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Although more countries are mandating new climate-related disclosure regulations, only 15% of organizations have prepared targets to reduce upstream emissions. This is mandatory under many new reporting directives (e.g. the Corporate Sustainability Reporting Directive). In all other cases, it’s still a recommended best practice.
While regulations are tightening, the Carbon Disclosure Project (CDP) remains a fundamental framework you can use to report on your environmental impacts and benchmark your performance. Let’s see just how the CDP has changed and what you need to take into account.
What is the Carbon Disclosure Project (CDP)?
The Carbon Disclosure Project (CDP) is an NGO that manages an environmental disclosure system, enabling companies, cities, states, and regions to measure, manage, and disclose their environmental impact. Like with other organizations such as the Task Force on Climate-Related Financial Disclosures (TCFD), they focus on greenhouse gas emissions and climate risks.
By disclosing climate-related data, CDP helps companies manage relevant risks, improve and monitor sustainability processes, and improve transparency. This can influence the investments a company gets and helps organizations improve their responsiveness when faced with climate-related risks or opportunities.
How does the Carbon Disclosure Project work?
The Carbon Disclosure Project's primary function is to offer a framework that helps companies gather, manage, and report environmental data effectively.
The CDP has built its proprietary step-by-step process to first and foremost motivate and support organizations with disclosing their environmental impact, helping them make significant steps toward increased sustainability.
To evaluate disclosures, CDP turns to its own scoring methodology that analyzes organizations using CDP Scores. Investors and customers can also leverage these scores to evaluate a company's commitment to sustainability and make better decisions regarding partnerships.
Once companies or cities have been scored, the Carbon Disclosure Project can incentivize them to improve their current approach to sustainability. For instance, a company that scores higher through its methodology is more likely to maintain a good reputation and be attractive to investors.
But the scoring process doesn't end there. The CDP follows up with feedback, helping organizations find their strengths and weaknesses so they can refine their sustainability strategies.
The group also surveys companies and cities, asking for the details of their environmental practices such as greenhouse gas emissions, water management, and deforestation. These are the CDP's main areas of focus. You can find all the latest reports and studies on their website to use as a reference or benchmark.
Who needs to disclose to CDP?
Compliance with CDP isn’t mandatory since we’re not talking about a directive or new law, but rather an organization with its own set of recommendations. Yet, besides national and regional governments or cities, there are three main types of organizations that will benefit from adhering to the CDP’s methodology:
- Large corporations in sectors where environmental impacts are significant such as the energy, manufacturing, or transportation space.
- Publicly listed companies where reporting through the CDP can help with their obligations to investors and stakeholders who demand data on climate-related risks.
- Small and medium-sized enterprises that want to develop their sustainability efforts or hit investor-imposed targets.
The CDP’s best practices do align with those of other organizations or directives though. This makes for one more good reason to run reporting with the help of the Carbon Disclosure Project.
CDP vs TCFD: How are they related?
While created by different organizations, the CDP and TCFD (Task Force on Climate-Related Financial Disclosures) recommendations are highly similar thanks to their shared purpose (i.e. improving transparency when it comes to climate-related risks).
For years, the TCFD provided the very base of best practices companies could rely on to disclose climate-related financial risks and opportunities in a standardized way. The CDP came in to help organizations with the actual disclosure process through their own scoring system, supporting the implementation of TCFD rules.
Today, many companies report their climate data to CDP with TCFD's recommendations as a guideline. This is beneficial because it means organizations now have a common-ground method for disclosing climate-related risks to stakeholders and comparing disclosures. Plus, 87% of companies noted that disclosing through CDP improved their organization's environmental transparency.
Also worth noting is that more than 18,700 companies disclosed environmental data through CDP in 2023 alone. That's because the CDP has a stronger focus on environmental data.
The TCFD remains financially focused, looking at how climate risks affect a company's financial results. The TCFD framework was primarily built to disclose climate risks in ways that are financially material.
So, the ultimate goal in this case remains making climate-related risks understandable and actionable for investors. TCFD reports also go onto financial statements while CDP disclosures are part of sustainability and ESG reporting.
Nevertheless, both TCFD and CDP share the same broad scope of climate-related risk and opportunity disclosure.
Read more on how TCFD suggestions align with CDP’s corporate questionnaire.
What to disclose for CDP?
For a Carbon Disclosure Project report, the most straightforward approach is to follow TCFD's four focus areas: Governance, Strategy, Risk Management, plus Metrics and Targets.
Under Governance you’d be describing the structure and processes you're using to manage climate-related risks and opportunities, giving details of where your board of directors comes in. For Strategy, outline the actual and potential climate-related impacts on your organization's business, strategy, and, importantly, finances.
In Risk Management, write down the steps you used to analyze climate-related risks and share how you'll manage these. Lastly, Disclose the Metrics and Targets you use to assess climate-related risks and opportunities, including greenhouse gas emissions metrics (i.e. Scope 1-2-3).
When responding to CDP questionnaires that rely on these TCFD pillars, companies disclose information across four environmental areas: Climate, Water, Forests, and Plastics.
Here’s what goes into each:
Climate
Use this section to disclose greenhouse gas (GHG) emissions (for Scope 1-2-3) and climate-related risks, opportunities, and strategies for emission reduction. Give the details on the targets you’ve set, what methodologies you’re using to track emissions, and what your resilience plans for climate-related impacts are.
Water
Report on water usage and management practices, as well as potential water security risks in your operations. The CDP questionnaire will let you assess your water conservation efforts and plans for addressing water-related challenges. These questions only apply if water is a core operational factor in your case.
Forests
Stay transparent about your deforestation risks and the impact that sourcing commodities like timber or palm oil has. At this stage, investigate disclosing any sustainable sourcing practices, supplier relations, and policies for reducing forest-related impact.
Plastics
This part taps into plastic usage, waste management, and efforts to reduce plastic footprint. The disclosure focuses on the impact of packaging and recycling efforts. You should also add in your plans to reduce the impact of plastic-related factors on the environment.
Most companies have picked only two key TCFD recommendations as nearly all report on Governance and Risk Management. Fewer fully disclose information on Metrics and Targets, and even fewer on Strategy.
This is concerning as comprehensive disclosures are a must to avoid reporting gaps. The latter could limit your ability to identify and handle climate-related risks and opportunities — leading to poor decision-making and decreased investor confidence.
Need a more balanced approach to ESG reporting? Book a free ESG Flo demo to get your own CDP submission report.
