What is the Carbon Disclosure Rating
A carbon disclosure rating is a numerical score which indicates the level of reporting of a company's climate-change initiatives. The best-known carbon disclosure rating comes from a survey issued by United Kingdom-based, Carbon Disclosure Project (CDP), a nonprofit formerly known as the Climate Disclosure Project. CDP claims it has amassed the most extensive collection of self-reported climate data from corporations in the world.
BREAKING DOWN Carbon Disclosure Rating
The carbon disclosure rating focuses on information on a company level rather than on a national level. After collection, the Carbon Disclosure Project shares the individual scores and related information with clients. Clients include institutional investors, many of which are interested in determining the potential long-term risks associated with companies’ environmental impacts.
CDP's metrics separate companies based on their understanding and application of climate-related changes.
- A carbon disclosure rating of 71 to 100 reflects that a company’s management team understands the business issues related to climate change and is building climate-related risks and opportunities into its core business.
- Scores between 50 to 70 indicate an increased understanding of company-specific risks and opportunities related to climate change.
- Ratings below 50 suggest a limited ability to measure and disclose climate-related risks and opportunities, as well as a company’s overall carbon emissions.
The CDP’s carbon disclosure rating does not necessarily reflect the actions a company takes to mitigate its impact on climate change or to offset its carbon footprint. A significant part of the CDP’s scoring demonstrates the level of disclosure of climate-impact information.
Pros and Cons of Carbon Disclosure Ratings
Carbon disclosure ratings are useful to institutional investment firms that use social, environmental and governance (ESG) criteria, to evaluate long-term investments for clients. As shown by Global Sustainable Investment Alliance (GSIA) most recent report, ESG-based investing assets in the U.S. expanded to $8.72 trillion by 2016, up 33 percent since 2014. The report concluded that one of the leading ESG issues, based on assets affected, was climate change.
GSIA defines sustainable investing as activities and strategies that exclude problematic investments; seek out best-in-class investments; integrate environmental, social and corporate governance (ESG) factors; and focus on sustainability as well as on impact investing aimed at solving social or environmental problems. Additional information for investing using ESG criteria comes from the Forum for Sustainable and Responsible Investment (US SIF), a 501(C)(3) non-profit organization.
A common criticism of the CDP’s carbon disclosure rating is that companies who choose not to participate in its survey, perhaps because a management team takes issue with particular criteria within the rating system, receive low scores as a result. For instance, as reported by the Seattle Times, Amazon received a poor carbon disclosure rating from CDP in 2016, mostly because it was among the minority of companies traded on the S&P 500 that chose not to respond to the CDP survey.