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CDP Climate Change 2022 Reporting Guidance

(C3.4) Describe where and how climate-related risks and opportunities have influenced your financial planning.

Question dependencies

This question only appears if you select any option except “No, and our strategy has not been influenced by climate-related risks and opportunities” in response to column 1 of C3.1.

Change from last year

Revised question dependency

Rationale

This question is seeking to understand where the identified risks and opportunities may have influenced your financial statements, and how this has been incorporated into your financial planning process.

Connection to other frameworks

TCFD

Strategy recommended disclosure b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.

Response options

Please complete the following table:

Financial planning elements that have been influenced Description of influence

Select all that apply:

  • Revenues
  • Direct costs
  • Indirect costs
  • Capital expenditures
  • Capital allocation
  • Acquisitions and divestments
  • Access to capital
  • Assets
  • Liabilities
  • Provisions or general reserves [Financial services only]
  • Claims reserves [Financial services only]
  • None of the above
 Text field [maximum 7,000 characters]

Requested content

General

  • Climate-related issues can affect several important aspects of an organization’s financial position, both now and in the future. For example, climate-related issues may have implications for an organization’s capital expenditures. In turn, capital expenditures will determine the nature and amount of fixed assets, how these depreciate over time and the proportion of debt and equity to be funded on an organization’s balance sheet. Climate-related issues may also carry implications for future cash flows (operating, investing, and financing activities). This question seeks to establish whether climate-related issues have already had implications on your financial planning.

Description of influence (column 2):

  • Provide details on how climate-related risks and opportunities have influenced the selected elements of your financial planning. Include a case study for at least one of the elements selected. For example, if you have disclosed substantive climate-related risks or opportunities in questions C2.3a or C2.4a, you may provide details of how the risk or opportunity has affected the financial planning element selected in column 1.
  • Specify the time horizons this planning covers.
  • If you selected “None of the above”, explain if there is another element of financial planning that has been influenced; or why climate-related risks and opportunities have not yet influenced your financial planning.

Note for financial services sector companies:

The climate-related risks and opportunities to be considered in this question refer to lending, financial intermediary, investment and/or insurance underwriting activities of your organization, in addition to your operational activities.

  • Banks:
    • Describe the potential financial impacts of the identified climate-related risks and opportunities on your core businesses, products and services. For example, you may do this by translating climate risk data into probability of default, total committed exposure and/or exposure at default.
  • Asset managers/Asset owners:
    • Where appropriate, describe how climate-related risks and opportunities may affect the financial returns of relevant products or investment strategies.
    • Asset managers should also describe how each product or investment strategy might be affected by the transition to a lower-carbon economy.
  • Insurance companies:
    • Describe the potential financial impacts of climate-related risks and opportunities on your core businesses, products and services. For example, you may do this by translating climate risk data into probability of default and/or exposure at default.
    • As asset owners, insurance companies should describe how climate-related risks and opportunities may affect the financial returns of investment strategies. This could be described from the perspective of the total fund or investment strategy or individual investment strategies for various asset classes.

Explanation of terms

  • Financial planning: in line with the TCFD recommendations, refers to an organization’s consideration of how it will achieve and fund its objectives and strategic goals. Financial planning allows organizations to assess future financial positions and determine how resources can be utilized in pursuit of short- and long-term objectives. As part of financial planning, organizations often create “financial plans” that outline the specific actions, assets, and resources (including capital) necessary to achieve these objectives over a 1- 5 year period. However, financial planning is broader than the development of a financial plan as it includes long-term capital allocation and other considerations that may extend beyond the typical 3-5 year financial plan (e.g., investment, research and development, manufacturing, and markets).
  • Revenue: Income arising in the course of an entity’s ordinary activities (less returns, allowances and discounts) - before deducting costs for the goods/services sold and operating expenses to arrive at profit (based on the International Financial Reporting Standard)
  • Direct costs: Also known as “costs of goods or services sold”. These expenses can be attributed to the manufacture of a particular product or the provision of a particular service.
  • Indirect costs: Also known as 'operating cost' or 'overheads'. This generally refers to the essential expenses incurred in order to maintain the business including wages, rent, transport, energy (electricity, fuel, etc.), maintenance, and so on. These expenses cannot be attributed to the manufacture of a particular product or the provision of a particular service - they are standard costs that apply regardless of the volume of goods produced.
  • Capital allocation: refers to distributing and investing a company's financial resources in ways that will increase its efficiency, and maximize its profits. Some options for allocating capital could include returning cash to shareholders via dividends, repurchasing shares of stock, issuing a special dividend, or increasing a research and development (R&D) budget. Alternatively, the company may opt to invest in growth initiatives, which could include acquisitions and organic growth expenditures.
  • Capital expenditure: Capital expenditure is a measure of the value of purchases of fixed assets such as property, buildings, an industrial plant, technology, or equipment. Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.
  • Acquisition: Obtaining ownership and control by one firm, in whole or in part, of another firm or business entity.
  • Divestment: A process for selling assets for financial, environmental, political or social goals. In the progression to a low-carbon economy, organizations are recognizing climate-related transition and physical risks posed to minimize exposure to stranded assets (assets that have suffered unanticipated or premature write-downs, devaluations or conversion to liabilities).
  • Access to capital: Cash flows from sources other than an organization’s sales and other revenues. It includes cash infusions from investors or securing lines of credit with banks and other lenders.
  • Assets: Entities functioning as stores of value and over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them, or using them, over a period of time (the economic benefits consist of primary incomes derived from the use of the asset and the value, including possible holding gains/losses, that could be realized by disposing of the asset or terminating it).
  • Liabilities: An obligation which requires one unit (the debtor) to make a payment or a series of payments to the other unit (the creditor) in certain circumstances specified in a contract between them.
  • Provisions or general reserves [Financial services only]: Balance sheet items representing funds set aside by the organization as assets to pay for anticipated future losses. For banks, a general provision is considered to be supplementary capital under the first Basel Accord.
  • Claims reserves [Financial services only]: Balance sheet reserve specifically set aside by insurance companies to pay policyholders who have filed or are expected to file legitimate claims on their policies. Consider both reported but not settles (RBNS) and incurred but not reported (IBNR) reserves.

Example Response

Financial planning elements that have been influenced Description of influence
Capital expenditures In 2017 our organization introduced an internal price on carbon into our capital expenditures approval process, with the aim to redirect investments towards clean technologies, lower-carbon solutions, and renewable energy projects across our operations and supply chain. We conducted a benchmark study and decided to set the price at a relatively high level, 36€/tCO2e, to internalize the potential future cost of carbon in the long term. Returns on investments are assessed with the impact of the carbon implication. This enables management to arbitrate between different options and to choose the most virtuous and efficient ones in order to achieve our organization’s strategic goals. This is a long-term measure, and the price will be periodically reviewed and updated. As a direct result of this implemented internal price on carbon we have approved a project of installing solar panels in our factories in Spain that will reduce our demand for purchased energy by 30% in the next 5 years.