Sustainability issues are now a primary catalyst for global economic reform on an enormous scale
by Bronwyn Davis
The global moves to address climate change and anthropogenic greenhouse emissions have put the world on notice that it is witnessing what is arguably the largest socioeconomic reform since the industrial revolution.
Those who ignore the growing call to embrace sustainability as an integral platform for daily business operations face a bleak financial future. The first, and most tangible sustainability wake-up call has come about through the expanding adoption of emissions trading schemes.
What was largely seen as the preserve of intense scientific debate and a key platform for environmental groups and politicians has dramatically switched to become urgent government policy and regulation.
The Australian Government's draft Garnaut climate change review released in June by Professor Ross Garnaut is a classic example of how green has become politically mainstream.
'The median temperature and rainfall outcomes for Australia from climate change with unmitigated growth in global emissions, particularly from impacts on infrastructure, agriculture and international terms of trade, may see GDP fall by around 4.8 per cent [over $400 billion in today's purchasing power], household consumption by 5.4 per cent, and real wages by 7.8 per cent by 2100.'
The financial ramifications are clear and so is the underlying message. Namely, a failure to compel businesses to adopt sustainable practices means the fast-emerging tomes of international government legislation will invariably drive the issue to the forefront of corporate agendas.
The primary international framework governing environmental reform is the Kyoto Protocol, named after the 1997 environmental summit held in Japan, which sets legally binding greenhouse emissions targets on all developed countries that ratify the agreement until 2012.
So, where has that protocol brought about the desired effects?
Australia signed up under the current government, with an annual emissions entitlement set at 108 per cent of 1990 emissions between 2008 and 2012.
In December 2007 the United Nations Climate Change Conference held in Bali resulted in the Bali Roadmap; an international pathway to reach agreement on post-Kyoto arrangements for emissions reduction in the future.
The Australian government pledged at the conference to further extend its emissions reduction target to 60 per cent on 2000 levels by 2050.
The majority of developed countries have already heeded the urgency for action outlined in such influential literature as the UK's Stern review, report on the economics of climate change.
The European Union has proposed an independent commitment post-Kyoto of a 20 per cent reduction over 1990 emissions levels by 2020, and the UK Parliament passed the Climate Change Act in November 2007. This sets an incremental reduction target up to 60 per cent by 2050.
Although the US political approach to climate change has been undermined by President George Bush's refusal to ratify Kyoto, various emissions reduction mechanisms, including carbon trading schemes and 'green' energy incentives, have been implemented in the US at state level and by private enterprise.
Japan has had various industry performance standards and renewable energy technologies in place for some time and has now formed an unlikely alliance with China to champion the environmental cause.
China released its inaugural National Climate Change Program in June 2007, confirming its target to reduce the energy intensity of its economic activity by 20 per cent below 2005 levels by 2010.
India is expected to release its national plan this year, and already has a five-year mitigation process in place, which includes increasing energy efficiency by 20 per cent by 2016-17.
No developed country wants to be seen as sitting on its hands when it comes to environmental policy. This is particularly the case with Australia, which due to its economic growth and resulting high domestic living standards, is placed ninth in the world as the largest consumer of energy on a per capita basis.
The Australian government's green paper outlining its carbon pollution reduction scheme proposes that the 'strong reliance on emissions-intensive energy resources means that we could be vulnerable to poorly targeted mitigation responses by other countries, such as protectionist responses that impose tariffs on Australia's emissions-intensive exports.'
The National Greenhouse and Energy Reporting Act came into effect on 1 July. However, corporations most directly impacted will have until 31 August 2009 to apply to register under the scheme and until 31 October 2009 to submit their first annual greenhouse and energy report, with emissions trading expected to officially commence in 2010.
Emissions trading is fast becoming the international benchmark in the sustainability fight, and is already under way in 27 European countries. London is considered the centre for carbon trading, and recently the World Bank reported that in 2007 the market in emissions trading doubled in the space of a year, to US$64 billion.
Senator Penny Wong, Australia's minister for climate change and water, made it clear that 'the introduction of emissions trading will constitute the most significant economic and structural reform undertaken in Australia since the liberalisation of the 1980s.'
In spite of that, it's thought the new provisions will mainly affect the largest carbon emitters producing more than 25,000 tonnes of carbon emissions a year, and representing less than 1 per cent of all Australian businesses. The other 99 per cent of businesses will be likely to study the provisions more leisurely.
'This has caused a lot of companies to think it's only the top end of town that has to worry about emissions reduction and trading,' says Bruno Gerrits, general manager of business development with the Australian Carbon Exchange.
'The truth is they've [the government] designed it that way so it's easier to administer because they can capture everybody simply and quickly,' Gerrits says.
'However, the cost of trading for those large corporates will be passed downstream, which is why every single company, regardless of size, needs to understand which of their manufacturing or production processes is carbon intensive.
'If the big guys have to pay for those down the supply chain who are producing carbon as a result of their operations, they will inevitably pass that cost burden back down to those suppliers.'
Agencies such as the Carbon Reduction Institute (CRI) assist businesses to undertake carbon footprinting and assess where they can make internal reductions in energy consumption and greenhouse emissions, before entering into carbon emissions trading.
Gavin Pereira, environmental director of the CRI explains that the first step the CRI takes is to audit the greenhouse emissions impact from the different facets of an organisation. This includes electricity use, waste management, transport, consumables and energy requirements.
'We then identify "low hanging fruit", which are the baseline opportunities that will cost very little to implement and that immediately return any initial outlay due to financial savings for, say, electricity usage, and in a reduced need to purchase carbon credits if they're looking to meet an emissions reduction target,' he explains.
'That gives them a starting point to price carbon into their operations and use opportunities that cost the least.'
Pereira says there are opportunities within many organisations to reduce the tonnage of greenhouse gas by making slight tweaks to their operations.
In many instances these little adjustments within the voluntary space cost comparably less than the acquisition of permits or credits.
For many businesses the financial carrot is this potential to offset the costs of going green and purchasing carbon credits with operational savings. 'You might have an emissions impact of one million tonnes of CO2, but you may only need to buy half a million permits because you can reduce half a million tonnes of emissions through your internal process changes,' explains Pereira.
Direct cost savings made by reducing reliance on high-cost energy resources, including oil and black and brown coal, will further incentivise businesses to start looking at alternative fleet assets, such as hybrid and turbo diesel vehicles, and renewable energy options.
Fiona Wain is CEO of not-for-profit organisation Environment Business Australia. She suggests that the potential to achieve lower operating costs with such alternatives are becoming increasingly important as we see energy and oil prices rising.
'It's not like the old greenie days of going out and hugging a tree,' she says. 'This is all about protecting the fundamental capital that sustains civilisation as we know it. Everybody needs to get to grips with the fact that this is the major economic issue of the time.'
Australia's multinational corporates are taking this issue very seriously, and in undertaking their own sustainability initiatives have uncovered innovative and unique market opportunities. 'To come up with the best way of reducing emissions in a carbon-constrained world is a great business advantage,' says Rio Tinto's media communications manager Amanda Buckley.
'We've created a new company called Hydrogen Energy in partnership with BP that looks at carbon capture and storage (CCS). This will be very beneficial for sustainable development reasons, but it also makes great business sense to be able to develop that technology to market and use.'
Obviously the technological transition to a new 'green age' comes at a price. Part of the global environmental reform agreement that is now in place is the requirement for participating countries to commit investment funding to the research, development and commercialisation of new low-emissions technologies.
Garnaut estimates that Australia's minimum financial commitment would be more than $3 billion a year by the time the proposed Low Emissions Technology Commitment takes effect in 2013.
Businesses that ignore the global push to go green will find themselves at a severe competitive disadvantage.
Not only are consumers becoming more environmentally savvy, investors are also starting to exert their influence.
'The Carbon Disclosure Project has over 150 institutional investors representing more than $55 trillion worth of assets under management, who are starting to ask questions about the impact of climate change and what the companies they're investing in are doing about their carbon footprint,' EBA's Wain says. 'An awful lot of money is mobilising on this issue.'
In 2004 and 2005 the market capitalisation of 85 of the world's largest renewable energy companies doubled to $50 billion. In 2006 there were $71 billion worth of investments made in renewable energies, an increase of 50 per cent from 2005.
However, for the Australian Government to obtain the blanket cooperation they want from businesses, one issue they need to rapidly address is the confusion surrounding mechanisms for measuring, reporting and verifying environmental impacts and emissions levels.
The government is proposing that the current OSCAR (online system for calculating and reporting emissions) system be integrated into the National Greenhouse and Energy Reporting System for reporting of emissions.
'Some users are unhappy with OSCAR because it perhaps doesn't work so well for companies with multi-site operations, for instance,' Pereira says.
'There certainly needs to be recognition of the fact that a lot of organisations captured by new legislation are going to have multi-sites, and therefore have challenges associated with reporting.
'If it's too burdensome then it will be met with less satisfaction and more resistance.'
Deloitte's Wilson says that businesses can use this year to 'practise' within the existing framework. Although it's a formal year in the scheme it's not auditable, but it will provide vital feedback on the reporting and verification process.
Ensuring the accuracy of sustainability within a transparent framework is where the accounting profession can drive and underpin key parts of the new carbon economy.
Setting the corporate example
Firms such as PricewaterhouseCoopers (PwC) and Deloitte are very much aware that taking the initiative now is the best way to ensure competitive advantage.
Deloitte Australia's green agenda is based on a review of operations over the past year and includes quick-win adjustments to its day-to-day procedures and staff travel habits, as well as a comprehensive communications program to engage its staff on all levels.
'An absolute market opportunity is that people will make buying decisions based on whether you're the best in the market around the finance and accounting treatments of sustainability, and if you have a better grip of the tax implications going forward.
'That's where we have to make sure we're as good as our competitors,' partner in Deloitte's consulting practice and internal climate change and sustainability leader Chris Wilson says.
'If large companies try to pretend this isn't happening to maximise their profit, it will be to their dire peril in the long run,' says Rick Millen, partner corporate social responsibility with PricewaterhouseCoopers.
'Getting onto this upfront and being a leader gives you a much better chance to take advantage of the opportunities that will present, rather than waiting until you have no alternative.'
PwC's Australian operations started to implement sustainable practices about six years ago, and it was the first professional services firm to officially announce its carbon neutrality as at 1 July this year. Critical to its success in attaining this goal was the involvement of those at all levels within the firm.
'We've embedded our ambitions into the business plans of the organisation so it's not simply seen as a corporate responsibility team that's encouraging it to happen, it's the day-to-day leaders in the business who have a responsibility to deliver,' says Millen.
PwC has established a group of internal 'environment champions' to ensure that environmentally sustainable behaviour is constantly on the agenda, and activities are taking place to keep it in the staff psyche at all times.
An intranet has been set up to inform staff about the firm's internal environmental initiatives and provide the opportunity to make suggestions.
Employees have access to a carbon footprint calculator that uses the same rigorous emissions testing as the firm underwent, along with the option to purchase carbon credits to offset their own individual footprints at the same wholesale prices PwC enjoys.
This coincides with incremental steps such as the installation of sensor lights, double-sided printing, more sophisticated recycling arrangements, adjusting travel habits and reducing the operational temperature of their data centres.
'It's no good expecting all the young people of the organisation to do it for you if the CEO still insists on flying everywhere and doing everything his or her way,' Millen says, 'It has to come from the absolute top down and bottom up.'
PwC has included measurable sustainable targets within their business plan, aiming to achieve a 15 per cent reduction in flights during the course of this year and committing to move towards 100 per cent renewable energy over the next two years. They also select their suppliers on the basis of their individual sustainable strategies.
Both PwC and Deloitte have found that by adopting internal environmental initiatives and developing client services around this new business frontier, attrition rates have dropped and university graduates are lining up to become part of a corporate world that cares.
Mechanics of a cap-and-trade carbon pollution reduction scheme
the government sets a cap on the total amount of carbon pollution allowed in the economy by covered sectors
the government will issue permits up to the annual cap each year
industries that generate carbon pollution will need to acquire a 'permit' for every tonne of greenhouse gas that they emit
the quantity of carbon pollution produced by each firm will be monitored and verified
at the end of each year, each liable firm would need to surrender a permit for every tonne of carbon pollution the firm produced in that year
firms compete in the market to purchase the number of permits that they require. Firms that value the permits most highly will be prepared to pay the most for them, either at auction, or on a secondary trading market. For some firms, it will be cheaper to reduce emissions than to buy permits
as a transitional assistance measure, certain categories of firms might receive some emissions permits for free. These firms could use these permits or sell them.
The price of permits is not set by the government, rather, it emerges from the market. If a firm can reduce carbon pollution more cheaply than the prevailing market price of permits, it will chose to reduce carbon pollution rather than buy permits.
Therefore, this kind of scheme provides a strong incentive for participants to reduce their own carbon pollution. By making this business decision around whether to reduce carbon pollution or trade in permits, firms operate within the overall cap at least cost.
In this way, the scheme gives firms the flexibility to choose the most cost-effective way to meet the carbon pollution cap. At the same time, the carbon pollution market provides a greater financial incentive for firms to develop and adopt technologies to reduce emissions.
