By Dave Collins, MAC Consulting (Contributor)
2013 will be the seventh successive year in which the Carbon Disclosure Project (CDP) has sent a request to South Africa’s top listed companies, asking them to measure and disclose what climate change means for their companies. The 2013 CDP season is now officially upon us – the new questionnaire has already been issued and responses are requested by 30 May.
The CDP’s website states: “The first step towards managing carbon emissions is to measure them because, in business, what gets measured gets managed. The CDP has played a crucial role in encouraging companies to take the first steps in that measurement and management path.” This is indeed true, but several important issues remain to be addressed by companies and the CDP itself.
Disclosure and performance
South African companies have improved their understanding of what climate change means for them. They have also become better at answering the CDP questionnaire. This is illustrated by two sets of numbers: over the four years from 2009 to 2012, the average South African disclosure score rose from 62% to 82%, and the number of companies scoring more than 90% on disclosure rose from zero to 19, with12 of these scoring 95% or more!
Table 1 Disclosure scores
South African JSE top 100
CDP year Average Disclosure score % Number of companies scoring more than 90% on Disclosure
2009 62% 0
2010 74% 2
2011 76% 5
2012 82% 19
Disclosure measures the quality and completeness of a response
It is interesting to note that the top three scorers were all mining companies, with scores of 100% (Exxaro Resources), 99% (Gold Fields) and 98% (Harmony Gold Mining). This illustrates the concern that the mining sector has about the physical, regulatory and general effects of climate change.
With so many companies now crowding at the top of the hill, disclosure, which measures the quality and completeness of a response, must surely be seen as a pre-qualification for the essential business of achieving performance. Importantly, the latter focuses on the ambition and the success of actions to mitigate climate change. This is clearly what ultimately makes a difference.
As South Africa’s CDP 2012 report noted: “For companies to respond meaningfully to mitigation and adaptation, they will need to demonstrate willingness (where necessary) to interrogate their core business strategy. Unfortunately, a well-answered CDP questionnaire is not in itself sufficient to enable an informed assessment of a company’s strategic engagement on climate change.”
What is unclear is to what extent performance is going to be encouraged; the CDP designates performance scores in a series of five bands, a methodology which as yet has to command the profile and the excitement of the disclosure score.
World governments’ stated ambition of limiting global warming to 2°C increasingly appears to be unachievable. Expert organisations such as the International Energy Agency (IEA) are now projecting a rise of around 3.5°C if existing policies are maintained and recently announced commitments and plans, including those yet to be formally adopted, are implemented in a cautious manner. Climate Action Tracker and others have drawn similar conclusions. The International Energy Association (IEA) now considers 4°C and 6°C scenarios, as well as 2°C in their Energy Technology Perspectives 2012 analysis.
Therefore, companies, communities and governments will need to focus more explicitly on preparing for a warmer world. Moreover, companies can expect their adaptation efforts to become increasingly material to investor decisions.
Since the CDP questionnaire focuses strongly on quantification of footprints and emission reduction initiatives, arguably to the detriment of attention to adaptation measures, companies should make a special effort to describe their approach to adaptation in their CDP responses.
Equity versus control accounting and carbon taxation
The CDP 2013 Question Q8.1 asks: “Please select the boundary you are using for your Scope 1 and 2 greenhouse gas inventory” and the Guidance defines the options:
• An organisation has financial control over an operation if it has the ability to direct the operation’s financial and operating policies with a view of gaining economic benefits from its activities. Generally, an organisation has financial control over an operation for greenhouse gas (GHG) accounting purposes if the operation is treated as a group company or subsidiary for the purposes of financial consolidation.
• An organisation has operational control over an operation if it or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation.
• Under the equity share approach, a company accounts for GHG emissions from operations according to its share of equity in the operation. The equity share reflects the economic interest, which is the extent of rights a company has to the risks and rewards flowing from an operation. Typically, the share of economic risks and rewards in an operation is aligned with the company’s percentage ownership of that operation. The equity share will normally be the same as the ownership percentage.
It seems that many (if not the majority of) South African companies are reporting to the CDP on an operational control basis and a few on a financial control basis. However, from the viewpoint of a company aiming for carbon neutrality, or needing to understand its exposure to carbon tax, the use of the equity share approach is appropriate.
This means that companies using operational and financial control as a basis for accounting will at some stage either change to the equity approach basis or choose to report on multiple bases.
Other issues for CDP 2013
A grouping of organisations, led by Exxaro Resources and including Eskom, the National Business Initiative, the Carbon Disclosure Project, the Industry Task Team on Climate Change, the World Resources Institute and MAC Consulting, has established some anomalies in the methodology for calculating South Africa’s Grid Emission Factor. A major implication is that companies appear to have been overstating their scope 2 emissions by up to 10% for the past few years. A paper explaining this will be placed in the public domain shortly, and the intention is to generate a definitive factor in time for use in CDP 2013.
The structure of the questionnaire has settled down, with very few changes in 2013 from 2012, which in turn had changed little from 2011; the evolutionary years were until 2010. Some of the pertinent changes in 2013 from 2012 are:
• Strategy: Engagement with policy-makers: a much more structured approach with more information is required.
• Scope 2 emissions: more breakdowns are required.
• Scope 3 emissions: sources: more sources and more information is required per source.
• Scope 3 emissions: engagement with value chain: more information is required.
South African approach to the CDP
In discussions with Paul Dickinson, executive chairman of the CDP, during a visit to South Africa in late 2012, it was noted how competitive South African companies are in their approach to the CDP. This is reflected in the results of CDP 2012, with South Africa having the second highest country response rate in the world, and in the fact that 19% of the JSE top 100 companies had a Disclosure score of more than 90%, the same proportion as for the Global 500 CDP.
South Africa is recognised by the CDP as a thought leader. The preparation of responses to CDP 2013 offers companies an opportunity to not only reinforce this reputation but also to take a fresh look at the climate change response strategies.
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