Corporate Social Restriction: How The UN & EU Governments Compel Private Industry To Fulfill Government Obligations

http://www.tcsdaily.com/article.aspx?id=040406F


http://www.itssd.org/Publications/CorporateSocialRestriction.pdf


http://brunoleonimedia.servingfreedom.net/Report/IBL_Report_apr_06_print_en.pdf (p.9)


Corporate Social Restriction


TechCentralStation


April 4, 2006


In recent years Corporate Social Responsibility (CSR) has become a mantra. A complex movement has been campaigning throughout Europe for high labor, environmental, and human rights standards, even though it is not quite clear what 'is meant by "high". The movement comprises Western trade unions, environmental non-governmental organizations (ENGOs), and human rights activists who have little faith in the ability of private companies and free markets to generate wealth and improve living conditions for all workers. In fact, these groups believe that there exists a threshold beyond which a company's profits become too high, inequitable, and even immoral.


The CSR movement has grown to become a potent regional political force, and has thus far succeeded in causing many companies to "voluntarily" adopt or develop programs that have nothing at all to do with their core businesses. They range from special commitments to environmental and labor conditions, to aid initiatives in developing countries that are often accompanied by information and education-based campaigns. Notwithstanding the costs incurred and distractions suffered by such companies in pursuit of CSR, many critics within the CSR movement are still not satisfied.


Sensing that companies are employing CSR disingenuously as a mere advertising façade to cover up their otherwise socially bereft conduct, CSR activists have sought to raise the level of "public accountability". They now want the current voluntary benchmarks converted into something more concrete: mandatory requirements. Their goal, simply, is to impose upon companies third-party monitoring and enforcement systems, thus providing themselves with an ample source of future employment, to ensure that pure and unadulterated CSR is practiced company- and region-wide. And they have enlisted none other than national governments and international organizations, including the United Nations, which endorse public "naming and shaming" campaigns in order to "smoke out" (expose and extinguish) corporations' heretical practices. The movement is especially strong in the European Union, where the Commission is expected to and often does embrace every request.
















If you combine the political agenda of the CSR movement and the political power of the European Commission, the result may well be explosive. In fact, Europe's business climate is already less-than-welcoming. There continues to be a persistently low rate of economic growth and technological innovation, and a dramatic rise in the number of costly regulations that require strict company compliance. It is no surprise, then, that European companies have chosen to invest significantly less on local research & development than their American and Asian counterparts.


If recent media reports are any indication, perhaps the Commission has finally awakened from its largely self-imposed stupor, and has discovered the distinctly negative influence that the movement has had on European corporate performance. Indeed, Enterprise and Industry Commissioner Günther Verheugen might have been so startled by what he found when he actually took the trouble to look, that he "moved [the Commission] towards a more pro-business view on CSR over the past year." This change of heart has resulted in last month's launch of the "European Alliance for CSR". The alliance focuses on enterprises as the "primary actors in CSR". This is an elegant way of signaling that, at least for the time being, CSR is and should be the business of companies, and not the business of NGOs or the Commission. "The Commission has opted for a voluntary approach which is more effective and less bureaucratic," Verheugen said. "Since CSR is about voluntary business behavior, we can only encourage it if we work with business."


CSR proponents, such as the European Trade Union Confederation and Friends of the Earth, attacked Verheugen as a hijacker of CSR. Despite his attempt to implement a soft move from the old to a new concept of CSR, however, one must seriously question the Commission's ability to stay the course in the face of rabid NGO opposition. No matter how one "packages" CSR the problem of unmasking its true identity will remain, as long as the core issue underlying CSR is left unresolved: what is the social responsibility of a business? According to renowned economist and Nobel laureate, Milton Friedman, "there is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." Although this makes perfect sense in the increasingly competitive and low-margin global marketplace in which companies operate, regionally-focused and regulatory-minded NGOs and EU bureaucrats abhor it.


If a business has any "social" corporate responsibility at all, it is owed to the shareholders and debt-holders who keep it going. Plus, in order to survive and flourish another day so that it might later consider redeploying excess profits to "social philanthropic causes", a business must also competently serve its market constituents. If Jean Q. Consumer is different from Jean Q. Citizen, then the products and services a company offers for sale may also need to be different. For instance, Jean Q. Consumer may only want high quality and performance-driven goods and services at an affordable price, while Jean Q. Citizen might not be so concerned. He might instead demand only goods and services with a "high" level of environmental, labor and human rights protections, for which she would be willing to pay a higher price, even though she does not quite know what those protections really mean. Is it substantively different than "low" standards? How is this measured? Who makes such a determination? Is it verifiable and truthful?


In the end, the decision to purchase one rather than the other of these types of products or services is part personal and part market-driven. And, despite what the NGO community often claims, there exists no moral difference between the companies that respond to these different demands. Indeed, one may argue that each such company is socially responsible.


EU bureaucrats and European NGOs recognize the truth about market influences, and have developed ways to distort it. One such way is to identify artificial distinctions between products and services, such as "low" and "high" environment, worker, and human rights content, and to falsely claim that the former are not socially responsible because they pose unacceptable health and environmental hazards to the public. When this distortion rises to the political sphere as the result of well-organized and funded NGO public fear campaigns, it is usually doomed to turn into anti-business regulations that raise costs to all businesses, harming both shareholders and consumers. Firms that suffer from harmed reputations become fearful, risk averse, less competitive, and protectionist in nature. As Professor David Henderson, formerly head of the Economics and Statistics Department of the Organization for Economic Cooperation and Development Organization, has said, "insofar as this trend weakens enterprise performance, limits economic freedom and restricts competition, the effect is not only to reduce welfare: it is to deprive private business of its distinctive virtues and rationale".


Mr. Kogan is CEO of The Institute for Trade, Standards and Sustainable Development, Inc. Mr. Stagnaro is Free Market Environmentalism Director of Istituto Bruno Leoni.

Responsible Corporate Social Responsibility Must Contribute to the 'Bottom-Line'

http://www.forbes.com/2006/11/16/leadership-philanthropy-charity-lead-citizen-cx_ba_1128directorship.html


Is Corporate Social Responsibility Responsible?

Betsy Atkins Directorship 11.28.06, 12:00 PM ET

Forbes


The concept of corporate social responsibility deserves to be challenged. It seems that political correctness has obfuscated the important business points. It is absolutely correct to expect that corporations should be “responsible” by creating quality products and marketing them in an ethical manner, in compliance with laws and regulations and with financials represented in an honest, transparent way to shareholders. However, the notion that the corporation should apply its assets for social purposes, rather than for the profit of its owners, the shareholders, is irresponsible.


The corporation’s goal is to act on behalf of its owners. The company’s owners--its shareholders--can certainly donate their own assets to charities that promote causes they believe in. They can buy hybrid cars to cut back on fossil fuel consumption or support organizations that train the hard-core unemployed. But it would be irresponsible for the management and directors of a company, whose stock these investors purchased, to deploy corporate assets for social causes.


It would be very easy to carry out a litmus test of the market for corporate social responsibility. For example, Apple Computer could sell one iPod for $99 and another for $125. The company could announce that the extra $26 from the more expensive iPod would be spent to promote specific social causes, such as education, environmentalism, etc. Such a test would account clearly and honestly for how shareholders’ money was being used and would allow the market to drive the outcome. If consumers wanted to pay the extra $26, voting with their wallets for a cause they believe in, they could.


Interestingly, such a litmus test already exists, albeit not in the private sector. Beginning in tax year 2002, the state of Massachusetts gave taxpayers the option of checking a box on their 1040s to pay a higher rate, with the extra funds going to social services. Out of the $16 billion that Massachusetts residents paid in taxes that year, only $100 million came from people who volunteered to pay extra. That’s less than 1% of the market--sobering when one considers that Massachusetts is a state with a high degree of social consciousness. (See: America's Most Generous States.) In point of fact, when it comes to actually voting with their wallets, consumers prefer not to be directed to do so. They like to contribute individually, to charities they believe in and wish to support as individuals, not as part of a huge pool. They certainly do not expect the for-profit corporations in which they invest to deploy corporate assets for social causes.


Thus, it would be a questionable use of corporate assets for a company to invest its shareholders’ money in a “green” headquarters that cost an extra $100 million. The goal of reducing pollution by building an environmentally friendly headquarters may be a worthy one--but the corporation hasn’t asked shareholders whether they want their assets spent that way. In fact, it would be not only irresponsible but deceptive.


Management is charged with making informed decisions to invest corporate assets for uses that will efficiently achieve corporate goals. These include growth, profitability, product innovation, and anything else that drives the shareholders’ return on investment as measured by the stock price. What quantifiable outcome could a green headquarters produce? How could the corporation justify, in a quantifiable way, the use of shareholder assets?


There are practical reasons why corporations should cloak themselves in the politically correct rhetoric of social responsibility. But marketing should not be confused with significant deployments of corporate assets. For example, British Petroleum's marketing campaign, which is all about looking for alternative energy sources, makes the consuming public feel good about purchasing BP products. But if BP had redeployed billions of dollars into environmental investments that yielded no profits, and its stock plummeted, one would certainly expect the investing public to transfer its money to a competitor.


What the investing and consuming public really means by “social responsibility” is:


--Be transparent in your financial reporting. --Produce a quality product, and don’t misrepresent it.--If you know something about the product that endangers the consumer, be forthright and let the public know.

--Do not use predatory practices in offshore manufacturing, such as child labor.

--Do not pollute your environment or other environments, and adhere to laws and regulations.

--Be respectful, fair and open in your employment practices.


In other words, corporate social responsibility actually refers largely to what the company does not do. I think this is a clarification that should be understood by all constituencies.


Betsy Atkins is CEO of Baja Ventures, a VC firm focused on technology and life sciences. She serves on the boards of Reynolds American, Polycom, Chico’s FAS, SunPower and several private companies.

European & U.S. Companies Should Consider Regulatory & Reputational Risks Posed to their Key Business Assets and Operations

http://www.dlapiper.com/global/media/detail.aspx?news=2360

News

--------------------------------------------------------------------------------

15 Mar 2007

European companies fail to deal with regulation threats

Press Release

--------------------------------------------------------------------------------
Major companies throughout Europe are increasingly worried about the threat from regulators - so much so that 40% believe they will be investigated within the next 12 months.


The findings, from a survey of 250 leading European firms for the global legal services organisation DLA Piper, show that companies consider regulatory risk management important to their business strategy, but are failing to manage the risk effectively.


The survey also shows that a large number are failing to put adequate measures in place to protect themselves. Companies also have a huge blind spot when it comes to putting in place mechanisms to protect their reputations in the event of investigation.


In a business climate where high profile investigations into European companies have become commonplace, the survey examines the approach to risk management and compliance, the powers and sanctions of domestic and international regulators, and crisis management among leading European companies operating internationally .


Offences for which companies face investigation by regulators (such as the Financial Services Authority, Serious Fraud Office, Office of Fair Trading, Health and Safety Executive and others) include corruption, price-fixing, abuse of dominant market position, tax and accounting irregularities.


The survey was carried out for DLA Piper by the international market research organisation TNS.


The findings include:


40% of respondents believe their own company will be investigated by a regulator over the next 12 months 57% believe that their industry is "likely" to be investigated in the next year 75% of the companies surveyed believe that company directors’ personal exposure to the punitive consequences of regulatory breaches is likely to grow over the next five years 76% of respondents believe that the risk of criminal penalties for regulatory breaches will continue to grow over the next five years 25% of the major European companies surveyed do not have any procedures at all in place to deal with a regulatory investigation.

Contrary to companies' beliefs that they are managing their risk, the survey reveals substantial gaps in European companies’ understanding of the powers of regulators.


For example:


67% of respondents are not aware that their competition regulator has the power to enter by force 63% of respondents do not know that their competition regulator can suspend or cease their company trading at will.


European companies are behind their US-listed counterparts when it comes to managing their regulatory risk, but US-listed companies are also falling short of the mark since only 52% can claim to have a structured compliance plan in place and only 71% can effectively deal with a regulatory crisis, meaning 29% would be unable to cope if investigated or raided.


Whether listed in the US or not, when it comes to the long arm of the US regulator, 32% of respondents are not aware of the US Sarbanes-Oxley Act (which deals with US accounting irregularities post-Enron), and 61% have not heard of the Foreign Corrupt Practices Act (which deals with bribery and corruption in relation to government officials). This is surprising since both pieces of legislation have set the standard against which companies are being measured.


Neil Gerrard, Global Head of the Regulatory and Government Affairs Group at DLA Piper, said: "Regulation is on the increase and the consequences are more real than ever before. Companies are facing huge fines. Directors are facing extradition, imprisonment and/or fines. Companies need to be aware of and manage this risk. They owe it to themselves and their shareholders.


"It is clear that businesses are starting to take the threat they face from regulators more seriously. However, they are still largely unprepared for the consequences of serious regulatory breaches.


"Companies need to be able to manage and respond to domestic and EU regulation and, increasingly, the long-arm of the US authorities. However, our survey clearly shows that they are failing to put in place a comprehensive response to managing these risks. They are putting themselves in grave danger by failing to address these problems."


Businesses across Europe recognize the danger to their brand. However, they are failing to put in place the means to protect it. Less than 30% of those drawing up a risk management plan consult a communications specialist.


The survey further shows that where companies have crisis management plans they are not comprehensive and do not deal with the wide range of risks that corporates face.


The survey shows that 51% of the companies surveyed have no crisis management plan at all and 47% of respondents with crisis management plans in place do not include procedures to deal with a Competition Authority investigation.


Neil Gerrard added: "The statistics on the lack of crisis management plans are shocking. An investigation by a competition authority, for example, can result in fines worth 10% of a company's turnover. The company can also be forced to sell off parts of its business. Such events can, without careful handling, irreparably damage a company's reputation and financial position.


"Firms across Europe need to address all potential areas of risk in order to manage that risk as effectively as possible.


"Breaches are inevitable. The best run companies will, from time to time, get it wrong. What is important is having good compliance programmes and managing the breaches as and when they occur.


"Our survey reveals that European businesses must work harder to ensure they have the key elements in place to ensure effective regulatory risk management: dedicated teams, compliance programmes, investigation procedures and crisis management plans that are regularly tested."

Creative Corporate Consultants Push Climate Change Risk Mitigation Products & Services

[THE FOLLOWING ARE EXCERPTS TAKEN FROM A RECENT SURVEY REPORT PREPARED BY THE CANADIAN OFFICES OF ONE OF THE LEADING INTERNATIONAL ACCOUNTING/TAX/CONSULTING FIRMS.


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].


http://www.deloitte.com/dtt/cda/doc/content/ca_en_ers_ManagingGHGEmissions_dec2007%282%29.pdf

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
storage)


Price/Market • Carbon prices have been extremely volatile,
ranging from 31 € /tonne to less than 1 € /tonne in
Europe
• Lack of historical data makes forecasting difficult
• Lack of liquidity has hampered carbon markets


Physical Operations • Severe weather may present physical risks to
infrastructure
• Changing weather patterns can hamper operational
logistics


Volume • Changes in temperature patterns may result in
changes in energy demand
• Changes in precipitation patterns may affect
availability of water

(p.9)


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.