Building a more sustainable future for everyone relies heavily on companies disclosing information about the impact their activities have on the environment. But what if companies are unwilling to disclose the information that lenders and investors need to track companies’ progress, manage their exposure to climate risks, and set their own targets and ambitions?
Even today, most climate and environmental disclosures by companies are still voluntary, although that is changing as regulations like the EU’s Corporate Sustainability Reporting Directive come into force.
Yet, despite many companies making net zero commitments, many are not always forthcoming when it comes to disclosing information about how their activities impact climate and nature. So, how can financial institutions encourage greater disclosure from companies and get the information they, and the rest of the world, needs to forge a path towards net zero?
The Carbon Disclosure Project, or CDP, the world’s largest environmental disclosure platform, knows a thing or two about getting companies to disclose information about their environmental impact.
Every year for the past 20 years, the non-profit has worked with investors and banks to try and encourage companies to take part in its main disclosure request — a questionnaire covering key environmental themes pertaining to climate change, forests and water. “We started off with climate-related disclosures,” says Claire Elsdon, global director of capital markets at CDP.
“We’ve had a water questionnaire for over 10 years now, forests slightly less, but last year, we included biodiversity questions for the first time. So we’re expanding all the time. It’s very likely that next year we’ll also be including oceans, and we have announced that we intend to be aligned with the TNFD [Taskforce on Nature-related Financial Disclosures].”
Companies that disclose to CDP are scored according to the comprehensiveness of their disclosure, as well as the actions they are taking on environmental issues. “Companies do take the score on board, and it’s an incentive to continue responding to improve that score and to create a consistent baseline for investors to engage with them on,” says Sebastian O’Connor, associate director at CDP.
Financial incentives for disclosure
When companies disclose to CDP, Elsdon says they’re also making a Taskforce on Climate-Related Financial Disclosures-aligned disclosure or an International Sustainability Standards Board disclosure. “We’ve made a concerted effort that a disclosure to CDP actually ticks a lot of boxes so that companies don’t have to go through multiple different exercises as all companies have limited bandwidth. So we’ve got to make this as valuable a task as possible.”
Elsdon says what often helps to get companies to open up is pressure or engagement from shareholders and investors. “Shareholders have a stake in a company, so they have that authority,” she explains. “With a bank, the nature of the relationship is inherently different. They don’t own these companies. They want to have good relationships and there’s always a marginal question around not wanting to create excessive friction in a relationship. They don’t have the option to say, ‘I own [10 per cent] of your shares, so you need to do this otherwise I will sell out or your cost of capital may go up’.”
However, Elsdon says banks have started offering financial incentives to suppliers of multinationals to get them to make climate disclosures to CDP. Where banks are joining up with multinationals to offer financial incentives to suppliers of those multinationals to disclose, she says CDP is seeing a doubling in disclosure rates. “Banks are joining forces with multinationals and requesting disclosure by offering a carrot — a discount on their financing or cost of capital.”
Running in parallel with its main disclosure request, a more concentrated list of financial institutions also take part in CDP’s Non-Disclosure Campaign. The NDC aims to leverage the influence of financial and investment heavyweights to try and encourage laggards or companies that have failed to disclose or open up in previous years via CDP disclosure requests.
Fossil fuel companies reluctant to disclose, despite engagement
For CDP’s 2023 annual NDC, out of a total 6011 non-disclosers, a record 1590 companies were targeted — an 8.5 per cent increase from 2022. Together, these “high-impact” companies are said to emit an estimated 4200+ megatonnes of carbon dioxide equivalent annually — nearly equivalent to the combined greenhouse gas emissions of the UK, the EU and Canada.
In total, 221 companies ended up disclosing in the campaign after engagement by financial institutions on climate change, 58 on forests, and 66 on water security. In terms of regions, Japan had the highest disclosure rate, at 39 per cent, followed by 24 per cent in Europe. Oceania had the lowest disclosure rate at 8 per cent, while FIs had the least impact on companies in North America.
In terms of industry sector, fossil fuel companies had one of the lowest rates of disclosure in the 2023 NDC sample at just 8.8 per cent, and apparel (24 per cent) the highest.
Only eight out of the 104 fossil fuel companies targeted disclosed, which is “deeply concerning” the CDP said, given they are the main contributor to global warming, accounting for 75 per cent of all greenhouse gas emissions worldwide.
Elsdon says the CDP is a great tool for relationship managers to be able to make an assessment, over time, as to which specific types of company they are looking to attract into their portfolio, with the right credentials. “For those that aren’t making any kind of disclosure, and for those who are particularly active in high emitting and hard-to-abate sectors, over time, we are likely to see a distancing from financial institutions that have set net zero goals in terms of actually engaging with those organisations,” she says.
In the 2023 campaign, CDP says financial institutions had the strongest impact on encouraging companies to disclose through its forests questionnaire, compared to climate change and water. Traditionally a lagging theme in terms of disclosure rates, within the campaign, the targeted companies were 6.8 times more likely to disclose on forests.
This year, 66 of 463 companies targeted in the campaign also disclosed through the water questionnaire. Household names that disclosed on water for the first time included BMW and Hugo Boss. “In the water space, there’s still a massive lack of understanding of the materiality of water to supply chains,” says Elsdon. “Eighty per cent of companies in the UK, for example, are sourcing goods and material from companies in water-stressed territories. The dots are not being joined because of a lack of data.”
One of the areas CDP is looking to improve on is disclosures by small and medium-sized enterprises, which it believes could help fill many of the current gaps in financial institutions’ Scope 3 emissions data. In June, CDP plans to launch a questionnaire specifically aimed at SMEs.
“We have a programme in which large corporates can request disclosure from our suppliers,” says Elsdon. “They’ve been saying to us, ‘Look, we really need a much better way of capturing disclosures from our SME suppliers’. Because at the moment, a CDP questionnaire is so big and so intense that it’s too complex and time consuming for an SME to engage with.”
