Climate Change Reporting
Most of the companies surveyed are undoubtedly feeling their way towards providing stakeholders with a more uniform approach to carbon emissions reporting via the web. The survey revealed that while most FTSE50 companies are still a long way from standardizing their carbon emissions reporting, there has been some progress, particularly among companies which stick most closely to voluntary reporting guidelines such as those contained in the GHG Protocol Corporate Standard or the World Business Council for Sustainable Development GHG Protocol.
Tom Woollard
Caption 40: The UK Government, Stern Review on the economics of climate change
The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.
Background
Climate change, and in particular carbon trading schemes and carbon disclosures, receive a high profile in the media. Climate change poses a serious problem for the world. The March 2007 Harvard Business Review article, Competitive Advantage on a Warming Planet, warns that climate change risk presents business risks that are different in kind because the impact is global, the problem is long term, and the harm is essentially irreversible. However, as both this article and the UK Stern Review recognized, (see caption 40), tackling climate change is a pro-growth strategy. Therefore, climate change needs to be considered primarily from a strategic perspective. The Enterprise Governance model (see IFAC and Chartered Institute of Management Accountant's report, Enterprise Governance: Getting the Balance Right), encourages organizations to view governance as having a performance as well as conformance perspective. Sustainability as an extension of Enterprise Governance also requires a long term view of an organization's activities in order to create both shareholder and stakeholder value. Therefore, long term risks and opportunities presented by climate change should be addressed when determining strategy, and then in performance management, so that outputs such as environmental metrics and sustainability reporting are aligned to achieving this strategy (see All Change, the Chartered Institute of Management Accountants is issuing a climate change call to action).
Many companies have started to improve the disclosure of their strategies for mitigating their carbon footprint, managing carbon risk, and meeting their targets for greenhouse gas (GHG) emissions. Climate change is so pervasive in the business community that an increasing number of executives refer to climate change and global warming in their messages in annual or sustainability reports. Organizations involved in emissions trading particularly strive to improve reporting on GHG emissions. Some have started to (a) disclose the strategic and financial consequences of emissions trading, and (b) consider the recognition, measurement, and reporting of emissions.
The Greenhouse Gas Protocol (GHG Protocol) is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions. The GHG Protocol, a decade-long partnership between the World Resources Institute and the World Business Council for Sustainable Development, is working with businesses, governments, and environmental groups around the world to build a new generation of credible and effective programs for tackling climate change. It provides the accounting framework for nearly every GHG standard and program in the world - from the International Standards Organization to The Climate Registry - as well as hundreds of GHG inventories prepared by individual companies.
Companies may also disclose their carbon emissions through participating in various voluntary disclosure schemes. The Carbon Disclosure Project (CDP) is an independent not-for-profit organization to facilitate and promote an ongoing dialogue between institutional investors, purchasing organizations and senior corporate management regarding the business implications of climate change. In 2008 CDP's annual Information Request was signed by over 385 international institutional investors and its corporate supply chain Information Request is signed by more than 30 major multi-national companies and eight public sector organizations. The authority of the CDP signatories has encouraged corporations globally to report, measure and manage their greenhouse gas emissions and climate change strategies. The 2008 findings from the CDP include data from 1550 of the world's major companies on greenhouse gas emissions and climate change related strategies.
The divergence of information available to organizations on climate change reporting can be unhelpful and often confusing. Therefore, the possibility of convergence of this information into a single standard is being explored. The Climate Disclosure Standards Board (of which the CDP is also a Board member), was convened at the 2007 Annual Meeting of the World Economic Forum in response to increasing calls for action from corporations and financial markets to address (a) global warming, and (b) the associated growth of climate change information collection and reporting initiatives. Its mission is to promote and advance climate change-related disclosure in mainstream reports through the development of a global framework for corporate reporting on climate change. By working with preparers and users of information, their advisors, regulators and public interest groups, the Board aims to develop a framework that will elicit comprehensive, consistent, and comparable information for investors, offer greater certainty on disclosure requirements for corporations, and thereby provide useful guidance for standard setting by national regulators.
There are also a number of other schemes that encourage disclosure in various parts of the world. For example, the California Climate Action Registry has developed a General Protocol that provides detailed guidance on how participants must disclose their GHG emissions. Regulatory disclosure requirements are also increasingly common. For example, in the US, the State of California has passed two laws to reduce California's emissions of carbon dioxide and other heat-trapping pollution, and from January 1, 2008, the State of New Mexico requires certain industries to report their emissions. The Australian Government's National Greenhouse and Energy Reporting Act 2007 establishes a mandatory reporting system for corporate greenhouse gas emissions and energy production and consumption. Key features of this Act are (a) reporting of GHG emissions, energy consumption and production by large corporations, and (b) public disclosure of corporate level GHG emissions and energy information.
The reasons for climate change reporting and carbon disclosures are generally for the purposes of monitoring regulatory compliance, supporting management and investor decisions, and facilitating emissions trading schemes. The functioning of emissions trading schemes is covered in caption 41. The Investor perspective covers the importance of enhanced transparency via narrative reporting, and caption 33 considers climate change oriented information for investors. However, the way in which climate change issues are reported, and the quality, is varied and could benefit from a more consistent approach.
The key considerations offered here help organizations to consider how to measure and report their climate change-related initiatives, whether or not they are involved in an emissions trading scheme. They are derived from the analysis of climate change reporting in the 2007 ACCA/FTSE Group discussion paper Improving Climate Change Reporting.
Key Considerations
Transparency on strategy, governance and accountability: stakeholders need to see that management is aware of and tackling difficult issues, and responding strategically. Disclosure can usefully indicate where the responsibility for climate change lies (with a named senior person responsible for climate change initiatives), accompanied by a policy statement outlining an organization's approach and aspirations to managing its climate change impacts. Reporting on climate change issues is more meaningful where disclosure is relevant to an organization's operation, and therefore disclosure should be made in the context of an explicit policy.
Providing a policy context: an organization can include a context within which its policy sits, for example the Kyoto Protocol or other national or regional initiatives. This is an opportunity for organizations to explain the reasons for what they are doing to manage their GHG emissions. As climate change science develops (and the evidence increasingly points to climate change of greater speed and magnitude), organizations can also consider (a) raising awareness with their stakeholders on the science, and (b) explaining how they are adapting in the short to medium terms as well as the longer term.
Transparency at a management level: by ensuring the disclosure of short- and long-term targets for emissions reductions both related to products and operations. Disclosure on GHG emissions can be more useful where responsibility for it is allocated at the product and operational level. The disclosure of credible targets can help to provide an impression that a structured management system exists to manage climate change.
Including quantitative data: operational and product emissions data is needed, as is auditing of the data (External review and assurance of sustainability disclosures), but its disclosure will be more useful if it conforms to reporting guidelines and standards, such as the GRI Guidelines and the GHG Protocol. The use of reporting guidelines will help to normalize disclosure to allow data comparison and benchmarking. It is also important to note that emissions can (a) be reported on several levels, for example total and per unit of production; (b) cover CO2 and other greenhouse gases; and (c) be attached to operating segment, products, production operations, and processes. The increasing financial risks and opportunities associated with carbon emissions means that provision of emissions data is increasingly crucial when reporting. For example, where carbon emissions carry material risks, data can be provided on a country, installation, and/or source basis to improve that data's usefulness. Climate change risk is more usefully represented when discussed with its potential financial impact.
Establishing a data context and explaining trends and impacts: In addition to providing information on climate change impacts, it is useful to provide performance trends and explaining them. This helps stakeholders put performance in the context of the organization's history and operations, and to use them to make sector comparisons and in benchmark studies. Context can also be provided by including information on industry characteristics. For example, in the electricity industry, the method of power generation and the loss of electricity during transmission are drivers of CO2 emissions, and are closely monitored.
Consider how to report transformational initiatives: this includes disclosure of information and any planned or actual strategic initiatives designed to reduce GHG emissions. This should include both quantitative and qualitative reporting to demonstrate how an initiative led to reduced carbon emissions. Such initiatives may also impact the industry sector as well as the organization. Although reporting on transformational initiatives is relatively new, some organizations are beginning to disclose their work on generation of renewable energy, fuel switching, and efforts with carbon capture and product innovation.
The UNEP Finance Initiative has also published a useful Global Framework for Climate Risk Disclosure (together with a report on using the Framework), providing guidance and examples of what to disclose, including emissions disclosure, strategic analysis of climate change risk and emissions management, assessment of physical risks, and analysis of regulatory risks.
Caption 41: Emissions trading
The International Emissions Trading Association provides useful information on emissions trading and describes market mechanisms for dealing with climate change. Emissions trading evolves from a system that restricts the aggregate allowable amount of a pollutant and allows market forces to continually move the allowed emissions to the highest value uses.
The Kyoto Protocol, which expires in 2012, set binding targets for the European Community and 37 industrialized countries for reducing GHG emissions. New emissions targets have been and are being set at a regional and country level (and state level in the US, now that California has passed a bill requiring GHG emissions in the state to be reduced to 1990 levels by 2020). In March 2007, the European Council agreed to reduce CO2 emissions by at least 20 per cent compared with 1990 levels, by 2020. The Kyoto Protocol incentivized governments to establish carbon markets and trading instruments to encourage investment in renewable energy. Emissions trading is one of four mechanisms in the Kyoto Protocol to assist participating countries in meeting their climate change targets. Emissions trading allows an individual organization to emit more GHG than its allocation, as long it can find another organization that has emitted less than allowed and is willing to transfer its excess allowances. Other vehicles for acquiring emission rights include Joint Implementation and the Clean Development Mechanism.
Country and regional emissions trading schemes, such as the EU Emission Trading scheme, which can require mandatory participation by specific industry sectors, encourage organizations to incorporate climate change into their strategies, because carbon reductions have a value. Governments are also using other policy instruments to reduce carbon emissions, instruments such as climate change levies (tax on energy use) and climate change agreements (between government and business to reduce the tax payable under climate change levies).
The Institute of Chartered Accountants in Australia 2008 paper, The Benefits of Assuring Carbon Emission Disclosures, includes a summary of emissions trading schemes around the world.