Investing with environmental data for a greener, resilient future

Dennis Wan, Head of Capital Markets for Asia-Pacific at CDP, in an exclusive interview with ET Edge Insights discusses CDP’s mission to transform environmental data into a potent tool for investors, companies, and governments, shaping the trajectory of capitalism towards sustainability.

Interview excerpts

When we talk about the investors in today’s time for relevance to environmental data, how can integration of environmental data into CDP benefit an investor into making more informed choices?

Twenty-three years ago, the founders of CDP grappled with a pressing question: “How do we rescue the world and humanity from, as of back then, 130 years of unbridled capitalism?” This urgency arose from the realization that capitalism, in its pursuit of profit, was making investment decisions without adequately considering the environmental toll. Individuals can only hurt the environment a little bit more or a little bit less by decisions that we make; but big companies make the most environmental impact. It’s the way that big companies produce, how they waste and how they sell us things we don’t really need. Now, after 150 years, this is what has left the world in such environmental crisis. Our founders’ inspiration was to ask big companies, ‘How can you measure yourselves and then be able to manage your environmental impact.’

The problem was our founders were just three young people in London with this idea and big companies are not going to listen to an NGO, so their second idea was to talk to banks, financiers and investors because investors own or finance the big companies. If you ask the banks to ask the companies for environmental data, then fast forward 23 years, and we have the world’s largest environmental database to give back to investors for making better investment decisions and to build into their ideas and products to guide capitalism in a better way.

Are there any industry specific considerations for investors when it comes to incorporating environmental data into their decision-making process?

Different industries have different impacts to consider. Scope 1 is what a company has under direct control. Scope 2 is where a company gets its power from, but Scope 3 is the environmental impact of everything outside the company itself, all the way down to their supply chain where they procure and even all of their customers as well.

It’s important to state the breadth of Scope 3 impact. The magnitude varies significantly across industries; for instance, in manufacturing, Scope 3 is seven times greater than the combined impact of Scope 1 and 2. In retail and apparel, this impact can be 20-30 times larger than the sum of Scope 1 and 2. Even greater, in finance and banking the number is 700-1000 or more times within the financed emission portfolios of companies.

Understanding the dynamics outside the direct purview of a company is imperative for effective environmental management. One fascinating observation is that everyone’s Scope 3 is somebody else’s Scope 1 and 2! So, CDP’s proposed solution is for everyone to measure and report their impact to a central platform. This way, we can all see and understand the environmental footprint across different industries, promoting transparency and collective awareness. And with that insight, and with the leveraged power of those 7, 20-30, 700-100 multiples I mentioned before, the right procurement and investment decisions can make massively nature-positive actions possible!

Are there any emerging trends or technologies in environmental data analysis that would significantly impact investment strategies in the near future?

CDP has recently announced a partnership with XBRL, a seasoned firm specialising in data tagging information reporting. As a data-centric NGO operating in environmental data for over 23 years, we acknowledge the need for data to be more user-friendly in today’s technological landscape. This collaboration aims to enhance the usability of environmental data by ensuring proper tagging.

This partnership intends to maximise the utility of the two-thirds of the world’s listed market capitalization which discloses to CDP. With over 23,000 global companies reporting to us, including 702 Indian companies with a combined market capitalisation of 1.4 trillion USD (a 44% increase from the previous year), we recognise the potential for transformative impact. In optimising the tagging of this wealth of data, we will ensure that the entire ESG information ecosystem can use CDP data better. Ultimately, this initiative aligns with our mission to rectify the course of capitalism through informed and responsible practices.

How can CDP help a government in making data-informed policy decisions or addressing environmental challenges in a more effective manner?

Over two decades of our serving the world, we have identified three key actors in our ecosystem.

The first set of actors were investors. Recognising the influence investors wield in the real economy concerning environmental data, we observed a positive response from companies operating in the real economy.

Then 14 years ago, a second set of actors was companies themselves who started wanting to share the advantages of sharing their environmental information with CDP by asking their supply chains to disclose, too. By encouraging their supply chains, major buyers themselves caused an acceleration in data being collected.

But finally we know that companies, even if they can overlook investor or buyer demands for environmental data, are unable to disregard the third set of actors who are regulators or government requestors. For example, we have an MOU with the Hong Kong Monetary Authority (HKMA), where our CDP questions are used to facilitate reporting among Small and Medium Enterprises.

The result of two decades of data collection inspired by the three actors above is that through our government partnership programme, we provide a dedicated government dashboard, offering jurisdictions collaborating with us a comprehensive view of environmental data from corporations and institutions within their purview. CDP offers these tools because we know that to manage well, you need to measure, and you can’t solve problems without understanding what’s happening. So, we work with governments all the time simply by providing them a view of what is going on in their jurisdictions and we welcome partnership with any interested government seeking more environmental data.

Do you have any specific strategies or initiatives planned for the near future?

We have recently announced two major partnerships, including future alignment with the International Sustainability Standards Board (ISSB) and Taskforce for Nature Financial Disclosures (TNFD). By simplifying complex sustainability recommendations into business-friendly questions, we aim to guide companies towards responsible practices, fostering transparency and contributing to our mission of course-correcting capitalism.

For example, consider the Task Force on Climate-related Financial Disclosures (TCFD), which provides fundamental recommendations, such as having the board oversee the company’s climate risk exposure. When a board encounters a recommendation, the typical response might be, ‘What do we do now?’ However, if you read the TCFD questions within the CDP questionnaire, the inquiry becomes more direct: ‘Does your board oversee climate risk?’ This shift from a suggestion to a specific question rewards transparency. Your answers send a powerful message to investors and stakeholders globally that your company is committed to doing the right thing by having the board supervise climate risk exposure. If the answer is no, it prompts self-reflection and a potential reconsideration. This approach aligns with CDP’s mission of guiding companies toward a stewardship journey for better environmental practices.