As the link between environmental indicators and financial data is ever more in the spotlight, CTMfile speaks to Nico Fettes, of CDP Europe, who is leading the Climetrics green ratings initiative, to ask how data requirements for sustainable ratings will affect CFOs and corporate treasurers.
Sustainability and financials
Companies are increasingly being encouraged to measure and report on their environmental impacts, such as carbon emissions, use of fossil fuels, clean technology and deforestation. And the link between sustainable or green indicators and corporate financial data is becoming more apparent. Last month, Climetrics, the world’s first and only independent body that provides climate ratings for investment funds, announced its advanced methodology for scoring funds that invest in companies with emissions reduction targets based on climate science.
The green ratings system is a joint initiative between CDP and ISS-Ethix Climate Solutions. The project is led by CDP's Nico Fettes, who explains: “The whole purpose of Climetrics is to show that the financial markets and investors are using the data corporates provide on climate risks and that data is out there and visible. So CFOs are becoming more interested and involved in their company's sustainability programme and it's something that will affect financial and control departments.”
Corporates asked to provide more financial data
This is part of a broader move towards a more robust understanding of the financial impact and financial risk related to climate change. The aims of Climetrics are in line with the Task Force on Climate-related Financial Disclosures (TCFD), a G20 task force coordinated by Bank of England governor Mark Carney. The TCFD promotes a disclosure framework to establish a link between climate and financial indicators. This year it is encouraging companies to report both sustainability and financial data, with results expected at the end of the year.
Fettes explains that CDP's survey – the mainstay of its business – goes through a consultative phase every year so that it reflects changes in the market, in particular the move towards trying to quantify the risks associated with climate change and how this links to the bottom line. This year, for the first time, he says, corporates are being asked to provided more data on their financials.
How Climetrics works
CDP – previously known as the Carbon Disclosure Project – describes Climetrics as “the world’s first fund rating which enables investors to integrate climate change into their investment decisions”. The company runs the global disclosure system that enables companies, cities, states and regions to measure and manage their environmental impacts. The company, which is 55 per cent funded by philanthropy and public government funding (it also charges admin fees to corporates and investors and offers some commercial services), aims to introduce greater transparency into investment in financial markets, enabling investors and companies to make more sustainable decisions and to understand their environmental impacts.
Using data gathered in CDP's detailed annual survey questionnaire, sent out to between 6,000 and 7,000 mid- to large-cap corporates worldwide, the Climetrics system is able to evaluate and gauge the environmental impact of thousands of the world's biggest companies, with a focus on those that have implemented science-based emissions targets. Climetrics can then assign a 1-5 leaf rating to the funds that invest in these companies. Five-leaf ratings are given to the most environmentally-friendly organisations.
The Climetrics ratings are based on largely self-reported data but some modelling is also involved. Fettes explains that some companies struggle to report certain types of data, such as carbon emissions, accurately. Other types of corporate financial indicators are also difficult to quantify, for example the extent to which a company might impact the environment through its supply chain. CDP's survey questionnaire asks qualitative questions, such as how companies engage with their suppliers and how they implement green policies, while CDP's partner ISS-Ethix also does some quantitative modelling. Fettes notes that there are, however, areas that lack breadth of data.
Each fund is benchmarked against all the other funds in the same segment, meaning that the benchmark can shift up or down according to data provided. Fettes says that Climetrics aims to eventually tie the rating to an environmental benchmark (such as the 1.5 degree rise target). But he adds: “With the data we have today, that's not possible so we rate funds against the 'universe'. So we have to become a lot more ambitious on benchmarking and having an impact.”
The ratings are currently assigned to funds for institutional investors but CDP's long-term aim is also to use Climetrics as a tool to engage retail investors, in line with the company's overall mission to create awareness and transparency about environmental impacts in financial markets.
CFOs: speak to sustainability colleagues
But the message for corporates is clear: financial data will be playing a far more central role in measuring a company's sustainability efforts in future. And investors will be watching closely. Fettes concludes: “Our message to CFOs and treasurers is that their company's financial data will be evaluated in relation to the organisation's environmental and sustainability programmes and that the data is being used by investors and shareholders – I would encourage CFOs to speak to their sustainability departments.”
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