2 Dec 2015 10:31am

Sustainable businesses: for the greener good

With the environment forcing its way to the top of the business agenda, David Adams looks ahead to the COP21 conference in Paris and considers the extent to which firms have adopted sustainable business practices

There was a time when business and the environment appeared to be in perpetual conflict. I am reminded, for example, of the 1970s children’s book Barbapapa’s Ark, in which business is portrayed as so rapacious and polluting that the animals of the world leave to live on a greener and more pleasant planet. At the end of the story, the animals are persuaded to return when humans, realising what a mess they have made on Earth, clean everything up. Such a happy ending to our current environmental predicament seems unlikely. The current scientific consensus suggests climate change will have profound consequences for humanity and the natural world during most of our lifetimes.

Today, primarily out of self-interest, businesses of all types and sizes across the globe, along with governments and regulators, are actively working towards creating more environmentally sustainable economies. Almost every month we see another illustration of the acceptance of the sustainability agenda into the mainstream. In September, Mark Carney, governor of the Bank of England, made a major speech at Lloyd’s of London in which he warned that climate change poses a huge risk to global stability, as the costs of catastrophes related to extreme weather increase.

“There is a growing international consensus that climate change is unequivocal,” Carney told his audience, highlighting research findings suggesting that in the Northern Hemisphere the past 30 years have been the warmest since the Anglo-Saxon era; that eight of the 10 warmest years on record in the UK have occurred since 2002; that atmospheric concentrations of greenhouses gases are higher than at any time in the past 800,000 years; and that the rate of sea level rise appears to be quicker than at any time during the past 2,000 years.

Carney noted that the insurance sector has been swift to react to the consequences of these changes, because “while others have been debating the theory, you have been dealing with the reality”. He noted that the number of registered weather-related loss events has tripled in 30 years, while inflation-adjusted insurance losses from those events have increased from an annual average of around $10bn (£6.55bn) during the 1980s to $50bn during the past decade.

Carney called for more disclosure from businesses on their climate change footprints and their plans for managing climate risks. He also anticipated some positive outputs from the 2015 United Nations Climate Change Conference (COP21), to be held in Paris this month. Its key objective will be a legally binding, universal agreement on climate, ideally one that will succeed in restricting the average global temperature rise over the next century to no more than two degrees Celsius – although this will be difficult to achieve.

Another notable contribution made in 2015 to the discussion around climate change was a report from The Economist Intelligence Unit, The cost of inaction: recognising the value at risk from climate change. It calculated the value at risk of the world’s current stock of manageable assets as a result of climate change. It suggested the average expected losses would total $4.2trn this century – roughly the equivalent of the GDP of Japan. But it also looked at losses in worst case scenarios. If global temperatures rose by five degrees Celsius, losses could reach $7trn (greater than the total market capitalisation of the London Stock Exchange), while a six-degree increase could wipe out $13.8trn – approaching 10% of all global manageable assets.

Energy, utilities, transports and infrastructure, agriculture and real estate were identified as sectors facing large direct risks; with metals and mining and industrial sectors also facing smaller direct risks. There would also be significant systemic risks for sectors including construction, technology, health and consumer goods.

There's a growing recognition that decarbonising society is all about the private sector

Kate Levick

In any case, many businesses will ultimately have no choice: it seems certain that in most geographies there will be a significant increase in regulation designed to mandate sustainable business practices. If this does not affect an organisation directly, larger entities are sure to compel supply chain businesses to improve sustainability in order to help them meet their own obligations. Rising energy prices in many countries will also force more businesses to become more sustainable.

So the threat-based case for sustainability is clear. But becoming a more sustainable organisation can also deliver valuable benefits, in cost savings, efficiency and productivity improvements; and for an organisation’s reputation.

Clearly progress is already being made. In September 2015 the Carbon Disclosure Project (CDP), a not-for-profit organisation that runs a global system for measurement and disclosure of environmental information, announced a tripling in the number of companies pricing greenhouse gas emissions over the previous year – up to 437 from 150 in 2014. A further 583 companies say they will start using internal carbon pricing within two years.

The CDP also works with 822 institutional investors, holding assets worth around $95trn, encouraging companies to measure, disclose and seek to mitigate environmental impacts. And it has worked with over 300 cities in Europe, the Americas, Asia and Africa to help reduce greenhouse gas emissions and mitigate climate change.

Kate Levick, director of policy and regulation at the CDP, highlights progress in applying pressure to businesses through supply chain relationships: “That is becoming an increasingly powerful lever, as we see more organisations using this in supplier selection criteria. It is becoming more powerful than the institutional investor lever.”

Levick is pleased that at COP21 there will be more emphasis placed on the role private sector companies play in mitigating climate change. “There’s a growing recognition that decarbonising society is all about the private sector,” she says. CDP is also involved in a number of other initiatives and collaborative projects feeding into COP21. These include the We Mean Business coalition, which encourages companies to use science-based emissions reduction targets, to price carbon emissions, procure 100% of electricity from renewable sources, include climate change information in mainstream reports as a fiduciary duty, remove commodity-driven deforestation from supply chains (by 2020) and reduce pollution.

Companies should be considering doing all of these things in part simply because so many of them are likely to be compelled to do so in the future, as a result of increased regulation, or increased energy prices, or both, says Levick. “There’s a lot to be said for positioning yourself ahead of the trend and getting a competitive advantage.”

September 2015 also saw ratings agency Moody’s publish a report explaining how it incorporates environmental, social and governance (ESG) risks into credit analysis. “It is not our role to make moral or ethical judgements,” says Henry Shilling, senior vice-president at Moody’s. “Moody’s provides forward-looking opinions on the credit risks of financial obligations. [But] this topic has become of rising interest and there is a greater sense of awareness of the environmental issues, so Moody’s is setting out its approach.”

Shilling suggests that around a third of institutional assets under management are now managed with at least some reference to a socially-responsible investment (SRI) strategy. Around 75% of S&P500 companies now issue corporate and social responsibility (CSR) reports – a huge increase on the number doing so 10, or even five, years ago.

Major businesses to have embraced sustainability include BMW. “The company integrates environmental considerations into all major investment decisions at an early stage, setting ambitious targets and using key environmental indicators to track and monitor how it is performing,” says Ursula Mathar, vice president sustainability and environmental protection at BMW Group. “One method of enhancing resource efficiency is to take account of environmental aspects when planning new investments. This allows potential improvements in efficiency to be identified and implemented at an early stage.”

BMW also encourages suppliers and other business partners to follow its example. Since 2013 the company has been participating in the CDP’s supply chain programme. Suppliers surveyed reported savings of over 21 million tonnes in carbon equivalents in 2014, representing significant savings on energy costs.

“Resource efficiency reduces the risk of availability bottlenecks and price fluctuations, thus contributing directly to higher earnings by reducing costs,” Mathar points out. “Between 2006 and 2014, energy and water consumption and waste and emissions per vehicle in the worldwide BMW Group production network were reduced significantly. This allowed us to achieve €15.8m (£11.36m) in cost savings in 2014.” By 2020 the company aims to have reduced energy consumption per vehicle produced by 45% compared to 2006.

Cutting your carbon footprint is not only good corporate citizenship - it's also good business

Another major brand, Siemens AG, plans to halve its 2014 carbon footprint by 2020; then to work towards carbon neutrality by 2030. “In the next three years we plan to invest more than $100m in projects that improve energy efficiency at our sites worldwide, starting in the US, Germany, China, Brazil and the UK,” says Michael Stevns, senior communications manager at Siemens AG.

“Siemens is not just interested in sustainability because we believe this is the right thing to do, but because deploying energy efficient, low carbon technologies has a clear business case. Through our CO2 Neutral programme we hope to demonstrate to other companies that cutting your carbon footprint is not only possible, but profitable.

“It might require an up-front investment, but it will pay for itself quickly and produce even greater returns over time,” he claims. “We expect our $100m investment to pay for itself in just five years and generate $20m in annual savings thereafter. Cutting your carbon footprint is not only good corporate citizenship – it’s also good business.”

KPMG has set itself emissions reduction targets, developed new approaches to account for social and natural capital it and its clients consume or create; and has contributed to collaborative programmes such as the UN Global Compact. KPMG is also supporting the Carbon Price Communique, a call for making setting a price on carbon emissions a key building block of climate change policy; and also the work of the Climate Disclosure Standards Board to bring climate change disclosures into mainstream corporate reports.

Elsewhere, PwC has achieved carbon neutrality across its UK operations, while cutting carbon emissions by 25%, and reducing both energy use and waste by 50% since 2007. Both firms are helping clients become more sustainable and to measure and benchmark their progress.

More companies of all types should be following the lead taken by these major brands, says Richard Spencer, head of sustainability at ICAEW. “The economy is going to decarbonise one way or another and all businesses are going to have to adapt,” he says. “The other thing is, as regulation hits big companies they’re going to push that down their supply chain. What if you, as the supplier, are ready for that, when it happens? You’d have an advantage over competitors.” There are also opportunities for smaller accountancy practices to provide clients with energy or waste audit services.

Will COP21 produce a deal that compels businesses of all kinds to become more sustainable? There are, says Spencer, reasons to be optimistic. For one thing, since the last major UN summit on climate change both the US and China are now more fully committed to achieving an effective agreement. China has also announced it will create a carbon pricing market, as have a number of other significant economies, including South Korea. The EU is to review and refine its own carbon market.

Nor does the opposition of climate-change-denying groups now seem to be having much affect on mainstream business opinion, or at policymaking level – even if there are many in the UK, for example, who fear the current government is taking some backward steps in this regard.

“There is still some debate in business, particularly in sectors exposed to international competition, about what the right balance is between investment and innovation,” says Levick. “But I don’t think any companies are calling this nonsense any more. All businesses are seeing climate change as a risk to their business in one way or another.”

“Investing in sustainable business practices is investing in the success of your company,” says BMW’s Mathar. After all, as Spencer says, every business depends, ultimately, upon sustainable natural resources. You’re not doing this for the sake of being a “good” business – it’s just good business.

Related articles

The link between sustainability and finance

The path to carbon pricing

The right price for preserving our climate

Accountants can help fight climate change