Delivering value from emissions reporting

Transcription

1 Delivering value from emissions reporting June 2011

2 Jonathan Shopley, Managing Director at The CarbonNeutral Company and Dr Richard Tipper, CEO of Ecometrica review why and how businesses are measuring and reporting their greenhouse gas (GHG) emissions. They conclude that current practices do not serve companies well because they do not put emissions management at the heart of corporate strategy. They make the case for carbon balance sheets to give businesses better control over their carbon management over time and carbon offsets to turn carbon into an asset that delivers sustained business value. 2

3 Measuring & reporting -- for all the wrong reasons? GHG measurement and reporting has for the most part been driven by disclosure requirements rather than business s desire for control and strategic advantage from competitively focused GHG management. No wonder, therefore, that they don t yet serve business well. Voluntary Disclosure When Shell International published its first People, Planet, and Profits report in it was an open kimono move to reclaim its reputation after severe damage from Shell s involvement in Nigeria and the Brent Spar offshore oil-rig decommissioning fiasco. It wasn t the first sustainability report, but it was the first to disclose performance with unprecedented openness. And it certainly accelerated initiatives which increasingly put companies under pressure to disclose their social and environmental (including GHG emissions) performance. 80% of the Global 500 disclose their carbon emissions and carbon risk management strategies on an ongoing and annual basis. The Global Reporting Initiative (GRI) helped formalise such disclosures, and gave them wider applicability and comparability across many sectors. In the climate change area, The Carbon Disclosure Project (CDP), with backing from institutional investors managing trillions of dollars, has 80% of the Global 500 disclosing their carbon emissions and carbon risk management strategies on an ongoing and annual basis 2. This helps investors select companies which are future proofed for a low-carbon economy; a task made easier with some CDP data now available through Bloomberg and Google Finance. 3

4 Regulatory Disclosure Of course, for some companies, carbon reporting is already mandatory or soon will be. In the European Union, the EU-ETS cap-and-trade scheme already requires companies in the most energy-intensive industries to report their emissions, and individual governments are now introducing a variety of national carbon reporting rules. With the spread of cap-and-trade and carbon reporting schemes, including emerging schemes in Asia and in regions of the US, many more companies even those in sectors that do not currently face emissions caps will need to measure and report their emissions in the future. However, whether obliged by legislation, or voluntarily taking responsibility, measurement and reporting need not be seen as a burden. Considered in the form of rolling assets and liabilities, a business can take advantage of its carbon accounting to deliver real business value. 4

5 Improved reporting gives more for less Clearly, carbon measurement and reporting is becoming an established facet of business and done well in its current form is able to wash its face by leading to cost savings and improved customer communication. In fact increasingly so, as the manual approaches involving reams of spreadsheets and many staff years spent populating these with emissions data are replaced with online measurement and reporting systems, such as Ecometrica s Our Impacts. Now Energy, Facility, HR, CSR, and EHS (Environmental Health and Safety) managers can spend their valuable time analysing data and prioritising reductions, as opposed to collecting it. Further, we have educational organisations like the Greenhouse Gas Management Institute training the next generation of business managers and technicians in the art and science of sound GHG measurement to tried and tested national and international standards and protocols, and so generating economies from shared and applied learning. Comparable, credible information enables businesses to be held to account on their performance, and forces them to become more economically efficient around energy and environmental impacts. Things are definitely looking up for GHG measurement and reporting. But clearly something is missing. If it s that good a thing for business, why aren t companies all over it like consumers responding to a newly launched ipad? Alan McGill, partner at PricewaterhouseCoopers and a specialist in carbon reporting, put his finger on the issue when he said: Comparable, credible information enables businesses to be held to account on their performance, and forces them to become more economically efficient around energy and environmental impacts. 5

6 A recent survey of 155 companies by PwC 3, shows that the majority of companies enjoy a net benefit from their carbon measurement and reporting. And The UK s Carbon Trust which deploys public funds to offer grants, free advice and interest free loans for low-carbon solutions, reported in May 2011 that small companies in the UK could save 400m per year by increasing energy efficiency and reducing carbon emissions. And there it is the fact that many companies extract returns on their reporting efforts is a fortunate byproduct of their substantial efforts and the problem with current approaches to carbon measurement and reporting is that they have evolved largely for companies to disclose information, not process it for competitive advantage. And there is a second problem too measurement and reporting to deliver reductions which save money are all well and good but how do companies use the reports to set targets and establish which reductions to prioritise? 6

7 Targets are what matter most So the question is how do we go from measurement to reporting and managing GHG emissions in ways that will inform process improvement, capital asset investment, development of new products and services and mergers and acquisitions in order to treat carbon as both an asset and liability in business? The importance of targets Setting and meeting meaningful reduction targets enables a business to take leadership, differentiate from its competitors and build revenue and market share. As demonstrated on a grand scale by GE and its ecomagination solutions which generated $18billion in revenue in 2010; or within a smaller business, by the UK s Commercial Group which attributes as much as 60% of its growth to its carbon neutral position. For many businesses, GHG emissions are still managed on a best efforts basis because they are largely unregulated. Businesses reduce emissions as and when it saves money and won t go further unless there are other commercial benefits. The implications of this rational response become apparent when we view it in the context of scientific advice suggesting global GHG emissions need to be reduced 80% by 2050 relative to a 1990 levels to avoid very serious impacts on ecosystems and society. If companies only reduce emissions when cost savings can be obtained, they will miss the full commercial benefits of a more strategic carbon management programme and, at the same time, continue to contribute to greenhouse gas concentrations rising to dangerous levels. The UK s Commercial Group attributes as much as 60% of its growth to it s carbon neutral position. Setting and meeting an emission reduction target which will deliver a business strategic value need not require a total overhaul of processes, systems and infrastructure. A combination of internal reductions and carbon offsets enable a business to select the most immediate and cost-effective ways of reaching the target, while considering the requirements for more substantial process changes in the future. 7

8 Carbon as currency In the mid-noughties, before the recession hit and when climate change was on the front page of most newspapers and news reports, there was an often heard quote going around the edges of the newly-formed carbon market: Carbon! It s the new currency. Of course, that was nonsense it would take hell to freeze over before an environmental externality became a medium of exchange in its own right. But behind and beneath the hype are noteworthy similarities. 8

9 Flows, assets and liabilities Financially successful companies make profits year on year; their balance sheets strengthen as a result of profit generation and successful investments in assets and sound management of liabilities. Carbon is similar in reverse. Companies increase their carbon capital when they emit fewer GHGs (carbon flow), and their carbon balance sheets strengthen when they show an ongoing net decrease in emissions. The importance of measuring carbon both as a flow (annual footprints) and as a stock (carbon balance sheet) is critical to a company s ability to generate business value from its carbon reduction investments over the longer-term. The balance sheet is particularly useful because a company s obligations roll over from year to year. The discipline of greenhouse gas accounting means that emissions not dealt with in one reporting period roll over into the next period in much the same way that debt incurred in one period does not disappear at the end of the financial year. The carbon balance sheet enables a company to weigh the costs of avoiding emissions, and provides a potent tool for shaping carbon management strategies. 9

10 Meeting targets to turn carbon into an asset A carbon offset is a GHG reduction generated by a resource conservation or renewable energy project which would not have happened without access to carbon finance. Having set targets, businesses can seek to reduce emissions from within their own operations or further afield. Flexibility about where emission reductions occur is good. For example, if a company has recently invested in state of the art equipment, the cost of making an incremental emission reduction is likely to be much higher than in situations where old technology is still employed. For many companies, carbon offsets provide an immediate way to deliver emission reductions and meet targets efficiently, thereby providing the competitive advantages they seek. Methods for quantifying and certifying emission reductions from offset projects are now well established, and subject to a number of standards. A carbon offset is a GHG reduction generated by a resource conservation or renewable energy project which would not have happened without access to carbon finance. GHG reductions from these projects are validated and verified by independent organisations in order to be certified against third party carbon offset standards. Businesses purchase carbon offsets which are then retired and no longer available for sale or trade. The business is then able to count that reduction to compensate for its remaining emissions and reach its target. 10

11 Many companies are realising the climatic and commercial value of implementing offset-inclusive carbon management programmes, because they represent: the most cost-efficient way to reduce emissions when energy efficiency gains don t cover the cost of reductions for many companies, the only way to reach scientifically informed or regulated emission reduction targets a benchmark against which to measure the cost-efficiency of internal reduction opportunities an effective way to present climate change credentials to customers to drive revenue, and to stakeholders to enhance corporate reputation. The non-profit research and advocacy group, Ecosystem Marketplace, estimated in its State of the Voluntary Carbon Market 2011 report that 131m tonnes of carbon credits were transacted through 2010, as the market for carbon offsets continues to help companies set and meet their GHG reduction targets. Companies pursuing offset-inclusive carbon management will typically evaluate all carbon reduction opportunities in terms of the cost of reducing a tonne of carbon, and implement those projects with a lower cost of carbon than the cost of an offset. The remainder of the target is met through the next most cost effective source of emission reductions -- carbon offsets. In simple terms, businesses set emission reduction targets which will enale them to deliver strategic valye and then meet that tarhet immediately and costeffectively through an offset-inclusive carbon reduction strategy. 11

12 How to build a carbon balance sheet A carbon balance sheet 4 shows the balance of a company s greenhouse gas emissions and removals or offsets, and the financial liabilities associated with those emissions. It effectively shows the position of a company in relation to its commitments and policies on climate change in much the same way that a financial balance sheet gives a snapshot of the financial position of a business. 12

13 A carbon account is the first step. It is constructed from the traditional carbon footprint, and shows the balance of greenhouse gas emissions and removals or offsets, in units of tonnes of CO 2 e. The carbon balance sheet is extracted from the carbon account by showing the financial liabilities associated with it. Table 1 (overleaf) shows the carbon account for a hypothetical business (Metrica Global Partnership) for the year ending 31 March Table 2 (overleaf) illustrates how this is built into a carbon balance sheet for the same business. In the following example, the company made a commitment to offset its emissions from 2009 onwards and accordingly arranged to purchase 50,000 tco 2 e of carbon offsets over the next two years. The first year of commitment, the company s emissions were below the level of offset purchased and a surplus of 4,270 offsets were carried over as an asset. In the following year emissions exceeded the amount of offset purchased and therefore at the end of the two year period the company was left with a liability corresponding to 3,970 tco 2 e. 13

14 Table 1. Metrica Global Partnership s carbon account for the year ending 31 March 2010 Carbon Account Year to 31 March 2010 tco 2 e Year to 31 March 2009 tco 2 e Carbon offsets purchased 50,000 50,000 CO 2 e released during year (scopes 1-3) Net carbon (release)/capture (58,060) (45,730) (8,060) 4,270 Table 2. Metrica Global Partnership s carbon balance sheet for the year ending 31 March 2010 Carbon Account Year to 31 March 2010 Year to 31 March 2009 tco 2 e tco 2 e Price of carbon offset Carbon assets/ (liability) bf 4,270 46, ,270 46, Carbon price change Adjusted carbon assets/(liability) bf Carbon assets/ (liability) Intangible asset/ (liability) cf 0 49, (8,060) ( 93,093.00) 0 46, (3,970) ( 43,774.50) 0 46,

15 In addition to enabling a business to measure its carbon assets and liabilities over a rolling period, therefore setting achievable and meaningful targets over the longer term, with a realistic approach to achieving them; the balance sheet is also useful because it clarifies the transfer of carbon assets from one entity to another. For example, if a company is undertaking emission reduction projects within its carbon footprint in order to generate emission reduction credits, the balance sheet can be used to reflect the generation and transfer of these assets. This avoids any risk of double-counting. Overall, a balance sheet approach makes a company s policies and actions on carbon emissions far more transparent, because it sets out what has been achieved in terms of internal and external emission reductions relative to a commitment, whether that commitment is a legal requirement or a public promise made to cement a brand s environmental credibility. Therefore, using a carbon balance sheet helps build trust and understanding of a business s claims. 15

16 Balance sheets unleash the value of offset-inclusive carbon management Carbon balance sheets pass power back into the hands of business, moving away from current GHG measurement and reporting disciplines that have evolved in ways which do not serve business s best interests. Current reporting can promote reductions without strategic targets, trapping business in a culture in which being less bad is okay. However, without real and absolute targets with flexibility on how to reach them, business is restricted to an ad-hoc set of responses which are neither cost effective nor likely to deliver a stable climate. Carbon balance sheets are a natural extension to established approaches to carbon foot-printing, and are a powerful tool to help businesses optimise investments in internal reductions and carbon offsets for sustained competitive advantage. For those businesses seeking to capitalise on the substantial opportunities available by taking a strong environmental position and delivering solutions to climate change, a carbon balance sheet approach, combined with offset-inclusive carbon management, provides a powerful tool. 16

17 References 1 - Shell. People, planet & profits: an act of commitment. 1999, last accessed 26 May servicepages/previous/files/shell_report_1999.pdf 2 - Carbon Disclosure Project. Carbon Disclosure Project 2010 Global500 Report. London: Carbon Disclosure Project, PricewaterhouseCoopers LLP. Measurement and Reporting of Greenhouse Gas Emissions Delivers Carbon Emissions Reductions and Business Benefits. 30 November 2010, last accessed 11 February Measurement-and-reporting-of-greenhouse-gas-emissions-deliverscarbon-emissions-reductions-and-business-benefits-fa4.aspx 4 - Ecometrica. Carbon Balance Sheet. London: Ecometrica Press, About The CarbonNeutral Company The CarbonNeutral Company is a world-leading provider of carbon reduction solutions. We work with more than 500 businesses in 32 countries to develop offset inclusive carbon reduction programmes which enable companies to increase revenue, manage costs and engage stakeholders. Since 1997, we have purchased carbon credits from more than 200 projects in 24 countries. CarbonNeutral is the registered trademark of The CarbonNeutral Company and is a global standard to certify that businesses have measured and reduced their CO 2 emissions to net zero for their company, products, operations or services in accordance with The CarbonNeutral Protocol. We have offices in London, New York and Singapore and are a founding member of The International Carbon Reduction and Offset Alliance (ICROA), which provides leadership and a unified voice in advocating for rigorous offset industry standards. To find out more about how an offset inclusive carbon management programme can benefit your business, please us or call: EU +44 (0) , US or Singapore About Ecometrica Ecometrica is a company of leading specialists in greenhouse gas (GHG) accounting, ecosystem services, climate change policy. With offices in Edinburgh, Scotland and Montréal, Canada, Ecometrica has unrivalled experience in the development and application of all major standards for GHG accounting, ecosystem change measurement and monitoring. Ecometrica s analysts have worked with the Carbon Neutral Company for more than 10 years, provided input to the Carbon Neutral Protocol and sit on the management board as a special advisor. Ecometrica s Greenhouse Gas Accounting software service - Our Impacts - is accredited by the Carbon Disclosure Project. Our mission is to make accounting for GHG emissions and ecosystem changes easier for all organisations, including business and government, by making our expertise available through a comprehensive range of webbased and professional consulting services. To contact Ecometrica, you can either us or give us a call on +44 (0)