All ESG scores need context: CDP’s response to Ulf Erlandsson’s recent critique
CDP’s Ross Simson puts the record straight on Adani’s latest score
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As anyone who relies on ESG data knows, it is never a good idea to fix upon a single data point or ranking without fully understanding the wider context.
That is why the article ‘Adani Ports and its CDP score’ published in Responsible Investor last month was both unhelpful and misleading to anyone involved in the business of encouraging markets to use ESG data to make better investment decisions.
Firstly, the article suggests that the reason for the score of Adani Ports score being higher than last year is due to its answer to the question ‘Have you identified any inherent climate-related risks with the potential to have a substantive financial or strategic impact on your business?’, which the article calls a ‘headline question’.
It would be chronologically impossible for CDP’s score to influence the DJSI
This is not accurate. This question (called C2.3 and C2.3a in CDP’s questionnaire) is just one question among many – the questionnaire is long and comprehensive with 15 sections and dozens of individual questions which are all considered in the scoring. This question is not called a ‘headline question’ by CDP or highlighted in any way in the questionnaire. Basing conclusions solely on this response is, at best, putting two and two together to make five.
What’s in a B-?
The article provides legitimate criticism of Adani Ports’ activity in the coal industry, but a logistics company providing logistics support for transporting coal does not prevent a company from achieving a B- score in CDP’s methodology.
In CDP’s scoring methodology, a B- score indicates that the company has better performance than last year (when it achieved a C), but it also means that it did not provide enough demonstration of good environmental management to achieve a B. A B- score certainly does not reflect environmental leadership and it is misleading to imply this. B- may be slightly above average, as 75% of disclosing companies achieve a D-C score, but CDP does not consider a B- to be a high score.
It is also important to note that the article makes the direct inference that Adani Port’s 2020 CDP score resulted in its inclusion in the 2020 Dow Jones Sustainability Index. This is inaccurate. Not only is the methodology for the DJSI independent of CDP, but since the DJSI publishes its scores ahead of CDP’s, it would be chronologically impossible for CDP’s score to influence the DJSI.
Until environmental disclosure rules are standardized and made compulsory across the world, self-reporting remains the best option currently available to the market
The importance of self-disclosure
The more general point of the article was to highlight that with self-disclosure comes the risk of companies not disclosing full or accurate information. That is true, and it is the reason why at CDP we mitigate against this as much as possible by incentivizing comprehensive and transparent responses through our scoring methodology, and reminding companies that their response will be viewed by their investors. Most companies are not currently required by law to disclose environmental information, and even in jurisdictions that have mandatory disclosure, the legal requirements are generally much more ‘light touch’ than CDP.
Until environmental disclosure rules are standardized and made compulsory across the world, self-reporting remains the best option currently available to the market. Even with mandatory disclosure, it is likely to provide a floor rather than a ceiling, and CDP data will continue to be more comprehensive. Rich environmental data is key to achieving the low-carbon transition.
It is also working. Over 10,000 organizations now respond to CDP’s questionnaires and companies are more than twice as likely to report climate risk data when investors actively pressure them to do so.
Almost 700 of the companies who self-report climate data through CDP have committed to set a science-based emissions reduction target. Recent analysis of 338 companies with science-based targets found that they had reduced their combined emissions by 25% since 2015 - a rate that exceeds the rate needed to limit warming to 1.5°C.
We at CDP believe that ESG disclosure should become mandatory generally and as such we welcomed the UK government’s announcement last year that it will mandate climate disclosure in alignment with the TCFD recommendations. As the first G20 government to do so, this sends a powerful signal to the market and other governments that they should follow the UK’s approach, ahead of COP26.
The wider context here is that while voluntary disclosure is not perfect, it is the most effective framework we have as a once-in-a-generation opportunity approaches to progress the low-carbon transition.
Ross Simson is the Global Director of Disclosure Data, Insight and Products at CDP