Strategy & Operations » Financial Reporting » Taking climate into account: Reporting the right metrics & targets

This is the final article in a series of four blogs from CDP, the founder and driver of climate disclosure, addressing what FDs need to know after Mark Carney and Michael Bloomberg’s climate Task Force reported to the G20.

When President Trump announced the US plans to withdraw from the Paris Agreement earlier this month, it was striking to see how many large corporates – including the likes of Google, Apple, Levi Strauss and Morgan Stanley – publicly opposing the move.

That response underlined how most major companies see climate risk as part of business, and helps explains why corporate attention is now focused not on whether to manage climate risk, but how to do it.

This is the rationale underpinning the fourth and final key area addressed by the Task Force on Climate-related Financial Disclosures (TCFD), led by Mark Carney and Michael Bloomberg.

‘Metrics and Targets’, focuses on disclosure of the goals and indicators that should be reported in this area.

What metrics and targets will companies be expected to report?

The TCFD recommends that companies should disclose the metrics and targets they use to assess their corporate progress in managing climate-related risks and opportunities. In practice, the TCFD argues that this will mean reporting on the following areas:

  • Disclosing the indicators used by the organisation to assess climate-related risks and opportunities, in line with its strategy and risk management processes.
  • Disclosing Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks.
  • Describing the targets or goals used by the organisation to manage climate-related risks and opportunities, and their performance against these targets.

At recent workshops held by CDP, the feedback heard most often is that it is the challenge of finding clear, measurable targets that can be easily integrated into a company’s mainstream reporting that seems the most overwhelming. However, there are several popular initiatives that can help companies find the right KPIs for them.

A good example of this is the science-based targets (SBT) initiative featured in the previous blog in this series. SBTs are a way to set meaningful reduction programmes that align with the Paris Agreement and therefore also ensure that your company’s efforts fit into the bigger picture of climate change mitigation. SBTs also enable companies to better understand where they are vis-a-vis their competitors.

In the power sector we have seen industry initiatives like Carbon Pricing Corridors emerge. This initiative responds to the fact that current carbon-based price signals in the wider economy are too low to attract the low-carbon investments needed.  It also brings together industry experts to shape realistic prognoses of the range of investment-grade carbon prices needed to decarbonise electricity generation through 2020, 2025 and 2030.

Some of the most common metrics used by companies that report to CDP that can help form corporate environmental targets include:

  • Total capex in low carbon investment: Providing a relatively easy-to-quantify way to measure progress towards decarbonisation.
  • Operational efficiency measures: Improvements in areas such as energy efficiency and water use provide a material and quantifiable way to measure progress.
  • Percentage of production in water stressed areas: An important target for companies in water-risk areas, especially in sectors with high-water use such as extractives, apparel or beverages.

What are the benefits of working towards these targets?

The metrics and targets that the TCFD recommends all tend to link closely to clear business benefits including cost savings, better investor and customer relations and a healthier working environment.

Most of all, they are about showing how a company is futureproofing its growth ahead of likely future policies and regulations to limit GHG emissions.

All this leads to better overall performance; companies on CDP’s ‘Climate A List’ outperformed the market by 6% over four years.

Companies that start to introduce and report on these kinds of metrics will take a first mover advantage and are very likely to be those we still see on our Bloomberg terminals in 20 years’ time.

Every company is different, and not everyone will agree on the timing or scale of what FDs should report on in this area. However, the importance of climate risk is only likely to increase, and getting disclosure rules right will allow both individual companies, and the market as a whole, to price risks more accurately and build a more sustainable global economy.

 

Paul Simpson is the CEO of CDP, formerly the Carbon Disclosure Project.