The Continuing Carbon Conundrum

In several past articles, we discussed various business risks associated with calculating “carbon footprints” and making investments in climate change or CO2 emissions strategies.  During the last few weeks, more information has surfaced that illustrates an increased recognition of these risks.

The Wall Street Journal reported:

Manufacturers and retailers across the globe are working to measure their products’ carbon footprints for a variety of reasons, and all of the efforts have one thing in common: The results have the appearance of precision.

But all the decimal points in the world can’t hide the fact that measuring carbon footprints is inexact. It is clouded by varying methodologies and definitions — not to mention guesses.

“There are no clear rules for the time being,” says Klaus Radunsky, who co-chairs a group within the Geneva-based International Organization for Standardization that is producing a guideline for measuring products’ environmental impacts. “It depends very much on how you do the calculations.”

The well-regarded law firm of McGuireWoods LLP released an article comparing corporate responses to the Carbon Disclosure Project (CDP) to financial risk discussions/disclosures in the same companies’ 10-K reports for SEC.

[T]he Carbon Disclosure Project (CDP) in September 2008 released the results of its annual questionnaire. According to the CDP, 321, or 64%, of the S&P 500 companies responded to the questionnaire. In contrast, only 19, or 15.4%, of the 123 S&P 500 companies whose 10-Ks we reviewed provided any type of disclosure in their 10-Ks. In fact, at least one of the U.S. companies graded as a “top scorer” in the CDP’s U.S. Carbon Disclosure Leadership Index provided no climate change or GHG disclosure whatsoever in its 2008 10-K.  There may be reasonable explanations for this disparity. However, the fact remains that many S&P 500 companies make extensive disclosures regarding these matters in the CDP and in many cases these companies identify climate change as posing “commercial risk,” having a likelihood of “significant impact” or as a “potential material risk.” and yet they do not reflect those risks in what is arguably their most important SEC report for the year.

Reuters echoed this in a report September 21, 2009:

“European countries do score highly [in the CDP rankings]. Of course, they are subject to a lot more regulation on greenhouse gases so they are more advanced than other places in terms of being able to report complete data,” Zoe Riddell, who produces the annual CDP report, said ahead of its release.

With all this ambiguity surrounding the reporting of GHG/climate risk information, one impact seems to be clear and easier to measure – the growth of “climate change business”:

HSBC, the big investment bank, just tallied up the revenues of listed companies operating in the “climate-change sector.” That includes companies that make low-carbon energy gear; energy-efficiency; and water and pollution management.

The upshot? The sector’s sales worldwide grew 75% last year to $530 billion, the bank reckons. That makes “climate change” a bigger business than wireless telecoms, capital markets, and aerospace and defense. The field is dominated by Germany, France, Japan and the U.S., which led the pack.

As companies look to evaluate climate change initiatives, pressure is mounting on audit functions.  There appears to be a growing – and almost complete – reliance on auditing as THE tool for verifying emissions calculations, reductions, reporting and accuracy.  But without established and auditable standards, what will an audit provide?

The environmental auditing industry is looking for auditing methods/tools that are sound, consistent and pragmatic.  Although EPA has proposed federal greenhouse gas (GHG) reporting requirements, they are not yet final.  Right now, most EHS auditing functions don’t include climate change program elements.  So audits at this time tend to review the management system aspects of GHG emissions management rather than the technical.  Until acceptable and credible standards exist, audits may not be able to provide the level of reliance desired.

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