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FT Investing in a Sustainable Future March 24, 2010, New York

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Measuring Up

By Paul Dickinson / Carbon Disclosure Project

What gets measured gets managed: Understanding the first steps of implementing a carbon management strategy

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Twelve years ago, the Internet was a development that hung on the edges of mainstream business. A few forward-thinking managers spotted the opportunities it created, integrating the Internet firmly into the business through e-mail, creation of a company Web site and other opportunities that every business has now come to recognize.

Climate change is a similar story. For many companies it still sits on the periphery, while others have spotted opportunities and are adapting their businesses accordingly. Senior managers who understand climate change is going to shape business models of the future also understand it is an issue that must be factored into business practices today so companies are prepared for the business climate of tomorrow.

Collecting information can be highly informative and acts as the first step on the path to carbon management.

Major global companies have been reporting greenhouse gas emissions data and strategies in regard to climate change through the Carbon Disclosure Project (CDP) since 2002. There has been a real sea of change in awareness since then. When CDP first asked Global 500 companies to report, response rates were around 50 percent and the quality of response and level of understanding was patchy. It was common for companies to answer questions we asked by saying climate change was not an issue for them, even if they clearly had risks associated with energy consumption. Some were slow to spot opportunities, too.

Today, the situation is quite different. Nearly 80 percent of global 500 companies respond to the CDP questionnaire, with most showing a clear understanding of how climate change affects their business. More and more companies see climate change as an issue of risk and opportunity. From a risk point of view there are several key areas. Regulatory risk, an increase in the price of carbon or taxation on carbon that may affect the bottom line, is most frequently identified. Physical risk, interruption of operations or supply due to extreme weather events, is also an issue. In addition, insurance companies may see an increase in insurance payouts due to more extreme weather events. Of course, this can have a huge impact on the whole business. Reputational risk is also a factor, particularly for consumer-facing organizations. Companies perceived to be following business practices that are not sustainable can suffer.

Equally, opportunities surrounding climate change are a key area of focus for forward-thinking management. A large number of products can actually benefit from greater awareness of climate change. Video conferencing systems are a good substitute for business travel. Companies such as TNT have implemented such systems and have seen a return on investment within just a year. Broadband enables working from home to avoid travel to the office every day. Hybrid cars are proving popular with the consumer wishing to cut his own carbon footprint. Toyota is benefiting from record sales of its Prius hybrid. Low-energy light bulbs, better insulation in housing stock and locally produced foodstuffs are all products reaping the rewards of greater awareness of climate change.

Many companies have already spotted that marketing their products as low carbon is of huge benefit. In their advertising campaigns, car advertisers focus on fuel efficiencies, while oil companies focus on investments in renewable energies. Even the wine industry is tapping into the green marketing wave.

We’ve also seen tremendous investment growth in clean tech and renewable energies. Investment into clean tech has doubled in the EU and USA since 2004 to well over $50 billion. With large investments flowing in, carbon markets are judged to be worth well over $60 billion by the World Bank.

The Case for Measurement & Management

Of course, all this work begins with measurement and management of emissions. This is where the CDP’s work begins. Every year, CDP sends out an annual request for climate change-related disclosure to over 3,000 listed companies globally on behalf of 385 investors, with an asset base of $57 trillion. This information request asks companies to disclose greenhouse gas emissions and their assessment of risk and opportunity associated with climate change. It also requests they report on their strategy regarding climate change.

Employee buy-in is required to gain access to all necessary data and to encourage behavioral changes to reduce emissions.

CDP holds the largest database of corporate climate change data. Every September, the responses are made public and analyst reports are launched on the findings. For many companies this is the first time they consider what their emissions actually are. Collecting information can be highly informative and acts as the first step on the path to carbon management.

The process of measurement often highlights areas within a business where there’s scope for energy savings and efficiencies that may not have been previously identified. Not only does this provide opportunities to cut emissions, but in turn, often leads to significant cost savings.

We recommend companies use the GHG (greenhouse gas) Protocol, which breaks emissions down into three parts. Scope 1 is direct emissions from fuel consumption; scope 2 is emissions generated from electricity purchased; Scope 3 encompasses effectively everything else, from supply chain to waste disposal, to staff travel to outsourced emissions.

CDP recently conducted research with IBM, investigating how leading companies including Centrica, Lloyds TSB, Scottish and Southern Energy, TNT and Unilever are managing their carbon strategies. The research, Making Advances in Carbon Management, highlighted some interesting trends.

Most companies recognize it can take several years to come up with a carbon management strategy. We found that it is vital to engage with a wide range of stakeholders to ensure that strategy succeeds. Employee buy-in is required to gain access to all necessary data and to encourage behavioral changes to reduce emissions. Buy-in from senior management is also vital. Companies have found it important to work with customers and suppliers to understand risks and opportunities, and to understand the boundaries of control and influence. Of course, it is much easier to reduce emissions within an area controlled directly by the company, while it is much harder to achieve this goal through outsourced activities.

This is why CDP has been working closely with some of the largest multi-nationals, including Wal-Mart, Cadbury Schweppes, HP, Kellogg Company, L’Oreal and P&G to work with their suppliers to measure greenhouse gas emissions, and the risks and opportunities associated with climate change. For many companies, supply-chain emissions make up the majority of their total footprint. Equally, it is important to understand where the pinch points are within the supply chain regarding carbon risks. In our first results of this work, we found 96 percent of suppliers in the study judged regulation to be a potential risk to them in regard to carbon.

The first vital step to corporate engagement on climate change issues is encouraging companies to think about climate change more strategically. By asking the right questions, you shine a light on areas within a business where there is scope to make a difference. By encouraging companies to do this, they are then able to move from measurement and disclosure to management and action. It is only then we see real action taken to reduce emissions. This is the only way we will reach the reduction targets required to halt abrupt climate change and the resulting disaster that would bring. (See www.cdproject.net.)

Carbon Disclosure Project Report 2008
Corporate ability and willingness to monitor and report carbon disclosure activities and issues reflects the inexorable rise of climate change from debate to boardroom agenda. The Carbon Disclosure Project (CDP) report, prepared by CDP’s global adviser, PricewaterhouseCoopers LLP, analyzes responses from the Global 500, the 500 largest corporations in the FTSE Global Equity Index Series.

To view the complete report, see http://www.cdproject.net/reports.asp.

Move from measurement and disclosure to management and action.

Cap and Trade;Risk Management ;

*Footnotes