Founded just over 20 years ago, CDP has grown and evolved to become a key part of the sustainable reporting ecosystem. In the early days, just a couple of hundred companies responded to its questionnaire on carbon emissions. Today, the organization collects information on climate change, deforestation and water security from nearly 10,000 businesses worldwide.
Last year saw further developments when CDP released a joint statement with four other organizations – the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board – announcing a shared vision for the future of corporate reporting. In the statement, the bodies recognize the ‘complexity surrounding sustainability disclosure’ and the need for a ‘comprehensive solution’.
A month later, the five took a step toward this goal by publishing a prototype climate-related financial disclosure standard. The prototype, which makes use of the different frameworks and standards, aims to show how sustainability can affect enterprise value.
Below, Pietro Bertazzi, global director of policy engagement at CDP, discusses collaborating with other groups, the importance of broad sustainability disclosure and what topics IR professionals should keep an eye on over the coming year.
At what stage is collaboration between the five standards and reporting organizations? And how do you see CDP’s role?
The work we’ve been doing, with the so-called group of five, is to bring a bit more clarity to the market about how the different standards and frameworks work together toward a more coherent and comprehensive system of corporate disclosure. Each standard or framework has a different yet complementary take and target audience, possibly a different materiality concept.
One of the reasons we launched the statement last year was to make clear the dynamics of nested materiality, depending on the value creation for the company or the impact on people and planet. That is the key element that differentiates every single standard or framework. The idea is to create this comprehensive system because each one of the standards and frameworks has a role to play.
Talking about CDP, we see ourselves as, first of all, the global platform for hosting the information companies disclose based on those standards. Second, we’re not a standard-setting organization. We provide disclosure questionnaires so we exert normative power over corporate behavior. If we have a question in our questionnaire, companies will disclose the relevant information.
And the third element is that, because we’re not a standard-setting organization, we do not have a heavy process to develop the questionnaire. This allows CDP the agility to adjust the questionnaires, swiftly responding to market needs and policy developments.
What were the aims of the prototype you jointly developed?
One of the key elements we are incredibly proud of that we used the Task Force on Climate-related Financial Disclosures recommendations and made them into a financial reporting standard prototype. We call it a prototype because it didn’t follow any due process: it was an exercise to demonstrate what climate-related financial standards could actually look like. In terms of use, it could be used as an input for the IFRS Foundation, which started a consultation last year on the role of sustainability reporting.
You will also notice in the prototype – it’s a bit hidden – that the conceptual framework could actually be used for all sustainability topics. So we tried to do a bit of a longer-term exercise when it comes to thinking about how sustainability information can be included in financial reporting.
For companies, how important is it to continue disclosing broader sustainability information?
This prototype helps companies understand how climate impacts value creation. That’s essential – but it’s not the full story. We need to look at two [other] elements. One is forward-looking information, such as target setting and transition plans. Even if they do not have a financial materiality impact right away, they will have in the long run. That’s why more and more investors have been seeking this kind of information.
Besides that, the other bit of materiality is the impact on people and the planet. That is incredibly important for us to complete the picture, because if a company fails to assess its impact on climate change and other sustainability topics, it will not do service to advancing the global agenda toward the Paris Agreement goals and the Sustainable Development Goals.
What other sustainability topics should IR professionals be focused on at the moment?
A strong emerging topic is regulation on the disclosure of climate-related financial information. At the end of last year, the UK government announced mandatory disclosure, just after New Zealand, and recently Hong Kong did the same. If you look at the EU, the revision of the non-financial reporting directive is coming up – we expect to see more stringent rules when it comes to climate-related disclosure, and possibly environment-related disclosures. Policy and regulation is something we see as a continued growing trend in 2021.
Along with this, there is an element that could be incredibly transformational: the uptake of taxonomies. We have a taxonomy in the EU [for sustainable activities], but other jurisdictions are [also] considering a taxonomy for ESG-related topics. There is one being developed in China that we’re following pretty closely. We should keep an eye on taxonomies because they will change the way companies disclose [and how] investors use the information disclosed.
What impact could the change in presidency in the US have on ESG reporting there?
As you can imagine, this has been a big change in our world, in our community. At the moment, all we can say is hopes are really high. We all hope to have some kind of regulation – it looks at the moment like the conversation is around risk disclosure.
We are trying to engage on the side of mandatory disclosure around climate-related risks. With the appointment of the cabinet, there were a few appointments that were going toward our agenda. So maybe it’ll be more ambitious than we hoped, but I believe it’s still a bit too early to make a proper assessment.
