Environmental disclosure is becoming common practice across industries. The climate change benefits of transparency are fairly well-established, and evidence is mounting that environmental disclosure and being an environmental leader can result in higher profits and stronger financial performance. According to CDP (formerly the Carbon Disclosure Project), on average, high-scoring corporations earned 67% higher Return on Equity (ROE) than non-responders, 18% higher ROE than low-scoring peers, and have 50% lower volatility than low-scoring peers. The industry leaders also generated 21% higher shareholder dividends than their low-scoring peers.
A 2013 study carried out by CDP and Sustainable Insight Capital Management showed a similar correlation between corporate carbon disclosure performance and ROE in 2008-2012. The analysis showed that industry leaders who have high CDP scores enjoy 5.2% higher ROE, 18.1% higher stability in cash flow generation, and 1.6% higher dividend growth. Comparing the two studies, we can find that industry leaders are creating comparatively higher figures than peers, and the gap has been increasing year-over-year.
Linking ESG performance and financial performance
A study from Bloomberg shows a positive correlation between traditional financial indices like the Bloomberg World Index (BWI), and environmental performance indices like the Carbon Performance Leadership Index (CPLI) and Dow Jones Sustainability World Index (DJSWI). In recent years, CPLI performance has even surpassed BWI. Many of the most valuable companies and brands in the world are also on the 2015 CDP A List, including Apple, Google, BMW, Samsung and Nestle.
More companies are choosing to disclose environmental and social data. According to Ernst & Young, KPMG, CERES and SASB, an increasing number of the Global Fortune 500 companies have reported or published their data on CDP, GRI and other environmental data disclosure platforms – from less than 50% in 2005 to about 80% in 2014.
How does a high CDP score help improve financial performance?
Having environmental awareness, transparency and a successful sustainability approach are vital to achieving a high CDP score. These same factors can also reduce operating costs, enhance corporate reputation, and improve a company’s overall risk management strategy.
Reduced operational costs
According to Harvard Business Review, companies can save money by increasing water efficiency, reducing energy consumption and optimizing manufacturing processes. For example, an agriculture company saved 20%-40% on water costs by implementing sustainable cultivations. A beverage company saved $750 million by improving their water transporting system and addressing water leakage. An Indian cement company greatly increased revenue from 2005 to 2009 with increased energy efficiency.
Higher consumer trust
Environmental transparency can bring more opportunities to attract consumers and increase market size. An Ernst & Young study found that reputation leaders enjoy 22% higher performance in S&P and 88% higher stock price. Disclosing environmental and social data helps establish trust between consumers and brands, which encourages brand loyalty and often a higher willingness to pay.
Improved risk management
The financial penalties for environmental non-compliance can be substantial. Disclosing data to CDP and achieving a high CDP score motivates companies to monitor corporate environmental performance systematically and reduces the risk of being
non-compliant, and also provides the opportunity to substantively understand corporate environmental impacts, expand value and gain market share.
A high CDP score is usually indicative of a company’s high environmental awareness, advanced sustainability governance and leadership to address climate change. These same characteristics can also translate to higher revenue, lower costs and stronger financial performance.
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