THIS REPORT CLEARLY REFLECTS HOW CREATIVE CONSULTANTS WITHIN THE BUSINESS COMMUNITY MAY BE OPPORTUNISTICALLY ENDEAVORING TO SHAPE/CONSTRAIN CORPORATE MINDSET & BEHAVIOR IN ORDER TO SELL NEW CLIMATE CHANGE MITIGATION 'PRODUCTS'.
WHILE THERE IS A GENUINE NEED FOR GLOBALLY-FOCUSED COMPANIES TO IDENTIFY, ASSESS and MANAGE THE EXISTENCE OF EMERGING FOREIGN and INTERNATIONAL REGULATORY & REPUTATIONAL RISKS POSED TO THEIR KEY BUSINESS ASSETS AND OPERATIONS, IT IS ALSO IMPORTANT FOR THEM TO DISTINGUISH BETWEEN REAL & PERCEIVED RISKS.
FOR EXAMPLE, MANY SUCH RISKS MAY NOT HAVE MATURED, WHILE OTHERS MAY ACTUALLY BE SMALLER THAN THEY APPEAR. COMPANIES MUST BE ESPECIALLY VIGILANT IN TRACKING PROPOSED LAWS/REGULATIONS, ESPECIALLY THOSE IN EUROPE, CHINA , BRAZIL, THAILAND, INDIA and THE U.S., INTRODUCED BY LEGISLATION/REGULATION-HAPPY BUREAUCRATS AND CHAMPIONED BY IDEOLOGICALLY-BASED NON-GOVERNMENTAL ACTIVIST GROUPS.
CONSULTANTS SHOULD TAKE CARE NOT TO INJECT THEIR OWN OR THEIR FIRM'S SUBJECTIVE POSITIONS ON POLICY DEBATES WHEN OFFERING THESE 'PRODUCTS' & 'SERVICES' TO POTENTIAL CLIENTS.
CONSULTANTS SHOULD ALSO TAKE CARE NOT TO OVERSTATE and/ or MISREPRESENT THE BENEFITS SUCH 'PRODUCTS' & 'SERVICES' MAY PROVIDE - i.e., THE EXTENT TO WHICH COSTS MAY BE REDUCED AND REVENUES ENHANCED].
Deloitte – Enterprise Risk Services
Managing greenhouse gas emissions: Mitigating risks and uncovering opportunities A survey of Canadian emitters
Climate change has become a strategic imperative
With each passing month, the issues of greenhouse gas (GHG) emissions and climate change attract increased public and media attention. No longer just for the activists, climate change issues are quickly becoming critical factors for corporate strategy and business competition. The investment community is requesting increased disclosure, and employees and other stakeholders are demanding action on organizations’ environmental impact. Climate change issues will affect future performance results and even how companies do business.
GHG emitting companies are under scrutiny by institutional investors, banks, rating agencies, and other financial parties demanding improved disclosure on how a company is adapting to climate change and addressing their risks and opportunities. They are exerting pressure through vehicles like the Carbon Disclosure Project and shareholder resolutions. In 2007, the Carbon Disclosure Project represented 315 signatory investors with $41 trillion of assets under management. The respondents included 30 Canadian firms, representing nearly 70% of the total market capitalization of the 200 largest TSX companies. A review of 306 shareholder proposals made in 2006 and 2007 showed that nearly half of all resolutions were related to sustainability and climate change.¹ [Shareholder proposals were found in a database compiled by Interfaith Center for Corporate Responsibility. www.iccr.org/ethvest.php ]. And, the voting success on these proposals is capturing the attention of boards of directors.
Younger and older workers increasingly want to work for companies that take environmental and social issues seriously. In addition to attracting and retaining talent, organizations that implement sound environmental policies are being publicly recognized for their commitment and achievements. Many leading workplace ranking programs in Canada and the United States are asking specific questions related to a company’s environmental practices.
From operational to regulatory to financial, the business risks inherent in climate change are highly interdependent. They cover a broad range of risk types that have implications across an enterprise’s global operations, impacting many business units. Risk Intelligent Enterprises™ know that risk walks hand-in-hand with opportunity. They are searching to fi nd an effective means to identify and exploit opportunities while managing and mitigating unrewarded risks.
Forward thinking, Risk Intelligent Enterprises are recognizing and acting on the potential financial consequences of a future carbon constrained economy. Resource constraints of any type drive innovation, and while some companies face increasing operating costs and asset devaluations, leading organizations may find opportunity in being part of the solution. They will develop new processes or technologies and drive increased profitability through new revenue streams or increased efficiencies.
Companies that take early action can position themselves to realize competitive advantages resulting from their climate change strategies. Managing GHG emissions is a key component of a climate change strategy for emitting organizations. To address climate change related risks and capitalize on opportunities, Risk Intelligent Enterprises take steps to integrate their GHG emissions management efforts with their business strategy. (p.1)
How are Canadian companies responding?
Despite an increased awareness, climate change is still predominantly considered an environmental management issue.
Although the impact of climate change cuts across business areas, 50% of corporations rely predominantly on their head of environment or sustainability to develop GHG policies. With only 18% of companies having secured executive level involvement, the situation remains virtually unchanged from last year. Boards of directors are involved in GHG emissions management issues at only half of the companies, 49% this year, similar to the 53% reported in last year’s survey. Notably, 40% of companies consider the lack of executive accountability to be a significant or somewhat of a barrier in developing a comprehensive GHG emissions management strategy. (p.3)
Companies remain in the early stages of response.
Lack of executive accountability, along with ongoing regulatory uncertainty, may be responsible for confining many companies to early stage response strategies. For instance, this year’s survey showed that 94% of respondents possess a general awareness of GHG emissions issues, 75% have completed an emissions inventory, 57% have evaluated their emissions reduction options and 55% have publicly released the results of their emissions management programs. Yet organizations do not yet appear to be pursuing later-stage responses, such as establishing budgets for acquiring offset credits or setting emissions management targets and schedules. In fact, only 24% of respondents have even established budgets for reducing their GHG emissions. (p.4)
GHG management plans are not connected to corporate strategies.
Lack of senior executive leadership may also contribute to the challenge of integrating emissions management with the rest of the enterprise’s activities. To wit, only 43% of companies surveyed believe their climate change plan reflects or aligns with their overall risk management strategy. Similarly, only 28% of respondents have successfully integrated their emissions management efforts with their business strategy. (p.5)
Companies are starting to listen to [activist] investors about climate change.
Increased shareholder involvement is having an impact, prompting companies to more clearly articulate their stances on climate change. While only 26% of companies have had shareholders raise GHG-related concerns at shareholder meetings, 62% of respondents received disclosure requests regarding their GHG management from the investment community. These calls to action have prompted management-level response at 41% of companies and may have contributed to this year’s 67% participation rate in voluntary carbon disclosure initiatives.
Regulatory uncertainty remains the primary barrier to the development of a GHG emissions management plan.
While several factors hinder the ability to develop a GHG emissions management strategy, the most frequently identified obstacle is regulatory uncertainty. Corporate interest in the regulatory debate is demonstrated by the finding that 61% of companies are actively or periodically involved in public policy development. Almost three-quarters (72%) of respondents stated a preference for international or national regulations – a result that may reflect a corporate desire to have harmonized regulations across the jurisdictions in which they operate. (p.6)
Companies are seeking a range of public policy tools to guide their responses to climate change.
When asked what types of public policies might help guide corporate response, respondents expressed preference for a range of policy tools. For instance, 76% of respondents favoured enticement-based policies, such as tax incentives. Approximately 70% of companies were interested in energy efficiency standards, a result that may be related to widespread anticipation of cost reductions through energy efficiency.
Other preferred policy options included market-based mechanisms such as emissions trading with intensity-based caps (56%) and emissions limits (58%). Given the respondents’ stated desire for increased regulatory certainty, only 37% favoured voluntary targets as a policy tool.
A majority of organizations see potential opportunities in climate change.
Most notably, 56% of companies see climate change as an overall opportunity from cost savings to innovation, most notably in the areas of energy efficiency (73%), emissions trading (47%) and new technologies (41%).
Strategies for leveraging opportunities
Gain executive and board-level support.
The results of Deloitte’s 2007 GHG Emissions Management Survey show that, while most companies are actively addressing GHG emissions management, the approach within a single company, remains fragmented.
For instance, a majority of respondents monitor GHG emissions issues, have completed an emissions survey and have developed protocols for performing an emissions inventory. Yet, by and large, organizations are not addressing later stage response strategies, such as establishing a budget for reducing GHG emissions.
This focus on less comprehensive responses may be due, in part, to the ongoing lack of executive-level involvement. For most organizations, the head of environment or sustainability remains predominantly responsible for developing GHG policies. Ultimately, a company’s response to climate change can affect its reputation, its operations and its profitability.
Given these repercussions, the time has come for companies to task senior level executives with key responsibilities for climate change oversight. Although the specifics will vary depending on a company’s size and resources, the people who are assigned this responsibility should also have the authority to delegate risk management duties to the appropriate business units. The Risk Intelligent Enterprise™ embeds responsibility for risk oversight in the board of directors. They must ensure a company’s enterprise-wide risk management program includes components that address both GHG emissions management in particular and climate change in general.
Integrate climate change responses into enterprise risk management strategies.
Risk Intelligent Enterprises take advantage of the opportunities presented by an effective climate change strategy, such as uncovering new revenue streams from emission offset projects, enhancing productivity thanks to technology improvements and increasing energy efficiency to reduce costs.
To optimize these benefits, however, companies will need to integrate their climate change responses into their overall risk management and business strategy frameworks. To succeed in this effort, Risk Intelligent Enterprises explore strategies for adopting an integrated enterprise-wide approach to climate change. This includes identifying the full range of risks and opportunities presented by climate change and assessing strategies for mitigating those risks and leveraging the opportunities.
These are just some of the risk types that might be identified:
Risk type Characterization
Regulatory • Policies have been proposed at the federal level
but regulations have not been drafted
• Provincial regulations exist in only some provinces
• Enterprises that operate globally face the risk of
different regulation in different countries
Technological • Climate change concern may accelerate
investment in alternative forms of energy
• Timing, cost and effectiveness of mitigation
technologies is uncertain (e.g., carbon capture and
Price/Market • Carbon prices have been extremely volatile,
ranging from 31 € /tonne to less than 1 € /tonne in
• Lack of historical data makes forecasting difficult
• Lack of liquidity has hampered carbon markets
Physical Operations • Severe weather may present physical risks to
• Changing weather patterns can hamper operational
Volume • Changes in temperature patterns may result in
changes in energy demand
• Changes in precipitation patterns may affect
availability of water
Take steps to deal with uncertainty.
Companies must be prepared to move forward and develop a strategy that allows them to manage in the face of uncertainty (e.g., regulatory, technology, carbon pricing and physical environment). Scenario planning is a tool that can help address these uncertainties, and allow businesses to prepare for plausible future situations. Scenario planning helps put strategic options on the table before making decisions, and helps organizations frame uncertainty for possible competitive advantage. This planning approach involves four stages.
1. Businesses need to identify the key drivers of uncertainty
These drivers will be company specific, but as an illustration, a company may determine that the following four key conditions create the greatest risk, as well as the greatest opportunity:
• Regulatory uncertainty: The final nature and extent of government limits on greenhouse gas (GHG) emissions and their intensity is still unknown.
• Technological uncertainty: There are currently no commercially available technologies to mitigate carbon emissions. No one knows how fast technology will move or what the cost of any advances might be.
• Carbon pricing: Even companies that don’t participate actively in traded markets will be affected by the price of carbon because it will impact the price of energy.
• Physical environment: Scientists are identifying a large number of potential changes in the physical environment that may result from climate change, such as more intense storms and rising water levels.
2. Use limits and reason to develop plausible scenarios
For each key driver of uncertainty, planners then identify the lowest and highest values they might have in the future. How low or how high might carbon prices be? How restrictive will regulations on GHG emissions be? By assigning two values to each of the four drivers, planners create 16 scenarios – too many to be effectively considered in strategic planning. The smart planner will eliminate some combinations that have a low probability or don’t make sense. For example, it’s safe to assume that a scenario of low regulatory requirements, early technology advances and high carbon prices is improbable. The next step is to cast the fewer remaining but more plausible scenarios as compelling stories, which can then be used to drive strategic planning.
Companies that take early action can position themselves to realize competitive advantages resulting from their climate change strategies. [??? - THIS IS NOT NECESSARILY TRUE - ACTUALLY THE OPPOSITE CAN OCCUR - FIRST-MOVERS CAN INCUR SIGNIFICANT NONRECOVERABLE COSTS]
3. Build a strategy by asking and answering fundamental questions
As management answers fundamental strategic questions about their current situation, future goals and strategic options, they will begin to develop strategies in response to scenario outcomes. Scenario-driven action plans include both:
• Core strategy elements: These elements are not scenario-specific, and should be implemented regardless of which scenario is realized.
• Contingent strategy elements: Contingent strategies are scenario-specific, and should be developed simultaneously with core strategy elements. However, companies should commit to them only if and when they perceive a specific scenario unfolding. These elements often incorporate action options, in which companies invest upfront and have the right but not the obligation to execute if the scenario unfolds.
4. Revisit and revise the strategy
Managers then implement the core strategy elements and any applicable contingent strategy elements, based on actual scenario unfolding. Management should set a schedule for periodic reviews of the scenarios and identify key events that will trigger scenario reassessment, such as new legislation or specific carbon pricing levels.
For companies implementing a proactive climate change strategy, scenario planning can be a powerful tool. By thinking in terms of scenarios or “stories,” companies can stand ready to rewrite the stories as time unfolds, new scenarios emerge and the plausibility of events changes.