As Fink’s CEO Letter Calls For TCFD Disclosure, CDP Enables Investor Pressure For Corporate Transparency

In his annual letter to shareholders, Blackrock's Larry Fink says transparency is an important element of delivering long-term, durable returns, yet CDP says many companies are still failing to report. It's Non-Disclosure Campaign (NDC) enables investors to have an impact on disclosure through direct engagement, addressing the disconnect between rhetoric and reality.

The last eighteen months have seen a growing number of investors and financial institutions announcing net zero targets. By COP26 in Glasgow last year 90% of the world's economy had committed to net zero and the total financial capital committed to net zero targets was $130 trillion, up from the beginning of 2020.

Yet disclosure has not kept pace with commitments. Fink's latest letter asks companies to issue reports consistent with TCFD framework disclosures on climate risk, yet CDP says many companies are not engaging at all. Over 7000 of the world's largest companies are annually requested by CDP, on behalf of their investors, to disclose their impact and management of climate change, forests and water security. In 2020 over 4,000 – more than half – did not provide the requested information.

One of the earliest entrants into the world of environmental reporting, the CDP reporting platform provides capital markets with the most complete source of self-reported corporate environmental data, in a consistent and comparable manner. It is fully aligned with the Task Force for Climate-Related Financial Disclosures' (TCFD) recommendations and the data it collects forms part of a number of ESG ratings assessments across the market.

The campaign allows investors to directly engage companies who have previously failed to disclose their environmental impact through CDP, and encourage them to do so. Analysis shows that companies are more than twice as likely to disclose their environmental impact if directly engaged by investors to do so. Furthermore, after a company has disclosed to CDP for the first time, they are very likely to disclose the following year. Of the companies that participants successfully targeted in the 2020 campaign; 85% responded once again this year on climate change, 90% on water and 91% on forests.

Laurent Babikian, Joint Global Director of Capital Markets CDP says that comparable and transparent data is essential to delivering net-zero targets. He says, "Data availability, quality and comparability was cited as a key challenge by financial institutions who tested the EU Taxonomy to Core Banking Products." The Non-Disclosure Campaign (NDC) is a way for investors to directly engage those companies which are failing to engage in what is swiftly becoming a 'must have' for investors and continue to fill the environmental data gap.

In 2021, 168 investors and financial institutions from 28 countries (including 78 financial institutions who joined the campaign for the first time), representing $17 trillion in assets signed up to the campaign and selected to engage 1,317 companies on environmental disclosure. Those companies were based across 77 countries, represent $29 trillion in market cap and 4.9 billion in tCO2e in emissions. Overall this was a 56% increase in participating investors and a 29% increase in the number of companies they engaged, compared to 2020.

Babikian says, "Since its inception in 2017, the campaign has seen an average 35% year on year increase in both participating investors and companies as ESG moves into the mainstream and the need for comprehensive, comparable environmental data becomes ever more necessary. A record 25% of companies which were engaged in the campaign disclosed through CDP in 2021. This includes the likes of Amazon, Netflix, Facebook and Twitter, which disclosed through CDP for the first time after being targeted.

Geographical coverage is also important – an overwhelming majority of the financial institutions taking part in the campaign are asset managers, with the greatest regional representation being from Europe and the UK. 77 of the 168 investors that took part in the campaign were from Europe, whilst 41 of the 168 participants were from the UK alone.

There is still a great deal of work to be done. Credible action needs to be taken to show a trajectory in line with the Paris Agreement. Shareholders, and indeed stakeholders, expect companies today to play their part in the transition towards a low carbon economy, they expect to see action taken on emission, resource use, energy and environmental impact. Net zero is now a totally mainstream goal – even laggards like Exxon have made such commitments.

Without disclosure however, it's impossible to know what's going on. Definitions, boundaries, measurement and performance against targets needs to be comprehensible to all. This is not just about net zero but a basic risk management issue – the old line is that you can't manage what you don't measure – if a company is not measuring, managing and disclosing their actions, both company and investors run the risk of coming up against unexpected problems that can range from supply chain challenges to reputational cost, regulatory impacts and even liability challenges.

Fink's annual letter to CEO's underscores the importance of disclosure and CDP's work highlights the impact of getting institutional investors to engage with individual companies. While members of the public may not be able to get involved, Babikian suggests that any member of the public may wish to ask if their pension fund is a CDP signatory and whether they support the non-disclosure campaign, He adds, "We would welcome their advocacy in doing so – similarly, shareholders could ask large purchasing corporates to participate as well, although there is no coordinated campaign or avenue for these communications at this stage."

Access to capital is going to be a defining factor in the credibility and speed of the transition to net zero. Fink says, "Capital markets have allowed companies and countries to flourish. But access to capital is not a right. It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you." Accurate, robust and transparent data is the only way to ensure that investors and stakeholders can be confident in a company's operations and strategy. As Larry Fink says, "Companies not adjusting to this new reality … do so at their own peril."