EP 58: The Business Case for Environmental Disclosure

Josh Green: Welcome to Sustainable Intelligence, where we discuss all things sustainability in the private markets. I’m Josh Green, Co-CEO and Co-Founder of Novata. And today we’re joined by Sue Armstrong Brown, Global Director of Environmental Impact and Thought Leadership at CDP.

Environmental disclosure has historically been viewed by some as merely a reporting exercise, but today that’s changing. New research from CDP suggests it can also be a powerful driver of business value. In today’s conversation, we’ll explore CDP’s newly released Disclosure Dividend Report, which examines how environmental disclosure can help organizations better understand risk, uncover opportunities, strengthen resilience, and ultimately create long-term value.

Sue, welcome to Sustainable Intelligence.

Sue Armstrong Brown: Thank you, Josh. It’s great to be here.

Josh: So before we dive into the report, for listeners who may not be familiar with CDP, could you tell us a little bit about the organization, your role there, and the work you lead, and maybe a bit of backstory, too, how you got into this role?

Sue: Of course. CDP’s the global nonprofit that runs the world’s leading environmental disclosure system. And to do that we work with companies, investors, cities, states, regions, and policymakers to identify what information they would find most useful, and then build that into our disclosure platform to collect that.

It’s a self-disclosure model, which is very useful. And the stakeholders that come to it disclose are in charge of the data that they deliver onto the platform and they’re making choices about what is most material to them. Our aim is to help organizations better understand their environmental risks and opportunities so that they can make more informed business decisions.

And that’s because when businesses and investors and purchasers are fully across those risks and opportunities, they can integrate them in a much more comprehensive manner. And we do see that as being one of the major factors in driving down the environmental footprint that is arising from economic actions and decisions that are being taken.

So the more information that can be surfaced and delivered through disclosure, the higher quality environmental decision-making we will start to see.

Josh: Wonderful. And tell me about your role.

Sue: So my part of the organization we look at the beginning and the end. We’re looking at what environmental data needs to be collected, what does the world need, and looking at how we might evolve our disclosure system to make sure that we continue to be across or even ahead of emerging risks, emerging priorities, emerging environmental topics.

And then we come in at the end again after the disclosure cycle has taken place and we look at what has been surfaced, what the patterns are, what the insights are, what companies are telling us, what investors are telling us, what policymakers are telling us, and we try to draw the patterns out from the disclosure that we’ve had every year and surface the insights.

Josh: So that brings us to the Disclosure Dividend Report. And for listeners who may be hearing about this for the first time, tell me about what the Disclosure Dividend Report is, where it came from, what the goals of the report are.

Sue: So Disclosure Dividend, it’s the title of the report, but it’s the term we’ve come up with to describe the benefits that organizations receive by disclosing and then acting on environmental data.

And we thought that was really important because disclosure is obviously an important compliance tool, but it has become so much more than that. So we wanted to make sure that we were able to talk about it in terms of the contributions that come from the act of disclosure as well as the requirements and the security that arises from doing disclosure, which I think are more front of mind when people think about it.

But disclosure isn’t simply about reporting. It’s enabling companies to better understand their environmental risks and identify their opportunities, and then improve their resilience, strengthen the confidence of their investors and their purchasers, understand what the impact changing regulation is likely to have on them, and put plans in place.

So that’s why we’re calling it the Disclosure Dividend, and it’s really trying to explore that space around the benefits that companies have when they engage in disclosure. Last year’s report was primarily focused on climate risk. It was the first time that we ran the report. This is the second year, so we’ve been able to build out a little bit more.

And the big priority areas in addition to climate risk that we wanted to move into to fully cover were the physical and transition risks across not only climate, but forest and water security, so the big nature themes as well. And that gives us this year a much broader picture of the financial value that businesses can create when they start to address, surface, measure, and manage their environmental risks.

What we found and I’m sure we’ll go on to talk about this in more detail but the real high-level message that we found this year in the report is that environmental action is not a cost. Companies told us about the return they were getting on their investment. And that really is a key message to understand that environmental decision-making can deliver measurable financial returns for business, and that really tells us something about how we should see sustainability as a core driver of economic advantage as much as anything else in any given business.

Josh: Feels very timely given the pushback that we’ve seen against sustainability over the last couple of years in particular.

I think it’s led to a real desire to see a business case for this work. And it seems to me that you’re making that business case. And was struck by one of the headline findings that companies are seeing a median return of $8 for every $1 invested in responding to environmental risks.

Did that surprise you? Did you see that coming? What was your reaction to that finding?

Sue: We never quite know what the numbers are gonna be in any given year because companies are constantly assessing their environmental value and applying new factors, but the overall picture, not really, actually.

And you touched on a really important point about in the face of the wider shift away from sort of global unity around this and into individual risk assessments. This is a really important element. Companies need to be empowered and equipped to identify the risks.

Any risk is critical for a business to understand. So understanding what the return on investment can be from addressing a key area of risk, in this case environmental, is critical.

And it tells us quite a lot. So the biggest takeaway that came through for me was how consistent that business case is. So across the sectors and across the industries, we looked at the same question, and it came back consistently each time that the amount of return vastly outstrips the cost of investment in mitigating environmental risks.

On average, as you’ve said, we saw that one to eight ratio, and when we look at physical climate risks, we get even higher returns. It’s about $10 for every dollar spent in handling a physical climatic risk. And that’s gone up since last year too, and we all remember the year we’ve just had.

We’ve seen some acute physical climatic risks affecting businesses, from floods to wildfires. And we’re starting to see that in the numbers that get reported into us. We’re seeing it in financial services too where higher returns on every dollar invested when you’re in the financial sector.

And we also do see some variability by sector as well for companies. You’d expect those patterns, but the overall story is loud and clear. And probably something to just draw out there is sustainability’s, it’s no longer about avoiding harm.

But it’s more than that. It’s about becoming a driver of resilience. Being able to identify and invest in managing environmental risk is a massive driver of business resilience and operational efficiency. That’s what these figures are telling us. The avoided losses, the competitive advantage, they’re all measurable, and you can put those on the balance sheet against the cost of investing to manage down the risk and see that it’s usually in a business’s favor to start to address them.

Josh: So can I push you on this a bit? So I think it’d be helpful to make this tangible for our listeners. I think everybody can grasp what the cost of reporting is, but in terms of tangibly where that $8, $10, or whatever the number is by sector, how that actually shows up. I think I heard a couple things from you.

Lower costs, so presumably that’s identifying cost savings as you’re going through the process of doing reporting. Avoided risks, competitive advantage. Maybe give us some, some tangible examples of how this actually shows up as a financial benefit to your organization.

Sue: Yes, and it can be very specific to the individual case that we’re talking about, of course.

But I’ll give you an example. There’s a company that’s featured in the report, an Indian food and bev company that was facing water stress and that was impacting its direct operations. And that risk was identified, and the company implemented a portfolio of water stewardship initiatives. And so obviously that had a cost, but that enabled the company to drive down their fresh water consumption and in turn reduce their exposure to those risks and the costs of doing that were dwarfed by the benefits in terms of operational stability and the efficiencies that brought.

That’s one example. But we do see that each company’s gonna have its own unique risk fingerprint, but the overall story tends to be similar in terms of taking the action to cut out the risk is it yields benefits in more than one area. So it’s not just return on investment on that particular thing. It will knock onto an operational efficiency or an avoided loss or a competitive advantage if the company can go out and say to their investors or their purchasers, “We’re a more stable bet.”

So you get that multiplier effect from surfacing and then addressing one of the risks that companies are facing.

Josh: Yeah. It’s so helpful to have the business case being made so clearly. So thank you for doing the hard work to build it out. Wanna talk a little bit about how things have evolved over the last, let’s say, decade. What have you seen in terms of changes?

Sue: In terms of how disclosure is handled?

Yeah. I think we can look back over the decade and see it was originally largely a transparency and compliance exercise.

Josh: Yep.

Sue: Now it’s turned into a management tool, and we can see that sort of coming through in a number of different ways. There’s some cool stats that are quite nice here.

In 2018, just under two-thirds of companies had an environmental risk assessment process. Already quite good.

Josh: Yeah.

Sue: But by last year, the last full disclosure cycle that we’re looking at the figures from, nine out of ten companies had an environmental risk assessment process, and that’s in seven years, so that’s really quite a steep trend.

This is surfacing in the minds of companies, and they’re investing in sorting out their processes to be able to handle environmental risks and quantify them. So to me, that trend is less about the mainstreaming of disclosure, although obviously that’s happening. It’s about disclosure moving from a reporting mechanism into a decision support tool.

Because you can tick the compliance box by disclosing at a lower level. But by the time we see companies moving along their disclosure journey up into the point where they’re quantifying risks and using them to support their own decisions, it’s less about the benefits to everybody else, and it’s more about the benefits to the company themselves.

And so that’s where we’re seeing the leadership trend moving, which is really interesting. And it’s actually quite encouraging. We know what we’re up against environmentally. We know where we are, and we know that philanthropy and governments can’t do the whole job, so we do need to see the big, powerful economic levers swinging into play.

And the more I see companies owning this agenda, surfacing their risks and investing to manage them, the more I feel like this could be the thing that makes the biggest difference of all.

Josh: So if you step back, more companies doing the work, and it sounds like the why they’re doing the work is changing as well.

It’s shifting from the compliance box-ticking exercise to actually identifying how it’s gonna help them in a material way.

Sue: Yeah.

Josh: And that hopefully is a virtuous cycle with companies doing that, seeing the benefit, and then doubling down on that work.

Sue: Yeah, the companies that are measuring and disclosing environmental data, they’re the ones who are best equipped to anticipate risk and to protect their value and unlock the opportunities. So there’s a little stat here. I don’t want to throw too many numbers at you ’cause-

Josh: No, we love numbers.

Sue: that’s redundant. But…

Josh: We love numbers.

Sue: Oh, good. Here’s a number. This report shows that companies that disclose through CDP face much lower transition risks by 2050 compared to the ones that aren’t disclosing. $1.7 trillion less in transition risks.

They can do major things that take quite a lot of high-level decision making, such as relocating their operations or transferring risks through different insurance adjustments. And then the proactive risk reduction ahead of time by strengthening their adaptive capacity. And those things, they’re not responding in the moment.

They’re anticipating and planning ahead and directing business strategies. It’s environmental strategy becoming business strategy, and that’s a big strategic advantage that the companies who are feeling confident and across their risks and able to look into the future and use scenario planning, which not all companies are yet able to do.

They’re the ones that are starting to seize these kind of strategic advantages as a result of doing that homework first, getting their disclosure done, identifying their risks, mapping them, knowing what it will take to shift their operations to reduce their overall risk profile going forward.

Josh: So I’d love to get your advice for companies that are thinking about how to move forward in a way that goes beyond compliance. And maybe we can be even more specific and say advice to sustainability leaders at companies that are trying to make the case internally that, look, we’ve got to change the way we think about this from a compliance exercise to an exercise that’s actually gonna generate meaningful value.

Any advice that you have for folks? I mean, should you let the numbers do the talking? Should we hand over the Disclosure Dividend report and encourage people to read it? What would you recommend that the folks do who want to make this case internally?

Sue: Yeah, it’s a really good question.

We do hear about this a lot. We have the sustainability teams in businesses who are very familiar with this, and then we have the C-suite, which has to think about all of the different dimensions of how the business is run, one of which is environmental, and are having to deal with different level of decision-making and different factors.

So my advice would be to always follow the money, because usually that’s where the business decisions are going to hinge. And that’s why the CDP questionnaire is really focused a lot on being able to identify the risk and then value it, being able to identify the opportunity and then value it.

So that will speak for itself. Those numbers add up. And obviously are meaningful to the degree that each business is able to view them in context. So that’s one of the big successes that we’ve seen where businesses are really taking the lead. They’re the ones putting internal carbon and water prices into their companies.

They’re the ones who are fixing incentives in executive pay to environmental performance, which then turns it into its own internal driver for success, but that comes from an understanding that managing down environmental risk and seizing environmental opportunity is an intrinsic part of the company’s success and not an extra nice add-on.

Whenever you see a company that leads with the wildflower strip around their car park rather than their operational impacts and how they’re gonna manage risk in their supply chains, you know that there’s another conversation that it would be great to have.

Josh: Follow the money. Good advice and reminds me, my father-in-law has an expression.

He says, “Money’s the answer. Now, what’s the question?”

Sue: What’s the question? That’s very good.

Josh: So let’s bring it home on the Disclosure Dividend report. If there’s one takeaway that you want people to walk away with, what would it be?

Sue: The key message really is disclosure isn’t just about transparency, it’s a strategic management tool.

It helps organizations understand their risks, it helps them uncover their opportunities, and probably the most fundamental point of all, it helps companies build resilience in an increasingly uncertain business environment and an increasingly uncertain external physical environment. So that’s basically what it says.

Josh: Wonderful. Thank you for giving us the CliffsNotes version of it. So I wanna shift gears, ask you two final questions before we go. First is about CDP, second is about you. So CDP has gone through its own significant change in corporate structure.

Would love to hear a little bit about it, what motivated it, what changes for stakeholders going forward?

Sue: Absolutely, yes. So this is an announcement that came out just at the start of summer. CDP is going to stand up as two separate organizations after 25 years of one. And that’s because we’ve come to this point where it’s really important that CDP is able to invest and deliver what the market wants in terms of the disclosure platform, the performance for disclosers, and the data supply.

Data is now so mainstream across business decision-making, we need to ensure that the CDP data is fully integrated and able to perform alongside all the other data ingestion that companies need to be able to do. And to do that takes investment. And so we found a fantastic partner to stand up the commercial entity that will be investing to really step forward and meet the speed and scale of the demand that we’re seeing for the data and the disclosure performance.

But it’s very important that in doing that, we don’t leave behind the idea that CDP as a nonprofit is independent. It’s not motivated by maximizing income. And so there will be the nonprofit, the CDP Foundation side, still doing the work that we do now on ensuring that the innovation and disclosure is taking place, that we’re across the scientific requirements, that we’re meeting the very high and growing demands of the environmental challenges that we’re facing.

The foundation will be providing the strategic advice that the company, the commercial company will be hearing and taking on board as they’re making their choices about developing the platform and the data products to meet the demands of the modern environment. So it’s a whole new phase.

It’s a- 

Josh: It’s exciting.

Sue: It’s a new horizon. It’s trying to respond to the maturing in the market that we’re seeing. But we share a shared purpose of continuing to surface environmental data to support good decision-making, and that’s written in bold letters right across the top of the two organizations.

That mission is unchanged.

Josh: Wonderful. Congratulations.

Sue: Thank you.

Josh: And that brings me to a final question, which is about what motivates you. We’ve alluded to a few times,the turbulent times we live in, and curious how you stay motivated, how you stay optimistic about the future ahead.

Sue: It’s a really good question. I know some people do… there’s actually even a phrase out there now, climate anxiety.

Josh: Yep.

Sue: We’ve named it. Actually, I don’t suffer from that, and what keeps me motivated is think, what else would I be doing? This is the challenge of our times.

In previous eras when you look through, you had horrendous diseases, you had infant mortality, you had awful human rights stories, you had emancipation, you had industrialization, and trying to feed the world.

All of those, to some extent, are still with us as challenges, but I think the defining challenge of the era we’re living through now is the collective impact that humanity is having on the environment in which we live and on which we depend. So I don’t know what else I’d be doing, Josh, if I wasn’t doing this.

This feels like the thing to do. What keeps me going in this particular role is I’ve worked for government before, I’ve worked for conservation organizations and nonprofits, and I’ve worked for a research organization, so I am a bit of an environmental mongrel. But my conclusion from all of that work is that none of those levers alone can shift the dial.

The global economy is so powerful that the global economy itself has to become more sustainable, and that’s why I wanted to come and work for CDP almost five years ago, and that’s why I remain on the foundation side, the nonprofit side as we stand up as two organizations trying to look forward, trying to understand what the science is telling us about how we should measure our economy, and whether it’s delivering what it’s going to need to deliver to ensure that we’re all safe on this planet that we call home.

Josh: That’s very well said, and I’m sure I speak for all of our listeners in saying that we’re grateful to you for doing the work that you’re doing.

Thank you so much for joining us today and for walking us through the findings from CDP’s Disclosure Dividend Report. Certainly recommend that our listeners check out the report.

We’ll include a link in the show notes. And that’s all for this episode. Until next time, let’s keep building sustainable intelligence together. And as always, you can find out more about Novata at Novata.com.