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.