CDP 'A-List' standards and the future of ESG reporting trends

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SOPHIE DEJONCKHEERE: Hello, everyone, and welcome to episode 5 of Viewpoint, a TD Securities podcast. My name is Sophie Dejonckheere and I will be your host for today's episode. I'm a Director on the Sustainable Finance Corporate Transitions team and head of our European Sustainable Finance practice here in London. Today I'm so pleased to welcome Mahesh Roy to the podcast. Mahesh is a Director at CDP and the Global Lead on Net Zero, Capital Markets, so he's well positioned to speak to our topic. We'll be taking a closer look at the recently launched International Sustainability Standards Board, or ISSB, and what it means for both reporting entities and other reporting platforms. If we have time, we'll also get a quick update on the Task Force for Nature-Related Financial Disclosures. So in the interest of time, I will jump right in. CDP was formerly the Carbon Disclosure Project, but it's come a very long way since then. CDP now collects information on climate, forests, and water from around 13,000 companies. Mahesh, could you give us some color on reporting trends in these areas?

MAHESH ROY: Hi, Sophie. Thanks for having me here, excited to be on the podcast. Yes, so you're right. CDP has been around for about 20 years and started as a Carbon Disclosure Project. In around 2010, we changed our name to CDP to account for broadening into other fields, such as water and forests. As far as disclosure trends go, it's been a really big upward trajectory, I guess, over the past few years. So as you mentioned, in the last year in 2021, we had over 13,000 companies respond to both our capital markets or investor request and our supply chain request. And that was up in total 37% on last year. We also have cities, states, and regions that disclose to us as well. And they've grown over the last year by about 53% as well. As we see things like mandatory disclosure come to light and just a greater focus on an environmental risk and environmental metrics, we're seeing more and more companies be requested to respond, but also the response rate increasing as well.

SOPHIE DEJONCKHEERE: CDP ranks its surveys. Perhaps the nomenclature isn't correct there, but CDP awards an A, B, C, or D to survey responses from companies. What do those grades mean? And what does it take to be an A student for CDP?

MAHESH ROY: So we really call them scores. And the A-students are A-listers, I think is what we use. Really the scores are around the quality of the disclosure. So they aren't so much like your overall ESG score, that might be around impact or level of emissions. It's very much related to the company responding to the questions posed to it. So the questionnaire is sort of modular depending on the industry and the activities of the company. So they might be asked to answer certain questions. Or they might be asked the water and forest metrics along with climate, depending on which industry they're in. And then we score them on how well they've answered the questions. So one is completeness. So if you don't answer it at all, you get an F. If you get a D, it means you've probably answered a few questions here or there. And often it might be companies responding with what they see as the bare minimum. When you start to get into B and A, that's where they've responded to every question and they've gone into granular detail. Now that may mean in areas like, say, within the TCFD alignment, when it comes to strategy or governance, it might ask, do members of your board have responsibility for environmental risk? The answer No would score you down. If you say Yes, and then it would say, Please Elaborate. Then you elaborate on that, then that will get you a higher score. And certainly when it comes to things like say targets and the like, if you have say you've got a target in place and it's a science-based target, that would score you higher.

SOPHIE DEJONCKHEERE: On that topic as well, I've seen some headlines recently on environmental finance that said that the standards for A-listers on climate for CDP just got a little bit stricter. You dropped something like 80 entities that had received an A before. So you're now-- you went from 280 to 200, I believe. What did that change mean? How did you guys get stricter on this?

MAHESH ROY: Yeah. I haven't looked at the particular disclosures of the companies in detail. But we did foresee this happening. And it was sort of communicated to the disclosures, mainly that was around targets. Basically the scoring methodology itself doesn't change so much. It's probably more the weightings. So the weighting is-- so we have subcategory scores. So we have the overall scores and the subcategory scores. This year there was a higher weighting to target. To get an A, you basically needed to have a net zero target and it needed to be a science-based target to get the highest score, or third-party verified science-based target. And that reflects just the overall raising of ambition, I think. If you're thinking 10 years ago, those sorts of things probably weren't in place so much or as expected. Whereas now, they're becoming sort of expected, I guess, from our requesting entities, being capital markets, participants, and large purchasing corporates. They want to see targets. So it sort of reflects the raising of ambition there. So I can't say for sure. From what we projected, this is sort of in line. And it's likely to be from that increased weighting towards targets.

SOPHIE DEJONCKHEERE: So Mahesh and I were at COP together. And we were at the S&P event which was really interesting. And one of my takeaways was that not only are targets going to be required, but now climate transition plans may be required in the coming years and become kind of standard part of ESG reporting. So it'll be interesting to see where CDP takes that and if you factor it in. But going along that theme, where is CDP going next? It's been hyper-focused on climate for a bit for good reason. What are you doing? What are you going to tackle next?

MAHESH ROY: Yeah, so I think much to your point, we are looking to integrate transition plans more fully into our questionnaire and probably into our scoring as well. So being able to look at through the questions we ask which may be tweaked a little over time. And probably in line with TCFD guidance around transition plans, we'll be probably looking to score the credibility of transition plans. We currently have a partnership with ADEME, which is the French government agency for energy and ecological transition on the ACT Initiative, so assessing low-carbon transition. If you want to see some of the work there, there's some recent work we've done with the World Benchmarking Alliance on oil and gas transport aviation. That is really a scoring methodology, looking at how to look at a company's transition. Now not to say that we will apply necessarily that particular methodology into our scoring, but probably the learnings from that might get integrated. So that's one area we're looking to branch out into. And I guess, much as we did 10 years ago, expanding our thematics into water and forests, certainly biodiversity and then other things like waste, plastics, and the like are probably going to come increasingly into focus especially as climate data becomes more standardized and commoditized.

SOPHIE DEJONCKHEERE: That'll be very interesting to watch. I feel like there's been a lot of focus on the EU taxonomy side as well. So I'm really curious to see that and hopefully we can dive into that in a few minutes. But first I wanted to pivot back to COP for a second. While we were there, the International Financial Reporting Standards Foundation, so the IFRS Foundation, announced the creation of a new standard setting board, the ISSB, which we've already mentioned. It was announced in early November. Now this announcement does come after mounting reporting fatigue on the part of companies. They're increasingly expected to report to what has become a cornucopia of ESG reporting platforms. And there's also frustration from investors who are frustrated by incomplete data sets and incomparable metrics across platforms. It's been a pretty confusing field with a lot of requests for bespoke metrics or surveys. I know that CDP has the climate force and water surveys. And we've talked a little bit about TCFD and the information that it requests on climate risk exposure. We've also got SASB and their ESG metrics. GRI Initiative is another reporting platform that is a bit more comprehensive on the social and governance side. And now we're also talking about the science-based targets initiative for climate transition plans. And we're staring the EU taxonomy in the face with the corporate sustainability, disclosure standards, and sustainable finance disclosure standards. So really a chopped salad of acronyms and reporting platforms. So ISSB, if I understand it correctly, was meant to simplify and streamline this confusing and cluttered playing field. The announcement last month was long awaited and has generally been very well received. Would you mind breaking down what exactly ISSB will be and whether you think it will address some of this confusion and fatigue?

MAHESH ROY: Yes, sure. And I think you make some really good points there around disclosure or reporting fatigue and there being multiple platforms with multiple sort of viewpoints. The ISSB is designed as a sustainability-related financial disclosure, I guess, framework, financially related disclosures. So the financial impact of, particularly in the first instance, climate. I think looking at our climate questionnaire, there is many different frameworks out there. And there's the TCFD which has started to bring it into line. What the ISSB looks to do under the IFRS is have these common metrics or these data outputs effectively that will be required. Now, the way the questions are asked might still vary. But what it will bring together, I think, between all of the different reporting platforms that are out there, is some commonality in the very base layer required for what our financially material climate-related disclosures. CDP has played a big role in the formation of the ISSB. 15 years ago, we started the CDSB, so the Climate Disclosure Standards Board with other reporting platforms in order to sort of start this coalescing together. Now, the ISSB itself is independent and the CDSB will be absorbed into that. What they're working on now I don't have too much view over, but the idea is, yes, it should simplify this. And in time, and it will take time, it would mean that certainly the companies wishing to disclose climate-related financial risk and climate-related financial metrics, what they're required to report will become very streamlined. And we do see over time this changing the way that we put together our reporting or our questionnaire much like we did with TCFD when we aligned with it in 2018. So I think for companies, it will help streamline this process to an extent. Now, that doesn't mean for, say, CDP where, as an NGO, we're really looking to raise ambition across the spectrum of environmental disclosure, environment being our main focus. But we do have social and governance that is related to that climate disclosure as well. That doesn't mean that we might not be expanding our questionnaire into other areas and looking to raise corporate ambition on both sides as well. But certainly for that core, those core principles, what is really financially material to markets and now increasingly to regulators, that will become streamlined. And hopefully, whilst it might be different, somewhat, in different jurisdictions, much like accounting and reporting laws might be different in different countries. The overall sort of international basis would be a much more homogenized, which should make it easy for companies, especially multinational companies, to understand what they need to report.

SOPHIE DEJONCKHEERE: Taking a step back, you mentioned that the ISSB is going to absorb the CDSB and I believe the TCFD, and SASB as well. Does that mean, just that we're all on the same page, that those three reporting platforms CDP, TCFD and SASB, that they will no longer exist? Or will they continue to exist and just use the same metrics?

MAHESH ROY: That remains to be seen. I think TCFD itself isn't a reporting platform. It is more the guidance. And that the different platforms have started to coalesce around when it comes to climate-related financial disclosure. But the different platforms, the way I think about it is, obviously, if, you're looking to provide financial accounting or financial disclosures, you might use different systems or different providers to put those together. There will still be different ways to put those together. Many companies now do their own TCFD stand-alone reports, especially larger ones. But when it comes to deeper environmental data, they may choose to respond to CDP because their requesters or the purchasing organizations ask them to do that. So they might still find it relevant to answer other questions. But in their own TCFD reports, there should be commonality. And then also what they report through all of the other platforms, being CDP, SASB and others, should be standardized. And one, it would make that a lot easier for them to actually just input that or to copy and repeat that data elsewhere as they know those core metrics are the same. But I don't think there will be one avenue much like as I outlined before, there's not one avenue to submit financial statements or prepare financial statements. But it's more the structure around them. What will be included in them is going to become much more standardized.

SOPHIE DEJONCKHEERE: That makes me think of the European single access platform that was just launched. I'm very curious to see how that plays out. Pushing forward a little bit, you mentioned that the ISSB is focused on climate risk metrics. I think that that's a big topic of conversation because one of the entities that's most used for ESG reporting is global, the Global Reporting Initiative. I think it's pretty ubiquitously used for sustainability reports. And they did not participate in the ISSB. Do you know, they were invited to participate, and if so, why they opted not to?

MAHESH ROY: Yeah, I can't speak too much for GRI and whether they've chosen to be directly involved, et cetera. They weren't involved in the CDSB, which is the angle that we've been engaging with this sort of creation of the ISSB. But they have released statements in support. I think you can refer to their last consultation's feedback to the IFRS, which mainly asked for alignment with the framework and with existing GRI standards which I think has been taken into account. They're not so much ignoring it or doing their own thing. They perhaps didn't choose to be or weren't brought into the tent for various reasons which I'm not aware of. But they're certainly feeding back to consultations and have released statements in broad support of what the ISSB is looking to do. And I think GRI obviously has focused on SNG as well, and certainly some great expertise there. And perhaps that's an area where they, as the ISSB looks to expand out from the EU, or the climate within the E, they will have a lot of expertise to contribute.

SOPHIE DEJONCKHEERE: I think that the GRI, what they also do very well is consider not just the risk side, but also the impact side. Is that-- You mentioned that the ISSB is focused on the risk side. Is there going to be a consideration of impact metrics as well in future iterations? What do you think?

MAHESH ROY: As of now, what I do know is the ISSB is on financially material, climate-related disclosures. So there isn't scope currently for impact. I do think that is certainly important, though some of those areas can be a little bit more nebulous. And if you look at the ISSB and the IFRS, where it's being formed, it is very much on, say, accounting standards, which are cut and dry in many instances. Obviously thoughts evolving there and there might be impact metrics become more widely accepted and a lot more easy to define. If that's the case, personally I would say they'd be great to include. But as of now, from my understanding, the ISSB is really on that financial materiality side.

SOPHIE DEJONCKHEERE: Well, thank you, Mahesh, so much for sharing your time and your thoughts with us. Really appreciate it. And thank you to our guests for listening.

MAHESH ROY: Thanks for having me.

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