Ethical Corporation is now Reuters Events - LEARN MORE
More companies have been trying to measure their greenhouse gas emissions in recent years. But emissions auditing still has a way to go before it is fully comprehensive – or especially useful
Carbon emissions disclosure is on the up – of that there is no question. The first decade of the new millennium has witnessed a deluge of data.
ExxonMobil illustrates this upward trend. The US oil major now produces climate change statistics at almost the same rate as barrels of oil. Its latest corporate citizenship report, published in May, is well-stocked with pie charts and percentage tables: 131m tonnes of direct greenhouse gas (GHG) emissions, 1.5bn gigajoules of energy consumed and a 30% reduction in upstream hydrocarbon flaring since 2007.
Eight years ago, readers of the company’s first corporate citizenship report were lucky to find a stray carbon emissions figure amid the anti-global-warming rhetoric.
Several of Exxon’s sector peers also recently brandished slick new reports. In front comes Shell. The Anglo-Dutch company tots up and breaks down its estimated annual GHG emissions of 75m tonnes every which way.
Shell’s printed report provides just a taster. Those in the mood for some serious data mining are invited to dig around the company’s website (www.shell.com/envdata) for a detailed list of key performance indicators. There they will learn that the company’s 2008 methane emissions were up 5.5% on the previous year to 126,000 tonnes. Or that its nitrous oxide emissions have remained steady at 2,000 tonnes since 1999.
A glimpse at the environment pages of this year’s non-financial corporate reports shows the phenomenon spreads beyond the classic list of “dirty” industries. Everyone from banks to retailers is getting in on the disclosure act.
The Carbon Disclosure Project (CDP), a non-profit organisation that encourages businesses to report their GHG emissions, received data from 245 companies in 2003.
By 2008, that figure had increased almost tenfold to 2,200.
The onus to audit
Companies are feeling the pressure to chart their GHG emissions from multiple sources: regulators, investors and even consumers.
The most obvious pressures are regulatory. Under initiatives such as the European Union’s emissions trading scheme, participating companies are obliged to provide data on a site-by-site level. Upcoming cap-and-trade schemes in Australia and the US are expected to carry similar obligations.
Lawmakers show an appetite to force more companies down the disclosure route. Under the 2008 Climate Change Act, for example, large British-domiciled companies could face mandatory reporting come 2012. The US Environmental Protection Agency has also just initiated a public consultation for proposed mandatory GHG reporting.
If new emission reduction commitments emerge from the UN climate change conference in Copenhagen in December, then more legislators can be expected to follow suit, says Rhian Kelly, head of climate change at the CBI, the UK trade group.
“Part of the implementation process [of any emissions deal] would be how to measure, verify and report on emissions nation by nation … which would spark a parallel discussion about how businesses go about doing this,” Kelly says.
Consumers play an important role, too. As scientific consensus and public awareness about climate change grow, so too does the appeal of low-carbon products on the high street. Through advertising and on-pack information, retail companies are tripping over themselves to provide tangible evidence of their climate change reduction efforts.
“The overarching driver is that people are becoming increasingly aware that climate change is real and it’s beginning to impact us,” says Paul Dickinson, chief executive of the CDP.
In terms of reported emissions data, the investment community represents the primary driver, Dickinson says. As the carbon market goes global and the cost of carbon increases, GHG emissions threaten to become a significant business liability. For clean businesses, of course, their low exposure to climate risk could come to represent a valuable asset.
“Either way, both those liabilities and assets in time need to be reflected in the balance sheet,” Dickinson says.
Between the statute book, the sales ledger and the investor’s spreadsheet, emissions measurement and disclosure are increasingly seen by companies as a non-negotiable. The argument for cost savings and business opportunities inherent in improved energy-efficiency is also winning its fair share of corporate adherents.
From these twin realisations, the private sector has busied itself developing standards. Most are national or sector-based. A handful have international aspirations. Exxon, for example, bases its emissions calculations on methodologies approved by the American Petroleum Institute. For communicating its findings, it turns to disclosure guidelines from the International Petroleum Industry Environmental Conservation Association.
By natural progression, a shortlist of widely accepted norms has emerged. The greenhouse gas protocol, a set of guidelines telling companies how to measure their carbon footprints, is generally regarded as topping that list (see box).
The product of a decade-long partnership between the World Resources Institute and the World Business Council for Sustainable Development, the GHG protocol provides companies with guidance on drawing up a “true and fair” inventory of their GHG emissions.
The chief selling point for the protocol, which covers all six GHGs included in the Kyoto agreement, is its broad compatibility with the majority of other national and sectoral standards.
The numbers game
For all the progress in recent years, however, environmental auditors admit that emissions measurement and reporting have a long way to go.
Carbon footprinting – as companies typically refer to the measurement of their GHG emissions – continues to mean “many things to many people”, according to Justin Olusundé, an independent emissions auditor. “It has been plagued by misunderstanding, deliberate greenwash and a lack of academic rigour … in short, it’s a mess,” he says.
Practitioners and companies are still grappling with a host of uncertainties related to the term carbon footprinting. Is it restricted to carbon-based gases, for example, or does it encompass substances without carbon molecules, such as nitrous oxide? Does it include emissions created during upstream production processes, or simply direct on-site emissions? Should it be expressed as a “pressure” indicator in tonnes of carbon dioxide, or as a “mid-point” impact defined in terms of carbon dioxide equivalent?
Answers to those technical conundrums are gradually evolving, but obstacles beyond the technicalities of measurement still remain.
One of the primary barriers centres on the scope of GHG reporting. It is common for companies to report on emissions in their home country or main markets, for instance, but not their global operations. The same is true for business units, with data provided for some and not for others.
Despite the breadth of Shell’s report, for example, the oil major does not include information on emissions from the offices, transportation and depots of its downstream businesses. It also omits to report on 43 exploration and production facilities in which its ownership stake is lower than one fifth. Ten refineries in which Shell enjoys only a minority share are also excluded. To its credit, the oil major owns up to these omissions. Most companies do not.
Inconsistency of emissions data is a second headache. Investors trying to identify meaningful comparisons often “have their work cut out”, says Rory Sullivan, head of responsible investment at Insight Investment, an asset manager.
“If two companies have the same scope and their numbers are different, it’s not possible to tell if this is due to fundamental differences in the business or because of the way they’ve calculated their emissions,” Sullivan says.
There is also data quality to consider. GHG emissions are not candy bars that trip off the end of a production line. Quantifying the type and volume of emissions produced by a particular company is a considerable scientific challenge.
Today, the world’s biggest polluters have that know-how in-house. Other global companies with low carbon impacts have the finance to contract external specialists. For smaller companies, however, obtaining the necessary expertise to accurately measure their carbon footprint remains a challenge.
A final hurdle revolves around communication. The way companies choose to present their emissions data can “obscure rather than elucidate” performance, according to Sullivan.
It is not unheard of for companies to tuck away emissions data in little-read analyst reports, for example, or to provide only top-line information in their public reports. Some companies go the other way, overwhelming readers with data. This can be equally counter-productive, especially if the figures are not disaggregated or explained. With the internet, the trend towards data dumping is on the increase.
Many companies simply refuse to go public at all. About a fifth of the companies that participate in the CDP, for example, communicate their findings only with investors. Other stakeholders are kept in the dark.
The reasons companies give for not going public are multiple. Some fear that poor results will spark negative publicity. Others say they are only just starting out and worry their data is not robust. Others claim that the information is commercially sensitive.
Without a mandatory requirement to report, there is little that can be done to coax such information into the light.
Companies and the carbon auditing profession are not blind to present shortcomings in reporting. Work is under way to bring clarity to existing protocols and to promote greater harmonisation between standards.
The CBI provides a case in point. It recently issued a report calling on the UK government to base its impending reporting requirements on the GHG protocol. Close alignment with existing requirements such as the European Union emissions trading scheme is equally essential, the report says.
On the technical side, the CBI suggests a variety of measures that should make emissions reports more comparable. Examples include reporting in terms of carbon dioxide equivalent, using government-approved conversion factors, following national guidelines on GHG emissions from renewables and publishing relative measures of total emissions.
Plugging some of the holes in reports’ scope is also addressed. All UK companies should disclose their total national emissions, for example. Emissions from industrial processes, heating, transport and refrigerants (defined as scope 1 under the GHG protocol) and all electricity consumption (scope 2) should also be included.
The recommendations are in line with current business practice and government thinking, according to Insight Investment’s Sullivan, who chaired the working group responsible for the report. “They focus on the areas where there is most experience, where methodologies are reasonably clear and where it would be quite feasible for companies to report fairly quickly,” he says.
Moves are also afoot on improving voluntary disclosure. The Climate Disclosure Standards Board (CDSB), a London-based non-regulatory protocol-setting body, unveiled guidelines in May for the inclusion of climate-change-related information in companies’ annual reports.
The initiative includes advice on precisely which climate change data should be reported by companies, as well as a framework for streamlining disclosure procedures. As with the CBI proposals, CDSB’s guidelines take the GHG protocol as their underlying benchmark.
“CDSB’s draft framework … will be instrumental in enhancing the calibre and comparability of disclosures within corporations’ reporting,” says Wolfgang Grosse Entrup, head of environment and sustainability at pharmaceutical company Bayer.
To make their mark, these initiatives and others like them need to become global in scope. For voluntary standards, that takes time. CDSB’s proposed guidelines already suppose a worldwide remit. The more companies that follow them, the more that remit will become a reality.
The UK Climate Change Act presents a different case. If lawmakers decide to impose a reporting requirement, it will be mandatory, not voluntary. On the other hand, it will also be jurisdictionally limited. National legislators, for instance, cannot mandate UK-domiciled multinational companies to report on their international emissions.
All the same, being the first country to establish national legislation on GHG reporting promises to have a knock-on effect in other jurisdictions, according to the CBI’s Kelly. “What we do in the UK should ultimately play into international accounting standards on corporate reporting so that it’s done consistently globally,” she says.
The UK government was due to start a consultation on its future reporting guidelines in mid-June, before publishing its final recommendations in October.
The holistic grail
At present, the focus of regulators, standard-setters and companies has been measuring direct GHG emissions. That is all well and good. The auditing journey must start somewhere.
Yet the biggest challenge still lies ahead: capturing a company’s indirect emissions. Statistical purists and industrial ecologists argue that only then will companies be able to declare their full carbon footprints.
They have a point. Up to 90% of an international company’s overall emissions can lie beyond the factory gates. A holistic carbon audit would ideally cover the full life-cycle of a business’s activities, from the carbon created during the extraction of raw materials through to the GHG impact of product disposal: what the GHG protocol defines as scope 3 emissions.
“When it comes to reporting the full carbon footprint, there is still considerable misunderstanding,” says Thomas Wiedmann, director of the UK-based Centre for Sustainable Accounting and a technical adviser to the GHG protocol.
Methodologies for ascertaining scope 3 emissions currently split into two main camps, he explains. One approach is to take a company’s financial data and apply sector averages to calculate the overall embedded carbon created by its economic activities. The second is to adopt a bottom-up approach, which involves requesting emissions data from suppliers and aggregating the results.
Both approaches are attracting their respective methodological tools. The University of Sydney, for example, has developed a software package based on financial accounts and site emissions. The Bottomline3 tool is being piloted by auditors in the UK and Australia.
Wal-Mart, meanwhile, has spearheaded a project with the CDP to chart the emissions in its supply chain. Other companies that have since signed up to the supply chain leadership collaboration include Dell, HP, L’Oréal, PepsiCo, Nestlé, Procter & Gamble, Tesco and Unilever.
Formal standards for scope 3 emissions are following close behind. One already circulating in the public domain is PAS 2050, launched in late 2008 by the British Standards Institution (BSI), a protocol-setting body. PAS 2050 sets out a framework for measuring full life-cycle emissions on a per-product or per-service basis.
Some of the technicalities of the standard are still being ironed out, says Maria Varbeva-Daley, sector content manager for sustainability at the BSI. Decisions such as whether or not to include emissions from employees’ transport or capital goods are currently under review.
For a global company with product lines running into the hundreds, the product-by-product approach remains both time-consuming and expensive. But as more products go through the process, more benchmark data will become available and the more streamlined the calculations should become, says Varbeva-Daley.
By 2010, two additional scope 3 standards should be on the market. The International Standards Organisation should be ready with its supply chain-focused ISO 14067 code by next year. The GHG protocol also aims to produce a definitive product life-cycle standard within the year. The project is being managed by the protocol’s product and supply chain initiative.
From data to decisions
As with direct emission measurement, it will take time to develop a uniform and agreed method of indirect emissions auditing. Auditors still find themselves largely in an experimental phase. But the momentum to find a resolution is there.
Environmentalists are naturally impatient. A full, comparable life-cycle assessment methodology should, they hope, present a clear picture of corporate emissions at a company level.
The reaction from some corners of mainstream business is more ambivalent. Many see in scope 3 auditing a requirement for more data, and therefore more work and more costs.
That is short-sighted. There are upsides, too. First-movers will get ahead of the regulatory curve, gaining competitive advantage as lawmakers move towards mandatory GHG auditing and reporting.
From a reputational perspective, a “major public relations coup” awaits the first full life-cycle reporters, according to Daniel Goleman, author of Ecological Intelligence.
Consumer benefits will also increase as auditing become more common. “As the cost of this information gets to zero – that is, it’s right there in front of the consumer in the shop – the impact on market share will become greatest,” he adds.
Most important, however, is the relationship between good GHG auditing and good business decision-making. Climate change represents a major business risk. Without a full picture of their companies’ carbon footprint, corporate executives cannot fully manage that risk.
A life-cycle assessment will enable companies to identify “hotspots” and “improvement opportunities,” says BSI’s Varbeva-Daley. “Organisations can then opt to re-evaluate their sourcing, manufacturing, supplier choices, etc, potentially making emission reductions and managing costs better,” she says.
It is imperative for businesses to cut GHG emissions when and where they can, starting now. At the same time, emissions auditing must continue to improve. As it does, companies should become more adept and more effective at running the race against climate change.
The GHG protocol
The Greenhouse Gas Protocol Corporate Standard provides standards and guidance for companies preparing a GHG emissions inventory. It provides technical advice on how to account and report on the six GHGs covered by the Kyoto protocol (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride).
Designed by US-based environmental non-profit group the World Resources Institute and the Geneva-based World Business Council for Sustainable Development, the protocol draws on the contribution of over 350 environmental experts. It was initially road-tested by more than 30 companies in nine countries.
To date, about 130 companies have used the protocol to report on their emissions. The majority are US-based, including Fortune 250 companies such as Ford, GM, Pfizer, Nike, Cargill, GE, International Paper and FedEx.
The GHG protocol is compatible with the accounting and reporting requirements of most existing GHG programmes. Its focus does not extend to the verification of emissions data.
Under the protocol umbrella, there are also standards and guidance for climate change mitigation projects. In addition, the protocol’s coordinators are currently developing a rule book for reporting on emissions in the supply chain and at individual product level.
CBI calls for common carbon reporting
UK business body the CBI in May made some specific advice to the government on standardising GHG reporting.
1. Base new GHG emissions reporting guidelines on the greenhouse gas protocol.
2. Mandate companies to report emissions from fuel, industrial processes, refrigeration and electricity consumption.
3. Align GHG emissions reporting with financial reporting.
4. Determine what size of company will be mandated to report its emissions.
5. Ensure reporting requirements align with existing compulsory schemes such as the EU emissions trading scheme and the UK carbon reduction commitment.
Carbon emissions reporting jargon
1) “Direct” and “indirect” emissions
Direct GHG emissions are emissions from sources that are owned or controlled by the reporting entity.
Indirect GHG emissions are emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity.
2 ) Scope 1, 2 and 3 emissions
Scope 1: All direct GHG emissions.
Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.
Scope 3: Other indirect emissions, such as outsourced activities, waste disposal, the extraction and production of purchased materials and fuels, transport-related activities in non-corporate owned vehicles and electricity-related activities not covered in scope 2.
3) “Emissions factor”
Emissions factor is the term given to the amounts of greenhouse gases emitted by a business when compared with a set amount of activity performed by that business.
Source: GHG protocol
Definitions of “carbon footprint”
BP: “The carbon footprint is the amount of carbon dioxide emitted due to your daily activities – from washing a load of laundry to driving a carload of kids to school.”
Carbon Trust: “The total set of greenhouse gas emissions caused directly and indirectly by an [individual, event, organisation, product] expressed as CO2 equivalent.”
United States Environmental Protection Agency: “The amount of greenhouse gases that are emitted into the atmosphere each year by an entity such as a person, household, building, organisation or company.”
Energetics (Australian carbon consultancy): “… the full extent of direct and indirect CO2 emissions caused by your business activities.”
Global Footprint Network (international thinktank): “The demand on biocapacity required to sequester (through photosynthesis) the carbon dioxide emissions from fossil fuel combustion.”
CarbonFootprint.com (UK carbon management company): “The amount of greenhouse gases produced in our day-to-day lives through burning fossil fuels for electricity, heating and transportation, etc.”
Source: “A Definition of Carbon Footprint”, Centre for Sustainability Accounting, 2007
What they say…
“Trying to draw comparisons and benchmarks is very difficult because one has to do a lot of work to fill in the gaps in the data.” Rory Sullivan, head of responsible investment at Insight Investment
“Greenhouse gas emissions reporting will be an important tool in making the shift to a low-carbon economy, and measuring emissions is the first step towards managing and ultimately reducing them.” Neil Bentley, director of business environment at the CBI
“It is extremely important for investors to take account of climate change in their decision-making. This contributes to enhanced public perception of both the risks and the chances of climate protection.” Angela Merkel, German chancellor
“There’s significant corporate confusion over the term carbon footprinting and what it represents … The devil is in the detail.” Justin Olusundé, independent emissions auditor
“All Together Now: a common business approach for greenhouse gas emissions reporting” CBI, May 2009
“The Climate Disclosure Standards Board Reporting Framework”, Carbon Disclosure Project, May 2009
GHG Protocol: www.ghgprotocol.org
BSI British Standards: www.bsigroup.com
Carbon Disclosure Project: www.cdproject.net
Centre for Sustainability Accounting Innovation Centre: www.censa.org.uk