As increased pressure for transparency motivates more and more companies to disclose environmental, social, and governance (ESG) information, third-party verification of the reported data is becoming increasingly valuable. Several frameworks are now available for such disclosures, with one of the more widely used being that developed by CDP.
CDP, previously known as the Carbon Disclosure Project, is a not-for-profit organization based in the United Kingdom that seeks disclosure on climate change business risks and opportunities, and greenhouse gas (GHG) data from the world's largest companies. Established in 2000, CDP has expanded its purview from investor climate change disclosure to include supply chain disclosure, water and forest footprint disclosure, and development of disclosure and performance leadership indices. CDP is the coordinating secretariat for 827 institutional investors with a combined $100 trillion of assets under management. CDP's influence is spreading through its Supply Chain program as well, with 89 companies requesting disclosure by their enterprise partners, comprising $2.7 trillion in procurement spending for 8,200 suppliers.
Disclosure and Scoring
CDP reporting and disclosure is performed on an annual cycle. The request for information (RFI) on behalf of investors is issued in February and directed primarily to Chief Executive Officers of Global 500 companies, with responses due to CDP by the end of June. Supply chain members receive their RFI in April, with responses due by the end of July. Companies can respond regardless of whether they receive the RFI and can participate in either or both questionnaires.
The scope of CDP reporting is comprehensive, covering management, risks and opportunities, and emissions for Scope 1, Scope 2, and Scope 3 GHG emission sources, thus providing a thorough disclosure of a respondent's global climate change strategy and program. Each question within the three core modules is thoroughly evaluated and scored based on the quality of disclosure and the respondent's performance. Table 1 provides a summary of the disclosure topics for both investor and supply chain questionnaires.
CDP publishes the scores through regional and country-specific reports in the fall of each year. Prior to 2016, a numerical disclosure score (1-100) and letter (A-E) performance band were assigned to each responding company. For the 2016 and 2017 cycles, the scoring methodology has been simplified and reflected in a letter designation, as shown in Table 2. For the 2017 reporting cycles, progression through the four consecutive levels is achieved by obtaining at least 80 percent of the available points at each level. Scoring less than 45 percent of the available points at a given level is denoted by adding a minus sign to the scoring level. Companies demonstrating climate leadership are recognized on CDP's "A-List." Companies that receive the annual questionnaire and choose not to respond receive an "F" designation and are listed in CDP's reports.
The Role and Value of Verification
CDP disclosure performance can be influenced by whether a company verifies its GHG emissions. While verification of reported GHG inventories is voluntary, there are several benefits to obtaining third-party verification:
- Market Demand – From state/province, to country, to regional schemes, mandatory or voluntary, verification is becoming increasingly valued by stakeholders.
- External Perceptions – Assurance from an independent third party can boost credibility with external stakeholders.
- Continual Improvement – The verification process assesses risks and opportunities of reporting processes, management controls and systems, and the ability to improve them over time.
- Competitive Advantage – Verification of GHG emissions and reduction data can differentiate a business from its competition.
For third-party verification to be valued by CDP, the verification must be conducted using recognized verification standards, which are evaluated by CDP against a common set of attributes based on the criteria below.
- Relevance: This relates to a third-party audit or verification process and is specified as part of the program compliance.
- Competency: Verifiers must meet competency standards.
- Independence: Impartiality must be maintained, particularly in cases where the same external organization compiles and verifies a responding company's inventory.1
- Terminology: Terms used for the level of the finding should be clearly defined (e.g., level of assurance).
- Methodology: The verification methodology must include verification of the process, controls and/or systems, and the data.
- Availability: The standard should be available for scrutiny.
CDP accepts over three dozen "standards" for performing GHG inventory verification, which are comprised of various protocols, methodologies, regulations, standards, and schemes.2 Additionally, CDP has several very specific requirements that must be fulfilled to garner credit for inventory verification, as outlined below.
- The verifier/assurance provider must be certified or accredited to provide verification services.
- At least 70 percent of a company's scope-specific emissions must be verified.
- The type/level of assurance must be specified.
- The verification/assurance opinion document must be attached to the questionnaire response.
Reporting companies have the potential to materially improve their CDP questionnaire scores through verification of their GHG inventory. Table 3 presents a selected comparison of potential questionnaire points available overall, for GHG emissions reporting, and a comparison to points available for achieving verification.
Points for GHG inventory verification are included in the maximum available points for emissions data (Scope 1 and Scope 2) and Scope 3 emissions categories. They comprise a material portion of these potential points and could make the difference in a company's ability to progress through the performance levels. The most significant proportion is awarded at the Disclosure and Awareness levels, and is predicated on providing the information explicitly requested in the questionnaire. Verification performance is not dependent on the level of assurance (e.g., reasonable vs. limited) or level of materiality utilized to perform the verification. And for Scope 3 emissions data, the larger proportion of points is garnered through reporting more categories of GHG emissions.
Additionally, CDP provides a verification opinion template that contains information on the reporting period and boundaries, reported scope-specific GHG emission data, verification standard, verification provider and associated credentials, and lead verifier name and relevant credentials.
Whether a company chooses to verify only its reported GHG emissions or its sustainability report as well, it should be aware of best practices such as those identified in Table 4.
To accomplish a successful verification, a company should plan ahead and be prepared to provide the documentary, testimonial, and observational evidence required by the verifier. The outcome and effort required to achieve that outcome are squarely in the hands of the company being verified.
As companies prepare their 2017 disclosure statements, it is worthwhile to consider the potential benefits of third-party verification.
- Verification improves the veracity and credibility of a company's GHG emissions disclosure due to scrutiny from an independent third party.
- GHG inventory verification improves performance and scoring through CDP's investor and supply chain disclosures.
- If an organization has not yet obtained verification of its data, it may consider a pre-verification assessment to determine the veracity of company processes, management controls and systems, and readiness for formal verification.
- Organizations that have been obtaining verification should focus on continual improvement of underlying processes and management controls and systems in order to derive appropriate cost-benefit.
With the 2017 reporting cycle in progress, it is time to take stock of your 2016 data and how it will be compiled, quality assured, reported, and potentially verified. Trinity performs CDP data verification and is also accredited by the California Air Resources Board to perform verification services for GHG emissions data reports. For further information, please contact John Fillo, Principal Consultant, at (724) 996-1946.
1 In most instances, regulatory programs and protocols/reporting schemes have strict conflict of interest criteria that preclude verfication of GHG assertions by a party that influenced the assertion's development.