Monday, 19 October 2009

Beyond Compliance

This article originally appeared in the October 2009 issue (no. 84) of 'the environmentalist', the magazine of the Institute for Environmental Management and Assessement (IEMA).

In the run-up to Copenhagen, governments around the world are proposing carbon reduction targets as part of their negotiating positions. New Zealand has set a preliminary goal to reduce emissions 10 to 20% by 2020; Japan has set a 15% reduction target – albeit from a different baseline. Meanwhile, proposed legislation in the U.S. sets a 17% target by 2020 and the EU has pledged to reduce emissions 20% by that date.

However, many leading global companies have set their own corporate targets for emissions reductions that make these country pledges seem modest and meagre. Wal-Mart’s climate change strategy sets a 20% reduction target by 2012 and Unilever have set a 25% reduction by that same year. British-French rail company Eurostar set a 25% reduction target for 2012, and reached its goal three years ahead of schedule. Meanwhile, supermarket chain Tesco promised a 50% reduction in its footprint by 2020, and Marks and Spencer pledged to go completely carbon neutral by 2012.

In this article, we explore why large companies commit to such ambitious reduction goals, and consider what this means for carbon reduction both at home and abroad.

Why do large companies go beyond compliance?

Companies embark on carbon reduction initiatives in order to exploit opportunities and to manage their risks, including costs, customer retention, regulation and/or exposure to weather and resource variability.

As described in “The end of the low-carbon agenda?” (Issue 72), many companies are attracted to the lower energy and transport bills associated with driving carbon out of the business. Marks & Spencer, for example, originally pledged to spend £200 million on its “Plan A” eco-initiative, but has since found the programme to be cost-neutral and expects the ultimate savings to outweigh its planned investment. In this context, a low-carbon initiative can engage staff in what would otherwise be a traditional cost-reduction exercise.

Multinational companies face more direct risks from climate change. Long supply chains and inefficient suppliers leave firms vulnerable to rising energy prices – especially as governments regulate emissions in transport. Meanwhile, weather-related disruptions – storms, floods, drought, can threaten companies’ “just in time” logistics networks. Climate change risks are increasingly being incorporated into businesses’ planning strategies. As Unilever states, ‘”there will be serious consequences for our business operations, including threats to our agricultural supply chain and the availability of water in some of our markets. The costs of addressing climate change now, while considerable, are likely to be far less than waiting and allowing the problem to get worse.”

With climate change now a popular concern, companies that voluntarily embark on carbon reduction initiatives are earning a reputation as environmental leaders. The Sunday Times “Best Green Companies” list is widely seen as the benchmark for sustainability leadership in the UK, and a company’s commitment to carbon reductions is one of the main criteria that the newspaper uses to evaluate performance. Companies strive to be on this and other “green lists” because environmental leadership can often translate into increased customer loyalty and sales growth, as well as employee satisfaction.

Anticipating regulatory trends is not a new concept for large corporations. For example, chemical companies have long understood that environmental risk management is essential to their continued profitability.

When the chemical industry launched its Responsible Care code of practice in 1988, only 13% of its practices were required by US government regulation. Four years later, the US government had made 80% of these company-initiated practices a regulatory requirement. Companies that had voluntarily adopted the Responsible Care principles were well placed to comply with the eventual increase of government regulation.

Climate change policy has followed a similar course: despite growing pressure, governments have been relatively slow to adopt emissions reduction targets. Meanwhile, leading companies have seen the advantages of a low-carbon economy. These companies have been steadily measuring, reducing, and offsetting their carbon emissions over the past five years – with telecommunications firm BT launching its carbon reduction initiative back in 1992.

The global supply chain

Unlike utilities and manufacturers, large retailers often have relatively low “direct” or “Scope 1” emissions (emissions from sources under a company’s direct control), and their emissions from purchased electricity and steam are not particularly high. However, these companies maintain extensive supply chains, and influence a carbon footprint that may be 20 to 60 times greater than their direct and energy indirect emissions.

Unilever, for example, reports the carbon footprint from their own factories, offices, laboratories and business travel at approximately four million tonnes of CO2 equivalent per year. Their wider (“other indirect” or “Scope 3”) footprint from sourcing agricultural and chemical raw materials is around ten times larger, and when consumer use and product disposal are included, this footprint can expand to 30 to 60 times greater than their direct emissions. As a result, many companies find that they can achieve more ambitious emissions reductions if they involve their suppliers – and even their customers – in their low-carbon initiatives.

These companies often wield tremendous influence over their suppliers due to their immense purchasing power. Wal-Mart, for example, is the largest single customer of many suppliers around the world. Even Proctor & Gamble, the world’s largest consumer goods maker, counts Wal-Mart as its largest customer. When Wal-Mart asks its suppliers to measure their carbon footprint or identify ways to reduce emissions, they are more likely to get a response than would be a smaller customer. As Marks & Spencer’s Mike Barry puts it, “They know that if they want to want to be pursuing business with us in the future, they have got to come on the journey with us.” To this end, Marks & Spencer has helped its suppliers set up four “green” factories that use significantly less energy and contribute to the firm’s lower carbon footprint.

Not only are these changes pushed up the supply chain, but also down to the end user. After launching their “Plan A” sustainability initiative, Marks & Spencer found that up to 75% of the carbon footprint of their clothing came from washing, drying, and ironing. As a result, the company has begun designing and labelling its clothes for washing at lower temperatures and launched a customer communications campaign.

As described in our article “Counting the Cost of Outsourcing” (Issue 55), many of the emissions from developing countries are attributable to outsourced manufacturing on behalf of Western companies. Indeed, adjusted for exports, China’s carbon footprint is significantly lower than the United States’. 70% of the products sold in Wal-Mart stores are made in China, and the company has supply relationships with 5,000 Chinese enterprises.

What happens when massive Western companies demand that their foreign suppliers go beyond compliance and reduce emissions? It may be too early to tell, but we would expect this supply chain pressure to lead to greater demand for green electricity and energy efficiency improvements at factories in China, India and other developing countries.

There is another source of external emissions reductions that major companies are pursuing: carbon offsets. Carbon offsets are purchased emissions reductions that occur outside an organisation’s boundaries. In this regard, generating measurable reductions by investing in a wind or solar project in China is only one step removed from investing to help an apparel factory in China reduce energy.

Indeed, large corporates in the U.S., U.K. and mainland Europe are embracing carbon offsetting to help them go beyond compliance and achieve net emissions reductions far faster than they could through incremental internal measures. By supporting projects in developing countries that do not have national caps on their carbon emissions, these companies are helping to accelerate the transition to a lower-carbon mode of economic development.

Different paths to a lower-carbon future

It is clearly in large companies’ best interest to announce and pursue ambitious carbon reduction goals. These initiatives can drive significant reductions in thousands of supplier companies in developing countries and provide an incentive for a rapid transition towards lower-emissions practices in those countries.

This ongoing trend raises an interesting possibility. The post-Kyoto climate change negotiations are currently bogged down over the issue of developing country reduction commitments. Developed nations like the U.S. and U.K. argue, correctly, that emissions from China, India and other poorer nations are so large that serious action to fight climate change will be stymied without their active involvement. The developing nations argue, also correctly, that current warming is due to richer nations’ historical emissions and rich countries should demonstrate their own commitment to reduce their footprint before lecturing others.

Wal-Mart, M&S and other companies are showing that it is not either-or. The world economy is so intertwined that actions taken in developed nations can lead to significant emissions reductions overseas. Indeed, while a binding emissions cap would provide the force of law, it is likely that supply chain pressure and demand for offsets will also drive significant cuts.

Major structural change to our carbon-based economy is inevitable as we shift to different ways of meeting our needs while tackling the challenges of climate change. Large corporates have led the way in showing how a commitment at home can lead to a reduced footprint overseas. As pressure mounts on carbon caps in developed countries, we can expect to see it spread into faster action around the world.

Suzy Hodgson, AIEMA, is a principal consultant and Jamal Gore, AIEMA is the managing director at specialist carbon management company, Carbon Clear Limited.