Carbon Disclosure Project Report: More Progress, More Hype

What do Amazon, Apple, Berkshire Hathaway and the Bank of China have in common? They are all large companies refusing to respond to the Carbon Disclosure Project’s (CDP) request to disclose their emissions. Unlike them, 404 global large companies replied to the questionnaire sent to them this year by the CDP, on behalf of 551 investors with US$71 trillion of assets, asking them to measure and report what climate change means for their business. Their replies are summarized and analyzed in the CDP’s annual report, which was released last week, providing us with a very detailed evaluation on the business sector’s current response to climate change. I have to say first that I’m full of admiration to Paul Dickinson and the other people who founded the CDP about a decade ago. Their innovative work at the CDP made them not just the ones reporting on the transition of business to a low-carbon economy, but also the ones accelerating the process. In many ways, companies started taking climate change and its impacts more seriously because of the CDP and we all should be very grateful for that. At the same time, I’d also like to add a word of warning – this report is full of good news on companies’ progress and accomplishments. Nevertheless, we shouldn’t forget the big picture which is still relatively gloomy. We need to make sure to run a reality check now and then. In other words, we should definitely celebrate progress, but avoid the hype. To do so, let’s look at some highlights from the CDP’s report, accompanied by a reality check. More reduction targets – “74% (294) of Global 500 respondents disclose absolute or intensity emission reduction targets, an increase from 65% (250) in 2010. This indicates that more and more of the world’s largest companies understand the need to, and benefits of, accelerating actions to reduce emissions.” Reality check: Good news, combined with the fact that a large majority of companies with absolute or intensity reduction targets are on track to achieve or are outperforming their targets. Yet, it’s not clear exactly how bold these targets are. You should also keep in mind the biggest emitting sector, energy, has the lowest proportion of responding companies with targets at 55%. More integration – “68% (269) of companies are integrating climate change initiatives into their overall business strategy, up from 48% (187) in 2010… This shows a marked rise in companies linking their climate change strategy with their overall business strategy.” Reality check: First, it’s not clear what the integration mentioned here means – it’s a bit of a vague term. Second, there are other surveys providing different indications – A climate disclosure survey among insurance companies found that only 11 out of 88 leading U.S. insurers have formal climate change policies, and over 60% of the respondents do not have a dedicated management approach for assessing climate risk. This is an alarming indicator because of the highly exposure of this industry to climate change impacts. Sustainability is rewarding – “Companies in the 2011 Carbon Disclosure Leadership Index (CDLI) and Carbon Performance Leadership Index (CPLI) provide approximately double the average total return of the Globxcal 500 between January 2005 and May 2011. This suggests a strong correlation between higher financial performance and good climate change disclosure and performance.” Reality check: This is one of the important findings of the report, as it relates to the challenge companies have showing the value of sustainability. Nevertheless, at CDP’s Global Forum last week, Ian Cheshire, CEO of Kingfisher noted that from his experience, investors still don’t know how to change their valuations of businesses when they become more sustainable. So are investors not familiar with the strong correlation presented by this report or is it just more complicated than that? For example, according to a research conducted by Prof. John Peloza, meta-analyses reveal a positive relationship between corporate social performance (CSP) and financial performance. However, Peloza says, the business case for CSP is somewhat unclear and the relationship is relatively weak. More incentives – “65% (259) of respondents provide monetary incentives to staff for managing climate change issues, versus 49% (188) in 2010. This suggests more active commitment in advancing greater management of carbon.” Reality check: Again, this is great, but too vague. We have no idea how significant these incentives are in relative and absolute terms, so although more companies provide them, I’m not sure if it necessarily suggests more active commitment on their side. Last but not least, fewer emissions – Total emissions - and most dramatically, Scope 1 emissions - reported by CDP respondents fell by over 1 billion tons CO2-e in 2011 from 2010. Reality check: It looks like in general companies actually emit more. In May 2011 the International Energy Agency (IEA) stated that emissions were at a record high. So even though CDP respondents do better, emissions are still going up and not down. As Paul Dickinson reminded the audience at last week's Global Forum, we are at critical junction now. Business has an important role in moving us all in the right direction, and therefore the progress shown in the CDP report is encouraging. Nevertheless, the big picture is still too vague and much less progressive, so it’s definitely not the time for celebrations yet, just for more hard work. Image credit: Carbon Disclosure Project Raz Godelnik is the co-founder and CEO of Eco-Libris, a green company working to green up the book industry in the digital age. He is also an adjunct professor in the University of Delaware’s Alfred Lerner College of Business and Economics.