Tuesday, 20 November 2012

The Missing 95%

Earlier this month, the consulting company PwC released an analysis showing that current efforts to reduce greenhouse gas emissions are not sufficiently ambitious to keep us within the two degrees warming target agreed at the 2009 United Nations climate change conference in Copenhagen.

This news, while distressing for those of us committed to combating climate change, is not surprising.  As Carbon Clear's FTSE 100 analysis shows, many leading companies have not even measured their carbon footprint, let alone put in place measures to drive emission reductions.  And those companies that do work to reduce their carbon footprint are often not making enough progress.

Let's face it: decarbonising an economy - or a business - is hard work. Greenhouse gas-emitting activities are embedded in our daily business lives.  Our vehicle fleets, logistics networks, energy infrastructure, built environment and even food production systems all release vast quantities of greenhouse gases into the atmosphere.  Each of these systems has been developed and optimised over several decades, and represents billions of dollars of cumulative investment.  We have trained generations of engineers, architects and farmers to design and use this infrastructure, and by and large, it works. It would be unrealistic to drop all of this and change overnight to a transportation, logistics, energy, built environment and food production system that releases 80% less carbon.

Seen in this light, the 3-5% annual reduction targets set by the most ambitious companies appear quite reasonable.  Coming at a time of reduced government spending and economic hardship, the 1% or even smaller reductions that developed nations are actually achieving likewise appear understandable.  These are often the "easy" reductions, the ones that save companies money and energise staff and stakeholders. These reductions should by rights be happening anyway.

The trouble is that they're not enough.

Achieving a 5% annual emission reduction target over ten years translates into a 40% reduction below the baseline by the end of that period.  A company that had been emitting a million tonnes CO2e a year would now be emitting only 600,000 tonnes.  Such an achievement would mark any business as a low-carbon leader.

But it isn't enough.

The problem is clear: a five percent carbon reduction target means not taking responsibility for the other 95% of the company's footprint that remains unabated.  And even though the footprint is shrinking year on year and may eventually reach zero, that residual 95% is causing a lot of damage along the way.

At the end of that ten year period, a company that had been releasing a million tonnes of CO2 to the atmosphere will have saved a cumulative total of 2.4 million tonnes, but will still have a cumulative carbon footprint of 7.6 million tonnes.  In other words, more than 3/4 of all the emissions they would have released without an ambitious reduction plan got released anyway.  And all else being equal, once that carbon is in the atmosphere it will contribute to a warming climate for hundreds or even thousands of years. Is that really the legacy of a leader?

As I said earlier, it is challenging for a company to radically alter its internal operations and reduce its carbon footprint immediately. No doubt about it. But the fact of the matter is they don't need to do it alone.  There is a tool that businesses all over the world employ when they don't have the time or local resources to achieve their objectives.

It's called outsourcing.

Companies outsource critical business services all the time: legal representation, website design, accounting and payroll, deliveries, building cleaning and maintenance, cafeteria food service, travel management, and annual report preparation.  They do this because it is faster, more efficient and, importantly, cheaper than trying to achieve an equivalent result in-house.

Outsourcing works for a host of important business activities, so why not carbon footprint reduction? We have already established that it is time consuming, difficult and costly to achieve in-house emission reductions on the the scale needed to avert disastrous climate change. In a situation like this, it makes sense to outsource the rest of the emission reduction effort to people who can do it faster, more efficiently, and cheaper. There are a host of companies (including ours) that can help companies deal with the "missing 95%" of their footprint.

(c) Copyright Carbon Clear Limited

What's surprising is that more companies are not doing this already.  According to our research, while the vast majority of the FTSE 100 have set an emission reduction target, less than 10% of these companies currently have a carbon offset programme of any kind.  Part of the reason is ideological. Google the phrase "carbon offset last resort" and you will find page after page of advice from organisations as varied as Friends of the Earth UK and IEMA (of which Carbon Clear is a corporate member) exhorting companies to treat carbon offsets as a fallback option. A sign of failure.  That same internet search will turn up scores of companies that offset meekly, offering up this "last resort" language as an apology for not doing more on their internal footprint.

This is a "through the looking glass" mentality.  While climate scientists tell us that global greenhouse gas emissions must peak in the next five years, some advisers are reassuring companies that they can demonstrate their leadership by deferring action on the vast majority of their carbon footprint, so long as they prioritise internal reductions.  In reality, the companies that show the strongest commitment to avoiding climate change impacts will reduce what they can, while simultaneously outsourcing the rest of their footprint reduction through carbon offsets.

Clear evidence of the link between environmental leadership and carbon offsetting comes from our analysis of the FTSE 100.  If companies saw offsetting as an "easy" way to relieve their green guilt or make up for a lack of effort in other areas, we would expect to see companies grouped into two clusters: those with a robust internal carbon management programme but no offsetting, and those with a weak internal carbon management programme who use offsets to make up for their lack of effort.

The results are quite different. Companies that are offsetting their emissions also cluster near the top ranks for reporting their footprint, developing an internal climate change strategy, internal emission reduction activities and engaging their stakeholders.  None of the bottom ranked companies on these other criteria offset their emissions.

This result shouldn't be surprising.  After all, carbon offset credits cost money, and the business benefits of a voluntary (or "beyond compliance") carbon offsetting programme, while real, are indirect.  Investors, finance managers and senior executives will face competing demands for scarce capital. A company that scores at the bottom of the league table and isn't serious about tackling the climate change challenge doesn't need to be discouraged from purchasing carbon offsets.  The "last resort" language, then, serves mainly to discourage people who might otherwise consider integrating carbon offsets into their broader carbon management programme. This is a wasted opportunity.

Our review of the FTSE 100 shows that using carbon offsets is not a sign of failure.  For companies that take climate change seriously, offsets are seen as part of their overall carbon reduction toolkit, a way to outsource those emission reductions they cannot readily achieve with internal resources.  Offsets help companies tackle the "missing 95%" of their footprint reductions, achieve business benefits and contribute to the fight against climate change.

Monday, 12 November 2012

Mandatory Carbon Reporting: From Compliance to Competitive Advantage

Four weeks have passed since the close of DECC's consultation on mandatory greenhouse gas reporting. That means we are now four weeks closer to the anticipated launch of the scheme in April 2013.  Now is not the time to rest easy.  We expect yet another consultation - on the guidance notes for the legislation - sometime in December.

We may have weeks or months to wait before DECC publishes the results of the legislative consultation. However, it would be a mistake for companies to wait until the final legislation is published before taking action. As I noted in a previous post, the original Carbon Reduction Commitment rules were only finalised a month before the legislation came into force.  Firms that fail to prepare in advance will find themselves at a disadvantage when it comes to complying with the new carbon reporting rules.

So what can companies do to get ready?

Many firms that need to report their carbon footprint make the mistake of leaping immediately into the data collection phase without specifying how they plan to use the resultant information.  In many cases, this approach yields a carbon footprint report that fails to generate broader benefits for the company.

We recommend that businesses take a more focused approach if they wish to get long-term value from their carbon reporting efforts.  The first step in this approach  is to determine the correct measurement and reporting strategy to pursue.  The measurement and reporting strategy will help dictate the human and financial resources the firm allocates to the initiative, the software and other data collection systems that will be employed to process the information, and even how the company will be able to communicate its accomplishments.

So what questions must the reporting team answer to determine their carbon measurement strategy?  One of the key issues is to understand the types of benefits the company expects to gain from their carbon reporting.  Is the main driver the promise of financial savings that result from better management of corporate resources, or does the business also expect to reap reputational rewards from their carbon disclosure? A logistics business focused on cost savings might go beyond the legislation to collect very fine-grained data on their fleet using a telematics solution, and then drive efficiencies through driver education. Meanwhile, a consumer facing retailer seeking reputational benefits might go beyond the requirements of the legislation in a different way and report voluntarily on a broader range of activities in its supply chain.  Each of these decisions has implications for the types of data a company chooses to collect, and the data collection tools and systems it uses to assemble this information.

Another key consideration in the determination of a company's carbon measurement and reporting strategy is the internal implementation capacity of the business.  Even with the best will in the world, a company that is unable to devote technical, financial and human resources to carbon measurement cannot achieve as much as one with a larger, more experienced team and proportionately greater budget. Understanding your resources, capabilities and limitations can help prevent over-reach and potential underperformance.

What you need, then, is an approach that is tailored to your company.  Carbon Clear has been helping firms determine their carbon measurement and reporting strategy, both in terms of the benefits they can reasonably expect to achieve and in terms of their internal capability to roll out their reporting initiative.

 Among other things, these basic criteria allow us to create a rough snapshot that plots corporate carbon measurement strategies within four quadrants, as shown below:

As firms' carbon maturity increases we expect movement towards the upper right quadrant.
Carbon Measurement & Reporting Strategy Quadrants(Copyright Carbon Clear, all rights reserved)

Every business needs a carbon measurement and reporting approach customised to their requirements.  However, we have found that this snapshot helps companies focus on the issues most relevant to their position, while avoiding the one-size-fits-all approach of some solution providers.

Companies that pursue a "Compliance" strategy tend to have limited internal capacity to implement a sophisticated measurement programme and see little reputational benefit from reporting their carbon data (perhaps because they are not consumer-facing a consumer-facing brand or anticipate limited investor pressure for carbon disclosure).  Firms in the "Compliance Quadrant" tend to follow the letter of the law. Their primary objective is to avoid any negative repercussions that result from failure to meet the legislation's requirements.  Financial savings that result from better data and efficiency improvements are secondary. These businesses may use a simple carbon accounting software package or even a spreadsheet tool to calculate their carbon footprint. 

Like their "Compliance" counterparts, firms in the lower-right "Cost Reduction" Quadrant lack strong reputational drivers for developing their footprint measurement and reporting system.  However, their strong internal implementation capability (budget, staff, management systems) means they are better able to use more sophisticated carbon accounting diagnostic tools to identify emissions hot-spots and drive footprint and cost reductions.

The upper-left quadrant, housing Performance Strategy firms, is for companies that face brand or reputational pressure to disclose their carbon performance, but who have limited ability to put in place a sophisticated measurement and reporting system.  These companies may choose to start with a basic carbon footprint report and embark on a programme of continuous improvement, that encompasses ambitious overall reduction targets.  In most cases, these firms will try to capture more and more of their total footprint as their data management capability improves over time.

Companies that stand to gain brand and reputational benefits from carbon measurement and reporting, and that have the internal capability to implement a robust data collection and management programme may find themselves in the "Leadership Strategy" Quadrant. These firms want to use their carbon reporting to demonstrate to stakeholders their commitment to environmental sustainability, achieve a high score at the top of the CDP and carbon maturity league tables, and use their carbon reporting initiative as a vehicle to engage their staff, their customers and, increasingly, their investors.  They may use more sophisticated carbon accounting tools that integrate with their accounting system and capture data for a range of other sustainability indicators at the same time.

Many companies that begin in the "Compliance", "Cost Reduction" or "Performance" quadrants may move to the "Leadership" strategy quadrant as their systems improve and as the broader benefits of carbon reporting and management become evident.  However, it isn't necessary to begin there, and many firms may be comfortable staying where they are. What it shows, however, is that there is no "one-size fits all" approach to carbon reporting.

Choosing the right carbon measurement and reporting strategy is the first step in preparing a fit-for-purpose carbon footprint report.  Getting it right requires a thorough evaluation of your company's business drivers and of your internal resources and capabilities.

These decisions will influence every other aspect of your company's response to Mandatory Carbon Reporting, so it is important to know where you stand.  The good news is that you don't have to wait for DECC to release the final details around the carbon reporting legislation before you determine the right approach.  We have already begun helping companies define carbon reporting strategies that range from compliance to competitive advantage, ensuring that they spend resources wisely and helping identify business benefits.

Friday, 2 November 2012

"This Is What Climate Change Looks Like"

Even as America's East Coast continues to recover from the impact of Hurricane/"Superstorm" Sandy, pundits are using it as a teachable moment to talk about climate change. Perhaps the most in-your-face comment along these lines appeared on the cover of Businessweek:

My preference for precision makes me wince a little when I see statements like this.  As I noted in an earlier post, there is a difference between weather and climate. A hurricane - even one as big and destructive as Sandy - is weather.  Weather is what you see when you look out the window on any particular day. Is it sunny? Is it snowing? Are there 70 mph winds and driving rain?  That's weather.

"Climate" is a description of the conditions you can reasonably expect given the location and time of year.  If it's autumn on the U.S. East Coast, you can reasonably expect a handful of hurricanes to strike.  Warmer ocean temperatures provide even more energy to power hurricanes, and we know that the planet is warming as a result of fossil fuel use, deforestation and other practices. As a result of global warming, then, we expect a changing climate with more and stronger hurricanes. But it's very challenging to point to any one storm and say, "Aha! Climate change made that happen!"

Meteorologists believe that increased freshwater as a result of Arctic melting may have contributed to the cold front that steered Sandy onshore. Those who are looking for a teachable moment are saying that all of this proves we are suffering from climate change impacts.  But as with hurricanes in autumn, cold fronts are not unknown in the north Atlantic.  It's an amazing coincidence, and matches very closely what we would expect in a warming world.  But again, if we want to be as accurate as possible, when describing any particular incident we are talking about weather. Our models are not sufficiently fine-grained to allow us to draw the causal link more directly than that.  At least not yet.

The danger with definitively attributing a bad weather event to climate change is that it can cut both ways.  When campaigners claim that a warm, snow-free winter is evidence of climate change, climate deniers can claim that a cold snap and blizzard the following year make the opposite case. Trends and statistics allow a more nuanced debate.

Businessweek quotes Eric Pooley of the Environmental Defense Fund, who uses a sports analogy: “We can’t say that steroids caused any one home run by Barry Bonds, but steroids sure helped him hit more and hit them farther. Now we have weather on steroids.” Steroids and other performance enhancing drugs increase the likelihood that a world class athlete will win games and break records, just as climate change increases the likelihood that we will experience monster hurricanes and other impacts.

This does not mean we can't use Sandy to have a serious conversation about global warming.  Rather than saying, "This is climate change," I might say, "This is what climate change looks like. We'll have to get used to much more of this if we don't drastically cut emissions."

We don't need 100% certainty before we take action.  People who live in relatively dangerous neighborhoods tend to have more locks on their doors than those who live on safer streets, even though the probability of a robbery is far below 100%.  The insurance industry in particular is very sensitive to the probability of a claim, and uses this information to decide who to insure and what premium to charge.  Even a slightly increased probability of devastating storms, droughts, floods, and the like is enough to spur insurers to change their policies.  When it comes to climate change, insurers are the canary in the coal mine.  They don't need to know that a particular storm or drought is due to climate change, just that those impacts match what we would expect in a warming world.

While I won't yet go as far as that Businessweek headline, I do think Sandy helps sound the alarm.

"This is what climate change looks like."