For most organizations today, sophisticated carbon management is simply not possible. At best, gathering, assessing, and analyzing the necessary information is a considerable challenge. In some areas, such as measuring actual product-level footprints, it is practically impossible.
But the marketplace is driving change as consumers and business buyers alike increasingly include green factors in their purchase decisions and as investors include them in their risk criteria. Regulations also are forcing the issue in certain geographies and industries, and that’s likely to increase as governments take steps to achieve their commitments for emissions reductions.
Customers are demanding much more information to support their purchasing decisions. Retailers keen to inform and influence consumers are introducing product labeling schemes, which in turn place information and environmental improvement demands on their suppliers.
Increasingly, brands are trading on their environmental reputations, and the information they provide to stakeholders, consumers, employees, and media needs to be accurate. Failing to provide information will be bad enough – but inaccurate or unproven information may be even worse.
A strategy for providing such information will need to be closely integrated with the overall business strategy and the information required will need to be managed along with that used for critical aspects of the organization’s strategy and operations.
Organizations need to build their environmental strategies on carbon management and measurement regimes that extend across the business, integrated at every level of their organizations, and which also cover other organizations along the supply chain.
They will require access to reliable information about current energy usage and CO2 emissions, along with detailed figures for past usage and credible forecasts of future trends.
All this information comes from four areas of management activity:
Disclosure: Information provided to a variety of third parties on the company’s carbon emissions and on actions to reduce them. This will include information provided to regulators to meet legal obligations and any voluntary disclosure in submissions in corporate social responsibility reporting. It also may include information provided to customers – through advertising, product information and possibly labelling – and other stakeholders.
Management: Information used to decide on actions to reduce energy consumption and carbon emissions, and to track progress in executing them. Complex analysis may be needed to identify root causes and select between alternative ways of doing business, such as when looking at supply chain configuration or product design issues.
Operations: The detailed sources of data that combine to create the key performance indicators used in the management decision support must be captured either from operational systems or directly from metering and sensors. The carbon intelligence solution will need to interface with a variety of operational systems such as those for asset management, manufacturing, procurement, human resources, distribution, warehousing, etc. Many energy reduction actions will need to be executed through these same operational systems.
Trading and Risk: The many risks posed by climate change that must be managed include market exposure risks associated with energy prices, the price of traded carbon credits/allowances, and the physical risks climatic events pose to business operations. There are reputational risks arising from environmental performance and customer risks from changed buying preferences resulting from a preference for “green” or different needs arising from the new climate.
On the surface, the information required for external disclosure is relatively modest. However, the data needed to derive reports and the information involved in engaging trading schemes can be significant and not at all readily available in the form needed. As an illustration, typically energy consumption is managed by physical site, whereas initiatives such as the Carbon Reduction Commitment program in the UK require it to be reported by organizational unit.
Complexity is added where businesses outsource parts of their operations or lease property, facilities and transportation from others. Does responsibility for reporting and management belong to the organization with equity ownership, or business control, or both?
Similarly, although relatively simple key performance indicators may be monitored, their calculation often requires many types of data to be captured from across the organization. Apparently simple metrics such as CO2 on business travel per department require new data to be captured such as journey distance and not simply cost.
At the operational level, many of the carbon emission problems have truly massive data issues at their heart. The obvious example is in measuring the environmental impact of a product throughout the supply chain, but there are many others. Optimizing distribution networks or deciding on material sourcing are examples of problems where treating carbon as a separate variable (rather than simply aggregating monetary costs) adds an extra dimension that may not be accounted for by the existing algorithms.
To manage risk in this environment requires these different sources of information to be aggregated and viewed through a different lens. Organizations need to think about adopting risk management solutions from other sectors — such as price-exposure models from financial services to model risk against energy and carbon prices, and scenario modeling from insurance to consider operational risks.
Perhaps the most critical risk that must be addressed is one of consistency: between information reported externally and that used for internal management decisions; between operational reality and management reporting; between assumptions made in carbon trading and the reality of the energy reduction program; between information provided to customers and the actual situation within the business. An effective solution must be able to address all of these risks.
This challenge requires the four information domains be interconnected just as the annual financial accounts, day-to-day purchasing decisions, monthly management control accounts and spot market trading of foreign exchange are – through a common, connected set of data through interconnected systems.
Robust systems will be needed to manage this information because of the large amounts of data to be processed, the cost of gathering it manually, and the increasing risks attached to failure. It will have to be accurate, and seen to be so. Companies will not only have to do the right thing — they will have to provide evidence to show that they have done it.
Jon Z. Bentley is IBM‘s consulting leader for green and sustainability issues in the UK and Northeastern Europe.