and transparent information on their environmental impacts and climate risk should be in any 21st century portfolio.