Developing a Carbon Strategy

Nothing in education is so astonishing as the amount of ignorance it accumulates in the form of inert facts.
Henry B. Adams

Business leaders are being barraged with ‘facts’ about climate change. With so much information and so little history, executives are trying to examine the problem and make critical decisions that will have the most significant ramifications on the future of their organization. Within some sectors, these decisions could prove to be the most important of their tenure. Organizations of all sizes are trying to decipher through the facts, propaganda and ‘greenwashing’ to develop an effective business strategy. Needless to say, this is not the ideal situation to make good business decisions.

By now most executives have heard of, and have some understanding of the carbon market. Examples of previous cap-and-trade systems and the European experience have led most North American businesspeople to believe that a similar system will be implemented here- it is simply a question of when. Unfortunately, for many organizations this is the point where knowledge stops and speculation and inaction begins. Not only do companies not know what to do, they don’t know who in the organization should do it, so they defer to business as usual. If questioned, most executives will tell you that they are waiting to see what the regulations will look like, in reality they are walking with blinders on.

For the sanguine executive, all problems are disguised opportunities. In order to steer your company on the right path away from the pitfalls of the carbon market, you need to develop and implement an effective carbon strategy. Below is a five point step-by-step process to help you do so.

Manage What you Measure

Simply put, an organization needs to have an accessible and auditable carbon inventory. The good news is that your organization likely has one or can create one quickly (if you don’t see the WRI’s GHG Protocol Corporate Standard). The bad news is the data may be old and inaccurate. When creating an inventory or examining an existing one, ask the following questions:

1. Is your inventory auditable
2. Do you have tools to analyze the data at the business level
3. Can it be shared/reported across the organization

Almost universally some form of the ubiquitous spreadsheet is used as the tool for creating an inventory and this has served its purpose very well. For an organization with a fairly simple emission footprint (electricity usage, mobile combustion, etc.) the spreadsheet is probably the best tool to get you started. For an organization with a potentially larger footprint, using spreadsheets to manage your multiple emission points may be creating a larger problem in the years to come.

The problem with spreadsheets in carbon management is twofold. First, as the need for data management grows across the organization spreadsheets scale by employing more man hours and becoming more complex-leading to more errors. Second, accessing quick and understandable executive reports to make business decisions can be very difficult. The people operating the spreadsheets may have a pretty good handle on how their operations are doing, but they are operating in silos, they have little means to share this information with the right people, and the knowledge is not transferred when they leave the organization. As a result, it is very difficult to analyze your organizational position or develop an effective strategy.

Analyze Your Position

Competitive organizations have become very adept at analyzing and managing risks and opportunities to their business operations, which makes it all the more surprising that very few understand their emission position. Most executives are quick to recognize the “Stroke of the Pen” risk, or the threat that legislation will change their business environment on emissions by creating new legislation. Few recognize the opportunities posed by emission reduction plans or the potentially serious consequences.

Executives must use their emission inventory to understand the risks facing their organization both upstream and downstream. Below are some potential risk considerations:

Stroke of the Pen
Company Valuation
Competition
Production costs
Employee knowledge transfer
Data auditing
Access to production sites
Corporate Image
Cost of inputs
Changing buyer preferences

These risks will be different across organizations and business sectors. Using an emission inventory, executives must first identify the risks that face their organization and then identify the cause of that risk. Is this due to organizational shortcoming that limits my ability to mitigate risk or due to issues that are beyond my control?

Remembering that all problems are disguised opportunities (I realize that this is not always true!); there is a possibility to benefit from your emission shortcomings. If you believe that a ‘carbon constrained world’ is inevitable, then by taking the lead to deal with your risks can become a significant competitive advantage. The basis of the cap-and-trade system is to make organizations competitive reduce their emissions, yet few are taking the lead. To give the ubiquitous sports analogy, it’s as if the starter pistol has been fired for the 100m dash and no one has heard it. By doing so you can have a leg up over your competition, increase your corporate image and company valuation, expose new business opportunities, and discover unrealized assets in a trading environment.

Develop Financial Mechanisms

Emission trading is based on market valuation. Why therefore are organizations still viewing their emissions as gasses rather than assets or liabilities? Carbon emissions are no longer merely a bi-product of production; they have direct impact on the bottom line of an organization. As such, they should be:

• Monitored and accounted for
• Inventoried and forecasted
• Planned and managed
• Valued against some financial baseline

The key to success in the market is not meeting governmental compliance requirements; it is learning how to leverage your emission assets.

Throughout the organization there is not a single area of business that is influential on the corporate balance sheet that is not monetized except carbon emissions. This simply does not make sense. Companies need to put a price tag on their emissions, measure their output versus a cap or target now and in the future, and use this to develop strategy. Use the tools you know from other lines of business to do this. Engage the financial experts in your organization to create a Carbon Balance Sheet, Income Statement and Cash Flow statement with your emissions.

Develop a Strategy

The key to developing a carbon strategy is outlook-move from a compliance to a performance based strategy. Examine your position on carbon and ask which currently best describes your organization:

• Spreadsheet based
• Mandatory
• Limited in scope/scalability
• Cost center

• Portfolio management
• Executive dashboards
• Voluntary & mandatory
• Scalable
• Potential Profit Center
  

Developing a carbon strategy must start at the top and get buy-in from more than one person or department-and it requires an organizational driver. Find ways to engage your employees to get them thinking about the opportunities facing their organization not just the risks. Many industry leaders have run monthly seminars and have been genuinely surprised by the turnout and engagement of their employees across the organization. People are interested in what they can do to help the company and what they can do outside of the workplace to help reduce greenhouse gas emissions-they lack the knowledge not the motivation.

Execute and Monitor

With the numerous options that an organization faces, it may be difficult to avoid ‘analysis paralysis’ when it comes to acting on an emission strategy. Within the European Trading scheme for example the bulk of the reporting organizations have not ventured in to carbon trading. Ensure that once you have developed a strategy you have the manpower and the tools needed to execute and monitor the progress of your strategy. Many companies in North America and around the world have begun to create a new position in their E, H&S department that is specifically suited to strategic analysis and execution of an emission strategy. This is a position that will pay for itself with one good trade or avoided penalty, without even examining the extrinsic benefits that may be created through public perception.

More importantly your company needs to find a better way to track your emission position. Many Fortune 500 companies have looked to build their own emission monitoring and trading platforms, however these can be costly to build and even more expensive to maintain. If you are shopping externally for a software solution, look for a tool that can grow with your needs and focuses on strategy rather than just compliance.

When I investigate and when I discover that the forces of the heavens and the planets are within ourselves, then truly I seem to be living among the gods.
Leon Battista Alberti

Conclusion

Recently there have been a growing number of organizations that have become interested or active in the carbon market. Many have put together a quality greenhouse gas inventory that the can work with to develop a strategy. Unfortunately instead of following the steps I have outlined above, they move straight to step five-executing their strategy. Often these organizations will look to jump straight into the carbon credit market, buy an unverified offset, or implement a well meaning but ill-advised reduction project without fully understanding their own position.

It is important to examine your corporate carbon footprint the way an institutional investor would manage a stock portfolio-by understand what they have, what their risks are, and what make the best financial sense now and in the future. Remember that most of your competition will continue to view the emission market as a mandatory compliance game rather than a strategic opportunity. There is a true competitive advantage looking you square in the eyes, the key is to seize the day.