Progressive Carbon Management

I am assuming that if you are reading this that you are already familiar with the threat of global climate change (global warming) and the relationship between 1) greenhouse gas (GHG) emissions, 2) the changes to average surface and ocean temperatures, and 3) the potential impacts of those changes. Whether you are an environmental evangelist or a pragmatic risk manager, even a "denialist" we all know that we action is required now, in order to mitigate future impacts (severe weather events) and to plan an adaptation strategy, is now more than ever overwhelming. Considering the extent of the current heatwaves and droughts being experienced globally.

In popular terminology, the mitigation of climate change risk is closely linked with the reduction of your carbon footprint. Therefore we can say that a company’s carbon footprint is a measure of its impact on the environment through CO2e and other GHG emissions. So for responsible organisations and global citizens that really want to respond to the the climate change risks has always had the challenge of adopting a financially sustainable approach to carbon emissions.

At a government or national level you may be seeing reductions targets linked to or in line with the Paris Agreement and the predecessor Kyoto Agreement. Governments may have also responded by establishing regulatory controls such as carbon tax, cap & trade, air quality and emission trading schemes be they regulatory or voluntary. This level of attention means that businesses may not only be required to comply with regulatory requirements, but in additional there are certainly direct cost-benefit opportunities as well.  

At the general public level we as consumers are more aware of climate change and the consequences than ever before. Individuals and businesses alike are looking for ways to reduce their own carbon footprints and are factoring environmental impacts into more of their decisions, such as reducing electricity consumption, recycling, waste reuse symbiotic business relationships and where possible either generating their own renewable energy or signing up to renewable energy supply. We are starting to question and consider the embedded carbon cost and environmental impact of the products they we are sourcing and are directing our spending and investment towards companies actively adopting socially responsible practices and being responsible citizens. Through work done by the CDP we now that on average an organisations supply chain carbon emissions is four (4) time that of their own direct emissions. So managing only your own direct emissions is no longer good enough, encouraging your supply chain participants is key.

The cost to a businesses that are still ignoring these signals could be very significant and I can only hope that now in 2018 the business’s board and CEO are already discussing and implementing strategies dealing with this risk to their business. We know that many have already taken proactive steps and actions to mitigate the impact and risk of climate change. Be this from a international, national, public or personal influence, businesses around the world have recognised and seeing the benefits of reducing their ecological footprint and emissions. These businesses know that it is not just good for the environment, it’s also good and ethical business practice and has sustainable benefits to their bottom line.

Lets consider an approach to delivering long-term, financially sustainable carbon footprint reduction for a company and how it can be supported through the adoption of appropriate strategies over time. Consider the carbon management maturity model (discussed later in this article) which highlights a strategy that allows a business to handle current challenges, alongside finding the optimal balance between financial performance and their carbon footprint reduction. We must then link it to carbon visibility, which allows businesses to move away from teh basic manual reporting of carbon to carbon conscience thinking being embedded into corporate behaviour and culture.

For a large number of businesses the requirement to deal with GHG emissions and/or carbon footprints is still relatively new, others have however had decades of dealing with them and are reaping the benefits. For those many that are still figuring out what they need to do, how to get started and how to manage carbon emission contributions effectively there are a number of factors that come in to play that make this a challenging task. To mention a few:  

1. Current and/or possible future regulations, managing public perception and impacts to brand and corporate value;
2. The development and developing of carbon offset products and markets, establishing appropriate boundaries over direct and indirect emissions; and
3. Balancing cost impacts against corporate social responsibility goals.

The starting point is to determine the businesses own footprint based on minimum of 12 months historical data. The outcome of this exercise is what is referred to as a static footprint-baseline. This comes from static data and the exercise is repeated on a periodic basis in order to identify actual reductions and you can then report on the emissions. At a single company’s operational level this may not be a bad approach. Looking at common items such as energy consumption, travel and direct emissions from processes can rapidly deliver an initial estimates of the static/baseline footprint.

Some businesses end their carbon management journey at this simple static footprint, thinking and believing that the job is done. It is in fact only the beginning. Areas for reduction are identified, reduction targets have a baseline to be measured against, emissions can be reported on, and marketing has the ability to spin a good story about what the businesses is doing about climate change and their impact. There are risk associate with this level of commitment:

• Only simple, obvious opportunities to reduce the carbon footprint will be identified;
• The overall ability to effect significant reductions in emissions are limited to internal company contributions – structural opportunities across the supply chain that can drive major reductions in emissions are not able to be investigated;
• Going carbon neutral at this stage is likely to result in the purchasing of carbon offsets which will far exceed the level actually required on an ongoing basis, and this can be a costly exercise as the prices of offsets increase in the future. It's also unnecessary expenditure which could have been spent on other emission reducing projects:
• There is a real danger that the public will see this climate change approach as a bare minimal effort to meet requirements and not being a responsible business;
• Customers will ask for more detailed information that an internal static footprint is not structured to provide which can possibly be construed as green washing. Which has a negative impact on the branding and public image of the business.

Therefore to deliver sustainable carbon footprint reductions, financially sustainable carbon management goals need to be considered, rather than just delivering an annual carbon footprint. By default, longer term carbon management goals need to drive sustainable reductions in emission to mitigate the risks associated with climate change. The challenge for businesses is you need to do this while remaining profitable and delivering value to shareholders.

To achieve this will require focus on financially sustainable carbon management that not only caters for the direct costs and benefits of emission reduction initiatives, but also the impacts to the brand and company value driven by market perceptions. The competitive advantage in a low carbon economy is to remember that when considering environmental risk assessments its not between sectors but rather within sectors, where a businesses climate related risk mitigation and product strategies can create a competitive advantage. Research has also shown that companies that are seen to be living and walking a environmentally sustainable operation can outperform the market by as much as 25%.

There are three (3) key objectives that emerged having direct impact on delivering financially sustainable carbon management: 1) External Footprint which is a businesses carbon footprint measuring the impact it has on the environment. For businesses that are truly concerned about their impact on the environment soon realise that the emissions from internal operations are not the only ones that need to be considered. The businesses operations drive numerous activities across a community of trading partners that result in embedded emission of GHG in supplied services and products to meet a businesses own demands. If you are a service provider, your customers are driving the activity within your business that results in emissions. These external emissions, typically from raw materials, manufacturing, packaging and transport, are often several times greater (4 times) than the internal emissions considered in an internal static carbon footprint. 2) Product level footprint looks at growing public sentiment, consumers are looking for information that tells them the carbon footprints of the products they buy. The realisation that carbon reductions from changes to household energy consumption are dwarfed by industrial outputs means that concerned consumers will be driving providers of goods and services to take positive actions. Retailers and brand owners have to consider how to determine carbon footprints at the product level.  In order to determine a product-level carbon footprint, all emissions, from raw material sourcing through to consumer purchase, need to be considered. That means a full accounting of internal and external emissions related to the sourcing, manufacture, distribution and sales of each product. 3) Modelling of relationships between cost and carbon emissions. As companies start to look at the impact they have on the environment, including internal and external contributions, the ability to determine carbon reduction strategies that do not have an adverse effect on overall financial performance can be very difficult. Many companies shifted production to offshore to take advantage of immediate benefits in production costs found that costs attributable to increased lead times, supply failures and increased inventory holdings requirements, out-weighed the initial cost benefits. A similar situation can be expected with carbon footprint reductions, in that manufacturers offshore may be using inefficient equipment, dirty energy and produce other harmful, uncontrolled emissions. Companies need the ability to understand the impact on financial performance when they investigate carbon reduction strategies, like changing suppliers, alternative energy sources, local sourcing, and alternative modes of transportation or process changes.

Strategies to reduce carbon are likely to have a significant impact on the physical structures of a company’s supply chain. Those who are familiar with supply chain management have come across the practice of strategic network optimisation. This is based on cost optimisation of a physical supply chain network, how to buy, make, move and store products at the lowest cost. The output of this practice drives decisions on where products are sourced, how manufacturing plants and distribution centres are used, where they are located and how products are moved from one place to another. A similar approach is required to facilitate the analysis of carbon reductions. There are a few tools that can aid in this analysis, one of them being the Carbon Maturity Model which is noted below.

The Carbon Management Maturity Model

In response to the need for companies to adopt financially sustainable carbon management practices you will need to look at the carbon management maturity matrix. This helps show the difference between the basic responsive action to climate change and the work required by businesses who's goal is to proactively reduce their overall impact on the environment. You can use this to identify your business is currently positioned, but but also the steps to be taken in order to meet their goal.

Level 1: The Basics - internal focus on basic operations

All businesses must begin with the basics of re-educating employees about the importance of implementing a carbon management strategies, it is critical to explain key terms, like the company’s carbon footprint that measures the impact the company has on the environment through its carbon dioxide and other GHG emissions to the atmosphere.

This effort builds initial awareness and develops an internal focus on improving basic operations. Level 1 is relatively quick and easy to implement, but the impact is minimal beyond a feel-good factor for employees. Example of level 1 practices include recycling, using eco-friendly light bulbs and selecting clean energy sources.

FOCUS: Reducing energy consumption, waste and immediate impact on environment

ADOPTIVE BEHAVIOUR: Change Light bulbs, Reduce Air conditioning use, Automated/sensor based lighting, recycling of paper and double sided printing, signing up to clean energy sources

Level 2: Company Level - carbon footprint at the business level using static data

At level 2, companies begin initial compliance, based on completing a static carbon footprint analysis using historical production data. At this level, the focus is primarily on internal manufacturing improvements that lower carbon emissions. These changes can result in significant cost reductions in energy usage, water usage and other areas given more environmentally sound operations.

FOCUS: Changing internal business practices to reduce carbon emissions

ADOPTED BEHAVIOUR: Established program to determine corporate carbon footprint, Use of carbon data for recognised authorities, structured recording of footprint data, management reporting on carbon footprint and reduction opportunities, installation of carbon reduction technologies in key operations

Level 3: Process level - carbon footprints at internal and external process activities using current transactional data

Companies automate their carbon management so they can capture a live carbon footprint at this level. They also broaden their focus to include both internal and external processes across the extended supply chain.

Using current transactional data, businesses can implement distribution and other supply chain improvements that positively impact the environment and lower operating costs. They can even use carbon footprint information when making sourcing and production decisions.

FOCUS: Managing extended business processes to reduce carbon footprint

ADOPTED BEHAVIOUR: Capture emissions data from across internal and eternal processes, drive carbon data capture at transactional activity level, monitor planned versus actual carbon emissions (verification), uses carbon footprint information when making sourcing and production decisions

Level 4: Product Level - carbon footprint at product level using current transactional data

At this level, live carbon footprints can be allocated to specific products automatically. Therefore a business can understand and manage product-level carbon footprints by process, based on internal and external carbon costs across their global supply chain. This powerful knowledge results in increased efficiencies and broader opportunities for savings.

FOCUS: Allocation of process activity level carbon emissions to individual products to enable informed consumer activities.

ADOPTED BEHAVIOUR: Modification of product specific process activities in order to reduce carbon footprint, automated determination of product level carbon footprints from raw material origins to consumption, drive changes in supply chain to respond to seasonal or other cyclical variations in carbon emissions

Level 5: Optimised Level - optional financial carbon restructuring across extended trading partners community

When a company reaches Level 5, they finally have all the information and solutions required to optimise the trade-offs between cost, time and carbon. At this advanced stage, companies can redesign their supply chain to create an eco-friendly network. The payoff is substantial since this optimised design can deliver financially sustainable carbon footprint.

FOCUS: integration of carbon and financial data in corporate decision making in order to drive financially and environmentally sustainable business value improvements

ADOPTED BEHAVIOUR: Perform analysis of financial and carbon relationships in order to balance footprint reduction and financial performance and if available actively trade Offset Products based on varying demand and price in order to minimize costs.

Finally we are left with the Question: "So why should a company consider moving up the maturity profile beyond delivering the static footprint at Level 2?" 

As the business moves from the basic stage of changing light bulbs through to an optimal footprint, the operation expected/achieved value to the business increases. The initial efforts such as the reduction of direct energy consumption deliver a level of cost/benefit, but have a minimal impact on the level of carbon emissions and the overall impact a company has on the environment. More will need to be done to achieve the goals and objectives of environmental and sustainability goals and objectives, therefore moving beyond Level 2.

So as the business moves forward and completes initial footprint moving to Level 2, a number of immediate opportunities for carbon emission reduction should be identified and implemented. Think of these opportunities to be the low hanging fruit or low cost no cost initiatives. If these are implemented in a financially sound manner, the reduction of carbon emissions in these areas should deliver additional direct cost savings in relation to operational costs and supplier input costs. It must be noted however that while the carbon footprint is being reduced at this Level there is likely to still be substantial opportunities for further improvement.

More thorough investigation will needed to investigate these opportunities, and information about underlying processes and activities will be required to achieve the additional savings. It must be highlighted that an Offset strategy at this stage indicates that going "carbon neutral" as this stage could be far more costly than it needs to be. Working with a carbon footprint that has not been effectively managed and reduced as far as possible will result in more offsets being purchased than at the final optimal stage. The Offset Costs at these early stages could be put to good use in other reduction initiatives that will have cost/benefits. Offsets do have quantifiable benefits for marketing and public image, but if not applied through reputable Offset Providers and based on sound Carbon Footprint Analysis businesses run the risk of being labeled with a "Green Wash" tag, which will be damaging to brand image and the bottom line.

Moving the business beyond Level 2 is going to be challenging but also has the ability to deliver greater value over time. As a business utilises its greater knowledge about the underlying processes and activities driven by the business, further opportunities will be identified for the reduction of carbon emissions. Activities with higher than expected emissions, and non value adding activities, can be identified and their associated processes changed or optimised. These actions not only help reduce the carbon footprint, but many business process re-engineering exercises deliver direct cost benefits as more efficient processes are adopted.

The final point to note here is that that while carbon reduction opportunities will decline as avoidable emissions are eliminated, the value of the optimal stage still increases. This is for three (3) reasons: 1) optimisation is known to deliver significant bottom-line benefits. 2) as companies and governments adapt to a low carbon economy, there are likely to be structural changes in global markets. Having the ability to model these changes at Level 5 allows businesses to respond in a financially and carbon-conscious manner and avoid having earlier benefits eroded by external factors. 3) the other reason for value growth is the direct result of expected increases in the price of carbon offsets in the coming years. As more companies look to offset carbon emissions, demand for those products will go up. In contrast to that, the number of approved offset generating projects is expected to fall far behind demand. In a market economy there should be little doubt that with a restricted supply of offsets, the price will increase.