Why Solar Should Care About Sustainability

Solar power is a poster child of sustainability, at least from the standpoint of energy users. It provides a clean alternative to GHG-emitting fossil fuels and runs indefinitely on free energy from the sun. What more, then, is there to the sustainability of solar energy?

Plenty, and the industry’s largest gathering, Intersolar, which I attended in San Francisco this week, offers a glimpse into why.

The event is an exhibition of more than 800 companies selling their wares—everything from wafer etchers, adhesives, and gauges to gears, filters, and fire alarms. They sell the equipment that makes equipment, and the equipment that makes that equipment. And they are the purveyors of exciting items like plasma applicators, robots, and lasers.

As for the attendees, it’s all black suits and ties, and the discussions are on engineering specs and market trends. It feels more like a summit for making deals, rather than achieving some vision of “ecotopia.”

While there is nothing wrong with all of this, it does bring to light an important truth: The parts that make up the whole of the solar industry are little different than those of any other. And while environmental conservation may be a side effect, the efforts, by and large, are about capitalism.

Thus, as manufacturers, solar companies may cause damaging environmental impacts from their use of water, gasses, chemicals, minerals, and nanomaterials. As designers of large, long-lived physical goods, they are seen as part of a great network of potential e-waste, with end-of-life responsibilities that extend beyond the law. And as global businesses that seek low-cost employees and supplies, the emerging markets that offer so much promise are rife with potential social challenges such as protecting human rights.

If the solar industry is to create the most value for its investors, customers, and communities—all of whom have growing concerns about sustainability and greater means for comparing companies and industries to one another—it has to make sense of all of this. The good news is that others have taken the lead. The information communications and technology (ICT) industry, for example, has started complying with best practices for responsible policy advocacy and working with their suppliers to improve labor conditions and environmental impacts. Since solar companies have similar production processes and supply chains, they can build off of the foundation that the ICT industry has already established.

Yet solar is different: It makes a promise, however implicit, to offer a clean alternative to fossil fuels. This expectation makes the industry a target, and if solar companies can’t objectively demonstrate better overall performance, they risk having their credibility undermined and their technologies devalued.

Some quick parting advice for solar companies new to managing sustainability: Consult the Global Reporting Initiative to understand the full breadth of key issues. Know who your stakeholders are, and identify and synthesize their concerns. Make sustainability a C-level concern, so when decisions are made about maximizing the all-important parameter of per-watt productivity, sustainability opportunities and risks are appropriately considered. And finally, attend this year’s BSR Conference, and join me at the panel, ”The CSR Blueprint for Renewable Energy.”

Helping Business Adapt to Climate Change

As climate change sets in, its impacts — increasing severity of storms and weather disasters, receding snow and rivers, advancing deserts, and more frequent landslides and floods — will test companies’ ability to effectively deliver high-quality products and services.

In response, BSR is launching a series of briefs to illustrate how these changes will affect each industry and what current adaptation practices look like, beginning with an examination of the food, beverage, and agriculture sector (PDF).

Some effects of climate change will be familiar, such as crop failures and ensuing price shocks, but over the next several years, they will happen with more frequency and with even higher insurance costs. Beyond direct business impacts, companies will also need to understand how climate change will affect their most vulnerable stakeholders — the poor, citizens of developing countries, and women — who will face increasing risks due to drought, disease vectors, and the perils of migration.

The good news is that many resources on business adaptation to climate change are already available (see end of article). McKinsey & Company developed a cost curve for adaptation (PDF), for example, which highlights different adaptation options and shows that investment paybacks can be short. Also, companies do not need to choose between adapting to climate change and helping to mitigate it; the distinction between these two is rarely clear and we should do both together.

There are also tools that translate state-of-the-art climate monitoring, prediction, and imagery into practical information to help companies improve their relevant governance and decision-making processes. These tools include: the Climate Administration Knowledge Exchange (CAKE), Google Earth Engine, the International Research Institute for Climate and Society, the National Oceanic and Atmospheric Administration’s Climate Prediction Center, and weADAPT. Companies can also take advantage of new market opportunities by providing solutions to enable effective adaptation.

There are several obstacles to climate adaptation, even for those most committed to proactive and responsible responses. First, the language of adaptation does not resonate well beyond specialists, so communicating on the topic is difficult. As Carmel McQuaid, Climate Change Manager at Marks & Spencer, recently told us, it’s usually more effective to engage stakeholders by communicating on the topics that matter most to them. For example, retailers would be most concerned with their ability to continue to sell high-quality products, such as coffee. For companies that thrive on innovation, positioning adaptation as part of the portfolio of trends affecting the industry is usually more effective than treating it as a standalone topic.

Another obstacle is the complexity and uncertainty of the climate. This goes for today’s weather, let alone the future of the climate more broadly, as evidenced by the fact that we are not well-equipped to handle disasters such as the recent floods in Pakistan and Australia. The fact is that we do not know how to properly prepare for disasters even when they are expected. This is partially due to the cognitive difficulty of coping with low-probability, high-impact consequences, and it is also a result of markets and organizations that don’t encourage or reward proactive preparation.

Third, our first reactions may not serve us well. Companies are at risk of taking seemingly sensible actions that may lead to adverse effects elsewhere or on others. Such “maladaptation” (PDF) can take many forms, such as combating heat by turning up the air conditioning (which would produce more greenhouse gas emissions), using desalinization technologies that pollute marine environments, raising prices or otherwise excluding vulnerable customers that depend on insurance or other essential services, or giving customers more resources without the incentives to conserve.

This is partly a result of focusing on the specific, current problem at hand while not taking into account the broader repercussions. It is also a result of failing to identify where weather risk and other familiar issues have climate change dimensions.

Identifying the Hotspots

Over the past year, we’ve been following the topic of adaptation through discussions with BSR member companies, leading and participating in workshops and forums, including the U.N. climate talks in Cancun, and examining business responses to the Carbon Disclosure Project on climate risks and opportunities.

In doing so, we’ve found that while climate change impacts are ubiquitous, there are some approaches companies can use to identify and focus on vulnerable “hotspots” in their operations, supply chains, and key markets. Hotspots emerge both as physical locations and features of the company.

In terms of location, companies with operations in Asia, Africa, and Latin America face some of the greatest risks due to the extreme water loss or flooding predicted for those regions. In addition, these areas suffer from a general lack of resources to respond to problems.

In all parts of the world, coasts, flood plains, and ecological boundary zones, including mountains and islands, are vulnerable. In many cases, cities (PDF), as well as settlements where subsistence is marginally viable, are especially risk-prone. Companies should consider how their direct operations and key partners and markets are situated in relation to these physical areas.

As for companies themselves, a key vulnerability is a dependence on natural conditions to foster crops, snow, and other climate-sensitive inputs, which are likely to migrate and, on average, degrade. In general, long-lived and fixed assets, such as mines, as well as extended supply chains and distribution routes, tend to be more exposed to physical disruption.

Finally, lack of transparency is a problem: A combination of weather events and climate-related political actions are increasingly likely to disrupt energy availability and general operations of suppliers and other partners. While companies may be able to take steps to mitigate their vulnerability, they will have a hard time doing so if they are unable to make informed judgments about their partners’ key issues, options, and systems for making decisions.

When companies look ahead, here are some issues that they should tune into:

Communicating about climate risks and opportunities: Investors expect companies to report on physical, regulatory, and other risks and opportunities of climate change through the Carbon Disclosure Project. The U.S. Securities and Exchange Commission has also made informed reporting on climate risks a requirement. Also, working with distressed communities to cope with climate change is an increasingly material issue for annual sustainability reporting.

Meet needs responsibly: The private sector is being called upon to drive an effective response to climate change, ranging from delivering hydration and other growing basic needs, applying finance and information and communications technology to build more resilient infrastructure, and solving the potential problems of maladaptation.

To do so, businesses need to foster connections and discussions that help deliver sustainable solutions to society under dynamic and uncertain conditions.

Create climate-resilient local benefits: Many sources of risk for companies are likely to be found far away from their headquarters and centered in local communities where, for example, vulnerabilities to floods, windstorms, and droughts are growing. These communities need help with local investments to developing disaster-response systems and continuity plans. Companies should look for ways to help their community partners achieve triple-win impacts by reducing the effects of disasters, adapting to climate change, and safeguarding development gains.

Each month through July, we will produce discussion briefs for specific industry sectors on what they are and should be doing about climate adaptation. Each brief will include basic tools and references. As we produce this series, we’ll be holding discussions with BSR members and inviting feedback. We’ll also store our resources and other tools at www.bsr.org/adaptation.

Further Information

Climate change adaptation can be defined as “adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts,” including “changes in processes, practices, and structures to moderate potential damages or to benefit from opportunities associated with climate change.” For more information and a list of suggested reading, visit www.bsr.org/adaptation.

First posted at GreenBiz.

A Sneak Peek at the New Rules for Supply Chain Footprinting

The art and science of carbon footprinting is about to take a step forward: The long-awaited launch of guidance for managing network and product lifecycle impacts is just around the corner.

If that’s news to you — and you have anything to do with managing a business with a significant supply chain — here’s your chance to get up to speed.

First, a little background. Carbon footprinting took off in 2001, when the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) established the GHG Protocol Corporate Standard. This standard outlined a practical way to quantify the greenhouse gas (GHG) emissions produced from materials and energy use in business operations.

It did this by offering an accounting framework with three GHG emissions “scopes:” Scope 1 is a sum of emissions from fuel, refrigerants, industrial gases, and other materials combusted or used at sites the company owns or controls; Scope 2 adds up emissions linked to electricity used by those facilities; and Scope 3 encompasses all other emissions in the business value chain.

Measurement of the “internal,” or “operational,” emissions of scopes 1 and 2 has always been straightforward, and thus those standards have been rapidly adopted. Today, a significant majority of the Global 500 companies report on operational emissions.

Scope 3, however, has incited many debates over interpretation. Originally referring to emissions from supply chains, including products, waste, distribution, and travel, Scope 3 outlined a much larger and more complex set of issues than those that characterize emissions from internal operations.

While Scope 3 has always been recognized as important, and indeed reporting has been growing, companies have been clamoring for more detailed guidance. Many companies have focused on addressing more easily measured Scope 3 activities, such as business travel and employee commuting. Also, business networks, such as the Clean Cargo Working Group and the Electronics Industry Citizenship Coalition, have begun developing shared approaches for issues very focused on their industries.

But there has not been a common language for measuring Scope 3 impacts in detail across industries. That’s about to change.

By summer 2011, WRI and WBCSD will finalize the Scope 3 standard and the related Product standard. This will be the result of a three-year project involving more than 1,500 diverse stakeholders from governments, research institutions, businesses, and civil society, all contributing to various discussions and drafts. BSR and many of its member companies have been represented in a technical working group.

Unofficially, this has been even longer in the making. A year after the 2001 launch of the first edition of the Corporate standard, a working group explored ways to flesh out Scope 3 with lifecycle assessment tools, finding that significant time and effort would be needed to produce an effective framework.

What led us to this final chapter? Brian Glazebrook, a senior manager of social responsibility at Cisco Systems who has been involved with Scope 3 efforts from the start, says that lifecycle and supply chain information is becoming more commoditized and therefore less expensive, while at the same time there is more demand for transparency. We have crossed a threshold that is making Scope 3 management undeniably more attractive to companies, and the case to do more will only become stronger.

Following are highlights of a recent discussion I had with Pankaj Bhatia (pictured below), director of the GHG Protocol at WRI, offering a preview of what’s to come.

Ryan Schuchard: Pankaj, how will the Scope 3 standard help companies?

Pankaj Bhatia: It will enable them to develop an organized understanding of the impacts, risks, opportunities, and considerations from energy and other sources of GHG emissions throughout business networks and relationships. As a comprehensive accounting and reporting framework, it will facilitate identifying GHG reduction opportunities, setting reduction targets, and tracking performance in value chains. In turn, it will provide a sophisticated framework for reporting to the Carbon Disclosure Project and the Securities and Exchange Commission, in annual CSR reports, and for other GHG transparency programs and B2B initiatives. It also may lead companies to develop stronger relationships with suppliers by reducing waste and improving efficiency through GHG management in their supply chains.

RS: What kinds of companies should utilize it?

PB: The Scope 3 standard is written for companies of all sizes in all economic sectors. It is especially applicable to three types of companies: (1) those with significant emissions in their upstream or downstream activities, (2) those that would like to engage and inform their stakeholders about their value chain emissions and performance, and (3) those wanting to identify business risks and opportunities in their value chain and develop strategies to minimize risks and leverage opportunities.

RS: Is it a full “standard” — in the way the GHG Protocol Corporate Standard is a standard?

PB: Yes. A GHG Protocol publication qualifies as a standard if it provides verifiable accounting and reporting requirements. The standard uses the term “shall” (e.g., “Companies shall account for and report all Scope 3 emissions and disclose and justify any exclusions.”) to indicate what is required for a GHG inventory to be in conformance with the Scope 3 standard.

Companies may use the inventory information to identify, prioritize, and guide innovative emissions reduction activities within and across Scope 3 activities. For example, a company whose largest source of value-chain emissions is contracted logistics may choose to optimize these operations through changes to product packaging to increase the volume per shipment, or by increasing the number of low-carbon logistics providers. Additionally, companies may utilize this information to change their procurement practices or improve product design or product efficiency, resulting in reduced energy use.

RS: Will there be any completely new ideas?

PB: Yes. Scope 3 emissions are now categorized into 15 distinct, mutually exclusive categories that avoid double counting. These categories are intended to provide companies with a systematic framework to organize, understand, and report on the diversity of Scope 3 activities within a corporate value chain.

Also, there is more guidance on characterizing confidence in data. This guidance was requested by stakeholders, since Scope 3 emissions data may be relatively less accurate and precise than Scope 1 and Scope 2 emissions data. Additionally, the Scope 3 standard allows for a range of data collection and calculation approaches, with a varying range of data quality. Scope 3 data may include reliance on value chain partners to provide data, broader use of secondary data, and broader use of assumptions and modeling (such as for downstream emissions categories, such as the use of sold products by consumers).

Higher uncertainty for Scope 3 calculations is acceptable as long as the data quality of the inventory is sufficient to support the company’s goals and the information needs of key stakeholders such as investors, while providing transparency on limitations of the Scope 3 data to avoid potential misuses. Companies are therefore required to provide a description of the accuracy and completeness of reported Scope 3 emissions data and a description of the methods and data sources used to calculate the inventory. The standard provides descriptions of accuracy and completeness, guidance on describing data quality, and guidance on uncertainty. The standard doesn’t require companies to provide a quantitative confidence level or confidence interval associated with the reported emissions data — though this is optional.

RS: Will the standard provide a good tool to compare companies against each other?

PB: No and yes. First, it is important to understand the limits. Companies’ selection of one or more Scope 3 categories and their choice of whether to base measurement on operational control or financial investment is based on considerations that aren’t easily comparable across companies, like corporate vision and business risk. That means even companies that seem like peers may not prioritize the same things, so it would not be meaningful to uniformly prescribe what should “count.” Also, within categories, the level of data quality and control will vary with the level of vertical integration and the public data infrastructure where sites are located.

What it will enable is comparison of the level of depth that companies measure and report on. This will help to clarify that a larger footprint doesn’t necessarily mean a company is worse off, but rather, that it might be examining its networks in more detail. Also, while the standard won’t provide a robust way to directly compare GHG performance between companies, it will let a company measure performance against its own baseline, which potentially could be compared between companies.

As companies take up this type of reporting, there will be opportunities to develop more specific norms and benchmarking for better comparability among more specific situations. In many ways, that’s what this standard provides—a platform that creates unified language across industries for going deeper on comparisons of key applications through development of sector-specific rules.

RS: What kind of data will companies need to gather to measure Scope 3?

PB: The standard asks that companies select data that is most representative in terms of technology, time, and geography; most complete; and most precise. We have categorized data needed to calculate Scope 3 emissions into two types: primary data and secondary data. Primary data means specific data provided by suppliers or other companies in the value chain related to the reporting company’s activities, including primary activity data, and emissions data that is calculated using primary activity data (e.g., primary activity data combined with a secondary emission factor). Primary data does not include financial data (e.g., spend) used to calculate emissions.

Secondary data refers to industry-average data (such as from published databases, government statistics, literature studies, and industry associations), financial data, proxy data, and other generic data. Primary data and secondary data each have advantages. For example, primary data best enables performance tracking of individual value chain partners and supply chain GHG management, while secondary data can be a useful tool for efficiently prioritizing investments in primary data collection and for tracking emissions from minor sources.

Choosing the appropriate type of data depends on the company’s business goals. The standard asks companies to make sure that the data quality of the Scope 3 inventory is sufficient to ensure that the inventory is relevant — both internally and for a company’s stakeholders — and that it supports effective decision making.

Companies may find that for a given activity, secondary data is of higher quality than the available primary data. In this case, if the company’s primary goal is to maximize the data quality of the Scope 3 inventory to improve decision making where accuracy is important, it should select secondary data. If the company’s primary goal is to set reduction targets and track performance from specific operations within the value chain, or to engage suppliers, the company should select primary data.

RS: What does the Scope 3 standard have to do with the Product standard?

PB: While the Scope 3 standard covers measurement and accounting to characterize the many broad types of corporate networks and relationships, the Product standard focuses on a view of the whole lifecycle of individual products. These two standards, which have been developed in parallel, share many features in common: accounting principles, approach to data allocation, approach to data collection, and treatment of confidence. A key difference is that a Scope 3 inventory is structured by organization-wide business activities, such as leased operations and employee travel, while a Product inventory is organized by key stages in the lifecycle of a product, like processing and recycling. These two different tool sets reflect two different needs: on the one hand, characterizing products’ lifecycles, especially from the view of the customer; on the other, examining the administration of organizational interrelationships and networks, something investors in particular are concerned about.

Watch for the release of the final Scope 3 and Product text next spring, and contact Ryan if you have questions.

First posted at GreenBiz.

Why Russia is the Land of Opportunity for Climate Action

Managers who want to lead on climate and energy should be looking carefully at Russia, where President Dmitry Medvedev has decreed a 40 percent reduction in energy intensity over the next decade.

The potential for scale is immense: Russia is one of the most inefficient countries in the world, the third-highest emitter of greenhouse gases (GHG) — both by traditional measures and in terms of exports for consumption — and its per capita emissions are on a path for the top spot by 2030. Yet Russia receives far less attention than its GHG-emitting peers, such as China and tropical rainforest countries.

Why is it overlooked? There are several reasons: Russia’s list of sustainability challenges, from nuclear waste to governance, is long, so climate change gets lost in the shuffle. Commentators focus on Russia’s struggling economy, asking things like whether “BRIC” really needs an “R,” signaling that attention is better paid where business is growing more predictably. Furthermore, non-Russians are perplexed about operating in what seems like too foreign a place — one that is European, Asian, and most of all, its own category altogether — and so give it wide berth.

Nonetheless, there are growing reasons for companies invested in Russia to proactively manage and reduce energy use in operations, by suppliers, and for customers.

The first is that Russia’s climate challenge is one that business is uniquely, and profitably, good at solving: audacious inefficiency, stemming from outdated equipment and obsolete management practices. Russia is the most energy-intensive (PDF) of the world’s 10 largest countries. Few, regardless of size, score higher, and many that do are Russia’s neighbors. Cost-effective efficiency measures could cut Russia’s energy use by as much as 45 percent (PDF), with prime opportunities in industry and manufacturing. One study has identified 60 measures representing more than $200 million in investments that can be made profitably.

Second, the government is showing increased willingness to incentivize action. In 2008, Medvedev signed presidential decree No. 889, a commitment to cut energy intensity by 40 percent by 2020. Last year he committed Russia to growing its renewables portfolio from less than 1 percent to 4.5 percent in that period. Medvedev then developed Russia’s first executive climate doctrine and began calling for action on climate change — a reversal of Vladimir Putin’s stance, symbolized by Putin’s infamous quip that climate change would be beneficial because it would mean fewer fur coats.

Now an innovation center is under development near Skolkovo, where companies such as Google and Intel are setting up research and development centers, similar to special business zones in China. In sum, there has been a change in the terms of debate in Russia, with climate change being taken more seriously by the government and productivity now a priority.

Another reason is that the drama of climate change is clearly unfolding in Russia, and so people are starting to appreciate the benefits of managing energy for sustainability. This summer, the hottest in 130 years, led to 27,000 wildfires and burning bogs, sending global wheat prices through the roof. Meanwhile, global warming is melting the arctic, where the government is leading a high-profile exploration, turning the most iconic imagery of climate change into a point of local news. Climate change is increasingly seen as real and important, making conversations more natural.

A fourth reason is Russia’s natural assets. The world’s most geographically expansive country, Russia is a storehouse of some of the world’s most significant natural assets and threats, from the greatest reserves of fossil fuels and forests to vast volumes of methane ominously locked up in tundra. If environmental markets are able to take hold in Russia — though it will be some time before the prerequisite monitoring and verification frameworks are instituted — business will have an opportunity to benefit from effective resource management on a vast scale. Heading in that direction in July, the government endorsed 15 clean-energy projects to start making use of its carbon credits.

Finally, Russia holds the key to a bigger puzzle: its 15-plus neighbors with similar ecological impacts and business environments, including burgeoning Ukraine and Kazakhstan. Succeeding in Russia also means opening possibilities for the whole region, which connects the markets of China, Europe, and the Middle East.

While these trends are encouraging, companies interested in managing climate and energy matters in Russia still must confront significant issues. Following are three key challenges that companies are likely to face and suggestions for addressing each of them.

Challenge #1: Low Awareness

Despite Medvedev’s efforts and the impact of this summer’s wildfires, there is still little social momentum for action on climate change in Russia. Many people still think that global warming will help this cold country. There is also generally a low appreciation of the impacts, risks, and opportunities that climate change creates for business. The Carbon Disclosure Project (CDP), reflecting on 2009 reports from Russia’s top 50 companies, found that climate change is often misunderstood (PDF) in the country as a purely environmental, rather than strategic, topic.

Solution: In working with Russian partners new to the subject, emphasize the links between climate action, energy management and modernization, a political priority likely to draw more government resources. Medvedev has said that his country’s subpar economic influence is due partly to the fact that “energy efficiency and productivity of most of our businesses remain shamefully low.” He has made becoming “a leading country measured by the efficiency of production, transportation, and use of energy” the first of his five pillars of modernization.

With that in mind, connect with partners on the ways that energy hits the bottom line and discuss opportunities to modernize. This can lead to discussion of how action on climate change can create other benefits, from carbon credits to attracting more international investors.

Challenge #2: Governance Obstacles

A second challenge is that energy waste in Russia is rooted in systemic, sometimes dysfunctional governance, and companies will typically find government difficult to engage because if is needed on larger projects.

For example, IKEA was recently stymied by Lenenergo, the electricity utility, in simply hooking up to the grid, and has thus tabled new investments in Russia. This is a problem not only for companies, but the government itself, since it is unlikely to effectively address climate change without policies that instill confidence and encourage investments.

Governance obstacles also come in the form of entrenched non-transparency in companies. After China and Hong Kong, Russia has the largest share of Global 500 companies that don’t disclose to the CDP. Of the mere six firms among Russia’s top 50 that did respond to the CDP last year, only two reported emissions or energy reduction goals. Low transparency is a substantial constraint, since measurement and governance are considered cornerstones of effective climate and energy management.

Solution: Focus in the near term on capacity building rather than precise data disclosure. Given BSR’s experience in China, there should be substantial opportunities to help companies identify energy-saving opportunities and train energy managers, and to assist them with developing action plans and understanding their economic decisions.

Although these activities don’t address transparency directly, they can build trust with suppliers and create results that they will want to be transparent about. Even if you don’t start with a discussion about disclosure, companies that succeed on climate and energy management will have an incentive to communicate their results over time. For those that are ready, show how the process of disclosure can lead to learning about risks and opportunities and create a basis for management. For projects connected with government contracts, encourage standardized, effective processes on how the government will decide tenders by doing an integrity pact with bidding peers.

Challenge #3: Slow Going in the Policy Realm

Although Medvedev appears serious about leading his government toward modernization, he is the first to admit that progress will be gradual. Ultimately, the challenge of modernization is to cultivate, unleash, enable, and protect the innovative potential of the Russian people — and that will take time.

On climate in particular, there is no unifying policy, and the government does not appear motivated to curb emissions soon. The country’s climate negotiator, Alexander Bedritsky, says Russia should be judged on progress since 1990, like other countries. The problem with that, however, is that emissions plummeted with the economy in the 90s, and when it bottomed out in 1998, emissions were far below the 1990 level. Russia’s current proposal (PDF) to reduce emissions by around 20 percent from 1990 actually means letting them rise today until they are fully 20 percent higher than their low point. Therefore, even if energy intensity decreases under Medvedev’s plan, total energy use and GHG emissions are likely to rise.

Solution: Focus on voluntary business actions that generate tangible savings in the near term. Improvements in energy efficiency offer direct and virtually immediate cash savings, give companies a better view of their processes, and enjoy support by the government. In the context of other CSR issues, this is a relatively straightforward starting point. In doing so, watch other organizations that are invested in energy modernization, such as the World Bank, the European Bank for Reconstruction and Development, and the International Finance Corporation, which may be able to offer signals and even more direct support.

To summarize, Russia holds vast potential for business action on climate change and should start to become a higher priority in managers’ minds. Doing sustainability work there is difficult because of low awareness, governance obstacles, and slow going in the policy realm.

Yet these challenges are surmountable, and conditions are increasingly favorable for climate and energy management. Companies have opportunities to start on practical initiatives that can make big impacts now, growing their efforts as policy and consumer behavior evolve.

First posted at GreenBiz.

The Latest CDP Results Reveal the Rise of Scope 3 Reporting

Last month’s release of the Global 500 Report, Carbon Disclosure Project’s (CDP) annual summary of climate reporting by the world’s 500 largest companies, gives the most insight to date on corporations’ reporting about climate change and their supply chains.

What does it tell us?

First, the number of companies reporting on their supply chains continues to steadily grow. Two years ago, only about a quarter of the world’s top 500 companies reported on “Scope 3” greenhouse gas (GHG) emissions, or the emissions from activities they have influence over, but are beyond direct ownership or control, such as in supply chains.

Last year, the reporting share climbed to 42 percent, and this year it grew to nearly half. That’s a steep change compared to reporting overall, which rose only a few percentage points this year to 82 percent.

At the same time, the quality and scope of reporting is improving dramatically. This year, for example, Kraft Foods said physical risks linked to climate change are not material, but they still described a whole set of supply chain and other issues that potentially matter. Kraft also clarified that they are closely examining supply chain issues to anticipate emerging enterprise risk and opportunities. The provision of this depth of information is a new development in CDP reporting, and has been aided in part by the more systematic ways that CDP is asking questions.

This relates to a third development: CDP made Scope 3 reporting more robust by expanding definitions this year. In following the Greenhouse Gas (GHG) Protocol’s Scope 3 Guidance under development, CDP transformed last year’s five categories into eight more specific ones, and then added nine more (see sidebar).

This helps transparency by increasing the comparability of reported figures. It also foreshadows the increasing sophistication of supply chain reporting to come. Indeed, Frances Way, CDP’s Head of Supply Chain, told me that CDP will continue working to ensure reporting requirements are aligned with the standard once finalized. Meanwhile, CDP is taking public comments on the design of the next survey.

Scope 3 emissions have taken center stage and turned out to be every bit as significant as we thought they would be. This raises an important question: Just how big are they?

In the summary report, CDP tallied aggregate figures by industry, finding Scope 3 to be on average about two times the amount of Scopes 1 and 2 emissions, which are sometimes called “internal” emissions. It will take a little digging, however, to get a representative number since 50 percent of companies don’t report Scope 3 at all. Of those that do, 40 percent only publish just one convenient category, such as transportation.

The companies to watch are the 10 percent that reported supplier emissions, and the even smaller 5 percent that reported supplier emissions beyond direct purchasing relationships.

For these companies, the Scope 3 multiple is much higher — more like five times greater for those reporting on direct suppliers, and 10 times more for those providing a comprehensive assessment. Some companies were much higher still: Kraft and Danone reported Scope 3 emissions that were more than 15 times the amount generated from their internal operations, and Unilever’s are more than 50 times greater.

As companies disclose their climate change and business interrelationships more fully, higher multiples like these are likely to become more common.

How to Open the Door to Supplier Disclosure

To learn more, I spoke to Kraft, which this year CDP named to its Climate Change Leadership Index, a designation for the most transparent companies taking action. Kraft is an interesting case because as recently as two years ago it had not reported Scope 3 emissions at all.

I asked Francesco Tramontin, associate director of global issues management, why Kraft is interested in managing and reporting supply chain emissions. Tramontin said that it is a logical extension of the company’s approach to climate change, and a natural step following Kraft’s achievement of GHG reduction targets within its own operations.

But, he said, Kraft’s increased CDP reporting didn’t begin with a reporting effort. Rather, the company’s R&D team leads its Scope 3 management efforts with the aim of collecting and interpreting data for strategic perspective and internal decision making. The reporting is a byproduct of these efforts, and Kraft began sharing it as management became aware of partners’ and stakeholders’ increasing interest.

One of the main benefits of Scope 3 management, Tramontin said, is that it provides an impetus to take a more careful look at internal management systems. It also enables Kraft to take part in important forums, such as the development of GHG Protocol Scope 3 Guidance.

Currently, Kraft is involved in testing a draft version of the guidance, and the company recently submitted feedback for it. According to Tramontin, participating in this governance-building effort has been beneficial. It has helped them exchange methodologies with peers and given them confidence in measuring and reporting in an environment where many communication standards are lacking.

One of Kraft’s main challenges has been deciding what types of information to publish. When Kraft set out to report Scope 3 emissions for the first time last year, the company had more information than it ended up reporting, but wanted to share the data in which it had the most confidence. The company published information in just two categories, business travel and logistics, which then represented about 40 percent of operational emissions. As Kraft did so, Tramontin said, it used a “lead with results” approach that emphasized progress against goals while remaining cautious about prognosticating.

This year, Kraft not only expanded the categories it reported on, it also found a way to provide more information on topics where there is more uncertainty. Kraft did this by disclosing emissions by subcategory with narrative descriptions and confidence estimates for each, ranging from plus or minus 20 percent (business travel) to about 40 percent (supply chain and end-of-life packaging). Tramontin said he couldn’t yet say whether Kraft would add more categories next year, but felt certain the quality and confidence of data would improve.

The Road Ahead

The supply chain will enter the picture more and more, Tramontin concluded. His experience, however, reveals a difficult balance that companies need to achieve. On the one hand, there is an incentive to report as openly as possible. On the other hand, there is pressure to ensure that disclosed information is trustworthy.

This leads Kraft and other companies to an important debate that is arguably the front line of supply chain reporting: the extent to which they can use the coarse data produced by life-cycle assessments and generalized industry “models,” versus more specific information provided by suppliers themselves.

The former is easier to obtain, but largely overlooks potentially vast differences in practices among peer suppliers; the latter can generate factory floor-level information about particular suppliers, but requires a much greater commitment of resources to manage.

Questions and answers regarding these issues will continue to unfold as new GHG Protocol guidance comes out this winter and companies report to CDP next May and beyond. In the meantime, here are some promising approaches borrowed from the experiences of Kraft and others.

1. Collect Data to Gain Insight for Prioritizing Sustainability Investments

In this context, reporting is important but it is a byproduct of understanding interconnections with suppliers, products, partners, and the physical world. This is really what most stakeholders are interested in.

2. Don’t Be Afraid of Your Footprint

The next phase of Scope 3 reporting will see more companies report on their impacts, more deeply and in more categories. This will allow greater comparability, better benchmarking, and more insightful discussion about ways forward.

Until that happens, a large Scope 3 footprint is a much better sign of leadership than no reported footprint. Scope 3 management can lead to enrolling suppliers directly in improvement efforts and leveraging their dollars and skills.

3. Address Budget and Resource Constraints by Using Sampling and Estimations

It is acceptable to provide information that is approximate or based on random and/or targeted verifications. The key to getting that right is to understand how accurate the information is, and make your level of confidence and uncertainty — like the figures themselves — transparent.

First posted at GreenBiz.

FTC’s New Anti-Greenwashing, Good-for-Business Green Guides

The U.S. Federal Trade Commission (FTC) has released its long-awaited draft guidance on environmental marketing. The so-called “Green Guides” tell companies how to prevent misleading customers—and avoid FTC actions against them.
Why now? The FTC says consumers are confused about environmental claims such as “sustainable” or “offset,” which lack consistent rules for usage. In response, the FTC’s proposed guidance does three things:
  1. Requires claims to be substantiated. Companies should communicate on specific issues for which they provide competent and reliable scientific evidence and avoid ambiguous umbrella terms like “green” or “eco-friendly.”
  2. Prescribes action on targeted issues. While the FTC leaves methodology mostly to companies, it advises on a few issues where deception is rife and solutions are particularly obvious. For example, the guides say that if companies generate renewable energy onsite and then sell their environmental attributes separately, they shouldn’t also say that they use that renewable energy themselves. Categories of specific advice include: certifications and seals, degradability, compostability, ozone-safe/ozone-friendly, recyclability, free-of/non-toxic, renewable materials, renewable energy, and carbon offsets. See the FTC’s cheat sheet.
  3. Defines where to tread carefully. The FTC acknowledges that some issues are difficult to provide blanket guidance on. For example, life-cycle assessments and ecolabeling are complex and require context, while the determination of carbon offset quality may be better handled by agencies with more expertise. In cases where the FTC “lacks sufficient information on which to base guidance,” it promises to analyze claims on a case-by-case basis.
What does this direction mean for business? I asked three individuals. Kevin Myette, director of product integrity at outdoor retailer REI, told me: “Guidance on green marketing claims has been extremely loose for years, and as a result, industry and marketers have operated virtually unchecked for too long. The FTC’s action to further define the rules is not a bad thing as they are only asking for the truth.”
Stanford Graduate School of Business Professor Erica Plambeck was similarly hopeful. She told me that the guidance “will increase incentives for retailers like Walmart to invest in the measurement of environmental performance and to provide detailed information about environmental performance to consumers. Transparency will lead to improvement.”
Finally, Dara O’Rourke, founder of the Good Guide—a product-rating initiative—said that more FTC involvement isn’t only good for consumers, but also for business. That’s because “the more there is transparency, the more the leading firms will do well in the marketplace. It’s a win for smart, thoughtful, progressive companies. This is basic ‘Econ 101’.”

What to do next: In the near term, leave any suggestions you have for finalizing the Green Guides below (with your name and affiliation) or contact me, and we’ll aggregate and submit your suggestions to the FTC before the comment period closes on December 10.

First posted at BSR.


3 Surefire Steps to Bring Climate Transparency to Your Supply Chain

With the release of guidance on supply chain reporting by the Greenhouse Gas Protocol just around the corner, companies will soon have more clarity on how to manage “Scope 3” emissions. 

At the same time, companies such as HP and others in BSR’s Energy Efficiency Partnership are working with a growing number of suppliers on climate change. As a result of these developments, minimum expectations for climate reporting on the supply chain are rising.

Now is the time for your company to embrace transparency, if it hasn’t done so already. It will help investors and partners, who increasingly see transparency as an indicator of a company’s competence, perceive your business as trustworthy. It will make outstanding achievements more credible, and it may even soften potential criticism, which is valuable in an environment where just about everyone, from journalists to employees, is inclined to write, blog, and tweet about your business.

But such transparency doesn’t come easily.

For one, almost every interest group, from consumers to investors to governments, has different information requirements, making reporting on climate impacts less about creating a single, comprehensive document and more about sharing granular information. The differences are growing. Consumers, for example, are using the Good Guide to screen for criteria that are most important to them, in effect creating their own “personal” certification.

Another challenge is the increasing demand for more specific information about companies’ suppliers — and their suppliers — when there is a lack of standards on what should be reported, when, and how.

A third challenge is the sheer expense of transparency, which takes substantial time and effort to effectively monitor and communicate.

To overcome these hurdles to transparency, we recommend a practical, three-part approach that involves monitoring your impacts, translating that data into actionable information, and promoting governance standards that catalyze progress.

1. Monitor in Order to Measure

Satisfying demands for granular information about climate impacts requires good measurement. Fortunately, most greenhouse gas (GHG) impacts boil down to energy, which is easy to measure.

Unfortunately, many suppliers whose impacts you want to report don’t have the monitoring equipment that’s needed to do so. It is unusual for suppliers in many countries, especially China — which matters most for many companies — to manage their energy use at all, both because they perceive it as a way to keep overhead low and because they don’t see other suppliers doing it.

Therefore, working with suppliers to install portable energy meters can be one of the most cost-effective ways to get more data. 

The basic versions of these monitors are available for less than US$10; more sophisticated options offer remote sensing and allow the uploading of data for analysis with software elsewhere. Over the course of a few months, companies can use a handful of meters to triangulate the most energy-intensive processes and pieces of equipment, and in doing so, show suppliers how they can take control.

In 2008, Nike was one of the first companies to report using remote energy meters (PDF). Today, Walmart is working with EDF to install energy meters in China, and BSR has recommended using energy meters to the 80 China-based suppliers who attended the recent launch of our Energy Efficiency Partnership.

In addition to enhancing transparency efforts, monitors open up new doors to companies in search of finance options. One of the main things holding up loans for the many energy-saving projects in China is verifiability. Monitors can potentially provide this assurance and therefore help companies in their efforts to gain finance from capital markets or private investors.

2. Count What Matters Most

Gathering granular data of the type provided by energy meters is useful in responding to the varying demands of different stakeholders, but it also creates a challenge in itself, often overloading you with information. To zero in on the important issues about your company’s climate impacts, it’s necessary to prioritize.

There are two ways to do this: Invest in intelligence tools that will help you glean more from the data, and use the right proxies to indicate how successful your company will be in meeting its quantitative targets.

Let’s look at intelligence tools first: Companies should consider how they can go beyond spreadsheets — the traditional mechanism for tracking GHG information — to using tools such as climate software packages (PDF) to glean more from data.

These tools complement energy metering equipment by allowing you to compare energy use at different points in time and on different time scales, which can help you identify cost-reduction opportunities and situations requiring maintenance. They also contextualize the energy meter information by putting it in terms of production output volume or other indicators your company is already managing. This helps embed analytics into existing business processes and continuous improvement initiatives.

Using proxies can also help you focus on the most important information. When starting energy management, it can be challenging in the short run to find a pattern in the most obvious and easily measurable data — energy actually used. That’s because things like weather and business variability make it difficult to see improvements in energy efficiency through electricity bills. However, you can use proxies as good predictors of success. These include, for example, whether a supplier has developed an energy action plan, what kind of target (say, to achieve 30 percent energy reduction) it has committed to, and how many energy meters it has installed.

Similarly, shortcuts are available with verification. For BSR’s work with Walmart, we designed a tiered approach to gathering data about suppliers’ energy impacts that included requests for narrative descriptions of energy projects and the names of team members working on energy efficiency. Those types of questions are easier to verify than accounting numbers themselves, and company representatives can use the information gathered to look for physical evidence of these things when they conduct supplier site visits.

3. Promote Action with Better Governance

Even when you have done your diligence to gather granular data and translate it into actionable information, one of the biggest barriers to progress in transparency remains: a lack of governance standards used by your peers. These shared systems are needed both to give stakeholders confidence in claims, and to create more clarity on where companies should focus their action.

What follows are some areas that are likely to present development needs for some time to come: 

Technical standards on how measurements are made: Even with more requirements, such as the Environmental Protection Agency’s mandatory reporting rule (PDF) and the U.S. Securities and Exchange Commission’s (SEC) interpretive guidance (PDF), many conventions are undefined, such as how to characterize progress on energy management, how to cost-effectively verify such results, and how to convert many local energy sources to GHG impacts. (See sidebar below for a more descriptive list.)

How Corporate Energy Managers Can Champion Better Technical Standards
One of the key challenges to improving business transparency on climate change is the development of technical standards that are shared across industries. Company energy managers have the opportunity to encourage the development of these standards, which are lacking in the following areas: 

•  Conversion factors: In much of the world, there is a lack of common measures for deriving GHG from energy sources. For example, in China, the government has published energy-carbon conversion factors for its seven grids, but there’s not yet an accepted standard for more local applications. A leadership opportunity exists for business to create open platforms that house much more specific and trustworthy conversion factors.

•  Supplier energy performance factors: In all but the most energy-intensive industries, there are few performance standards for energy use with suppliers in countries such as China. Managers can look for ways to identify and disseminate information about thresholds (e.g. best, average, minimum acceptability) with energy consumption and the type of equipment being used.

•  Management progress: There is a lack of agreement about how companies can state they have reduced or improved energy use for a group of diverse suppliers. Issues that need resolution include defining the scope and drivers of energy to account for changes to energy owed to operational changes, to describe how energy use is expressed (absolute or in terms of revenues or material inputs), and to determine rules for sampling (what minimum time period is allowed).

•  Cost-effective verification: There are few generally accepted alternatives to traditional energy audit processes like the International Performance Measurement and Verification Protocol, which are very expensive. Companies have the opportunity to work with stakeholders to create a system with sufficient accountability, while still being practical enough to apply to large sets of suppliers.

Shared systems: The process of interacting with suppliers and other partners to obtain information takes a commitment of people and resources. Suppliers and partners, in turn, are under pressure to respond to greater numbers and types of requests, meaning they have less time for your company’s request.A pioneer industry group, the Electronic Industry Citizenship Coalition (EICC), was formed in part to develop a central repository for suppliers to report into and buyers to read from, significantly cutting down on administrative expenses. This and other kinds of “cloud computing” solutions offer important opportunities for sharing information.

Communication among diverse stakeholders: The development of new governance requires participation by a range of stakeholders, including technical experts, civil society representatives, and industry peers. In addition to observations being made and analysis done, subjective issues matter.

These issues include the types of people who want the climate information (e.g. whether they are customers or project financiers), what action the measurement is meant to encourage (e.g. energy management decisions or something else), and how much “uncertainty” is tolerated and how it is accounted for (e.g. what disclaimers are used for making estimations).

With this in mind, companies that want to improve the impact and recognition of climate transparency should join existing programs or groups such as the EICC. If such groups are not available, consider starting a new one with industry peers by sharing metrics, publishing useful internal studies, and sharing insights about the efficacy (or lack thereof) of a certain key performance indicator. Companies can also suggest that their existing working groups and associations facilitate standards.

In summary, more climate transparency will be good for business. It can improve credibility, win trust, and make discussions about climate change more meaningful. While the solutions provided here will take work, they are likely to lead to better incentives to find efficiencies and lower costs, and ultimate progress on climate change.

First posted at Greenbiz.

BSR Kicks Off New Energy Management Collaboration…and Just in Time

I’ve just returned from China where I attended the launch of BSR’s Energy Efficiency Partnership (EEP), a working group of 11 member companies working with 80 of their suppliers on energy management.

Participants discussed the many reasons why this is an important—and urgent—issue for their companies. Starbucks’ Director of Ethical Sourcing Kelly Goodejohn explained in an opening presentation that climate change poses a substantial threat to coffee, the company’s core business, and that energy management is the most direct thing they can do to stop greenhouse gases (GHG).

Felix Ockborn, a member of H&M’s Far East CSR Program Development team, relayed that working with suppliers to mitigate climate change impacts is vital to H&M’s CSR strategy because the issue is important to its customers. He also said that it is a fundamental part of working toward sustainable use of natural resources in H&M’s value chain.

The one issue, however, on everyone’s mind was the recent pressure from the Chinese government to curb energy waste, which resulted in the mandatory closure of more than 2,000 factories and the shutdown of power to companies in major manufacturing provinces like Jiangsu and Anhui. This obviously has a major impact on companies: An auto-components maker reported that it had to slow production, and a cement factory said it would have trouble meeting orders and likely lose work in progress.

The shutdowns are part of China’s efforts to meet its current five-year plan commitment to reduce energy intensity by 20 percent from 2005 levels. All signs indicate that such pressure will increase: The next five-year plan (due out soon) is likely to include even more stringent targets, and last year’s goal to reduce GHG emissions by 40 to 45 percent by 2020 will also warrant additional measures.

EEP member, HP, has been keeping a close eye on these kinds of developments. Ernest Wong, Manager of HP’s Social and Environmental Responsibility Supply Chain program, said it’s important for factory managers to have tools for energy management so that they can understand their exposure and communicate their situation. In turn, explained Wong, it’s important for companies like HP to have a good picture of how suppliers can have better energy-saving plans and use energy management to minimize their carbon footprints.

We have a lot of exciting work to do. From helping executives in the board room understand the impacts of and options for energy efficiency to enabling managers on the shop floor to take action, I look forward to working with EEP to explore how companies can get the most out of energy management and raise awareness about the importance of working with suppliers to conserve energy.

First posted at BSR.

How Businesses Can Plan for the Unpredictability of Climate Change

With managers across industries under pressure to develop sophisticated views about how climate change will impact their companies, it might seem natural to look to the insurance industry for guidance on how to act and communicate about risks and opportunities.

After all, with climate change threatening to increase the severity of humanitarian crises, economic disruptions, and weather-related disasters — which, in the last half century, have cost more than a trillion dollars and killed more than 800,000 people (PDF) — the insurance sector is being called on (PDF) to play a special role in helping society to adapt to climate change.

Unfortunately, even the insurance industry lacks the coveted crystal ball that would preview exactly how climate change will impact us. That’s partly because prediction works by projecting future events based on past experiences, such as showing what the average distribution of the next thousand hurricanes in the Gulf of Mexico might look like. Climate change variables can be factored in, but what to include and how much to adjust them remains largely guesswork.

Even if we had the parameters to guarantee more statistical accuracy, we would still be at the mercy of what matters most: low-probability, high-consequence events that happen once in a generation, such as this summer’s heat wave in Russia and floods in Pakistan. Such outliers are hard to pinpoint in advance, yet these are precisely what the Intergovernmental Panel on Climate Change (IPCC) says business should be most worried about.

As a result, while climate science provides evidence of general trends, we are still a long way from being able to predict specific climate events. In lieu of precise predictions, a key to effectively managing the physical effects of climate change is preparedness, which can be achieved through developing literacy, identifying plausible impacts, evaluating priorities, and building resilience.

Practical Frameworks for Climate Change Preparation
•  U.K.-based Acclimatise’s three themes for senior executives (PDF): The group’s 10 questions cover risks, opportunities, responses. 

•  Alberta Sustainable Resource Development’s four-part framework (PDF): Scope and prepare, assess vulnerability, assess risk, and identify options — and integrate these into strategic management.

•  Economics of Climate Adaptation Working Group’s five-part framework (PDF): Identify risk, calculate expected loss, build response portfolio, implement, and measure.

•  Pew Center on Global Climate Change’s three questions (PDF): Is climate important to business risk? Is there an immediate threat, or are long-term assets, investments, or decisions being locked into place? Is a high value at stake if a wrong decision is made?

•  Risk Management Solutions’ four-module natural hazards model (PDF): Define hazard phenomena, assess hazard level, quantify physical impact, and measure monetary loss.

Developing Literacy

For business, developing literacy means understanding the mechanics by which climate change is likely to affect your company, and how to manage uncertainty.

In that sense, while climate change is expected to produce negative effects overall, there will also be important new societal needs related to climate change’s direct effects on water, food, health, ecosystems, and coastal areas that businesses can focus on. These impacts can be thought of as both risks (your workforce becoming increasingly susceptible to disease) and opportunities (the chance to develop and distribute health-improving solutions).

Future climate impacts are a function of three things:

1. Impacts from today’s climate, which may pose real risks, such as windstorms or floods, even if they haven’t materialized
2. The potential effects of climate change, which could multiply those threats
3. Development paths that put more people and assets in harm’s way

To develop expectations about total future impacts, business can use various techniques for characterizing the future, such as scenarios, storylines, analogues, qualitative projections, sensitivity analysis, and artificial experiments such as thought exercises. These all offer different tools. For example, analogues use past events to anticipate how communities will respond in the future, and storylines create narratives about how the company might logically evolve in response to climate-related economic trends.

Identifying Impacts

Given the most plausible physical effects of climate change mentioned above, which impact virtually all industries and regions, the next step is to identify where and how they might affect the company the most.

The answer depends on a range of geographic, market, and sociopolitical factors. As a starting point, the IPCC suggests that the most intense business impacts are likely to result from extreme weather, especially in coastal and flood-plain regions, in areas where subsistence is at the margin of viability, and near boundaries between major ecological zones.

With respect to business operations, impacts are most likely when there is dependence on longer-lived capital assets, (such as energy), fixed resources (such as mining), extended supply chains (such as retail and distribution), and climate-sensitive resources (including agricultural and forest products, water demands, tourism, and risk financing).

Finally, impacts are most likely in sociopolitical environments where substantial key stakeholder groups are based in poor communities, especially in areas of high urbanization. (For more details, review the IPCC’s report on “Impacts, Adaptation, and Vulnerability.”)

Evaluate Priorities

Once a set of potential impacts has been identified, they can be used to evaluate the relative areas of concern. One way to structure this assessment is to evaluate the following conditions independently: the intensity of likely climate change hazards, your company’s and its stakeholders’ vulnerability to those hazards, and the values at stake, both financial and human.

You can combine these to form probabilistic values for each potential impact, and then compare these impacts against each other to provide a picture of the most important expected effects across the organization.

Such a study is accessible to most companies. For example, a combination of desktop research, interviews with experts, and a facilitated discussion with management could provide a good estimate of the conditions mentioned above. This, in turn, can form an appropriate initial assessment for coverage in an annual report or in your company’s reporting to the CDP in May. To make the conclusions actionable, aim less for an abstract list of calculations and more for judgments that yield a rank-order priority set.

Build Resilience

A final step in preparing for climate change is to build resilience, which involves two steps. The first is to make “if-then” decisions. For instance, if energy prices quadruple, a drought occurs near a water-intensive plant, or a key ingredient is listed as endangered, what would your company do? This assessment should include both traditional disaster planning as well as defining contingencies for sudden changes in market needs or necessary supplies.

By extension, this is the time to consider how your company should react to plausible changes that could impact the whole enterprise, such as breakthroughs in energy information technology or aggressive climate policies in China’s next five-year plan.

Of course, this should also include a review schedule: what to watch for, and when. In sum, managers should be ready for anything, or at least what’s plausible.

The second step is taking proactive measures now, or if not now, then timed with and integrated into new capital investments. These measures include ensuring that new buildings and infrastructure meet codes to withstand extreme events; improving land-use planning, such as by limiting development in at-risk areas; and preserving wetlands, forests, and other natural ecosystems that provide cost-effective natural protection against storms and erosion.

When investing in these measures, combine adaptation with mitigation efforts wherever possible, such as by building green, and be wary of paths that are increasingly energy and water intensive because such resources will likely be under increasing strain.

It’s also important to pay special attention to people in poor communities and developing countries, as they are likely to be most affected by climate change, and therefore have growing needs for companies to fulfill.

First posted at GreenBiz.

Simple Tools for Effective Climate Reporting

With the fiscal year drawing to a close for many companies, it’s writing season for corporate social responsibility (CSR) reports.

As usual, reports provide a medium for communicating to investors who want to see companies creating value, customers who want to know which companies and products are leaders versus laggards, and watchdogs looking for inconsistencies.

In 2010, these groups will be particularly interested in how companies report on climate. This is due to several developments:

  • Last year’s treaty negotiations in Copenhagen, which prompted major economies to start their own, independent negotiating process (additional to the consensus-oriented UN framework), and resulted in the understanding that there is much more work to be done
  • The recent U.S. Supreme Court decision to allow spending on political campaigns
  • The Carbon Disclosure Project’s (CDP) increased emphasis on climate policy efforts in its 2010 Investor Questionnaire (PDF, due May 31), which asks companies to detail their climate policy efforts (question 9.10), as well as how those efforts fit into overall company strategy (question 9.1)

To date, however, companies have lacked direction on how to report on climate policy engagement. BSR’s new report, “Communicating on Climate Policy Engagement: A Guide to Sustainability Reporting,” (PDF) provides some of the first guidance available for companies.

12 Top Reporting Themes
• Acknowledgment of climate change as a problem and importance of climate policy for business 

• Advancement of industry standards through working groups

• Advocacy to national-level policymakers for climate legislation

• Demonstration of how the industry — especially ICT and finance — are poised to be solutions providers

• Disavowal of support for trade bodies that pursue inconsistent or regressive objectives

• Joining of coalitions and signatory initiatives

• Launching of carbon market or other quasi-government institutions

• Leadership of voter-education initiatives

• Participation in U.S. Environmental Protection Agency (EPA) and other government partnership programs

• Publicity of unintended consequences or re-framing issues

• Sponsorship or provision of research

• Testimony to national or state law-making bodies or filing court amicus briefs

What follows is an overview of what companies are reporting on today, what we recommend that companies focus on going forward, and how companies can approach reporting on climate policy engagement.

What Companies Are Saying Today

To learn what companies today are saying about their approach to climate policy, we recently conducted an assessment of more than 150 companies’ sustainability reports and related materials such as their websites, their responses to the CDP questionnaire, and their submissions to the United Nations Global Compact Communication on Progress.

We found that most large companies report one or more of the following:

1. Public policy is a main pillar of their climate approach, largely because climate change may not be solved without it.

2. Climate change is a main focus area of public policy efforts, in part because it is one of the single greatest issues of this generation.

3. Climate policy is a strategic issue, in that it is both likely to happen and likely to disrupt fundamental business drivers—for better and worse.

What to Cover

In general, managers should include three themes in their climate reporting:

  • Greenhouse gas (GHG) impacts: First, companies should report on their impact on climate change in terms of GHG emissions and efforts to reduce them. This is probably the longest-standing climate reporting topic, and it is more important than ever as increasing attention is focused on the impacts of the world’s largest companies. Companies should report on absolute and intensity figures using the Greenhouse Gas Protocol, and try to include impacts from their supply chain and other networks. One emerging best practice is to report figures in terms of the company’s share of planetary climate boundaries, as do British Telecom and Autodesk.
  • Risks and opportunities: Second, companies should communicate the business risks and opportunities created by climate change, such as the effects spurred by new regulations and/or changing physical environments. This area has followed closely behind development of reporting on GHG impacts, and is now not only expected by investors, but required in new guidance issued by the U.S. Securities and Exchange Commission. Risk and opportunity reporting should include the impact of legislation and regulation, international accords, indirect consequences of regulation or business trends (such as risks driven from legal, technological, political, and scientific developments), and the relevant physical impacts of climate change.
  • Climate policy engagement: Third, companies should report on climate policy engagement. Companies are expected to show what they are doing to address climate change, and many stakeholders see policy engagement as one of the most direct ways to do it. According to this view, effective climate policy is an important instrument for creating business value, and companies can build trust with stakeholders by leading more meaningful discourse.
This means companies should communicate about all policy efforts, including those that go beyond traditional lobbying, such as: 

1.    Calling policymakers to action by promoting specific legislation or endorsing the key objectives and parameters contained in them, as Johnson & Johnson has done in its 2008 sustainability report

2.    Informing policymakers through the provision of research and other technical insights on how specific policies could be most effectively implemented, as in IBM’s 2009 CDP response

3.    Enabling policy solutions by shaping the inputs to decision-making, such as by enhancing the state of knowledge among voting constituents, as Aspen Skiing Company is doing through its “Save Snow” website

4.    Setting the stage by advancing standard approaches to measurement and other processes that enable more meaningful dialogue about issues, as groups such as the Clean Cargo Working Group and the Electronic Industry Citizenship Coalition have done

An Effective Approach

Company managers preparing the climate-related sections of their reports should detail the governance around how climate policy engagement decisions are made, the strategy describing the broad outline of their companies’ objectives and approach, and their companies’ activities aimed at addressing climate change.

We also advise that leading reporters take the following approaches:

Be explicit. Use clear statements of position and objectives to focus the message. For example, Dow Chemical Company says that it will be “fearlessly accountable” in the pursuit of climate change solutions. This clarifies the company’s aims for stakeholders, who are, in turn, more likely to appreciate the commitment and support company efforts. Vale, one of the world’s largest mining companies, takes a different approach in its document, “Corporate Guidelines on Climate Changes and Carbon,” which acknowledges the scientific evidence of climate change and provides provisional guidelines subject to change based on the state of science.

Be the first to the punch. Aim to be straightforward about the company’s climate policy involvement. Head off potentially difficult questions by taking the time to answer them in advance. For example, let’s say a company is well known for lobbying — perhaps it’s on the Center for Public Integrity’s top 100 list or is prominently involved in a major trade association. That firm should be as detailed as possible about what it is doing and why. According to a recent study, this is especially important for companies in industries such as media, information and communications technology (ICT), oil and gas, transportation, pharmaceuticals and biotechnology, and mining and extractives, which tend to be heavily involved in policy engagement because governments either play a strong role in shaping their markets’ structure or substantially regulate them.

Use diverse reporting channels.
Climate policy engagement is a public affair, but company managers shouldn’t count on the public seeing the message if it’s only in one place. Some companies with compelling ideas and initiative aren’t saying much about their efforts, and others aren’t communicating very widely. Still others mention work in their CDP reports or websites, but omit it from their sustainability report. At the very least, companies should communicate a comprehensive and consistent message through their own websites and sustainability reports, and through the CDP. They should also consider reaching key audiences through customized channels as needed.

It’s also important to remember that communications happen not only through formal reporting, but through events such as trade association committees or government advisory groups. At such gatherings, the messenger is part of the message, so it is crucial that representatives know all the key points and have the authority to speak those messages on behalf of their company. As Matthew Bateson of World Wildlife Fund told us, “Having the wrong people at meetings is a barrier. If they are unable to listen, to contribute, and to be constructive — that won’t work.” So, when opportunities to collaborate or speak arise where climate policy efforts might be addressed, aim to send senior and prepared leaders.

First posted at GreenBiz.

10 Climate Trends That Will Shape Business in 2010

As 2010 begins, there are looming questions about climate change action: Will the political agreement made in Copenhagen in 2009 be developed by the next “COP” meeting to include detailed targets and rules? Will those targets and rules be binding?

What will happen with the U.S. Senate’s vote on cap-and-trade? Will U.S. public opinion about climate change — which has a major impact on how the Senate votes — ever begin to converge with science?

There’s no doubt that the year’s most interesting stories could turn out to be “black swans” that we can’t currently foresee. But even amid the uncertainty, there are some clear trends that will significantly shape the business-climate landscape.

1. A Better Dashboard

Carbon transparency isn’t easy — it takes science, infrastructure, and group decisions about standards to allow for more accurate information. We have started moving in that direction. Web-based information services provide illustrations: country commitments needed for climate stabilization, indications of where we are now, and the critical path of individual U.S. policymakers.

Meanwhile, more attention is being paid to real-time atmospheric greenhouse gas (GHG) concentrations, remote sensing technology that tracks atmospheric GHGs, and a new climate registry for China. As these data tools become more available, business leaders should begin to see — and report on — a clearer picture of their company’s real climate impacts.

2. Enhanced Attention to Products

There are signs that more consumers will demand product footprinting — that is, a holistic, lifecycle picture of the climate impacts of products and services ranging from an ounce of gold to a T-shirt or car. Fortunately, a new wave of standards is coming. The gold-standard corporate accounting tool, the Greenhouse Gas Protocol, aims to issue guidance on footprinting for products and supply chains late in the year, and groups like the Outdoor Industry Association and the Electronics Industry Citizenship Coalition plan to publish consensus-based standards for their industries in the near future.

3. More Efforts to Build Supplier Capacity to Address Emissions

With more attention on products comes an appreciation of product footprinting’s limitations. Many layers of standards are still needed, from the micro methods of locating carbon particles to time-consuming macro approaches defining common objectives through group consensus. Accurate footprinting that avoids greenwashing requires statistical context, especially related to variance and confidence levels, that companies often think stakeholders don’t want to digest.

Progressive companies such as Hewlett Packard, Ikea, Intel, and Wal-Mart are therefore pursuing partnerships with suppliers for carbon and energy efficiency, and they are focusing their public communications on the qualitative efforts to build supplier capacity–as opposed to pure quantitative measurements, which can imply more precision than really exists.

4. Improved Literacy About the Climate Impacts of Business

The bulk of companies’ climate management falls short of directly confronting the full scale of effort required to address climate change. That’s partly because organizational emissions accounting tends to treat progress as change from the past, as opposed to movement toward a common, objective planetary goal. But companies are becoming more aware of the need to be goal oriented. Firms such as Autodesk and BT have begun bridging this gap by illustrating that there is a common end–which is measured in atmospheric parts per million of emissions–and that company metrics can be mapped to their share of their countries’ national and international policy objectives toward them.

5. More Meaningful Policy Engagement

Related to the previous item, more companies realize that pushing for the enactment of clear and durable rules to incentivize low-carbon investment is one of the most direct things they can do to stabilize the climate. Therefore, more companies are engaging earlier — and in more creative ways — in their climate “journey.” There is growing realization that you don’t have to “reduce first” before getting involved.

There is also a general awakening to the fact that strong climate policy is good for jobs and business. Already, more than 1,000 global companies representing $11 trillion in market capitalization and 20 million jobs (PDF) agree that strong climate policy is good for business. There has never been a better time to get involved, especially in the United States, where the Senate is expected to vote on domestic legislation by Easter. Effective corporate action can help fence-sitting senators (PDF) gain the support they need by educating the public in their districts about the importance of strong climate policy.

6. Higher Stakeholder Expectations

As climate management enters the mainstream, stakeholders expect companies to do more, and watchdogs will find new soft spots. Companies should be prepared for new stakeholder tactics, such as the profiling of individual executive officers, who are perceived as having the greatest impact on company positions, and heightened policy advocacy efforts. The media’s role in promoting public climate literacy will continue to rank as an important part of stakeholder expectations. Currently, the U.S. public, which plays an important role in the critical path to a global framework, has far less confidence about the importance of acting on climate than scientists do, and the media can help educate them.

7. Increased Power of Networks

Economists see energy efficiency as a solution to 40 percent or more of climate mitigation, and with the technology and finance already available globally, companies can play a significant role in accelerating progress. While the price makes the energy market, and policy helps to set the price, companies like Walmart have shown that creating expectations for performance improvement, while providing tools and training, can help suppliers and partners clear the economic hurdles they need to get started. After this initial “push,” experience shows that suppliers take further steps on their own. As more companies take on supply chain carbon management, watch for lessons on how to do it effectively.

8.    More Climate Connections

Energy efficiency, which constitutes the core of many companies’ climate programs, offers a platform for broader resource-efficiency efforts. We expect to see many companies expand their programs this year to address water. Given that this is the “Year of Biodiversity,” we can also expect more movement related to forestry and agriculture. The nexus between climate change and human rights is also likely to become a hot topic, building on momentum developed during the run-up to Copenhagen.

Finally, watch for the climate vulnerability of mountain regions to gain attention, due to increased environmental instability, disruption of natural water storage and distribution systems, and stress on ecosystem services in regions near human populations.

9. Greater Focus on Adaptation

Climate management has already broadened to include adaptation, and this will receive increasing attention in 2010. This is already evident in company reporting, as evidenced by responses to the Carbon Disclosure Project (see answers to questions 2 and 5 about physical risks and opportunities). Companies are addressing many adaptation-related issues, including insurance, health, migration, human rights, and food and agriculture. It is important to note that adaptation efforts can–and must–also support mitigation, as in the case of resource efficiency.

10. More Political Venues Up for Grabs

The Copenhagen Accord (PDF) was produced only during the last few hours at COP15, as part of a last-ditch “friends of chair” effort involving around 25 countries. This nontraditional process proved to be an effective way to move swiftly in getting broad support, yet still failed to achieve consensus in the general assembly, with a small handful of nations vetoing due to a few apparently intractable disputes. In consideration, there are growing calls for additional forums beyond the regular United Nations Framework Convention on Climate Change process, to offer more responsive action in developing the global climate agreement needed.

Most notably, attention is on the G-20 countries, a group that comprises the vast majority of emitters and has shown that it can move efficiently, even while avoiding the troublesome distinction between developed and developing nations. Country associations are also changing. For example, instead of “BRIC” (Brazil, Russia, India, and China), we are more often hearing about BASIC (BRIC minus Russia plus South Africa) and BICI (BRIC minus Russia plus Indonesia). The point is, before Copenhagen, most thought updating Kyoto meant developing a global treaty through the formal U.N. structures. Now there is growing appreciation of the opportunity for complementary efforts, and new countries are coming to the fore in multilateral engagement.

In 2010, business leaders will be considering their best next steps after Copenhagen. At the same time, as BSR President and CEO Aron Cramer has written, while an overall framework agreement is important, we need to look beyond forums like Copenhagen for real results on climate — and that means looking to business. Business is important for two reasons: By engaging in policy, business can help increase the likelihood that policymakers will develop a strong framework. And by innovating and committing to progress, business will help a treaty achieve desired results.

At BSR, we will be tracking the opportunities related to these trends and working with business to focus on innovation, efficiency, mobilization, and collaboration for low-carbon prosperity. For more information about how your company can contribute, contact me at rschuchard@bsr.org.

First posted at GreenBiz.

The Nexus of Climate Change and Human Rights

Though climate change and human rights are important corporate responsibility issues on their own terms, they are increasingly interrelated. 

As our global climate destabilizes, there will be an increase in water stress, food scarcity, the prevalence and intensity of diseases, and the loss of homelands and jobs around the world. In turn, climate change is likely to affect several rights enshrined in the Universal Declaration of Human Rights (UDHR), such as the right to life and security, the right to food, and the right to health.

Meanwhile, efforts to mitigate climate change are creating new human rights problems. In particular, industrializing countries like China are concerned that regulation may unjustly hamper their economic rights by preventing them from growing. (Indeed, finding common ground on this issue is largely what developing a post-Kyoto global treaty depends on.)

Another challenge is that most mitigation scenarios rely on using global finance to lead carbon-reduction activities in communities where the cost of doing so is fairly low. However, this has had unintended human rights consequences for vulnerable populations in those communities. For example, there are forestry protection projects in Uganda designed to earn carbon credits, yet those same activities — aimed at reducing climate change — also impact local people who feel they are being kicked off their land.

In spite of these interdependencies, the relationship between climate change and human rights has only recently been acknowledged but receives scant attention. One reason is that the human rights community needs to broaden its focus from specific, visible impacts on human rights to likelihoods caused by climate change over time. Another challenge is that business approaches to managing climate change have tended to focus on quantifiable risk as opposed to more holistic appraisals.

As governments and advocates come to grips with how climate change and human rights are inextricably linked, managers looking to get ahead of the curve would do well to think of the connections between the two.

Three key issues are emerging for companies:

1.    Energy is the problem — and an opportunity. Energy is responsible for nearly two-thirds of global greenhouse gas emissions and more than 95 percent of emissions for typical companies, so moving to low-carbon energy is crucial for stopping climate change. Energy is also the key to helping the 1.6 billion people without regular access to the grid realize their economic rights as they attempt to adapt. In this respect, companies that enable a transition to affordable, clean energy will enjoy commercial success and help advance the communities in which they operate.

2.    Mitigation and adaptation require significant trade-offs. Climate change means more competition for fewer resources. The future will favor those who are already well off, while affecting the disadvantaged the most. Mitigation and adaptation, therefore, require hard decisions about land use, access to natural resources, and opportunities for economic development. This is true everywhere, but the issues are most evident in Asia, which holds the world’s largest population base.

3.    Scrutiny of companies is increasing. As legal specialists like Climate Justice and the Climate Law Institute emerge, there is growing support for creating a legal liability for the impacts climate change has on human rights. Meanwhile, watchdog organizations such as the Carbon Disclosure Project, Corpwatch, the Climate Lobby Database, and Oil Change are boosting efforts to publish public lists of companies that emit heavily or lobby against emissions regulation.

Climate Change as a Human Rights Issue

The effects of climate change are cumulative, and, so far, those effects have been relatively slow and incremental. Human rights managers who want to get ahead should complement their localized, site-specific approaches with broad, long-term frameworks that take into account how climate change will impact business-relevant human rights issues. Based on this, risk mitigation strategies may deliver both climate and human rights benefits. More importantly, by taking an integrated look at these two challenges, human rights managers may help spark innovative approaches to accessible technologies, such as small-scale irrigation, drought-tolerant seeds, medicines, and weather-related insurance.

These managers can also educate their colleagues about the importance of incorporating climate change into their work. Pfizer and GlaxoSmithKline have begun doing this by publicly communicating their views on how their companies help alleviate human problems caused by climate change. Managers might begin by dispelling common myths, like the sentiment that climate change is narrowly an “environmental” problem.

Human Rights as a Climate Change Issue

On the flip side of this coin, managers who are responsible for their company’s climate change impacts also need to consider human rights.

More Reading on Climate Change and Human Rights
Climate Change and Human Rights: A Rough Guide (PDF) A report by the International Council on Human Rights Policy on the relationship between climate change and human rights, and the policy implications of that link. 

Climate Wrongs and Human Rights: Putting People at the Heart of Climate Change Policy (PDF) An Oxfam briefing paper that focuses on putting people at the center of climate change policy.

Integrating Human Rights into Energy and Environmental Programming (PDF) A reference paper on integrating human rights into energy and environmental programming.

Background Paper: Human Rights and Climate Change A background paper from the Australian Human Rights Commission.

Climate Change, Human Rights, and Indigenous Peoples (PDF) A submission to the United Nations high commissioner on human rights by the International Indian Treaty Council.

Forests, Climate Change, and Human Rights: Managing Risk and Trade-offs (PDF) A paper from the Center for International Forestry Research.

Climate Change 2007 Synthesis Report A report by the Intergovernmental Panel on Climate Change.

Climate Change and Human Health A World Health Organization report on some social impacts of climate change.

These individuals, often finance and energy managers, are generally charged with making direct investments that can impact the human rights of communities in areas where these investments take place, such as buying or selling of carbon market instruments, recommending sites for new facilities, procuring energy and water, carrying out remediation activities, and engaging suppliers.

For instance, if a project involves establishing a new plant that will stress the local community’s water resources, over time this may impact the community’s right to food, safe water, and health — especially if the community’s water resources are already suffering from climate change-related drought.

Finally, managers should beware of adaptation’s pitfalls — namely, growing instability in communities where people feel they are disenfranchised — while prioritizing the development of strong foundations for a world of climate instability.

To address these challenges, climate change managers can use quantitative analysis to represent the longer-term trends of climate change while doing qualitative research via community engagement to determine potential human rights issues.

The Nexus of Climate Change and Human Rights as a Strategy Issue

The climate change-human rights link presents enterprise-level risks and opportunities that require attention by those setting company strategy: senior executives and boards. Lengthening time horizons and broadening measuring tools for decision-making are key.

Senior-level executives have an opportunity to help their company address climate change and human rights by promoting quantitative data analysis with qualitative, holistic thinking. At the same time, they should promote aligned, consistent actions throughout the company, particularly among their marketing, public relations, and government affairs teams.

Companies that do this will be ahead of the game — and ultimately more efficient, with lower risk profiles as climate change unfolds and companies are held to higher account for human rights.

First published by BSR.

Whose Carbon Is It? The ABCs of Counting Emissions in Your Supply Chain

Many companies have started scrambling to understand their indirect emissions — specifically, emissions in their supply chain — and for good reason.

According to a report by McKinsey that examined consumer goods makers, high-tech players, and other manufacturers, 40 to 60 percent of their total carbon footprint resides upstream in their supply chain. Knowing about the emissions in your supply chain can help you prioritize opportunities for reduction and understand the risks if carbon emissions are regulated.

But as the dialogue around carbon accounting increases, so does our awareness of the challenges and limitations in measuring indirect emissions and distributing the burden among multiple parties.

Take the Carbon Disclosure Project’s (CDP) 2009 supply chain report. The CDP’s supply chain initiative is one of the few global attempts at collecting primary data from companies in an effort to understand climate risks in a supply chain. Yet only five of the 100 companies in China contacted by the CDP fully responded to the CDP’s basic questions about climate management. Clearly, there is a gap in knowledge and data necessary to successfully accomplish this goal.

This raises many questions about accounting for indirect emissions: What are the emissions hot spots in a supply chain? Will companies downstream be held responsible? How much “ownership” should they claim? What should they be doing about it?

Effectively managing and reducing the total carbon footprint of your products and operations ultimately means getting answers to these questions.

Accounting for Supply Chain Emissions

To understand where we are in answering these questions, consider the two emergent methods for determining a company’s total carbon footprint: observed emissions accounting and model-based accounting.

The first method involves counting the observed emissions in a company’s supply chain — emissions that the company can arguably impact through its business decisions. This method typically requires tallying the measured emissions of a company’s direct suppliers, at the “point source,” and having those suppliers tally the measured emissions of their direct suppliers, and so on up the supply chain.

The second method is to count emissions based on the materials and processes used as a product moves from raw material extraction to manufacturing to end-use. This method is typically based on a lifecycle analysis of the product and uses models to estimate the embedded emissions.

Both methods can produce useful measurements, but neither provides a comprehensive picture based on primary data from the actual companies in a given supply chain, and neither provides information in a format that is comparable and cheap to produce.

Both of these methods will need to evolve to address what we call the ABCs of effective supply chain carbon accounting: allocation, boundary-setting, and the complexity of supply chains.

The ABC Framework

Allocation
Companies and their stakeholders need common systems for acknowledging their role in creating the emissions in their supply chains — or “allocating” emissions between different businesses and individuals.

Assigning ownership of emissions is a challenge at many levels. For example, China’s climate negotiator, Lia Gao, recently suggested that countries that import goods created in Chinese factories should be accountable for the related emissions. While this viewpoint is subject to international debate, it emphasizes the need for understanding the interconnectedness between producers and consumers, and all the actors in between.

Emissions allocation can be based on many things, like percentage of business your company does with a supplier compared to the supplier’s overall revenue, or units your company purchases as a share of the supplier’s overall production volume. Each method of allocation has benefits and drawbacks, and no single method makes sense for all business types.

Boundary-Setting
As the McKinsey report indicated, the emissions occurring within a company’s four walls are likely to be the tip of a much larger iceberg. The chain of supply goes on continually upstream and downstream, and it even becomes circular as products and materials take on second lives. This presents a significant challenge for accounting methods that prescribe the size of a footprint, as it’s nearly impossible to pick a clear beginning and end for a supply chain.

At a company level, you must decide which business units to include in your carbon footprint. For example, drawing your boundaries based on operational control can produce a very different result than using boundaries based on the amount of equity you hold in different entities. If companies in a supply chain are taking a different approach to boundary-setting, their footprints can’t be meaningfully allocated or aggregated among companies because there is a good chance emissions are being double-counted or going unclaimed.

Complexity of Supply Chains
Supply chains are more like webs than linear chains of activity, and the lifecycle of facilities in the network can be short and intermittent — both characteristics that make emissions accounting complex.

In consumer products and electronics industries, for example, brand-name companies procure from similar supplier bases, and the goods those suppliers provide come from different sources around the world that can change every day based on market conditions. It’s even likely that one company is both a buyer from and supplier to the same company.

Neither of the most common accounting methods can credibly deal with these complexities. Even the most progressive uses of the observed emissions accounting method would be challenged to factor in all the variables of the dynamic landscape, and the time it would take to track down the necessary information from suppliers makes it infeasible. Similarly, model-based accounting methods, which often rely on macro-level data that is several years old, are not designed to register operational changes or discrepancies among facilities.

A Way Forward

While the hurdles are significant, we believe that companies should start working immediately to understand their supply chain emissions for two reasons.

First, discussions on emissions ownership and the field of supply chain footprinting are gaining momentum, and business will be well-served by taking its place at the table. The World Resources Institute and World Business Council for Sustainable Development, for example, have kicked off a two-year process to develop the Greenhouse Gas Protocol’s “Scope 3” accounting standards, including a methodology for supply chain emissions accounting.

Companies that are taking the steps to collect data will be in a much better position to influence the global dialogue on topics like boundary-setting and allocation methods. Ultimately, the decisions that flow from these conversations will have significant cost implications for whoever is deemed “the owner.”

Second, this doesn’t have to be painful! Based on our work to date, we offer the following tips to reduce the burden and improve the outcome of your efforts:

  1. Be aware of the challenges and limitations described here.
  2. Be transparent about your calculation methodology and the extent to which you use primary data in calculating your indirect emissions.
  3. Engage directly with suppliers and establish a dialogue, enabling them to provide ongoing information as standards emerge.
  4. Collaborate with other companies to more efficiently gather data in your supply chain and share best practices.
  5. Participate in global discussions on these issues and continue to question whether the methods created provide a credible system for helping to manage carbon emissions around the globe.

First posted at GreenBiz.

What New Climate Change Policies Will Mean for Your Business

To read about policy developments taking place this year, see “Looking for Signs Along the Road to Copenhagen.” Listen to advice from Ryan on positioning your business at “Reading the Tea Leaves of Evolving Climate Change Policy.”]

As global leaders prepare to negotiate an updated version of the Kyoto Treaty at the U.N. Climate Change Conference in Copenhagen in December, the big question is whether China and the United States will join the 183 countries that have already signed on. If that happens, we’ll be on our way to a serious global effort to stabilize the climate.

What would this mean for your company? An agreement that includes China and the U.S. — the world’s No. 1 and No.2 emitters — will commit all signatory countries to broad reductions in domestic emissions. Beyond outlining general principles for international cooperation, however, the treaty likely will leave it up to countries to figure out how to do so. Therefore, an evolved global agreement will help speed up and synchronize country-level efforts, but national governments will continue at the helm of climate policy design.

Through that lens, consider the following ways in which policy will impact individual companies, starting with the most direct effects.

1. The Price of Carbon

From global to local, the essence of climate policy is putting a price on carbon emissions, which means either direct regulation by taxes or what’s known as “cap-and-trade” — a requirement for companies to buy tradable permits when they exceed a certain threshold of emissions. Generally, when experts talk about the “regulatory risk” of climate change, they’re referring to direct exposure to just such a price, and this is rightly considered one the most immediate and tangible climate-related risks.

The onset of a carbon price affects companies directly in two main ways. First, for those paying, there is a per-unit price, which, in recent years, has ranged between $1 to more than $50 per ton of carbon in voluntary carbon offset markets and regulatory schemes like the European Union Emissions Trading Scheme (ETS). The Economist suggests that range may move and narrow to between $38 and $63 in the future.

The second direct impact on companies is the uncertainty over what the price will be, and who will have to pay it. This may be more profound than the price impact itself, which is why companies in the U.S. Climate Action Partnership are asking for a system of regulation. Since most emissions come from fossil fuels, regulation is closely related to the supply and the cost of energy. And because corporate energy expenses are so substantial — many companies spend more on energy than they do on taxes — an increasing number of firms see regulation as a good deal, as long as the government clarifies it soon.

2. “Supporting” Policies

In addition to direct regulation, there are various supporting policies. One main type is standards, which include transportation sector fuel economy specifications and efficiency requirements for energy-using products in the information and communications technology (ICT) industry. Standards typically set out requirements for end products, but as international sectoral approaches take shape, standards increasingly will cover production processes as well.

Another main type of supporting policy is technology incentives, which include funding for R&D, the removal of barriers to enter new industries (particularly energy), and financial incentives such as tax credits to encourage companies to generate renewable energy on site.

While the three instruments mentioned so far tend to constrain emissions, there is also a widespread movement to develop “market mechanisms” that create positive incentives by taking advantage of the commodity aspect of carbon. For instance, since a ton of carbon emissions is a ton anywhere, it’s possible to use the market to promote activities being done at the lowest-cost locations — where investments in activities that reduce carbon emissions are cheaper. With market mechanisms, companies can buy reductions when it is cheaper than “making” them. Examples of markets include the U.S. Regional Greenhouse Gas Initiative and United Nations’ Clean Development Mechanism.

Despite the promise of environmental finance-based market systems, two big questions loom: whether and how carbon instruments can be “imported” from elsewhere, and whether forestry-related carbon instruments should be allowed at all.

3. All Policy is Climate Policy

Policies that reduce carbon emissions are not always named as “climate” policies. Case in point: Transportation accounts for a third of emissions in the U.S., so climate will be a significant topic when the U.S. transportation bill comes up for its six-year reauthorization in September. Also, with 20 percent of global emissions caused by forestry and land-use change, and with the food and agriculture sector looking for rewards for good behavior, climate considerations are also likely to come into play in agricultural policy.

In addition, climate issues are becoming ubiquitous in policies that address economic and social issues. For example, the growing risk of international legal and border disputes, the greater likelihood of damaging weather events, and the increasing vulnerability of energy security all mean climate change is a key security policy issue (PDF). It’s no coincidence that the first carbon tax bill — America’s Energy Security Trust Fund Act, which was introduced in the House earlier this month — has “security” in its name. Climate relations are also ground zero for trade issues. Realizing there is a legal basis (PDF) for using trade measures to enforce environmental initiatives, the U.S. and China are debating who is ultimately responsible for cross-border emissions. In other words, climate policy is trade policy.

4. Society as the Policy Authority

Ultimately, policy is part of a general contract between business and society, and social groups may start to hold companies accountable via direct pressure. These actions, according to a recent Harvard paper (PDF), can range from events targeting single companies to strikes and riots deriving from social instability exacerbated by climate change.

To stay ahead of this risk, companies should conduct broad policy assessments of sociopolitical situations, using resources like the Economist Intelligence Unit, the International Country Risk Guide, Business Environment Risk Intelligence, and S. J. Rundt & Associates.

5. Everyone is Affected

According to the Peterson Institute and World Resources Institute, the most vulnerable industries are those that have high energy intensity of production, low potential for efficiency improvement, little ability to switch to low-carbon energy sources, and high elasticity of demand. These include, in particular, energy utilities and heavy manufacturing sectors.

This analysis, like many, focuses on policies that likely will have a direct impact on a relatively small number of players — for example, the U.S. Environmental Protection Agency’s proposed reporting rule covers 85 to 90 percent of domestic emissions by focusing on just 13,000 facilities. Nonetheless, all of the policies mentioned so far may reverberate to impact the fundamental conditions on which all businesses depend. For instance, a carbon tax impacting the price of carbon-intensive energy could lead to reduced availability of carbon-intensive inputs such as steel. Such a tax could also lower demand for products that create higher emissions during their use.

These types of policies could also influence competitive dynamics. For example, incentives for renewables might lower entry barriers for ICT companies in the energy sector, while feed-in tariffs might enable consumer products companies to develop better cost positions over rivals. Also, with investor groups like the Carbon Disclosure Project demanding more information about companies’ self-appraisals of policy risk, those firms that are willing and able to disclose more have increasingly preferential access to capital.

Putting it in Perspective

By no means are the effects of climate policy all negative. The economy as a whole stands to benefit from comprehensive climate policy. Without it, a wide scale of human rights, health, disease, and energy problems will likely result.

But more pragmatically, for most climate policy risks, there is also opportunity. Companies that generate and rely on low-carbon energy are set to prosper, as are those that can exploit technological breakthroughs in resource efficiency and materials. Those firms generating new forms of energy — in particular, renewables — will participate in a massively growing market. Companies in industries that address adaptation problems, such as pharmaceuticals and biotechnology, stand to gain. In the end, as the world’s climate policies are developed and strengthened, there will be important roles for companies from almost every industry.

First posted at Greenbiz.

Field Notes: Helping Guide GHG Protocol’s “Scope 3”

As BSR goes to press with “Looking for Signs Along the Road to Copenhagen,” the debate about whose emissions are whose and what constitutes progress is heating up. It is going to get hotter, because it looks more likely that the WTO will enforce prospective border measures on carbon.

Hopefully, the Greenhouse Gas (GHG) Protocol’s emerging guidance for “Scope 3 Emissions” will be useful toward spotlighting risk.

The GHG Protocol, which is the global standard for organizational greenhouse gas accounting, recently embarked on a 2-year process to develop detailed guidance for calculating emissions for Scope 3—the infamously ambiguous designation for emissions outside a company’s direct ownership and control, but which they still have meaningful influence over.

As a participant in the Technical Working Group developing new Scope 3 guidance, I recently visited New York for an in-person meeting. The event was one in a multi-layered series of research collaborations bringing together perspectives from various sectors and locations.

What will Scope 3 guidance eventually look like? It is early to say, but what is clear is that that developers will wrestle seriously with the following issues:

1. How comprehensive. Some want measurement areas to focus on straightforward activities like flights and hotel stays. Others, such as some companies in the Electronics Industry Citizenship Coalition, want rules and principles that will allow propagating a measurement scheme through multiple tiers of suppliers.

2. How to measure. There are various methods of possible measurement, such as prescriptive calculations for commonly purchased services (like flights), predetermined conversion factors for emissions-intense materials (like aluminum), and descriptive protocols for counting observed emissions from suppliers (potentially, multiple tiers) based on rules for overhead allocation.

3. How to stay relevant. The current basic guidance on Scope 3 from the GHG Protocol assumes end-user consumers at the end of a value chain. This life cycle analysis-based depiction is easy to envision and practical for many so far. Yet, producers are also consumers, and the “linearity” and “endpoints” that tradition suggests are not so hard-and-fast absolutes, as a rapidly decentralizing and service-orientated global economy suggests.

Each conundrum illustrates huge trade-offs. The real challenge, therefore, is not technical perfection, but guidance that will have the maximum benefit for the most situations around the world. The ideal result? Catalyzing a transition from debating about the data of carbon to ratcheting it down.

First posted by BSR.

Creating Systemic Change: Lessons from Responsible Labor

Just one decade ago, the public was appalled to learn that children were producing Nike’s soccer balls in Pakistan, and the company was swiftly targeted by numerous high-profile, antagonistic NGO campaigns. Since then, more companies have come under fire by NGOs publicizing alleged corporate social and environmental abuses. Yet Nike — along with a handful of other companies once perceived as symbolizing ethical problems from global outsourcing — has come to be
regarded as a sustainability pioneer. What could explain such a fundamental turnaround?

In response to the exposure of poor labor practices in their supply chains, Nike and other consumer product companies embarked on a series of supplier audits and corrective actions to turn the problems around. They made many incremental improvements, but over time reached a common and critical conclusion — that on their own, compliance and monitoring processes are insufficient for creating real, sustainable improvements.

It turned out that although Nike was singled out by many in the NGO and corporate social responsibility (CSR) community, the company was not the sole culprit, but rather a harbinger of a greater, system-wide failure. As companies like Nike began to address symptoms of child labor through auditing, it became clear that the problems were driven by more fundamental institutional causes, such as absent and ineffective public policies, perverse and contradictory incentives from multinational business customers to their suppliers, and employees that lacked the power to stand up for themselves, given their communities’ prevailing customs.

In this process, industry learned a key lesson: Systemic change requires that multinationals work with relevant stakeholders to understand the root causes of problems and address them strategically. To increase the impact of this lesson, BSR has created the Beyond Monitoring initiative, which encompasses a strategy for next-generation management of sustainable supply chains. Beyond Monitoring uses four pillars to achieve its goal:

1. Alignment of commercial and social objectives by brands
2. Ownership of this agenda by suppliers
3. Empowerment of workers
4. Engagement with policy and governments
Now, as industry faces increasingly complex challenges,

Business for Social Responsibility (BSR) has started thinking about how to apply the Beyond Monitoring framework to sustainability issues beyond supply chain labor conditions.  Perhaps even more so than labor, other sustainability issues such as climate change and freedom of expression are increasingly complex. It is our hypothesis that by addressing the complexity of the whole system, the Beyond Monitoring principles could strengthen a host of other sustainability initiatives. The following framework, based on the four key concepts of alignment, ownership, empowerment and engagement, aims to do just that for two areas of particular interest:
􀀝 Greenhouse gas (GHG) emissions: in particular, reducing the impacts of supply chains.
􀀝 Privacy and freedom of expression: addressing the increasingly complex human rights problems faced by internet and telecommunications companies.

Alignment
In practice, aligning commercial and social objectives means bridging traditionally unrelated company teams and creating
consistent enterprise objectives and communications messages on sustainability.
􀀝 GHG emissions: For many companies, the primary driver of GHG emissions is energy use, which bears directly on costs. To encourage suppliers to undertake new energy investments and strategies, companies need to align the CSR and purchasing teams to give consistent and predictable messages about customer priorities.
􀀝 Privacy and freedom of expression: Three functions should align commercial objectives with human rights: 1. Technology and product design need to address the freedom of expression and privacy features and applications of the product. 2. Legal affairs needs to manage its relationship with law enforcement agencies consistent with human rights. 3. Sales and strategy need to consider human rights when deciding which markets to enter and which products and services to offer.

Ownership
Ownership means that all relevant actors identify a business case for “owning” their sustainability agenda, and they work with their partners in shaping shared objectives. With ownership, stakeholders are likely to make personal investments that support sustainability goals, and they are less likely to block progress.
􀀝 GHG emissions: Increasingly, companies are under pressure to disclose emissions. However, like many labor compliance disclosure requests during the past decade, emissions disclosure requests are often based on methodologies that were made without supplier input. As a result, suppliers resist for a number
of reasons: They don’t understand the request, they don’t know how to get the information or they don’t see the point. Instead, it’s important to work with suppliers to co-create protocols that make sense for everybody.
􀀝 Privacy and freedom of expression: In terms of ownership, the challenge is moving beyond large multinationals such as

Google, Yahoo! and Microsoft. With so many startup companies emerging, progress is most likely if these companies are equipped to “own” their own approaches to privacy and
freedom of expression. The goal is to develop international standards that are widely understood and accepted by the hundreds of small and startup companies operating in markets all over the world, such as those providing services for blogging and user-generated content.

Empowerment
By ensuring that stakeholders understand their options for recourse and have channels for action that are consistent with existing incentives and worldviews, empowerment increases the likelihood of sustainability policies to be embraced and implemented.
􀀝 GHG emissions: In this context, there’s an opportunity to empower two constituencies. The first is workers, who are most likely to act if they are trained, given a mandate and provided resources to increase energy efficiency. Communities and the public, which are stakeholders in the context of climate change, comprise the second constituency. Help educate them about issues and help them act through direct and other measures, such as voting in elections or making product choices.
􀀝 Privacy and freedom of expression: It’s important to empower the user through transparency about the circumstances
in which personal information may be passed to governments or content may be restricted. Information empowers the user to make informed judgments about data privacy or the
completeness of the content being provided.

Engagement
Companies often work with governments to ensure the consistent and fair application of laws and regulations. This includes
strengthening policies that exist but are not yet fully implemented, and facilitating the development of appropriate new ones.
􀀝 GHG emissions: Companies have two key policy opportunities — participating in dialogue about standards, and engaging in discussions
about legislation. With respect to standards, companies can help develop new emissions reporting systems like the GHG Protocol’s guidance
on product and associated (“scope 3”) emissions, and the Carbon Disclosure Project’s treatment of suppliers with respect to reporting. Companies can also attempt to provide input on rule-making. For example, in the United States, members of the U.S. Climate Action Partnership have been lobbying the U.S. Congress to begin phasing in regulation steadily and predictably.
􀀝 Privacy and freedom of expression: Often, when it comes to violations of privacy and freedom of expression, government is the main cause, and companies have limited room
to maneuver. However, companies can take action, such as advocating government approaches that are consistent with international human rights laws and standards on freedom of expression and privacy, and challenging governments when human rights standards or local law are not applied. They can also help educate and build capacity in governments of emerging economies.  At its heart, the sustainability challenge is characterized by common systems problems, and there is a wealth of knowledge
to build from. Sustainability practitioners owe it to their cause to make sure that they are thinking in terms of systems, and collaborating with each other. We believe the lessons from BSR’s Beyond Monitoring framework will help companies do just that.

Originally published by BSR.

A-B-C-Design: Engaging the Whole Company in Developing Sustainable Products

Given the sheer number of items we purchase, use and throw away every year, it’s no surprise that consumer products are the ultimate drivers of carbon emissions. In that context, product design is critical for addressing climate change. As the concentration point for a large set of decisions about human and material resource flows, product design can influence emissions throughout the value chain, with the potential to yield significant results: According to the U.K.-based Climate Group, during the next decade, developments to information and communication technology products alone could reduce global GHG emissions by 15 percent, while saving the industry more than $900 billion. 

Ironically, the shortest path to better products is often found not inside the design team, but throughout the rest of the company.

At Business for Social Responsibility (BSR), we worked with the design and innovation firm IDEO to produce the report “Aligned for Sustainable Design: An A-B-C-D Approach to Making Better Products,” [PDF] which shows that sustainability introduces a range of factors into organizations that require the engagement of people throughout the company. Indeed, the real bottleneck to design problems is often low organizational capacity. Rather than looking to the designer to lead product sustainability strategies, managers need to coordinate conventionally unconnected parts of the organization and promote dynamic organizational learning.

The four main ways to do this can be described as the A-B-C-Ds of sustainable design:

A: Assess the climate impacts of your company’s projects and evaluate your organization’s capacity to address these impacts. Some companies, like Sony and Philips, do this by pursuing formal lifecycle analyses and materials assessments of their products in order to ensure that they understand where impacts really come from. Others, like Intel, also focus on understanding the impacts of first-tier suppliers. Still other companies are experimenting with new methodologies entirely: BT, for example, has developed a “Climate Stability Intensity” method that conveys the company’s global emissions normalized by expected atmospheric levels needed for climate stability.

B: Bridge functions and people needed for making valuable, tractable product redesigns. Often, this means making unconventional cases for commitments and resources. For example, Procter & Gamble, recognizing that energy-efficiency projects have important benefits that outweigh traditional return-on-investment hurdles, has bridged sustainability and finance by earmarking 5 percent of its budget ($5 million) for energy-saving projects. Hewlett-Packard has developed an energy supply chain function, which creates a formal, cross-functional bridge between traditional procurement and environmental responsibility teams.

Three Approaches to Sustainable Design
Given the demand for greener products, many companies are incorporating sustainable design into everything from cars to computers. They are employing three main approaches to designing low-emissions products:
• Reducing lifecycle emissions in existing products through new design specifications and features: Toyota has started equipping its hybrid electric car, the Prius, with rooftop solar panels that power the air-conditioner, and companies with energy-using products like HP and Dell are developing better power-saving and idle modes. Even companies with products that don’t use energy are designing specifications for lower-impact maintenance and disposal. Apparel companies, for example, are providing cold-water wash instructions for clothing.
• Linking existing products to restoration: Tyson is eliminating emissions from waste by turning animal byproducts into biofuel. Other companies, like Nissan, are linking products with restoration by automatically buying carbon offsets with automobile purchases.
• Deploying new product and service concepts: With videoconferencing, companies such as Cisco and Skype are fulfilling the need for live communication with an alternative to emissions-intensive air travel. Other companies have focused their business plans around products aimed at saving emissions: One such business is Liftshare.org which uses a simple database platform to bring people and organizations together to carpool.

C: Create internal and external learning projects that enhance knowledge of product sustainability and support necessary changes in the design process. Nike, for example, has launched a number of projects, such as one that reduces production scrap and diverts worn-out shoes from disposal, and another that phases out industrial greenhouse gases from the bladders of shoes’ air soles. It also remotely monitors the energy efficiency of its suppliers. Marks and Spencer has launched a range of projects, including one aimed at in-store energy reduction, another to source food regionally and label food transported by air freight. Another program targets consumers with educational and inspirational messages.

D: Diffuse lessons and accountability mechanisms that build sustainability literacy and affect better decision-making throughout the organization. This puts information in the hands of the right people at the right time, and creates accountability for product outcomes. Wal-Mart, North America’s largest private user of electricity, has developed a comprehensive, companywide sustainability mandate with six broad priorities and 14 cross-functional teams. As part of the effort, Wal-Mart uses what it calls “Personal Sustainability Projects” to train employees on ways to incorporate sustainability into their lives. Toyota has a number of initiatives to diffuse sustainability lessons: It formally mandates environmental action in its “Earth Charter,” it is developing local systems that streamline complex ISO 14001 and OHSAS 18001 methods in North American facilities, and the company uses green supplier guidelines that emphasize collaboration.

To enhance product sustainability, more consumers and policymakers are pushing companies to reduce carbon emissions throughout their value chains. Remember the cardinal rule: The crux of sustainable product design is generally not found within the design team, but rather in the information flow throughout the rest of the company.

First posted at GreenBiz.

The Difference Between Product and Supply Chain Footprinting

As more companies gain carbon management experience, they are expanding work from their scope of direct operations to a broader sphere of influence. Expansion is happening through two main efforts — product footprinting and supply chain footprinting, both of which are based on broadening from the organization to the inter-organizational value chain system. Each has interrelated issues and drivers, but they represent two different movements with distinct activities and tradeoffs. As standards emerge, understanding their common denominators is important for guarding against greenwashing and making the right investments. The question for companies taking the lead on carbon footprinting now is: What is the relationship between product footprinting and supply chain footprinting, and what should your company be doing?

Product Carbon Footprinting

According to London-based Carbon Trust, a company founded in 2001 in partnership with the U.K. government, consumer purchasing is the ultimate driver of all carbon emissions, and because of this, policymakers in Europe and North America are paying more attention to carbon footprints of products.

In 2007, the E.U. Parliament called for companies to begin placing carbon labels on products. In part because of this effort, Carbon Trust, along with England’s Department of Environment, Food and Rural Affairs (Defra) and BSI, the U.K.’s National Standards Body, are developing the product standard PAS 2050, which will measure the embodied emissions from products.

In the United States, economists recently testified to Congress that product carbon content should be regulated through border tax adjustments, and this year, California Assemblyman Ira Ruskin, D-Los Altos, advanced the Carbon Labeling Act known as AB2538. In Japan, the Economy, Trade and Industry Ministry is working on rules for carbon labeling, which it aims to have ready for next spring.

Corporate product pilot programs are already hitting the shelves. The most prominent one, created by Carbon Trust, is led by 20 companies, including the U.K. retailer Tesco, which has begun placing carbon labels on detergents and light bulbs. In addition to working with industry to develop standards, Timberland, an outdoor shoe and clothing manufacturing based in Stratham, New Hampshire, is disclosing product metrics as part of its Green Index product rating system.

So far, product carbon labels make three types of promises:

1. Carbon embodied: This is based on a lifecycle analysis (LCA) of the cumulative carbon produced throughout the life of a product, which includes production, distribution, consumer use and disposal. The PAS 2050 and Timberland’s Green Index are both embodied carbon frameworks. Currently, these frameworks are most developed in the Europe, and are slowly spreading to the United States.

2. Carbon reduced: This framework covers embodied carbon avoided from “business as usual,” or the likely emissions trajectory if the emissions reduction program hadn’t intervened. The only significant program in development is one by Carbon Trust called the Product-Related Emissions Reduction Framework (PERF), which is based on PAS 2050.

3. Carbon neutral: Products that fall under this category promise net zero emissions, made possible with carbon offsets. The Washington, D.C.-based offset provider Carbon Fund, a Washington, D.C.-based offset provider offers its CarbonFree certification, which covers carbon-neutral products. Many multinational companies make carbon-neutral product claims, and this framework is probably the most widespread of the three types of promises.

In order for these labels to be meaningful to consumers, data need to be objective, comparable and prudent. But many companies are running into challenges, such as how to define “boundary conditions,” or which carbon to include. For example, should shampoo include the energy associated with hot water during use of the product?

Jay Celorie, program manager for supply chain energy at HP, points out that for some product sectors, such as electronics, which may have thousands of parts and hundreds of suppliers, the boundary problem is extremely complex. In those cases, it’s impractical to aggregate primary data.

In addition to making data collection expensive, this sort of complexity leads to ambiguous results. According to Mark Newton, environmental policy manager for the computer manufacturer Dell, product footprinting may seem simple but statistical errors related to each incremental greenhouse gas (GHG) impact in the product lifecycle must be considered cumulatively, and variation of these can easily supersede apparent differences between products or features, making legitimate comparisons or claims difficult. 

Finally, communicating meaningful results is thorny. Edgar Blanco, executive director of the MIT Center for Latin-American Logistics Innovation, explains that it’s misleading to boil down footprints into a single figure without qualifying the depth, breadth and precision of data. Nonetheless, few companies are acknowledging the statistical context of their data, and therefore many companies may face questions they have a hard time answering.

Supply Chain Carbon Footprinting

Supply chain carbon footprinting, the practice of accounting for the carbon emissions of suppliers, is intended to increase the transparency of energy use and the efficiency of suppliers, and also to eliminate waste and help managers make responsible purchases. Like product footprinting, supply chain footprinting addresses emissions outside of a given company’s ownership and control, by accounting for other organizations — potentially multiple tiers of them — among common value chain systems. Unlike with product footprinting, this requires tracking primary data from specific companies, generally starting at the enterprise level. While product footprinting has been evolving since LCA emerged in the 1970s, supplier footprinting is much younger and less standardized.

The most prominent effort in this arena is London-based Carbon Disclosure Project’s Supply Chain Leadership Collaboration (SCLC), a group of 29 multinationals led by Wal-Mart that encourages suppliers to disclose their emissions publicly. Another initiative — the Electronics Industry Citizenship Coalition (EICC), an effort in which BSR is assisting — is developing a supplier reporting protocol for the information and communication technology (ICT) industry. These efforts are focused primarily on direct supplier relationships, with the aim of establishing robust systems for pushing emissions reporting carefully but firmly up the supply chain.

Not surprisingly, there are challenges with these initiatives. Despite media attention to the issue, few companies — even those that disclose their own product carbon footprints — are directly engaging suppliers about carbon emissions. And those who are engaging suppliers rarely go beyond the first tier.

The challenges are multifold: Many suppliers, citing that they are small, private and/or exclusively business-to-business, don’t see a business case for disclosure. Others aren’t familiar with common emissions measurement practices. And in addition to technological and data transparency and assurance challenges, there are often language and/or cultural gaps between suppliers and customers. In some cases, suppliers feel they lack the authority to disclose, or they fear that if they do offer disclosure, they’ll be barraged with multiple questionnaires in varying formats.

The Wisdom to Know the Difference

As it turns out, product and supply chain footprinting have interrelated drivers and issues, but they represent different movements with distinct activities and tradeoffs. Many companies are committed to supply chain footprinting, which they expect to increase efficiency and reduce waste, yet they are reticent to advocate product footprinting because data complexity and virtually no standards mean high costs and uncertain results. At the same time, some companies advertise product carbon footprints in an effort to deliver more customer value, but they don’t engage suppliers directly because they lack the systems and know-how. Yet despite their differences, “bottom-up” supply chain footprinting and “top-down” product footprinting are both important, and contrasting them can provide useful insight for companies aiming to achieve a lower carbon footprint.

Companies seeking to reduce emissions from the value chain should keep in mind the opportunities and costs of both product and supply chain footprinting. Product footprinting frameworks such as PAS 2050 start with a product’s boundary conditions (e.g. which carbon to include), and then model the cumulative impacts of processes at various stages along the value chain. While this provides a conceptual overview of the value chain’s hotspots, it does not take into account operations changes inside individual companies, which is why supply chain footprinting is also essential. In looking at the supply chain, this framework identifies the most important suppliers and observes their actual data. (For SCLC, this means suppliers of the largest public companies, like Unilever and Procter & Gamble; for EICC, it is first-tier suppliers. HP has recently disclosed [PDF] its list of key suppliers. Unlike with product footprinting, the data can be used to define operational baselines and set process performance targets. The tradeoff is that it doesn’t prioritize areas where value chain carbon emissions are highest. 

Product footprinting extrapolates secondary data from manufacturing processes and makes assumptions regarding use and disposal, while supply chain footprinting measures data from real companies directly. The former gives substantial information with high variance, while the latter provides high confidence, but for one company at a time.Each has its own standardization problems. Product footprinting must merge hundreds of processes across multiple companies yet there are scant norms for making these massive summaries meaningful to the customer, whose aim is to make simple product-to-product comparisons. Supply chain footprinting, on the other hand, struggles with how to allocate and normalize emissions by revenue, production unit, facility or another other figure.

Although both product and supply chain footprint frameworks are still emerging, it is wise for businesses to invest in the building blocks for both while legislation, pilot programs and technologies develop. In doing so, consider the following recommendations:

  • Watch for meaningful standards to emerge, particularly the GHG Protocol, which is developing guidance for product and “scope 3” emissions, and the SCLC, which is establishing reporting norms.
  • Get involved in industry-focused forums to make sure that the right incentives are being created and your efforts are being counted. As economy-wide frameworks develop, there is an increasing need for industries to play a part in informing situational guidance and the rules for boundary-setting, normalization and allocation.
  • Work with your peers on standardized content for industry supplier questionnaires to ensure that the process is also the same, with a single entry point for suppliers and buyers. In doing so, develop tools that invite entry-level and experienced users alike, and that produce standardized data that potentially support both product and supply chain footprints.
  • In making carbon claims and wider promises (see BSR’s recent report, “Eco-Promising: Communicating the Environmental Credentials of your Products and Services”), watch for advice from authorities like the Federal Trade Commission, which plans to update its guidance on green marketing claims toward the end of 2008 for the first time in 10 years.
  • Keep it simple. Companies naturally want systems that best describe their situations. However, when aggregating footprints among many companies, data grow unwieldy so there’s a premium on accessibility and common denominators. To keep it simple, focus on materiality, deferring when possible to primary data (e.g. electricity use) and public data (e.g. financial statements), and encourage your peers to communicate analyses in straightforward, comparable equations.

Originally published at Greenbiz.