Global Climate Change Analysis 2018

4th September 2019 by Emma Goring

The demand for climate-related information is growing. Understanding that inadequate information can lead to the mispricing of assets and a misallocation of capital, more and more financial decision makers are demanding information on the business risks and opportunities associated with climate change.

In 2015, at the request of the G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB) and its chair Mark Carney established the industry-led Task Force on Climate-related Financial Disclosures (TCFD).

In recognition of the Task Force’s vital work, CDP committed to align its information requests with the TCFD’s recommendations and support the generation of decision-useful climate information. In 2018, 6,937 companies reported through CDP. Below we analyse two groups of companies: 1) all of those disclosing through CDP in 2018; and 2) a smaller subset of 500 of the world’s largest companies by market cap.

Governance

You can’t manage what you don’t measure, and where responsibility for climate change sits within a company can be an indicator of just how seriously a company is taking this issue. At CDP we have seen a positive correlation between board-level oversight and management responsibility for addressing climate risks and opportunities, and a company’s commitment to action.

All companies

73% of companies reporting to CDP confirmed that they have board-level oversight of climate-related risks. Despite US companies making up the largest proportion of the reporting sample by region, they trail behind the global average of reporting board-level oversight (60%). Brazilian companies report the least oversight at just under 50% (527 companies)

G500

A much larger proportion of the world’s biggest companies report having board-level oversight (94% of the reporting sample totalling US$27.4 trillion in market cap). A significantly higher proportion of companies in the US confirm oversight in this sample. This correlates with a strong growth in support for climate-related proposals in shareholder resolutions, according to US NGO Ceres.

Strategy

With climate change impacts already hitting companies across the globe, an increasing focus is being placed on both actual and potential climate-related risks and opportunities. Faced with growing scrutiny, companies need to show their stakeholders that they are integrating these potential changes into their business strategies and focusing on the long-term.

In 2018, over 6,000 companies reported to CDP’s TCFD-aligned questionnaire, measuring their climate-related risks and opportunities, as well as the associated financial implications.

All companies

Faced with growing climate risks, the majority of companies say they now integrate climate risk into their business strategy (72%). Companies in the US and Brazil are falling behind the global sample (at 65% and 56% respectively). European companies lead the pack, with French, German, Norwegian and UK companies reporting the highest figures and Italian companies the least.

G500

Again the world’s largest companies are above the global average when it comes to integrating climate risk into their strategies. Almost all European countries and 95% of US companies report integration of risks, as well as all companies in the fossil fuels, food beverage & agriculture, apparel, mineral extraction and materials industries.

Using scenario analysis is a key focus in the TCFD’s recommendations. Approximately half of the companies reporting to CDP in 2018 were asked to report on their scenario use (3,397 companies). Around 1,436 (42%) of these companies said they were using scenario analysis. A further 1,138 anticipate doing so in the next two years.

A higher proportion (63%) of the world’s largest companies reporting through CDP say that they already use or plan to use scenario analysis. However, given the market of this sample, it is surprising that 35 companies do not anticipate using scenario analysis in the future.

All companies

The majority of companies only use transition scenarios (513 companies, compared to 127 using physical scenarios). This is surprising given the high number of physical risks that companies identify in their risk analysis.

Over half of the companies use publicly-available scenarios, with 250 companies using the IEA’s 2DS scenario and 209 using scenarios based on Nationally Determined Contributions.

G500

Similarly to the full sample of companies, the G500 focus on transition planning, rather than physical scenarios. These companies identified 275 separate scenarios being explored. Roughly one third of companies report using the IEA’s 2DS scenario, with the IEA’s 450 and Sustainable Development Scenarios are being commonly used.

Only five of these companies reported using a beyond 2 degree scenario. Given the recent findings of the Intergovernmental Panel on Climate Change, we would expect to see an increasing number of companies using these scenarios in the future.

Risk management

Once a company has identified its risk it is also vital it examines just how it will manage these climate-related impacts on its business.

3,783 companies, or 54.5%, identified that their processes for identifying, assessing, and managing climate-related issues are integrated into multi-disciplinary risk management processes. This is an important step in escalating climate-related issues from a siloed or isolated CSR/ESG department issue to a company-wide issue. Importantly it means raising climate as an issue for legal, risk, and financial departments.

Data users need to understand which risk types are considered in climate-related risk assessments. Not all risk types are relevant for each organization and their operations, but it is important to regularly assess risk types to assess if they may pose a substantive risk to the business. Here we ascertain how thoroughly companies are examining multiple risk types as an indication of the comprehensiveness of their risk assessment.

Understanding a company’s time frame for risk analyses provides insight into the thoroughness of the assessment procedures employed by organizations. Companies that frequently assess risk and examine risks far into the future may be better equipped to handle longer-term uncertainties and liabilities.

Metrics and targets

To meet growing investor and lender demands, a company also needs to disclose the metrics and targets it is using to assess and manage its climate-related risks and opportunities, including calculating its emissions and reporting progress against climate-targets in place.

Here, we explore the gross scope 1 emissions figures for companies that responded to CDP’s 2018 climate change questionnaire. Not all companies disclosed gross scope 1 emissions figures via our questionnaire. To plug this gap we have integrated emissions data from CDP’s full greenhouse gas (GHG) emissions dataset wherever possible.

Our analysis below focuses on the 6, 937 companies who reported to CDP in 2018. We not only include disclosed emissions figures from CDP’s climate change questionnaire but also includes data from CDP’s full GHG emissions dataset. This dataset not only collects emissions figures from other sources (such as mainstream reports), and models emissions where no figures are available. The dataset is available for CDP investor members and provides full company granularity, across all 3 emissions scope types.

  • 146 power companies account for over 2.8 billion metric tonnes of scope 1 emissions (CO2e)
  • 583 materials companies account for 2 billion metric tonnes of scope 1 emissions
  • 111 fossil fuels companies represent nearly 1.1 billion metric tonnes of scope 1 emissions

All companies

3,610 companies reporting to CDP say they have an absolute and/or intensity target in place – this represents roughly half of all responding companies. However, only 67% (2,407) of these companies disclosed sufficient data for their emissions reduction targets. Of the companies who reported sufficient information on their targets more companies set intensity than absolute targets (1058 versus 874 who only set absolute); 475 companies set both.

CDP deems a target insufficient if they are fundamentally incomplete, i.e. when fields critical to understanding a target have been left blank (e.g. base year or % reduction); or analytically incomplete, i.e. that important information for relational checks and analysis were left blank (e.g. % achieved, base year emissions covered).

1,349 unique companies have set a total of 2,166 absolute emission reduction targets where sufficient information has been provided, with companies setting multiple targets across different scopes.

1,533 unique companies have set a total of 2,186 intensity targets where sufficient information has been provided, with companies setting multiple targets across different scopes.

Source: http://bit.ly/CDP_TCFD