Mathieu Nègre, head of emerging markets impact equities at Union Bancaire Privée (UBP), explains that while there is no irrefutable proof that investor engagement is what convinces a company to provide impact data, collective efforts to encourage it do have an effect.
CDP was founded in 2000 as the Carbon Disclosure Project, a non-profit organisation aiming to get companies to disclose their greenhouse gas (GHG) emissions and their strategies for reducing them. The key conviction was that “what gets measured gets managed”. Twenty years later, CDP counts over 500 investors and asset owners, including UBP, among its signatories, who together account for some $100 trillion in investments.
About 18,700 companies, representing half of the global market’s capitalisation, now disclose on the CDP platform, which has added water and forest management to its original carbon dataset, hence the continued use of the CDP acronym without reference to its original meaning. It is estimated that over 20% of industrial emissions in the world are disclosed via CDP.
CDP data is highly valued by many investors because it provides a level of transparency and standardisation that is additional to regular company publications. Any analyst interested in the details of a company’s environmental footprint is likely to check its disclosure on the CDP website. CDP also provides the opportunity for investors to collaborate through its collective engagement programme: the Non-Disclosure Campaign (NDC).
The annual campaign is designed to coordinate the efforts of the CDP members who wish to encourage companies to disclose their environmental data on CDP’s platform. It works in three steps; first, CDP establishes a list of target companies based on size, sector or country; second, NDC participants are assigned a number of companies for which they wish to lead the engagement effort; last, letters underlining the importance of disclosing this data are drafted by CDP, signed by all interested signatories, and sent by the lead investors to their target companies.
Overall, it is an opportunity to join forces with other like-minded investors to reach a common goal. Companies can be impressed by a letter signed by, for example, twenty shareholders, including some of their bigger ones. Ideally, the letter is followed up with a meeting at which the lead investor explains the benefits of disclosure and, on request, CDP employees can help with the technical details.
Measuring the additionality of engagement
One of the key strengths of this campaign is that its impact is rigorously monitored. Every year, CDP tracks a control group of companies that have the same characteristics as those targeted by the NDC but that are not engaged with and receive no letter. Comparing the disclosure rates of the two groups allows CDP to estimate whether the engagement effort has made a difference. Additionality is an overused concept in the impact world, mainly because it is so hard to measure, but this is, to our knowledge, one of the best attempts to measure the additionality of an engagement action.
For the 2022 campaign, it was found that engaging with companies multiplied the probability of disclosing with CDP by 2.31. Findings for previous campaigns confirm the positive effect and point to a similar magnitude, providing strong confirmation that this process works.
However, even then, we cannot be sure of the power of engagement in all cases. For instance, I remember a company (which shall remain anonymous), which did not reply to the CDP letter or to any of our repeated follow-ups. We were disappointed, as we had high hopes for this particular holding. To our surprise, though, we eventually found out that the company submitted its first ever climate questionnaire that same year, just before the deadline. Did we have an impact in this case? We will probably never know for sure, but we are happy they chose to disclose.
Disclosure: only the first step
Disclosure is only an initial step. As citizens conscious of the climate emergency, we should aim for immediate and ambitious reductions in GHG emissions. CDP does not provide that, but by encouraging transparency and an open and honest dialogue with shareholders on this issue, it puts the reporting companies on a path that naturally leads to emission reductions targets, and a greater awareness of their impact on water and forests. A logical next step should be to set up a science-based target for emission reductions. The Science Based Target initiative (SBTi), an organisation that validates the methodology for such targets, is, incidentally, a co-creation of CDP, in partnership with the United Nations Global Compact, the World Resources Institute, and the WWF.
No solution is ever enough when it comes to the climate emergency, but CDP provides two things that should inspire impact investors: first, it helps make environmental data more transparent and standardised, allowing better comparisons between companies; second, by rigorously measuring the efficacy of its Non-Disclosure Campaign, it demonstrates the impact of collective engagement on the part of investors. All responsible shareholders should take note.
Mathieu Nègre is head of emerging market impact equities at Union Bancaire Privée (UBP).