Report Card on Corporate Reaction to Climate Change

01 Apr 2005Archived News Energetics in the News

PUBLISHED: Ethical Investor Magazine.

By Peter Haenke, Practice Area Leader, Energetics Pty Ltd

Early corporate action in Australia to the issue of climate change could reasonably be characterised as cautious. The corporate response has typically centred on public reporting of greenhouse gas inventories and modest abatement activities. This was an appropriate stance when the science of climate change was little understood and accepted, a modest regulatory framework existed to control greenhouse gas emissions and the Kyoto Protocol was in its formative stages.

The situation today is vastly different and requires a quantum change in corporate response if companies are to meet the environmental and competitive challenges of the new century. Many of the worlds leading scientists have expressed their concerns about the challenges the global population now faces. The UK's Chief Scientist has said that "climate change is the most serious issue facing the world this century".

How is the corporate world reacting to such statements today? In Australia, we have seen a substantial change in the corporate approach towards climate change. The early 1990s saw a rapid growth in environmental reporting, particularly by companies perceived by the public to have high environmental impact, such as resource companies: mining, minerals and petro-chemicals. Large gains were made during this time in transparency and accuracy in reporting environmental aspects of heavy industry, including emissions of greenhouse gases. By the mid 1990s, the Federal government's Greenhouse Challenge program focused on understanding an organisations current situation and taking real actions for improvement. The program provided a framework for companies to establish greenhouse inventories, baselines, targets and action plans. Whilst initially targeting only the largest emitters in the country, the program grew over the remainder of the decade to include over 1,000 organisations.

A key plank of the Greenhouse Challenge program was the concept of "no-regrets" actions: i.e. taking only those actions which made sound commercial sense. This is, of course, as pertinent today as it was in the mid 1990s. However, what has changed since then is the scope of actions that make commercial sense. But has corporate mindset kept pace with the change?

For many organisations today, greenhouse gas emissions are overwhelmingly, if not exclusively, attributable to energy use. Greenhouse response has therefore largely centred on energy efficiency improvements. Traditionally viewed as a purely technical task, the responsibility was assigned to engineering and trades personnel, with little or no buy-in from senior level management or core operations teams. Within this context, "no-regrets" is often interpreted as "low-hanging fruit": easy, quick and low-cost "fixes", most commonly addressing ancillary energy users such as compressed air systems or lighting. Opportunities to make far greater gains through a fundamental re-evaluation of core processes can be much more difficult to identify and implement in the absence of wider corporate commitment.

In the current economic and environmental climate, external pressures are building making it necessary for organisations to take a much fuller and more rounded approach towards climate change. Some of these pressures include:

  • The emergence of carbon taxes and carbon trading schemes. The EU Emission Trading Scheme commenced this year and requires designated industries to meet an emissions "cap" by either reducing emissions, or else buying emission reductions from others. Several other countries have also introduced emission trading to target major emitting industries. In lieu of a national carbon trading scheme, all eight of Australia's states and territories are currently exploring a multi-state trading scheme. The States and Territories themselves have already introduced credit schemes for carbon trading, for example, Renewable Energy Certificates (RECs), NSW Greenhouse Abatement Certificates (NGACs), Gas Electricity Certificates (GECs) and Greenhouse Friendly credits. NZ will institute a carbon tax from 2007 with heavy discounts for companies meeting best practice. In parallel, the NZ government is running a series of tenders to allocate emission allowances to selected projects. Estimates of the potential size of the global carbon market range in the billions to trillions of dollars, depending on the design of the markets and the ultimate cost of carbon.
  • Shareholder and investor activism. For the past 3 years, The Carbon Disclosure Project (CDP), on behalf of institutional investors, has written to the FT500 largest companies in the world requesting information regarding greenhouse emissions, and the companies risk mitigation measures. Investors representing US $20 trillion have signed the 2005 CDP information request. In 2002, a number of global warming resolutions were filed against 27 U.S. companies. Support for these resolutions has more than doubled since 2000 and some commentators have identified climate change (and the companies responsible for greenhouse gas emissions) as the "next tobacco and asbestos" for litigation.
  • Kyoto Protocol ratification. Despite an arduous international negotiation, this landmark international treaty has now entered into force and provides a framework and mechanism for international emission reductions and carbon trading.
  • Deep cuts required. Following the statement made by UK's Chief Scientist, Australia's Chief Scientist has stated that cuts of 50% by 2050 are required to prevent dangerous change to the earth's climate.
  • Economic growth in China and India will contribute significantly to global emissions. The World Energy Congress "believes that global energy consumption will grow by about 50 per cent in the next 20 years".
  • CLERP 9 reforms. Changes under the Corporate Law Economic Reform program Bill 2003 (CLERP 9) include environmental reporting as a critical component of statutory reporting for publicly listed companies. Directors must address not only compliance with environmental regulation but also provide information on the potential effects of significant environmental issues on business strategy and future financial prospects.
  • Accounting standards for greenhouse gas emission liabilities and assets. The International Financial Reporting Interpretations Committee (IFRIC) released an interpretation in late 2004 specifying how emission rights and liabilities should be accounted for. This is a fore-runner to full integration of the cost of carbon into companies' balance sheets.

It is clear that the response required to these growing pressures goes well beyond simple and mostly peripheral "quick fixes'. Organisations leading in climate change response are now implementing a broad agenda to position themselves for a carbon-constrained economy. This includes:

1. Elevating overall responsibility for climate change response to board level. Deep and lasting cuts in greenhouse gas emissions require a diligent examination of all aspects of the business. This cannot occur without endorsement and genuine support from the highest levels.
2. Understanding greenhouse implications for the current business model and exploring the consequent risks and opportunities for value creation, including:
a. Opportunities for new and expanded markets and strategic withdrawal from dead-end markets;
b. Optimised capital investment in light of emerging markets and regulatory frameworks;
c. Optimised operational funds: minimising the financial impact of carbon constraint upon the organisation (including energy costs, carbon taxes and carbon markets) and identifying new revenue sources.
3. Integrating the desired response measures within the corporate management structure and processes. This encompasses a raft of issues including: assigning accountability and authority for greenhouse performance and improvement to core business operations supported by technical and engineering teams; providing for existing or future carbon costs in capital and operational budget setting processes; incorporating performance reporting in regular management reports; and reviewing and modifying operations and maintenance procedures and systems.
4. Developing capacity within the organisation to implement the required changes. This may include acquiring or developing skills in carbon accounting, carbon trading and energy efficiency.
5. Providing tools to track and report progress and impacts. For greenhouse accounting, energy consumption must be tracked, as opposed to the usual cost tracking for financial accounting purposes. Other emissions sources as well as production and other relevant factors influencing emissions (such as weather for air conditioning systems, for example) are also needed to enable reporting under voluntary and regulatory schemes and to enable accurate modelling of future carbon taxes and costs.
6. Reviewing and modifying responses as changes in business environment occur.

By adopting a broad agenda such as this, organisations are well positioned to effectively realise efficiency gains. For many organisations, these gains can result in emission reductions of 10% - 20% or more. The future however, could be set to require businesses to address more than process and product related energy use. Supply chain management and good corporate citizenship is driving further change.

Interface Carpets is an often-cited example of a company that has moved in this direction to address the sustainability of the entire supply chain. Interface changed its whole business model from selling carpet to providing a floor covering service. They looked at their market place and the supply chain of raw materials required to produce the carpet and adopted a largely recycled approach. This has resulted in a reduction in energy intensity (energy/m2 floor covering) of almost 30% since 1996.

New and emerging technologies may provide opportunities to completely leap-frog existing business approaches. For example, the way music is produced, distributed and used is being revolutionised by devices such as iPod. "Electronic paper" holds the potential to similarly revolutionise the way printed documents are handled. Imagine if electronic paper was adopted as the standard book form in China. It would reduce the need for paper and subsequent power requirements by at least 50%.

Leading organisations have taken the step to integrate climate change strategies and practices into their daily operations, rather than running stand-alone programs. Many others are yet to take this step and begin to benefit from the emerging market opportunities presented by international response to climate change.

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