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Carbon management: Measure, report, and reap the benefits

Carbon reporting has entered the accountant's remit. The Carbon Neutral Company commercial director Nathan Wimble explains how measuring and managing a company's environmental impact affects the bottom line, and just what this means for the accountancy team.

Regulations, soaring energy prices, and a growth in investor interest in environmental risks and governance mean carbon reporting has certainly entered the accountant's remit. October's Intergovernmental Panel on Climate Change (IPCC) report reminded everyone that climate change is very much a current - and growing - issue, which will increasingly have a significant impact on supply chain resilience, energy security and business risk: now is the time for finance teams and accountants to get to grips with broader forms of corporate reporting.

From Australia's National Greenhouse and Energy Reporting Scheme to Canada's Green House Gas (GHG) Reporting Programme, GHG reporting regulation has spread across the world, making carbon management a key issue for corporates globally. When it comes to environmental sustainability and corporate reporting in the UK, mandatory carbon reporting (MCR) - which requires all listed companies to report their greenhouse gas emissions - is just the tip of the iceberg. With a framework for all-encompassing Integrated Reporting (<IR>) recently announced, businesses including KPMG, Unilever, and HSBC will begin reporting on all forms of environmental and social issues. MCR is already upon us, so it's clear that accountants must prepare for more than pure financial reporting, and fast. Carbon emissions are the best place to start.

Investors value carbon management
The benefits of measuring carbon emissions are well charted, from internal and external stakeholder engagement, to cost reduction and new revenue streams. In 2012, 69% of the UK's FTSE 350 companies voluntarily measured and reported to the Carbon Disclosure Project (CDP), an organisation representing 722 institutional investors holding $87tr in assets. The majority of the FTSE 100, 96%, actually did so before MCR even came into effect in April this year, clearly highlighting the growing level of importance investors are placing on the management of carbon as a business risk.

The growth of the Institutional Investors Group on Climate Change (IIGCC) mirrors this, as the group now has over 65 members in Europe, managing around $8tr of capital, to say nothing of the Investor Network on Climate Risk, which has 90 institutional investors managing over $10tr. Carbon data is increasingly being put on a par with financial data when it comes to investor relations, meaning a company's position on climate change is fast becoming a driver for investment.

Manage carbon, manage growth
The commercial and competitive value that companies derive from effective carbon management is widely known, but the scale of this value is often under-estimated. Independent business services company, Commercial Group cites its carbon neutrality as one of the main contributing factors to its growth year-on-year. By tracking and then reducing its emissions, the organisation was able to drive down costs while reducing its carbon footprint by over 50%. The company saw over £2m ($3.3m) of new business gained in the first six months of the programme, has maintained growth every year, and saved well over £100,000. Marks & Spencer also became carbon neutral as part of its Plan A Commitments, which have contributed a £185m net benefit to the business in just five years.

Carbon emission reduction schemes enable businesses to meet targets in the most efficient, cost-effective way possible, reducing costs, boosting efficiency, and driving growth. International IT services company Steria recognised the potential of reducing emissions through its business travel, and encouraged each of its internal departments to reduce travel costs by using less carbon intensive modes of transport and leveraging conferencing technology whenever possible. This has driven a decrease of almost 20% in its travel emission footprint over a three year period. And its continual progress in managing its carbon emissions has enabled the group to be one of very few across the world recognised as a top band scorer for both performance and disclosure by the CDP.

Why act now?
MCR put carbon data on a par with financial data this year, by making GHG reporting in annual reports a matter of regulatory compliance for listed companies. This has propelled environmental sustainability further up the corporate agenda across the UK's business landscape. While immediately impacting the UK's largest listed companies, the domino effect of MCR is rippling downwards at a fierce rate, as larger firms inspect the environmental credentials of their supply chain. Not only this, but in 2016 the UK government will review the possibility of extending the pool of companies affected by MCR to all large companies in the UK, meaning between 17,000 and 33,000 companies would then be required to report their greenhouse gas emissions - Accountancy teams must be well-informed so they can prepare and begin to implement emissions reporting strategies, if they haven't already.

To that end, here are four of the most important things to know about MCR when thinking strategically about emissions reporting:

1. Do you already report?
The EU Emission Trading Scheme and the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme already regulate over 60% of the UK's GHG emissions. Though the reporting criteria are different, this will go some way to making life easier for you.

2. What do you have to report?
Companies are required to report their Scope 1 and 2 emissions, on a global basis, which means it doesn't matter whether or not the emissions have been generated within the UK's borders. These include energy, transport, fugitive, and process emissions, and are specifically referred to as Scope 1 and Scope 2. Scope 1 emissions are those resulting from sources owned by a given organisation (eg. company cars, boilers within company-owned buildings), while Scope 2 refers to those GHG emissions resulting from the electricity which the organisation uses. For now, Scope 3 emissions aren't included in MCR. These are more difficult to measure as they refer to indirect emissions which are a consequence of the activities of the organisation but not from sources which the organisation owns (eg. third party deliveries and business travel).

3. There is some flexibility
Unlike a lot of reporting regulations in effect in other parts of the world, MCR is quite flexible when it comes to the details of how companies report. The specification of which kinds of emissions need to be reported is prescriptive, but there is no such prescription when it comes to the methodology for calculation, meaning that it should be easier for accountants to add emissions reporting to its extant practices when it comes to reporting. If you're already reporting GHG you can continue to do it in the same way you're already working.

4. There's no regulator
Unlike other emissions reporting schemes around the world, the UK's MCR requires companies to publicly report their information through existing mechanisms, rather than to a regulator. Helpfully, this means that emissions reporting should slot into directors' reports.

Building for the future by acting now
There's strong evidence to suggest that effective carbon reporting and management goes hand in hand with commercial success, but you can only manage what you measure. A 2011 CDP study revealed that companies in the Carbon Disclosure Leadership Index and those in the Carbon Performance Leadership Index provide approximately double the average return of the Global 500 Benchmark, indicating a correlation between higher financial return and good carbon disclosure and performance.

Driving business performance requires the integration of carbon efficiency into the core of the business and leadership from the finance team. With this commitment to focus as much on environmental concerns as monetary business goals, firms can combine the benefits of satisfying stakeholder concerns with enhanced reputation, and clear and tangible bottom-line savings, risk management and business growth.

 

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