Sustainability reporting part 2: It's an ongoing process not a goal

(This article originally appeared on the 2DegreesNetwork website.)

If you're a committed environmentalist, it’s likely that the push for continuing improvement in sustainability is welcome. But it's also potentially nerve-wracking. It means that, as a sustainability professional, you can never rest on your laurels, and you may have to go back to your board to reset your targets - perhaps more than once, as definitions of "good enough" evolve.

All this becomes easier once you realize that sustainability isn't an end-goal. In an earlier post we discussed the evolutionary nature of carbon emissions and sustainability reporting and concluded that sustainability is a process and a way of working.

Most companies are not in business to consume resources, generate rubbish or emit pollution. They are in business to deliver a product or service to their customers. Resource consumption, waste generation and pollution result from the way they choose to deliver those products and services. Airlines emit carbon dioxide (CO2) into the atmosphere not because they are in the CO2 production business, but because liquid fossil fuels are affordable and have a very high energy density. Commercial farms release vast quantities of nitrous oxide (N2O), a potent greenhouse gas, not because they are in the N2O production business, but because farmers must fertilise and plough their fields.

So what's the best way to set your targets to reduce waste, resource consumption, and pollution?

Airlines could establish a realistic emission reduction target, set it in stone, and make a series of engineering and operational tweaks to achieve that target. However, they will likely not escape continuing criticism from environmental campaigners, passengers and other stakeholders whose concerns about climate change will only grow as they learn more about this threat. Airlines (and their internal sustainability champions) who view sustainability as a way of working instead of a fixed target may take a different view.

Yes, interim targets are a useful way to achieve quick wins and get buy-in across the company. But a company that is fixated on making their environmental performance 10% better will be blindsided by a competitor that innovates to make their performance 10 times better. For an airline 10X better might mean innovating to create a zero-carbon fuel or a designing a completely different type of aircraft.

Whether literal or metaphorical, 10X better means there is no end in sight: you don't know yet how the company is going to achieve its sustainability goal, or the goal so big and long term that you won't be around anymore when it finally gets there. Either way, it means changing the way you think about sustainability. In fact, it may mean rethinking how your company works, as GE did with its Ecomagination initiative.

Each of your company's sustainability achievements is a vital stepping stone rather than an end-point. That doesn't mean it's easy. Acknowledge the hard work required to attain that goal, and celebrate when you've reached it.

Then use that energy to set off towards the next goal. And enjoy the continuing journey.

Voluntary Offsets and the Backloading Brouhaha

My previous posts about "backloading" and the EU ETS have focused on the implications for the compliance markets in Europe and elsewhere. In compliance markets, government regulators set the rules governing the supply of emission reduction allowances and offset credits.  They also govern demand by setting the emissions targets that firms must meet by making internal reductions or purchasing permits and offsets.

Now I'd like to focus on what the backloading debate means for the voluntary carbon markets.  The short answer is that backloading will have little direct impact, but the reasons are worth a longer discussion.

The voluntary market is much smaller than its government-created sibling, but it is difficult to overestimate its importance. The voluntary market is self-regulating.  Its carbon offset credits are issued by independent standards bodies, and an increasing number of its largest market makers  follow a Code of Practice governing how they do business.

This self regulation makes the voluntary markets exceptionally flexible and a source of innovation that helps improve the slower and more bureacratic compliance markets.  All four of the protocols initially approved in California's cap-and-trade system were developed initially under the Climate Action Reserve, a voluntary carbon standard. A number of the carbon credit innovations that were pioneered by bodies such as the Gold Standard and the Verified Carbon Standard have allowed the United Nations carbon credit system to expand beyond large, industrial project types like refrigerant destruction, large hydropower and waste heat recovery. The project types favored by the voluntary carbon market, like clean cookstoves, village lighting, forest conservation and water purification can deliver greater sustainable development and have helped bring the benefits of carbon finance to poorer nations.

Voluntary market innovation is not limited to the projects. It's notable that California's fledgeling carbon market California has decided to use for its cap-and-trade transactions two private sector registries that were created for  the voluntary carbon market to - due in large part to their responsiveness, quality and cost-effectiveness.  And when the British government launched a short-lived effort to develop its own voluntary offset quality scheme, the market launched a more thorough and far-reaching system, twelve months faster, and for only one-tenth of the cost.

But perhaps the most important point that helps understand what makes the voluntary market special is that its carbon offset buyers choose to buy carbon credits! Voluntary market buyers take action of their own accord beyond or in advance of legislation to tackle their climate change impact. 

This difference more than anything helps explain why the backloading brouhaha has little direct impact on the voluntary market. In the compliance market, emitters tend to reduce their emissions just enough to avoid paying penalties. If they cannot meet their reduction targets, they tend to buy just enough offset credits (called CERs) and allowances (EUAs) to avoid those penalties. And when those firms find they have exceeded their reduction targets? They sell their surplus allowances, even if their footprint is still far above zero.  The economic recession made it very easy for many companies in the EU ETS to meet their reduction targets, nearly eliminating demand for allowances and offsets.  Supply and demand - too many permits and insufficient demand drives CER and EUA prices in the compliance markets towards zero.

Compare that to buyer behaviour in the voluntary carbon market.  The demand drivers for carbon credits could not be more different. Here companies pledge to reduce their net emissions - often
to zero - through a combination of internal reductions and voluntary offset credits. When voluntary customers fail to meet their reduction targets, they must buy more carbon credits to make up the difference.  When they exceed those targets, they buy fewer credits - but they keep buying.  Their reduction goals are sufficiently ambitious that it would be nearly impossible to reduce demand for offset credits to zero - at least for the foreseeable future.

Buyer behaviour in the voluntary market differs from the compliance market in another way.  Absent the carrot and stick of government regulation, buyers use their carbon management programmes as a way to demonstrate good citizenship.  As a result, many companies seek carbon offset credits from projects that do much more than reduce greenhouse gas emissions.  Emission reduction projects that improve local livelihoods help corporate offset customers achieve their broader CSR goals.  After all, which would you rather have on the cover of your CSR report, a photo of an industrial gas destruction project, or a photo of a family enjoying the benefits of solar powered lighting and safe drinking water? It is the value of these co-benefits that helps maintain prices in the voluntary carbon market, even during an economic recession.

With such different motivations for buyer behaviour compared to the compliance market, it is little wonder that the impact of policy measures like backloading would have little direct impact on the voluntary market.

However, compliance market policy failures can have an indirect impact on prices in the voluntary market. Actors in the compliance market have begun to take notice of the relative buoyancy of voluntary prices.  In September 2012 the UN Framework Convention on Climate Change included the following statement in its meeting notes:

"Project participants and others engaged in the [Clean Development Mechanism] will soon be able to voluntarily cancel their CERs into an account in the CDM registry at the UNFCCC secretariat in Bonn, Germany. This could encourage expanded use of CERs for voluntary emission reduction, such as by companies using credits as part of a social responsibility programme, by event organizers wanting to offset their emissions, or even by individuals wishing to reduce their carbon footprint."

Just a few months later Christiana Figueres, the head of the UNFCCC, made the following Tweet:

It appears that a number of people are hoping that the relatively buoyant voluntary market can support CDM  by serving as a source of demand for compliance credits.  This is a great idea in theory.  However, the primary CDM market was created to feed national and regional compliance schemes.  The promise of CDM has mobilised a tremendous amount of climate finance to feed the compliance market.  In 2011, the latest year for which figures are available, CDM was five times larger than the voluntary carbon market.  Since that time, we have seen record issuances of carbon credits on the CDM.

It would be wonderful if demand in the voluntary market expanded rapidly enough to absorb the surplus from the CDM (or at least from the CDM's more community-oriented and renewable energy projects).  The short-term impact of such an influx, however, would be to overwhelm completely the absorptive capacity of the voluntary market, driving prices towards zero and removing incentives to develop new and innovative voluntary projects.  It would be akin to fitting all the passengers from the Titanic into one lifeboat.  Rather than rescuing the compliance market, we would damage the voluntary carbon market, perhaps irreparably.

It's clear, then, that for all its inherent strengths, the voluntary carbon market remains vulnerable to poorly executed attempts to rescue elements of the compliance market. The most robust and sustainable fix for the compliance market's woes remains in the realm of politics. More specifically, national and regional leaders must show the courage to set ambitious reduction targets that accelerate the pace of action to fight climate change.  The depressed prices on the EU ETS show that companies have been able to meet their current emissions reductions obligations more easily than we ever thought possible.  Deepening emission reduction targets will accelerate the transition to a lower-carbon economy and strengthen the carbon markets by driving demand for compliance carbon credits and provide a sustained boost to prices.

Meanwhile, the voluntary carbon markets will continue doing what they do best: driving innovation and providing a vehicle for companies who want to take action beyond compliance to demonstrate their environmental leadership.

(Jamal Gore is Managing Director of carbon management firm Carbon Clear.)

More on the CRC and Carbon Offsets

One of the reasons participation in the UK's Carbon Reduction Commitment Energy Efficiency Scheme is a poor alternative to offsetting your company's carbon emissions is that the Government has no obligation to use your CRC "tax" payments to spur greenhouse gas reductions. A second reason is because, by DECC's own admission, the £12 per tonne permit price "may have a marginal effect on decisions to invest in energy efficiency relative to overall energy prices".

Pulling back to look at the big picture provides us yet another reason why companies participating in the CRC should not abandon carbon offsetting as a tool to fight climate change: the CRC ignores a huge portion of most companies' carbon footprint.

The CRC focuses on emissions from stationary energy consumption - particularly the use of electricity and gas in buildings.  In traditional carbon reporting parlance, the CRC focuses on Scope 1 and 2 energy emissions.  It does not cover other types of Scope 1 emissions - from refrigerant leaks, from land use and forestry activities, or from burning fuel to power a company's vehicles. The CRC is also silent on most Scope 3 emissions, which come from third party activities undertaken on the company's behalf. This includes taxis, commercial air travel, hotels, and outsourced goods and services.  Finally, even that limited CRC footprint is focused only on a company's UK operations - all emissions from overseas assets are excluded.

From the point of view of government regulators, these exclusions make sense. After all, the UK would risk an international outcry if it unilaterally imposed a carbon tax on company operations in, say Germany or China. And with buildings responsible for the lion's share of UK emissions, there is a strong case for focusing on this area.

For many companies, however, an emphasis solely on the CRC footprint marks a retreat from best practice.  The GHG Protocol and ISO 14064 reporting standards require firms to report all Scope 1 emission sources, not just energy, and recommend further that firms measure and report their Scope 3 emissions whenever possible. Therefore, relying on the CRC footprint would not be enough to demonstrate a firm's low-carbon leadership - even if the CRC were to begin driving investment into emission reductions on a massive scale.

For professional services firms the situation is even worse. Business travel often represents more than 50% of the carbon footprint of a major accounting firm, consultancy or auditor. As a recent  infographic in the New York Times demonstrates, frequent long-haul flights can easily swamp an individual's or company's other emission reduction efforts.  The problem for professional services is that these companies are selling time and brainpower. They are often most effective when they can sit side by side with their clients to solve business problems.  And when their clients are all over the globe, that means they have to travel. A lot. Many of these companies are CRC participants, but their CRC performance says little about their overall GHG impact.

Let me be clear: the CRC has helped us make progress in our efforts to decarbonise the UK economy. It has raise awareness of climate change among finance directors and other corporate leaders in a way that would be difficult to accomplish with voluntary measures alone.  Furthermore, it gives government the tools to drive further reductions in future. However, corporates who wish to demonstrate their low-carbon leadership must go further. They can set ambitious near- and long-term reduction targets that go beyond compliance, and they can invest in verified carbon offset credits that achieve guaranteed emission reductions, right here and now.

Jamal Gore is Director at carbon management specialist firm Carbon Clear. All opinions are his own.

Mandatory Carbon Reporting: What's the Big Deal?

There are just 26 days left before the 17 October  close of Defra's Mandatory Carbon Reporting consultation.

As I mentioned in a previous blog post, the formal requirements are not particularly detailed. Many of the biggest companies are already reporting their greenhouse gas emissions via the Carbon Disclosure Project and what is more, Mandatory Carbon Reporting, unlike the EU ETS and CRC, does not attempt to put a price on carbon or mandate reductions.

So why would Defra go through all the trouble?

In a phrase, climate change. The British Government made history with its 5-year carbon budgets, which established a path to an 80% emissions reduction target by 2050.

The most powerful tool in the Government's current arsenal is the EU Emissions Trading Scheme. Participating installations are responsible for approximately 48% of the country's emissions, but the low carbon price reduces incentives to invest in longer term reduction measures.  Similarly, the Carbon Reduction Commitment Energy Efficiency Scheme (CRC-EE) targets firms responsible for 10% of the country's emissions but energy represents on average 3% of these company's costs.  For these companies, the £12 carbon price in the CRC is rarely enough to justify massive energy reduction investments.

Note that the EU ETS and CRC schemes combined do not cover 58% of the UK footprint due to double counting. Most of the large companies covered by the CRC purchase energy from ETS compliant utilities. The ETS works to drive supply side reductions while the CRC drives demand side reductions.  The problem is that those reductions aren't coming fast enough.

Mandatory Carbon Reporting gives the Government a third arrow for its quiver. According to the latest CDP report, the subset of FTSE 350 companies that voluntarily report their emissions had a combined Scope 1 and 2 footprint of over 487 million tonnes CO2e for their worldwide operations. This is remarkably close to the UK's national carbon footprint total of 470 million tonnes CO2e.  Broadening this to the 1,000 or more firms covered under Mandatory Carbon Reporting would give a combined footprint considerably larger than the entire country. The emissions covered under Mandatory Carbon Reporting, then, are potentially several times larger than any other carbon reporting measure in the Government's arsenal.

Here's where it gets interesting. Defra's Impact Assessment for the draft Mandatory Carbon Reporting consultation estimates that firms will achieve a 4% emissions reduction simply by improving their footprint reporting.  In other words, they assume that forcing the Board and investors to pay attention to the company's footprint will lead to carbon savings, without requiring carbon caps, taxes, or mandated technology measures.  Of course, not all of those global emission reductions can be counted against the UK's carbon budget, but with so many of the largest emitters covered under Mandatory Carbon Reporting, these "easy" reductions will make a material contribution to Government carbon saving efforts.

In addition, the current reporting proposal is only the first step. In 2015 Defra will review the programme with an eye to broadening it to cover every large company in the UK, public and private.
 And should the need arise for a cap and trade system or carbon tax covering these companies at some point in the future, Defra will already have their emissions data at the ready.

Even though Mandatory Carbon Reporting looks like business as usual at first blush, its wide net makes it a very big deal indeed.

Carbon Clear's Autumn Breakfast Briefings: Telling the Story

There are only two days to go before the launch of Carbon Clear's autumn Breakfast Briefing series. A good deal of thought went into these sessions, and I like to think they come together to tell a compelling story.  Here's how they fit together.

The first session, on 20 September, will cover the UK Government's new Mandatory Carbon Reporting legislation, which I blogged about a few weeks ago.  I'll be joined at that session by my colleague Vincent Reulet and by Mardi McBrien, MD of the Carbon Disclosure Standards Board.

We'll be talking about why the Government is pushing for mandatory carbon reporting, how this new requirement fits in with other carbon reporting efforts like the EU ETS, the Carbon Disclosure Project and the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), and how companies can both comply with this legislation and use it to gain competitive advantage.  Should be an informative and dynamic event.

A few weeks later, on 2 October, we will be talking about what I sometimes refer to as Carbon Offsetting 2.0.  After the first wave of carbon offsetting in the mid- to late-2000s, there was a lull.  Now, a new crop of companies, from Microsoft to Marks & Spencer, are announcing carbon neutrality programmes.  We'll be discussing how this new round of carbon offsetting differs from the first, and how other companies can benefit.

Then, on 17 October we will be unveiling our Carbon Maturity whitepaper.  Our crack team of consultants has pooled decades of accumulated experience working with over a hundred companies to develop a model of corporate carbon maturity.  We've found that companies at each stage of the maturity curve share certain characteristics and encounter similar obstacles before moving on to the next level.  This applies to both their internal carbon management activities and their carbon offsetting initiatives.  Delegates at this briefing will learn how the carbon maturity model works, and how to benchmark their companies' performance against other businesses.

The breakfast briefing series, then, tells a story.  We start with carbon footprinting and show how it can go from being a burden to a source of competitive advantage.  We then move on to carbon offsetting and show how it has evolved to become a source of real business value for the largest companies.  And then we describe how companies around the world are developing increasingly sophisticated carbon management programmes that deliver benefits for management, employees, investors and the wider community.

I think that's a story that every company should hear. Join us, and help tell the story.

What Defra's Greenhouse Gas Reporting Consultation Won't Tell You

In late July I tweeted the news that the UK Department for Food, Environment and Rural Affairs (DEFRA) has released the final consultation on its proposed mandatory carbon reporting legislation.

If you went to Defra's website and download the consultation documents following that announcement, you might have felt somewhat confused and more than a little disappointed.  It all feels rather vague.

The draft consultation document from late last year, and Defra's ensuing feedback document released this spring each ran to dozens of pages focusing on the technical minutiae of setting organisational footprint boundaries based on operational versus financial control, whether or not to include Scope 3 emissions in the footprint, and the pros and cons of reporting all six Kyoto categories of greenhouse gases.  In the end, Defra expressed strong views on how these and other points should be addressed, and went to some length to justify those decisions.

The final consultation document totals just six pages and lacks specificity on most of these important points.  Required reporting standard? Not specified. Financial versus operational control? Not clearly specified. Penalties for non-compliance? Silence. What is more, the final consultation document appears to change the inclusion criteria that determine which companies are covered under the proposed legislation, narrowing them in one regard and substantially broadening them in others. You can find Defra's greenhouse gas reporting consultation page here - as I said, it's a relatively quick read.

When Nick Clegg announced the introduction of mandatory carbon reporting at the Rio+20 summit, it was touted as proof that the UK was leading the world in its response to climate change.  So why the sudden absence of detail?  I have three theories.

The first is political. The initial consultation documents clearly were written by technical specialists, who were focused on getting things right.  The final legislation needs to be read into the House of Commons and debated by politicians.  The more detail is included, the more likely the legislation will get delayed due to time pressure or tripped up by a Member of Parliament who objects to one or more provisions.  Seen from this perspective, short and sweet is the way to go.  Perhaps Defra will choose to issue clarifications containing the detail once the legislation is passed.

The second potential reason for this approach is to maximise the number of companies who report.  I call this the "boiled frog" approach.  By refusing to define rigidly what companies must report and how they must report it, Defra might be making it easier to comply.  Given the choice between companies submitting poor quality or incomparable data versus no data at all, my preference would be to get poor quality data. After all, we know the footprint isn't zero, and this flawed initial number gives us something with which to start.  Defra can then issue additional guidance as time goes on to improve the quality of data that companies submit and ensure that it becomes easier to make  comparisons between companies or industry sectors.  The responding companies, meanwhile, can gradually begin to implement better data collection and quality assurance systems - perhaps with less internal resistance than if they tried to jump from no carbon reporting to industry best practice all at once.

And the third potential reason Defra may have chosen to keep it simple, is that many of the largest companies already report their carbon footprints in a reasonably consistent way via the Carbon Disclosure Project.  CDP respondents report their greenhouse gas emissions using ISO 14064 or the GHG Protocol and answer the same standard questions about their carbon footprints.  Carbon Clear is a CDP accredited Consultancy Partner, and while respondents' footprints are not directly comparable, they do tend to take a similar approach.  I expect UK listed firms that already report their emissions to comprise the bulk of the total footprint covered under the Government's mandatory carbon reporting scheme.  As a result, Defra may have decided they did not need to reinvent the wheel.

The real reason is likely to include some of each of these, and perhaps some others that never see the light of day.  Whatever the reason, the result in the short term is confusion for firms that don't yet know whether they will be included, nor what they need to report.  Based on our previous conversations with Defra and the CDP, our team at Carbon Clear is able to tease some extra detail out of the current legislative draft, and will aim to give our clients a head start in preparing for the advent of mandatory carbon reporting in the UK.

ICROA's Code of Best Practice

Today I'm shepherding our third annual audit of Carbon Clear's compliance with the ICROA Code of Best Practice.

ICROA, or the International Carbon Reduction and Offsetting Alliance, is a self-regulatory industry body established in 2008 by Carbon Clear and seven other reputable carbon offset providers in Europe, the United States and Australia.  We came together to promote good practice for offset-inclusive carbon management, and to make sure customers and other stakeholders continue to have confidence in the voluntary carbon market.

It's not easy for a company or non-profit organisation to become an ICROA member.  First there are the membership requirements, which include having an established track record delivering carbon management products and services, a minimum annual turnover (revenue) threshold, and checks on the applicant's  reputation.  Member companies commit to volunteering time and resources to strengthen ICROA and its voluntary carbon market work, which may go beyond their day-to-day commercial activities.

Most importantly, members must comply with ICROA's Code of Best Practice.  It is the Code and annual compliance audit that distinguishes ICROA from other membership and lobbying bodies in the carbon market.  I have chaired ICROA's Policy Working Group from the beginning and have therefore been intimately involved in the development and implementation of the Code of Practice.

In summary, the ICROA Code of Practice requires members to:

1. Measure organisational or product and service carbon footprints to internationally recognised standards like ISO 14064-1, the WRI GHG Protocol, or PAS 2050.  Where members do not provide this service themselves, they must ensure that their subcontractors follow these standards;
2. Encourage customers to set ambitious greenhouse gas reduction targets and help them identify opportunities to reduce their footprint;
3. Help customers achieve zero net carbon emissions for all or part of their footprint via the use of carbon offsets from an ICROA-approved carbon credit standard.  Approved standards include American Carbon Registry, CarbonFix, the Verified Carbon Standard, the Climate Action Reserve, the Gold Standard, and of course the Clean Development Mechanism. (The ICROA Policy Working Group takes the lead in evaluating the suitability of carbon credit standards.)  Carbon credits must be shown to be real, measurable, permanent, additional, verifiable, and unique.
4. Retire carbon offset credits in a traceable independent registry after they have been sold to ensure those offsets are permanently matched against specific customer greenhouse gas emissions.
5. Work with customers to ensure they are communicating their carbon footprint, reduction and offset activities accurately.
6. Submit to an annual audit and report member compliance (or non-compliance) to the ICROA Secretariat.

The ICROA Code goes far beyond the requirements of the ill-fated Quality Assurance Scheme, which was  announced by DEFRA in the UK in 2007, finally launched by DECC in 2009 and abandoned in 2011.  It much more closely resembles the PAS 2060 "carbon neutrality" specification launched by BSI in 2010, which takes a similar "measure, reduce and offset" approach.

I believe the work of ICROA and its members is to some extent responsible for the rapidly growing maturity of the voluntary carbon market.  We are regularly approached by carbon offset providers who wish to become members, and push them to demonstrate good practice.  Even more interestingly, the carbon credit standards themselves often approach ICROA to be evaluated and added to the approved list.  A final proof point: last year, ICROA merged with the International Emissions Trading Association (IETA), in recognition of the growing importance of the voluntary carbon market.

Indeed, I don't think it would be a huge stretch to claim that ICROA and its members have helped to keep the voluntary carbon market buoyant even as the compliance market struggles with depressed prices and reduced demand for credits.  As I noted a few days ago, customers in the voluntary carbon market offset for a variety of reasons, but the environmental integrity of the carbon offset process is key to the buying decision.

No one enjoys an audit, but the knowledge that this annual process helps to strengthen the carbon market and reassures our customers makes the ICROA compliance audit that much more bearable.