Climate Disclosure and Investor Opportunism
How Investment Funds Used Climate Fear to Take Advantage of Corporations
Imagine the backroom of a smoky restaurant in the Manhattan financial district in 1999. A group of investment fund managers gathered to celebrate the end of a successful trading day over a fine brandy. The conversation drifted to how they could take advantage of the evolutions in the business environment.
Someone mentioned “climate change", a topic that was starting to be talked about. What if, they mused, the trading houses could make money out of carbon emissions. Not carbon trading, … too much work, but rather, information trading by getting companies to disclose how much carbon they really emit. The data could be kept private, except for the brokers and fund managers (who would be given special access) and they could use the information in their internal investment analyses.
The fund managers thought they could turn it into a membership club, rank the companies and even award badges while adding a layer of environmental virtue to those who fill out their detailed questionnaires. It could be set up as an NGO, link it to other environmental concerns, and use it for investors to play a leadership role in shaping the debate (to their private advantage of course).
And so, in 2000, the Carbon Disclosure Project (CDP) was born. It has become a lucrative business for a small American NGO but even more profitable for institutional investors, hedge fund managers and financial advisors. They have managed to sell a expensive and time-consuming disclosure process to companies and businesses who believed they had to play the game to keep their shares trading on the institutional funds. Little did these companies know they were disclosing confidential information to the investment houses who used it for their advantage.
The game is simple: Get industrial groups, banks, local governments and supply chains to declare (disclose) their carbon emissions (more or less) to an NGO that has created a ratings app. Everybody who discloses wins a “CDP discloser badge”. The data they disclose is then accessible to the institutional investors who are signatories to the CDP. The game was so lucrative that the NGO has since added forests and water to the disclosure categories.
This is the first part of a three-part series on the Climate Disclosure Project (CDP). It will look at the structure of the organization, how they compel companies to disclose their carbon emissions (in a sort of disclose or divest extortion process) and how their methodology is weak and naïve. Part 2 will look at the evolution that had brought the investment community into a close cooperation with the climate campaigners. The conclusion will look at the funds behind the machinery of this lucrative exploitation.
The CDP was founded in 2000 but only started requesting climate-related information in 2003. They did this on behalf of 35 initial financial investment organizations who were considered as “signatories”. Even if a company’s disclosure is marked as “private”, all of the confidential data is still accessible to the signatories who can use it in their corporate investment analysis. CDP was created by fund managers to be the link between environmental performance and institutional investment decision-making. In other words, the institutional investors, as CDP signatories, have access to private corporate information they can use in their investment decisions.
Does the SEC know about this? Regardless how virtuous they claim to be (with saving the climate and all of that), how is this not giving these investment houses inside information and an unfair trading advantage?
Join the Club (Be One of the Good Guys)
What the CDP did was create a club of the great and the good of the business community, involving a select few for events and strategy sessions. For example, this year in June, CDP held the Global Disclosure Dialogue in Japan, bringing together:
“our key partners and disclosers globally to discuss critical trends in the disclosure and environmental action landscape – from new regulatory disclosure standards, SME climate action, and how data has unlocked corporate action on climate and nature by driving access to capital, business efficiency and compliance.”
Participants were mostly sustainability representatives from the financial community and low-emission industries, meeting to determine the next set of rules and hoops for other industries to jump through. I once referred to this as a dark form of some ESG Squid Game.
The CDP argument is that those disclosing their carbon emissions will try to lower them; that investors will not want to invest in high carbon-emitting companies (see an article that examines this logic); and that companies that play the game and disclose, by that alone, are perceived as lower emitters attracting more attention from investment fund managers. Taking the inverse, if you don’t pay up and disclose, you will be excluded from the club.
CDP should stand for: “Disclose or Divest”.
Disclose or Divest
The first two reasons the CDP use to try to “encourage” companies to register their disclosures are rather extortionary. They frame it positively but if a company chooses not to register, the CDP suggest they will face reputational damage, lost trust, a drop in the value of their company’s share value and a difficulty in accessing capital and winning tenders (see image below). This is pretty tough talk for an NGO but they are acting on behalf of the major investment houses and hedge funds (the signatories) who appreciate the access to private corporate disclosures.
The Carbon Disclosure Project was the initial step for the investment world to take a leadership role in the climate debate and coordinate to empower climate NGOs. The CDP created the means to check/control other industries’ compliance and develop a new investment ratings system. Although ESG had been discussed within academic circles for many years, the CDP appear to be the first to apply this extortionary concept in practice.
Their justification for such strong-arm tactics on industry and local governments is that these financial wizards are saving the planet. No longer attacked for financing the big polluters, they have turned the table and are attacking the fossil fuel industry and denying them access to capital markets and investment funds. The World Economic Forum (WEF) is chock full of these saintly do-gooders. Who would ever dare call them opportunists?
Business leaders within the WEF started to believe in this new type of leadership, fawning over caricatures like Greta and masking their crass opportunism with an invisible moral cloak. When activist NGOs and academics were attacking capitalism, the investment houses, fund managers and financial operators actually believed the campaigners were not attacking them. The WEF was part of the solution and they wanted to get the activist community to believe that.
But when you work with activists, and you try to hide your opportunism, it is not surprising that the NGOs step up, start calling the shots and forcing you to try to keep up with their campaigns.
Carbon Majors, Methodology Minors
Leaving the activist NGOs in charge of the carbon hen-house was probably not a good idea. Within a few years, the CDP managers decided to use their data and reputation to put forward an argument that most CO2 emissions come from a small number of mostly fossil fuel companies. From 2008, the CDP put its name and credibility on a project called The Carbon Majors Database directed by the Climate Accountability Institute (the anti-capitalist NGO set up by the indefatigable Naomi Oreskes). Their 2017 report examined the largest fossil fuel companies (oil, gas, coal, basic resources) to compile a list of the worst carbon emitters. What it did was demonstrate how weak the CDP methodology actually is.
Not all carbon is the same and this report reveals how juvenile the CDP bean-counting approach is. The Carbon Majors Report bundled together all fossil fuels without considering the level of emissions and other pollutants. Coal then is considered on a same level as clean-burning natural gas without taking into consideration their efficiency, performance and ease of distribution. Natural gas should be considered as more sustainable than using wood for energy and heating, but as the CDP have labelled one a fossil fuel and the other a natural resource, the real environmental impacts are not taken into the equation.
How they calculate who is emitting carbon is also naïve. The calculation is tallying consumer use of oil products on the oil companies even though 90% of emissions come from the end-users of oil and only 10% from the oil companies (production, refining and transportation). Did the oil companies create this market demand or were other factors at play?
CDP had a very simplistic calculation method – you sell x amount of oil, thus you are responsible for x amount of CO2 emissions from that oil. But how the oil is used downstream does matter significantly. Does a well-insulated home using less heating oil mean the same in the emissions game? What about fossil fuels used to produce solar panels? How does energy recovery from the incineration of plastics influence the equation? The efficiencies and the sustainability of end-user’s products need to be considered here but the CDP kept it simple in favor of stronger headlines.
The Carbon Majors Database shows how limited and naïve the CDP actually is.
It shows a very simplistic approach to a complex problem (not considering evolutions in consumption, development, energy systems, food/trade/economies…).
It shows where the weaknesses of the ESG movement had its foundations.
It shows the credibility risks for business communities getting in bed with single-minded environmental activists.
But it was never about cutting emissions. It was all about getting confidential industrial data to give a group of institutional investment houses an inside advantage in fund management decisions. It was about taking in an enormous amount of fees from the disclosers and signatories. Oh yes, … and it was about “saving the planet”.
The next article in this analysis will look at how the financial community learned to love the climate campaigners and amplify their campaigns.