23 Jul 2013 05:21pm

Why carbon management pays

While environmental sustainability and carbon management have frequently been CSR initiatives, new operational, financial and regulatory risks, alongside customer demand and rising energy costs mean they are increasingly being escalated into the business and finance remit.

Companies are increasingly familiar with the benefits of measuring carbon emissions, from reducing costs and unlocking new revenue streams, to improving employee and stakeholder engagement. In fact, 96% of the UK’s FTSE 100 companies and 69% of the FTSE 350 measured and reported their carbon footprint to the Carbon Disclosure Project (CDP) in 2012. Representing 722 institutional investors holding $87trn in assets, the CDP’s increasing influence indicates the shifting level of investor importance being aligned to management of carbon as a business risk, and is just one example of why effective carbon management should be high on the CFO agenda.

Put simply, the benefits of taking action on managing environmental impact extend far beyond the philanthropic and firmly onto the bottom line. Enabling business to manage risk, realise cost savings and build revenue, strategic carbon management can – contrary to traditionally held beliefs by many finance professionals – have a positive and lasting impact on the corporate balance sheet.

Reputation and engagement maybe, but what about ROI?
Rising energy prices, the imminent introduction of Mandatory Carbon Reporting (MCR) in April and the impact of extreme weather events, are leading to the perfect storm: there’s never been a better time for firms to take action to understand and act to mitigate the true costs of their environmental impact.

Put simply, taking action on managing environmental impact extend far beyond the philanthropic and firmly onto the bottom line

In many areas the corporate world is already taking action: 92% of CDP Supply Chain members have reported having emission reduction targets in place, and organisations like Dell, PepsiCo, and Walmart use the CDP’s system to review their supply chains and mitigate environmental risk. With MCR making carbon reporting a matter of regulatory compliance, the 96% of the FTSE 100 which reported their carbon emissions in 2012 will become 100% in 2013. Carbon data is being put on a par with financial data and finance departments will need a clear response to questions about how they are managing their carbon risk and impact.

The qualitative benefits of investing in environmental sustainability are well known. Boosting the ‘green profile’ of a company can do wonders for brand reputation and corresponding customer loyalty, but can also deliver employee and prospective employee engagement. The Cone Millennial Cause Study supports this, showing over 80% of 13-25 year olds would only work for a company that cares about its impact on society, while The Journal of Organizational Behaviour has revealed that firms with eco-friendly initiatives have more productive employees than firms without environmental standards in place.

But what about hard ROI and bottom-line performance? CFO’s and finance professionals understand capital; they are driven by activities and strategies that act as a catalyst for business growth, manage risk and deliver bottom-line performance.

As the old adage goes, you can only report what you measure, and there’s strong evidence to suggest that effective carbon measurement and reporting goes hand in hand with commercial success. A 2011 study by the CDP 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, good carbon disclosure, and good carbon performance.

When faced with the irreversible trend of increasing energy prices, growing pressures on the supply chain and regulatory change, businesses need to take steps to understand their carbon footprint and how efficient they are, so that they can accurately quantify savings and protect against rising operating costs. By revealing data on energy usage, staff travel and the amount of waste a business generates, carbon management practices allow firms to accurately track and identify where they can make effective reductions and manage costs out of the business to yield financial savings.

Proven value
In our experience of working with hundreds of corporations on their carbon strategy, companies deriving commercial and competitive value that directly impacts the bottom-line are common.

Carbon emission reduction schemes are vital mechanisms for reducing costs, boosting efficiency, and driving growth

Independent business services company, Commerical 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 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 £185 million net benefit to the business in just five years.

Carbon emission reduction schemes are vital mechanisms for reducing costs, boosting efficiency, and driving growth: they enable a business to meet a target in the most efficient, cost-effective way possible. Recognising the potential of reducing emissions through its business travel, international IT services company Steria has encouraged each of its internal departments to reduce its travel costs by using less carbon intensive modes of transport and leveraging conferencing technology whenever possible. This has driven a decrease of almost 20 per cent in its travel emission footprint over a three year period.

Investors are increasingly aware of the need for businesses to demonstrate this sort of action to reduce a business’s carbon risk. The Institutional Investors Group on Climate Change (IIGCC) now has over 65 members in Europe, managing around $8 trillion of capital, and the Investor Network on Climate Risk has 90 institutional investors, managing over $10 trillion. It’s clear that a company’s position on climate change is a driver for investment, and this will only continue to grow.

Act now to realise the benefits
In an increasingly competitive marketplace, companies have an immediate opportunity to differentiate, manage risks and meet stakeholder demand through a comprehensive carbon management programme. As new operational, financial and regulatory risks related to environmental sustainability increase, soaring energy prices are driving businesses to understand the true costs of their environmental impact and demonstrate real action to reduce it. A considered carbon reduction programme can monitor, minimise and control these risks.

Yet taking action to build carbon efficiency into a business and realise its powerful potential as a driver of performance requires integration into the core of the business and leadership from the finance team to focus as much on monetary business goals as environmental concerns. With this approach, firms can combine the benefits of satisfying the concerns of stakeholders and enhancing reputation, with clear and tangible bottom-line savings, risk management and business growth.

 Nathan Wimble is commercial director at The CarbonNeutral Company