While spring has barely arrived in the Northern Hemisphere, thousands of organizations around the globe are already busy preparing for an event happening during autumn – the yearly release of the CDP climate change disclosure ratings. While only 17 years old, the CDP climate change disclosure process is now an established ritual among most of the leading companies being traded on stock exchanges worldwide. Why? Because investors are increasingly aware that climate change is one of the major issues expected to impact the return on their investments in the next decade. They are therefore increasingly using the CDP information and rating as inputs for their investment decisions.
However, two areas of particular interest to investors are often overlooked by companies in their CDP disclosure. These are the disclosure of scope 3 emissions and third party verification of disclosed emissions. When looking closer at investor expectations we see that both these areas score high on their radar. Their absence from the CDP disclosure will not only lead to a poor CDP grade, but also to a loss of credibility with investors.
Scope 3 emissions – the proverbial elephant in the room
Historically a lot of focus has been awarded to reporting Scope 1 and 2 emissions. However, we now know that in many cases they represent just the tip of the iceberg with respects to the overall emissions generated by organizations over the lifecycle of their products and services. As an example, Kraft Foods found that scope 3 emissions comprise more than 90 percent of the company’s overall emissions.
Organizations are in fact exposed to a multitude of carbon constraints and risks along their entire value chain, each potentially impacting long term returns. This is why many have warned that failing to properly account Scope 3 emissions may come short of the big picture mindset necessary in building a resilient low carbon economy. Recent studies are adding some hard evidence as they are showing that Scope 3 emissions might turn out to be a more powerful indicator of a company’s resilience and preparedness than scope 1 and 2 emissions. For instance ET Index Research analyzed the correlation between the carbon emissions and financial returns for 2267 companies. The research found that companies with low Scope 3 emissions intensities significantly outperformed those with high Scope 3 emissions. In addition this trend remained statistically significant even when other risks were accounted for. More interestingly, Scope 3 seemed to be a far more statistically relevant and therefore better indicator of returns than Scope 1 and 2 emissions.
As a result, investors’ focus is shifting more and more towards ensuring that relevant scope 3 emissions information becomes available. Companies that are calculating and disclosing their Scope 3 emissions will definitely send a clear signal that they are on top of this issue and are transparent. In addition, from a CDP scoring perspective, complete Scope 3 related information would add up to 7% of total points.
While some companies have already reported scope 3 data, there are still a few that are neglecting these emissions on the basis that it is extremely time and resource consuming to quantify. That is why CCG is using VitalMetrics software, a proven simple tool, approved by CDP that enables to quantify and report Scope 3 data with minimal work. Based on your organization’s ledger, CCG can estimate the scope 3 emissions for all 15 categories for a fraction of the time and the cost needed to collect physical flux. The methodology behind the VitalMetrics software is today the most widespread approach for scope 3 emissions estimation.
Third party verification of emissions data is called to become a standard practice
Third party verification of a company’s financial data is nowadays an undisputed standard practice and a fundamental requirement for any company listed on the major stock exchanges worldwide. Investors and stock exchanges are now also pushing for systematic third party verification of disclosed carbon emissions.
Because investors are increasingly factoring this information into their investment decisions and models and therefore need to be assured it is “investment-worthy”, just as financial data is. In addition, from a CDP score perspective, third party verification will add up to 12% of the total possible points, making a significant difference in terms of the final grade.
In addition, it brings additional confidence for the reporting company on its inventory. The verification from an independent third party includes a review of the internal process in place to measure the activity data, record and track the information, as well as the roles and responsibilities within the company. It is a very useful tool to ensure the robustness of the process, in particular as companies as setting targets for carbon emissions in the future.
Bottom line – two meaningful ways to improve your CDP declaration
At CCG, we can help you quantify and report your scope 3 emissions in a cost-effective manner. By using a few information at arm-length, it is possible to have an accurate estimation of these emissions not only to answer investors’ expectation, but also to quantify risk exposure to carbon pricing. In parallel, CCG can perform the verification of scope 1 and scope 2 emissions (and scope 3 if the quantification is done internally), to improve the confidence in the data. Ultimately both activities will benefit your company by helping you manage better the emissions induced by your activities, anticipating their increasing costs and by providing your shareholders reliable and credible information from a carbon standpoint.