We are about to experience a rare transformation in the global business landscape, on par with the industrial revolution of the 1800s and the modern era of globalization in the 20th century.
At long last, the inextricable link between productivity and sustainability is beginning to dawn on both individuals and businesses, driven by a multitude of factors including rising energy and commodity costs, and the negative effects of climate change. Public interest is dramatically increasing, shareholder resolutions continue to mount and climate policy discussions are actively taking place at state, regional, federal and international levels.
Executives need to understand that developing an effective carbon management strategy to accurately measure, track and reduce greenhouse gas (GHG) emissions across all business operations is now a minimum requirement for companies to address the business risks and opportunities presented by this critical environmental and public policy issue. Corporations that wish to remain competitive and relevant in this emerging carbon-constrained economy must establish capabilities beyond basic GHG inventories, enabling them to proactively re-position their business and capitalize on the environmental aspects of their operations.
There is a confluence of compelling billion-dollar market drivers that impact business today, and influence corporate executives to elevate sustainability discussions to a board room level. These include: cost-savings from operational efficiencies; voluntary and/or mandatory disclosure and reduction requests; and new business opportunities and increased revenues from products and services that help others become more sustainable.
Cost-savings from operational efficiencies. The tangible first step most companies make in identifying opportunities is tying their climate efforts to internal energy cost savings from efficiency programs. These quick bottom-line savings can begin to lay a foundation of return-on-investment (ROI) success stories, which can be leveraged into building a business case for larger initiatives with perhaps less-easily quantifiable measures. A McKinsey study has estimated at a global scale that there is $900 billion in energy savings, which could be captured with $170 billion in efficiency investment. There are also significant cost savings available from improved water and materials management practices. Almost all companies today are addressing one or more of these cost-saving opportunities, but very few are doing it within an optimized decision-making framework, and even fewer have extended the initiative into the supply chain.
Voluntary and/or mandatory disclosure and reduction requests. Companies are facing ever-increasing pressure to disclose the risks and opportunities presented by climate change by regulators, investors, and customers. Regulators in several jurisdictions are now requiring disclosure of carbon emissions and proposing market-based reduction programs anticipated to create a carbon commodity market that could approach $1 trillion by 2020; investors representing $57 trillion have requested disclosure of corporate climate strategies through the Carbon Disclosure Project; and companies representing $550 billion in revenues are driving suppliers to manage carbon in their business operations.
Companies are beginning to respond to environmental disclosure risks with widely varying degrees of sophistication, depending on their level of carbon intensity, exposure to possible regulation and brand positioning. Firms with significant GHG management experience are much better positioned to analyze risk, identify market opportunities, and influence legislation and investment decisions based on their successful track record of GHG management. The ability to influence key legislative decisions such as auctioning vs. grandfathering of allowances will enable companies to position for competitive advantage due to the significant asset value of the allowances.
New business opportunities and increased revenues from products and services that help others become more sustainable. Forward-looking companies are beginning to find new business opportunities and increased revenues from products and services that help others become more sustainable. Only a few mainstream companies are currently doing this well and it is important to note that the successful ones have been involved in carbon management for many years, having developed sophisticated internal tracking and reporting systems on which to base their external initiatives. It is critical from a customer standpoint to have unimpeachable credibility on internal GHG management and sustainability programs in order successfully market new product and services as “eco-friendly” or more sustainable on a comparative basis which target the estimated $230 billion spent annually by environmentally-conscious consumers.
As businesses begin to explore the implementation of a sustainable operational framework, it is important to note that the aforementioned market drivers will weigh differently on companies depending on their individual corporate culture, sector and the geography in which they operate. For example, sectors such as power, metals, minerals, chemicals, oil and gas, pulp and paper, automobile manufacturing and others with large stationary combustion sources in developed countries need to weigh regulatory risks much more heavily, since their capital expenditure cycles are longer.
Consumer goods companies, retailers, the travel and leisure sector, and other consumer-facing companies need to be more concerned with reputational risks to their corporate and brand image, and may need to be more concerned with supply chain, including contract manufacturing in developing countries. Of course, all are affected by operational efficiency.
Finally, companies that create a strategic operational framework will be better positioned not only to address the current market drivers, but agile enough to respond to rapid changes in market conditions as the science, technology, and policy responses evolve over the next few years.
Jim Sullivan is a Vice President at Clear Standards, a leading provider of enterprise carbon management and sustainability 2.0 software.