A Short Introduction to the CDP Temperature Rating

By Richard Howard

Clean and unambiguous data is vital if green and sustainable finance is to help with the climate fight.

Armed with better data, individual and professional investors alike will be able to more confidently allocate capital by knowing which projects and companies have less impact on the climate and are closer to net-zero goals.

Background

The obvious dataset to turn to first is carbon emissions. However, one of the major difficulties of carbon emissions data is that in isolation it does not mean much to the untrained eye.

Emissions are typically measured in MtCO2/year (metric tonnes of CO2 per year), but what does that actually mean? Comparing emissions between companies and industries can be difficult, but even then that is not an indication of how it relates to climate change more broadly. What effect does one MtCO2 have on the climate?

Furthermore, the historic emissions data do not take into account the company’s climate commitments going forward. If a company or industry were to meet these targets what temperature change are we heading for?

CDP Temperature Ratings

As a response to these issues the CDP (formerly the Carbon Disclosure Project) have launched a new environmental rating system, which translates a company’s or investment portfolio’s emissions data and climate goals into a temperature pathway.

The CDP is a UK based organisation who promote and campaign for companies and other entities to disclose their carbon emissions and targets [1]. As a result they have a large dataset with which to develop their new temperature ratings. This work has been carried out in conjunction with the WWF and Science Based Targets Initiative.

Temperature Pathways

A temperature pathway is an estimated reduction in emissions that will need to occur in order to limit global temperature rises to a certain value [2]. The most well known temperature pathway is the 1.5℃ pathway, which is the reduction in emission that will need to occur if we are to limit global temperature rises to 1.5℃ above pre-industrial levels by 2100.

However, there are other (less favourable) pathways such as 2℃ and above which detail what emissions reduction will look like to achieve those global temperatures limits.

The CDP have expanded upon this concept and have predicted, based on their emissions data and disclosed climate targets, which temperature pathway each company is currently on [3].

They have also included an extra methodology/protocol that incorporates investment portfolios with multiple companies, so a temperature pathway can be applied to the entire portfolio.

Brief Description of the Methodology Used

The CDP’s methodology has three layers [3]:

  • Bottom Layer: Target Protocol
  • Middle Layer: Company Protocol
  • Top Layer: Portfolio Protocol

Target Protocol

Before estimating a company’s entire temperature rating the CDP has to take into account several different factors:

  • the differing ways by which companies disclose their emissions data
  • the different industry in which they operate
  • the multitude of individual targets set by a company.

Crucially, a company’s emissions targets are not always given relative to scope 1, 2, or 3 emissions (see this blog for more details or note 5).

Instead, targets are sometimes given as ‘intensities’. That is tonnes of CO2 per unit sold. This could be tonnes of CO2 per tonne of steel, or tonnes of CO2 per unit of energy. Therefore, the CDP needs to translate the targets before fitting it to a specific temperature pathway.

Then using the IPCC’s 1.5℃ and overshoot pathways described in [4] the CDP have, for each industry, produced a range of different emissions projections for different temperature pathways. Using the company’s emissions data they can find the best match to the most relevant temperature pathway.

Company Protocol

Once the target temperatures have been decided upon, the methodology combines and filters those into two ratings per company:

  • Scope 1 + 2 – operational emissions
  • Scope 1 + 2 + 3 – value chain emissions

The CDP gives as an example the following company temperature rating:

“Based on its current emission reduction targets, Company A’s operational (scope 1+2) and value chain (scope 1+2+3) emissions are aligned to a 2.5°C and 2.8°C long term 2100 global warming pathway, respectively.” [6]

Portfolio Protocol

The CDP methodology report has outlined a series of algorithms to weight the different investments in a portfolio. The simplest case is weighting the temperature score via the percentage of the total portfolio. More complex methods have also been evaluated such as incorporating market capitalisation or revenue of each investment holding.

The CDP will continue to review this methodology and recommend specific weighting options sometime in the future.

Challenges and Opportunities

Forward-looking

The CDP are keen to highlight that this new measure is forward-looking. By projecting a company’s emissions (via their targets), it gives investors a good idea about a company’s climate ambition. This is something we have argued for in this series on net-zero investments.

This is similar to how a company might make revenue projections or give forward guidance about future profit or dividends.

The risk is, in the near term especially, how are we to know if a company is meeting their targets and temperature pathway? This might be possible if we can back date the method using the last few years of data, but until we have several years of decent temperature ratings then it may be difficult to fully assess how good a company is at continually meeting its targets (potential for a ‘target achieving’ rating system in the future?).

Relatable value of emissions

One of the likely successes of this method will be the condensing of carbon emissions and targets to a value of temperature. By stripping out variables, like what industry the company operates in, the CDP have created a measure which is easily comparable.

Furthermore most investors will already know the temperature boundaries. 1.5℃ above pre-industrial levels is good (all things considered), 2℃ is just about acceptable, anything higher is very much not acceptable.

The risk is that if this message gets corrupted and investors start to see 2.5℃ as an acceptable goal, for example. There are fine margins at play here, and it is not implausible that an ill informed investor thinks 2.5℃ is only 1℃ higher than 1.5℃.

In our opinion the messaging needs to be backed up with a net-zero or Paris Climate Agreement label. If a company is on a 2.2℃ temperature pathway it needs to be clearly stated that that is not commensurate with net-zero or the Paris goals.

Incomplete data

If a company has not submitted emissions data, submitted incomplete data, or has not disclosed suitable targets they will be assigned a business-as-usual temperature pathway. That is, they will be automatically assigned a 3.2℃ pathway based on findings in the UNEP Emissions Gap Report 2019 [7].

This is only an interim value, as other business-as-usual pathways exist, and may be revised higher in the future – for example, the IPCC’s RCP 8.5 projects a 4.3℃ increase by 2100 over pre-industrial levels [3].

Conclusion

The CDP, along with its partners, have cleaned up their existing carbon emissions and target datasets and created a new, rich and relatable dataset with bags of potential.

They have laid out a promising new metric by which to judge companies and investments. The fact that it relates to a value of temperature is much clearer and much more easily communicable than a value of emissions measured in tonnes of CO2.

The other key feature is that it is forward looking. However, if companies are able to set targets without meeting them then this measure will quickly lose legitimacy.

If, on the other hand, enough companies can consistently demonstrate being able to meet 1.5℃ pathways (or lower) then the CDP’s new temperature ratings have the power to show the rest of the world that a climate friendly future is possible.

References

  1. https://www.cdp.net/en/
  2. Arnell, NW, Brown S, Hinkel J, Lincke D, Lloyd-Hughes B, Lowe JA, Nicholls RJ, Price JT and Warren RF (2015) The global impacts of climate change under pathways that reach 2, 3 and 4 above pre-industrial levels. Report from AVOID2 project to the Committee on Climate Change, https://www.theccc.org.uk/wp-content/uploads/2015/10/AVOID2-2015-Global-impacts-of-climate-change-at-23-and-4K-above-pre-industrial-levels1.pdf
  3. CDP Worldwide and WWF International, TEMPERATURE RATING METHODOLOGY A TEMPERATURE RATING METHOD FOR TARGETS, CORPORATES, AND PORTFOLIOS BETA VERSION, 2020
    https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/comfy/cms/files/files/000/003/672/original/CDP_Temperature_Rating_Method_Draft.pdf
  4. Rogelj, J., D. Shindell, K. Jiang, S. Fifita, P. Forster, V. Ginzburg, C. Handa, H. Kheshgi, S. Kobayashi, E. Kriegler, L. Mundaca, R. Séférian, and M.V.Vilariño, 2018: Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty, https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf
  5. As a quick recap, scope 1 emissions are direct emissions from the company’s operations, scope 2 are emissions from the purchase of electricity and energy, and scope 3 is everything else, e.g. materials used by the company, the use of their products, commuting of their employees etc.
  6. https://www.cdp.net/en/investor/temperature-ratings
  7. United Nations Environment Programme (2019). Emissions Gap Report 2019. UNEP, Nairobi

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