Carbon: asset or liability?
Gradient Consulting is always looking at ways to use IT to drive business improvement and over the last year or so it has been closely following the development of carbon accounting systems as a way to address the sustainability agenda in UK businesses. Stephanie Snaith reviews the reasons behind the growth in interest in carbon management tools, why it is important for businesses of all sizes to engage, what best practice looks like and the role that IT professionals have in its delivery.
The positive and negative impact a business has on society is becoming as important as traditional performance metrics. Studies have shown that the reason for this is that an authentic commitment to building a sustainable business enhances financial performance through savings, risk mitigation and adding value. A key part of a commitment to sustainability has to be a focus on reducing greenhouse gas (GHG) emissions through energy efficiency initiatives. Whilst energy costs may not represent the highest costs faced by an organisation, embracing energy-saving opportunities can bring a number of ancillary benefits. These include reducing the risk of energy price shocks, improving corporate reputation, changing consumer behaviours and increasing staff productivity.
Many organisations have already embarked on environmental programmes to demonstrate their commitment to address climate change issues and to meet the growing raft of environmental regulations. However, according to Verdantix in research published in June 2011, many firms focus on communicating the percentage size of their carbon reduction targets and miss out on the business and sustainability benefits of tackling energy consumption.
There are three main reasons for organisations to adopt a carbon reduction strategy – legislative drivers, business drivers and carbon market drivers.
When the current Coalition Government came to power last year it committed to being the greenest government yet with plans to cut carbon emissions, create conditions for green growth and improve the country’s resilience to climate change. The Climate Change Act 2008 had already established a guiding framework for the UK’s transition to a low-carbon economy, setting legally binding targets to cut emissions by 34% by 2020 and by at least 80% by 2050. The introduction of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme in 2010 has further signalled the Government’s intention to establish a comprehensive framework to tackle energy efficiency. But despite this progress, recent data has suggested that poor energy efficiency is currently costing UK businesses upward of £6 billion each year – Energy Efficiency – The Untapped Business Opportunity report, produced by Carbon Connect 2011.
The CRC was originally designed as a mandatory cap-and-trade scheme for emissions and was targeted at large organisations in the UK’s non-energy intensive sector. In the 2010 comprehensive spending review the scheme was changed to act as a levy on carbon emissions, at least in the short term. Further consultation is currently underway to determine how far regulation should go as compared to voluntary schemes, which companies should be required to report, and how consistency can be achieved to support comparisons and benchmarking – with league tables being published for the first time later this year.
In July 2011 the Government published a white paper on Electricity Market Reform (EMR) which is about securing affordable and low-carbon electricity supplies, which should start delivering in 2014. This will have an impact on both businesses and domestic users.
In addition, there are other compliance drivers pushing towards the mandatory reporting of carbon footprints. The implication of this is that, inevitably, all organisations (no matter what their size or sector) will need to develop more robust and accurate reporting systems.
As economic recovery worldwide begins to take hold, issues of sustainability in general, and carbon management specifically, that were temporarily pushed out of the frame are now back in the picture.
Two years ago, most organisations looked at their carbon management as a communications or compliance exercise. Today, the majority of projects around carbon management and GHG emissions not only involve emissions tracking but also significant focus on forecasting and emissions reduction.
KPMG in their annual Corporate Sustainability Progress Report commented that the main drivers of sustainability were changing. Although regulatory requirements, brand enhancement and risk management remain major drivers of sustainability, cost reduction is also now a key rationale.
The Department of Environment, Food and Rural Affairs (Defra), in their recent report, highlighted that emissions reporting is a key part of a wider jigsaw that enables organisations to successfully tackle GHG emissions. Accurate emissions reporting can also improve the corporate reputation of an organisation and act as a key driver of behavioural change by focusing attention on the identification of opportunities for efficiency improvements.
Astute energy management offers a means to differentiate a business from its competitors and provides a clear signal to external stakeholders that the issue of climate change is being taken seriously. It can also reduce an organisation’s exposure to risks such as future energy price fluctuations.
Carbon market drivers
There is a third area of opportunity where accurately measuring carbon is essential – that of carbon trading. The carbon market is comprised of two types:
The compliance market – primarily this consists of cap-and-trade schemes. This approach sees carbon as a liability and a cost to the business.
The voluntary market – this consists of carbon-offset schemes generated from qualifying emission-reduction schemes. This approach sees carbon as an asset and a benefit to the business, assuming the savings made are being sold. However, purchasing carbon offsets rather than doing anything physically will have a detrimental impact on the financial position of the organisation, though this may be a useful stopgap until reduction targets can be achieved.
An organisation cannot consider entering the carbon market, in either capacity, without first establishing what level of carbon emissions is currently produced. To achieve this, the organisation needs to focus strategic effort on developing a carbon management system.
Carbon management solutions – best practice
With regulators, consumers and stakeholders all putting sustainable business into the spotlight, organisations need to be able to provide accurate and real-time information on their environmental performance. Key to tracking carbon emissions and subsequent reductions is the introduction of a carbon management system. Best practice suggests this should be comprised of a number of critical elements:
Baseline – it needs to start from the creation of a comprehensive base position or current position assessment (CPA) whereby current levels of scope 1, scope 2 and scope 3 emissions are established. These being direct emissions from activities owned and controlled by the company, indirect emissions from purchased electricity, and heat and steam and other direct emissions arising from such activities as travel respectively.
Targets – strategic targets for energy reduction then need to be set. These targets need to be aggressive to deliver real cost improvement. Recent analysis by Carbon Trust Advisory Services confirmed that many energy efficiency projects offer attractive paybacks, with an average internal rate of return (IRR) of 48% per annum and payback within three years.
Measurement – metrics need to be quantifiable and measurable, enabling updates at regular intervals and comparisons across reporting periods. These metrics can also be used to justify investment and funding decisions required to produce the capital for retrofits and other structural or process changes essential to delivering energy consumption reductions.
Analysing – reporting needs to be transparent and auditable so that transactions can be traced and matched for compliance. In addition, it needs to deliver data in the timeframe required to support decision making and meet disclosure requirements. This information can be publicised to meet stakeholder requirements but can also be used as a market differentiator and competitive advantage – but accuracy is essential. The cost of getting it wrong will be catastrophic.
Continuous assessment – the system needs to be standards-based, both accommodating existing generally accepted standards but also able to adapt and incorporate emerging ones.
Although many companies already have some environmental measurement systems in place – primarily around energy consumption – both the processes and data are invariably fragmented. As a result, correlating the information to create meaningful statistics is a complex and manual process often attempted only on an annual basis as part of a corporate social responsibility report or carbon statement.
The role of software and IT professionals
According to Mike Barry, the head of sustainable business at Marks & Spencer plc: “The whole area of carbon management, from measuring your own carbon footprint to developing practical ways to reduce it, requires a new set of business skills.” IT professionals can serve as leading agents for change by applying their skills and competencies to develop sustainability strategies, facilitate effective implementation, accurate measurement and credible business reporting.
There has been a rapid growth in both the number and sophistication of software products designed to support organisations in the measurement, reporting and management of GHG emissions. The global market for GHG accounting software and support services grew by nearly 84% from 2008 to 2009, representing a total market of $384 million and is expected to achieve 40% CAGR by 2017. The survey by Verdantix of the UK market suggested that 54% of companies have already set aside a budget for carbon management solutions.
By implementing specialist IT solutions, organisations can bring greater intelligence and efficiency to the measurement and monitoring process – and make it a real-time activity.
There are a myriad of packages on the market professing to provide a business with the tools required to manage their carbon. These range from the simple to the complex, with price tags to match. Many enterprise resource planning (ERP) vendors have incorporated a carbon management module into their products or have integrated a best-of-breed third-party package.
As with selecting an ERP package it can be a minefield, so careful consideration given to the process and robust questioning of the vendor is essential.
Carbon regulation changes the rules of competition. Within an industry, a company with either carbon assets or products with lower GHG emissions has a chance to dramatically strengthen its position compared to its competitors. Whether an organisation acts for compliance reasons, business reasons or to take advantage of new carbon markets it needs to quickly adopt a strategy focused on carbon reduction. There are a range of options open to an organisation developing a carbon accounting approach, including some excellent software products, but it is essential that whatever process is followed that it stands up to public and formal scrutiny. But this will deliver a positive bottom-line impact – so it is really worth the effort.
“Whether an organisation acts for compliance reasons, business reasons or to take advantage of new carbon markets it needs to quickly adopt a strategy focused on carbon reduction.”
“A key part of a commitment to sustainability has to be a focus on reducing greenhouse gas (GHG) emissions through energy efficiency initiatives.”
Stephanie Snaith is the founding director of Gradient Consulting, which has for the last 14 years specialised in specifying, selecting and implementing business systems aimed at improving business efficiency.