What Is a Carbon Disclosure Rating?
A carbon disclosure rating is a measure of the environmental sustainability of a company, based on voluntary disclosures by the company itself. The practice is intended to help investors who wish to incorporate environmental, social, and governmental (ESG) factors into their investment decision-making process.
The most widely used carbon disclosure ratings are administered by CDP, a United Kingdom-based non-profit organization formerly known as the Carbon Disclosure Project.
The carbon disclosure ratings collected by CDP are comparable to the carbon disclosures collected by the Amsterdam-based Global Reporting Initiative (GRI). GRI works with businesses and organizations alike, while CDP works specifically with individual companies.
- A carbon disclosure rating is a measure of the environmental sustainability of a corporation.
- It is administered by CDP, a non-profit which collects self-reported survey responses from just under 6,800 participating companies.
- The companies which achieve the most favorable rankings tend to be large institutions that are dominant in their respective industries.
- Critics argue scores are inconclusive or misleading since failure to provide information to CDP—or to provide the information in a timely manner—is taken into account when a score is determined.
How Carbon Disclosure Ratings Work
The basic framework involved in generating carbon disclosure ratings is the use of questionnaires administered by CDP. Companies participating in this program, which number nearly 6,800 as of year-end 2020, submit responses on an annual basis to a series of questions tailored depending on the company’s industry. The responses are then analyzed, graded, and made available to institutional investors and other interested parties.
CDP's metrics separate companies based on their understanding and application of climate-related changes.
A and A- | Leadership level
B and B- | Management level
C and C- | Awareness level
D and D- | Disclosure level
F | Failure to provide sufficient information to be evaluated
One criticism of the carbon disclosure rating process is that its scores do not necessarily reflect the actions a company takes to mitigate its impact on climate change or to offset its carbon footprint. Rather, a score may simply reflect that the company failed to promptly or fully disclose information with CDP. For example, for 2020, Amazon (AMZN) was given a score of “F” by CDP because it did not respond to CDP’s requests for information.
However, an "F" does not mean the company has failed to reign in its carbon footprint. Rather, it means that the company has failed to provide enough information to CDP to receive an evaluation. As a result of this, another criticism of the process is that the ratings are inconclusive, as many companies do not provide information to the CDP on what actions they've taken to limit how they impact climate change.
Real-World Example of a Carbon Disclosure Rating
CDP publishes an annual “A-List” of the companies that ranked most favorably in their carbon disclosure ratings. In 2021, 342 companies were featured on this list, many of whom are large multinational corporations that are dominant in their respective industries.
These include many prominent American companies, such as Apple (AAPL), Bank of America (BAC), Ford Motor Company (F), Johnson & Johnson (JNJ), Microsoft (MSFT), and Walmart (WMT).