Carbon disclosure project reporting: what is it and how does it work?

The Carbon Disclosure Project (CDP) is an extra-financial questionnaire that collects data on companies’ environmental practices and performance, which serves as a reporting standard on environmental topics.

CDP gives a score that confers a total ESG rating for the subjected enterprises to assess their environmental impact.

In order to shed some clarity on CDP’s particularities, it is worth exploring the following definitions of the aforementioned key concepts:

Climate change, water management, and deforestation all became persistent issues for businesses worldwide.

In order to tackle these challenges, Environment, Social & Governance (ESG) reporting represents a viable option for various stakeholders to ascertain their impact on their surroundings and to be held accountable.

CDP emerged as a pioneer in the area of ESG reporting at the beginning of the 21st century.

CDP is a not-for-profit organization that administers the worldwide disclosure system used by investors, businesses, cities, governments, and regions to manage their environmental effects.

CDP surveys assist the business sector in successfully communicating their strategy for quantifying emissions and managing the risks and opportunities connected with climate change’s consequences.

In other words, CDP is a tool that businesses may use to develop their climate plan and benchmark themselves against other businesses in their industry, even on an international level.

CDP was established in 2000, building on The Global Reporting Initiative’s (GRI) idea of environmental disclosure, focused on individual corporations rather than states. GRI-compliant reporting is geared at stakeholders and provides a framework for evaluating an organization’s economic, environmental, and social performance.

In comparison, CDP reporting is more investor-focused, supporting the aggregation of information on climate change risks and possibilities, as well as statistics on emissions reduction, business measures to mitigate climate change and minimize environmental impact, and so on.

In 2021, a record number of firms of more than 13,000 submitted environmental data to CDP, marking a 37% increase in the number of organizations sharing information since 2020 across the three surveys. These corporations account for more than 64% of market capitalisation.

CDP’s A List of environmental leaders includes just 2% of the world’s Fortune 500 businesses, with a combined market capitalization of $12 trillion.

However, approximately 17,000 companies with a combined value of $21 trillion continue to withhold information.

Another prominent occurrence for CDP in 2021 was the publication of CDP’s five-year strategy. Overall, CDP aims to strengthen the involvement, monitoring, and analysis across a diverse collection of stakeholders, broaden their coverage to include additional environmental challenges, and emphasize concrete objectives, plans, and performance.

Moving forward, the guidance for CDP reporting in 2022 has been issued, and the response platform will be accessible in early April.

CDP has enacted many significant revisions to the questionnaires for 2022, such as extended governance questions to determine the competencies in managing climate, water, and forest risks as well as more emphasis on biodiversity.

Moreover, the questionnaire will elicit detailed information on transition strategies and the existing and forecast capital expenditures and operating expenses necessary to achieve net-zero emissions by 2050.

Following the United Nations Climate Change Conference from November 2021, there is growing pressure on businesses, financial institutions, and investors to live up to their Glasgow obligations.

Environmental regulations are becoming more stringent, and governments require companies to align their operations with national and international sustainability goals.

In addition, consumers are becoming more conscious of their environmental impact. When it comes to the products and services consumers purchase, they expect transparency and rigor.

Hence, CDP represents the perfect opportunity for companies willing to meet contemporary sustainability standards and set carbon targets and action plans.

Moreover, the information encompassed by the CDP is essential for businesses since institutional investors utilize publicly available data to drive their decision-making, and large firms use it to analyze and interact with their supply chain.

Beyond innovation, companies must identify hidden opportunities within the risks posed by climate change. These risks may be transformed into opportunities for the company and incorporated into their fundamental strategy.

For instance, CDP includes a question on how respondents transformed challenges into feasible business opportunities as part of the questionnaire.

Therefore, businesses must understand whether particular hazards associated with climate change might have a meaningful impact on their operations, how big of an impact this would have on their bottom line, and what efforts must be made to avert these risks in the first place.

CDP brings forward a plethora of advantages for the enterprises, such as the following:

Each year, CDP assists thousands of stakeholders in assessing and managing their climate change, water security, and deforestation risks and opportunities. CDP is not limited to businesses; cities and governments may also respond to similar questions to contribute to a more sustainable future.

CDP reporting necessitates collecting data and using that data to complete questionnaires through the CDP’s Online Response System (ORS). CDPs questionnaires are assessed by qualified scoring partners who have been educated by CDP.

Each business has its own dashboard from which it may access the ORS.

Additionally, the dashboard displays which surveys a company is being asked to answer and which stakeholders are demanding information.

Investors and clients alike may demand environmental information from businesses through CDP, and the data is used to inform and motivate action.

The subsequent report, which may be made public or confidential, is used to educate investors and calculate CDP ratings.

As its name indicates, CDP is mainly concerned with climate-related issues such as carbon emissions, water use, and deforestation.

Hence, companies wishing to report on social and governance concerns will be required to do so via the use of a secondary reporting structure.

Enterprises may submit information about their operations through CDP’s three corporate questionnaires:

In terms of CDP submissions, the climate change questionnaire accounts for the vast majority.

Each of the three areas of emphasis has its own scoring methodology, which is somewhat different for each of the three categories.

Not all respondents are evaluated on all three key areas; for example, a company may be required to answer on climate change but not on water or forest, depending on its size, location and investors or clients needs.

Companies in high-impact areas will be asked sector-specific questions along with generic inquiries.

CDP’s Activity Classification System (CDP-ACS) is used to assign sector-specific questions to enterprises. CDP has created the novel Activity Classification System to assign sector-specific questions to businesses.

This framework categorises businesses according to their most relevant industries, focusing on the varied activities that generate income for businesses connecting them to the commercial implications of climate change, water security, and deforestation.

CDP-ACS is a three-tiered system comprising Activity, Activity Group, and Industry.

The CDP questionnaire is structured around the following items:

Nonetheless, companies will be evaluated only on the basis of their primary questionnaire sector.

This implies that not all questions will be scored if the organization is subject to more than one set of sector items. Sector-specific questions will be labeled with the sector(s) they pertain to.

However, companies should answer any queries that pertain to their business sector.

The sector-based approach enables CDP to render more meaningful assessments of companies’ responses by taking into account each sector’s unique characteristics and intricacies, leading to a score that accurately represents the company’s environmental stewardship progress and enables more accurate benchmarking criteria against other businesses.

Overall, a CDP score evaluates an organization’s environmental performance.

Companies and governments who reveal information to CDP are graded using letter grades ranging from A to D-, with distinct ratings offered for each focal area of the report (climate change, water, and forests).

Companies are graded on their environmental openness and activity by the CDP, based on the information they provide via its annual questionnaire process.

The internal scoring team at CDP coordinates and collates all scores, as well as conducts data quality checks and quality assurance procedures to guarantee that scoring standards are consistent across samples and scoring partners.

The scores are determined based on the replies to the questionnaire.

Scores are assigned to entities based on the level of detail and comprehensiveness of the information they provide in their questionnaire, their awareness of climate change, water scarcity and forest issues, and their understanding of management methods and progress toward actionable change.

Firms that do well on the CDP scoreboard enjoy a competitive edge over their competitors.

It is also possible to utilize scores inside an organization to benchmark progress and ensure that plans are consistent with current best practices.

A-List comprises organizations that have received CDP ratings of A or A-, which indicate that they are at the “leadership level.”

Companies and governments that reach the A-List have proven excellent environmental knowledge and management to establish themselves as industry leaders in openness and action on environmental issues.

Only companies that make their response to the CDP public are eligible for an A rating (companies’ response can be found on CDP website).

There are more than 300 firms represented on the 2020 A-List, including well-known brands such as L’Oreal and Adobe, as well as eBay, Volkswagen, Levi Strauss, Hewlett-Packard and others.

It is sufficient for a corporation to achieve an “A” rating in one of the three key areas of CDP reporting to be featured on the A-List.

For example, a corporation that obtains an A in climate change but a C in water will still be included on the A-list of companies.

Nonetheless, CDP maintains that only 10 firms have earned A ratings in each of the three major categories.

Respondents to the CDP are evaluated on four levels, corresponding to the stages that an entity goes through as it works toward environmental stewardship. These levels include:

Overall, CDP operates on a calendar year-by-year basis.

To access the system, companies must first register for a CDP account.

If investors or consumers request information from the firm, CDP will alert the participants through email and provide them with access to a designated company dashboard and ORS.

Numerous businesses report on a calendar year basis, from 1st January to 31st December.

Annually, the CDP’s submission deadline for score is the end of July, they usually disclose the exact date at the beginning of the year.

As a result, companies will have about seven months from the end of the reporting year to compute their carbon emissions, complete the questionnaire, and evaluate and sign off on their submissions internally.

Carbon footprint data gathering takes around three months on average, but might vary significantly due to the nature of the organization and the availability of carbon activity data.

Therefore, each enterprise should begin the procedure immediately, determining their carbon footprint and completing all portions of the CDP questionnaire simultaneously.

One thing to keep in mind is that CDP’s internet interface, the Online Response System (ORS), does not open until April of each year, therefore companies will need to work offline until then based on the previous year’s questionnaire.

CDP updates its questionnaire every year, so changes (new questions or title changes) are to be expected.

CDP offers a range of resources to assist firms with sharing information through their platform.

Their corporate advice website includes the following important materials that enterprises might reference as they prepare for their response:

Furthermore, CDP provides detailed reporting guidelines for each questionnaire to understand questions, terminology, and standards.

The reporting guidelines section includes an overview of each module, rationales for each question, linkages to other frameworks, desired material, definitions of words, sample replies, and extra information.

Each mandatory question in the questionnaire is rated for Disclosure, which means that unanswered questions earn a score of 0 out of the maximum possible points for that question or combination of questions.

Additionally, if a question does not earn Disclosure points, the enterprise will be unable to earn points at the Awareness, Management, or Leadership levels.

There are several strategies that an enterprise could utilize to increase their CDP score:

Notwithstanding the benefits provided by CDP, several challenges might hinder the effectiveness and optimum prospects, such as the following:

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The Carbon Disclosure Project is a questionnaire that collects information on companies’ environmental practices and performance. This assessment serves as a reporting standard on environmental issues. The CDP score confers a global rating for the companies to evaluate their overall impact on the environment.

The most popular questionnaire focuses on Climate Change and was created by the CDP in 2006. Other CDP questionnaires exist such as the CDP Water or CDP Forests.

Companies that participate in CDP reporting must collect data and use that data to complete questionnaires through the CDP’s Online Response System (ORS). The ORS provides a secure online environment in which companies can access their own dashboards, which display all the surveys they are required to answer.

Investors and clients may demand environmental information from companies through CDP. This data is used to inform and motivate action, and the subsequent report may be made public or confidential. The report is used to educate investors and motivate companies to take action on environmental issues.