Climate Change: Balancing Corporate Responsibilities

Financier Worldwide , Saturday, April 17, 2010
Correspondent : Muazzin Mehrban,
Following the largest meeting of world leaders brought together to discuss the affects of global warming, many lobby groups such as Greenpeace have lamented the outcome of the Copenhagen summit for not producing affirmative action. Some of the targets agreed by major economies including the European Union, the US and China, although lower than many hoped, will require wholesale changes to the energy sector. Efficiency, renewable energy and nuclear power will play a leading role. But the accord agreed to by the world’s largest economies was not a legally binding treaty, and the document was criticised for not detailing exactly how countries should go about reducing emissions.

Some business leaders do consider climate change in their top tier strategic plans, and continue to pursue their green ambitions. But the increase in associated costs and lack of legislative direction appear to have eroded support. Over the last six months, many have agreed that climate change is now a major issue, although it is uncertain how and when they will begin to take affirmative action.

“It needs to be recognised that many businesses are acting despite a lack of consistent regulations,” says Sally Vivian, an associate director at URS Corporation. “Having a business-focused climate change strategy can provide cost savings and support long term business sustainability; and many businesses recognise this and have developed strong climate change programmes.” Renewable forms of energy, which do require initial investment, could provide savings in the long-run as a cheaper alternative to conventional sources of power such as oil and coal. Given the finite nature of fossil fuels, it is uncertain how long companies can continue to rely on these forms of power.

Meanwhile, over the past few months, governments around the world appear to be focusing on target-based solutions, such as providing incentives for companies that switch to renewable energy. Efforts have focused mainly on sectors which so far have not shown a willingness to change despite their heavy impact on the environment. Take the agricultural sector for example – a global industry which is loosely spread and therefore harder to regulate. The damaging affect that over-cultivation can have on land and water quality, as well issues concerning the use of pesticide, means that even primary industries such as farming contribute to the problem.

Political and corporate mindsets

Global climate change is a divisive issue, made clear by the developed versus developing countries debate. Industrialising nations reject the idea that they should be punished more because of their burgeoning economic growth, and put the onus on the world’s major developed economies to lead the way. But most countries seem to be waiting for someone else to put the first foot forward. Undoubtedly, the actions of markets like the EU and US will be key. But the fact that major developing countries managed to reach any type of agreement at Copenhagen, albeit a weak one, was seen as one of the few positives of the summit. Yet some leaders, including China’s representative for climate change, Yu Qingtai, appear pessimistic about the prospect of building on these agreements ahead of the expiry of the Kyoto Protocol in 2012. Mr Yu was quoted by Reuters as saying that the unfair negotiating position of developed countries was an issue unlikely to change. He added that developed nations would continue place blame on emerging economies, pressuring them to accept an unreasonable level of responsibility during a period of rapid economic growth. In fact the pessimism did not stop there. Yvo de Boer, the outgoing head of the UN Climate Change Secretariat, was equally negative. He suggested that a cohesive agreement could be some distance away given that developing countries would carefully evaluate the obligations set by any treaty and what returns it could generate, through finance and technology for example, before taking any binding steps.

But companies, regardless of their location, should realise that climate change strategies can help to significantly cut costs. Businesses must endeavour to understand the impact climate change can have and where savings can be achieved. But they also need a predictable environment to help them make such decisions. Unfortunately, companies are still awaiting a more long-term and stable regulatory framework to use as a basis for their green investments. The problem is evident in the US, for example, where legislation may struggle to advance due to the recent surge in anti-climate change activism. “The Obama administration will have significant challenges in getting climate change legislation through,” says Chris Smith, a principal at Arthur D. Little. “Media criticism of the Intergovernmental Panel on Climate Change science has added momentum to the anti-climate change lobby in the US, which will only make progress more difficult. Presently, the problem is that many company responses to climate change are underpinned by government intervention, whether grants, tariff support, or regulation. In many cases, companies do not trust that these measures will remain in their current form for the long term future.”

Some commentators argue that getting companies to work towards targets would be an important first step – perhaps more crucial than reaching the targets themselves, since some progress is better than none. But definitions of progress can differ. Often companies implement changes to reduce carbon emissions but fail to accurately measure their success and so misjudge their impact. Furthermore, there can be a lack of transparency whereby companies inflate their ‘carbon neutrality’ to win the support of consumers.

In fact, across the issue of climate change, discrepancies in terminology and measurability are evident. “There is also the challenge of allocating resources between understanding your carbon footprint and taking action to reduce it,” states Ms Vivian. “There can be a tendency for companies to spend considerable resources making their carbon footprint calculations as detailed and accurate as possible but this shouldn’t be at the expense of resources to take action to reduce. Businesses need to balance resources across developing a robust baseline.” By taking action and tracking performance, companies can focus on the most damaging aspects of carbon reduction.

Existing environmental policies and regulations have been described by some commentators as insufficient. They suggest that some of the measures put forward have not been executed effectively. The EU Emissions Trading Scheme (ETS), for example, has been criticised for its allocation and auctioning processes, and is perhaps the most striking example of a system which has not delivered on its potential. The scheme is said to have several failings, including over-allocation, windfall profits and price volatility. However, defenders of ETS claim that its benefits will surface; its initial phase, from 2005-2007, was a learning period and industry is still coming to terms with creating the infrastructure needed for a carbon friendly market. Similar criticisms have also been levelled at the US cap and trade scheme, a proposal published in February 2009 by the Obama administration.

Despite the criticism, the UK and Europe have shown strong leadership in introducing regulation. In the UK, the Climate Change Commitment (CRC) Energy Efficiency Scheme, enacted last month, is now a core part of the country’s strategy of reducing emissions.

To ensure compliance with the scheme, organisations will be forced to hand in reports detailing their energy consumption. Penalties for non-compliance are severe. Failure to submit reports will result in immediate fines with cumulative fines for any delays. It is hoped that regulation, rather than best practice guidelines, will translate better into results. There are, however, perceived drawbacks associated with any legislation that imparts severe punishment. Some experts are concerned that industry will now focus on areas of climate change that carry the greatest risk of regulatory penalties, at the expense of other areas of corporate social responsibility.

Uncertainty surrounding climate change

A company must fully understand its climate change risks to effectively manage the uncertainty and develop a strategy. In terms of carbon reduction, companies should evaluate the impact of different carbon price scenarios and determine which of its products and services could be at risk from new legislation. Offsetting the impact of change on the value chain, while also looking at any opportunities it might present, is one way organisations can learn what steps to take.

Dealing with uncertainty in all aspects of strategy is a daily issue for companies, and climate change is just another consideration. What experts do recommend, however, is for companies to integrate their climate change strategy with the overall business strategy, rather than treat it as a separate entity which is purely owned and delivered by environmental departments. The emphasis on optional participation which many industries place on climate change initiatives, is seen as a major obstacle.

Consultants argue that the key to change is aiming for sustainable targets that can be incorporated into business models. Carbon management should be approached in a way that maximises opportunities and makes targets achievable. “Many of the most successful companies delivering medium to long-term value are those embracing sustainability. This provides a mechanism to identify issues such as water supply, energy security and so forth. Even in financially stressed times they find themselves more able to react and cope,” says Dr Simon Johnson, director of the UK & EMEA region at Aon Environmental Services Group. Of course, return on investment remains the key driver for companies adopting a new platform, and there are concerted efforts to demonstrate such possibilities in the response to climate change .

As long as the reduction of carbon emissions is not considered a key performance indicator for companies in developing and developed countries, and hence not primary objective for senior management, any advance on this issue is likely to be incremental. Although a number of solutions related to climate change can lead to improved energy efficiency and cost savings, the payback time of one to two years is often seen as disruptive to current processes, especially for smaller enterprises where capital expenditure is tight. Furthermore, other solutions associated with renewable energy resources are often more expensive than traditional energy usage. It remains questionable to what extent companies will be willing to pay more for greener fuels – at least without a regulatory imperative to steer their behaviour.

 
SOURCE : http://www.financierworldwide.com/article.php?id=6535&page=1
 


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