Dispatch from Hong Kong: Will We Ever See Big-Picture Climate Accounting?

This week in Hong Kong, ASrIA held a press conference that covered two arenas of business climate action that, disappointingly, have yet to mix.

The first was Carbon Disclosure Project’s 2009 Asia report, which announced that the number of companies reporting on emissions has doubled from the previous year, up to 127. This study, much like Newsweek’s inaugural Green Rankings, emphasizes the micro-accounting of entities, and exudes optimism.

The second was the announcement of the Copenhagen Communiqué, a movement to re-gear the economic systems within which companies work. This signatory policy call—much like the Business for Innovative Climate and Energy Policy, the U.S. Climate Action Partnership, and the World Wildlife Fund’s Open Letter to the U.S. Senate, and Ethos’ similar letter to Brazil—emphasizes that in the big picture, greenhouse gas and clean energy trends are unlikely to change without legislation making the former more expensive and the latter less so. In this macro context, managing emissions has little overall effect if the regulatory systems are defunct.

Will these two arenas ever mix, with climate accounting incorporating performance against the big picture?

Originally posted at BSR.

A Business Guide to Managing U.S.-China Climate Relations

Earlier this year, we noted several factors that are key to staying on the critical path to an effective climate treaty: The U.S. must enact serious climate legislation, both China and the U.S. would have to ratchet up their respective commitments, and the U.S. Senate needs to ratify the international treaty produced by negotiations in Copenhagen this December.

There is movement forward. On June 26, the U.S. House of Representatives approved the American Clean Energy and Security Act, the nation’s first-ever cap-and-trade bill that is also known as Waxman-Markey. China and the U.S. have held numerous climate policy talks, and the U.S. has exerted more leadership in U.N. negotiations than it has in more than a decade. At the recent G8 summit, U.S. President Barack Obama and Chinese President Hu Jintao joined other heads of major economies in agreeing that they should not allow the world to warm more than 2 degrees Celsius.

Yet China still has not committed to specific emissions cuts and targets, a step not only essential to the fight against global warming, but one that will also influence whether the U.S. Senate passes Waxman-Markey. Whatever happens in the Senate, it is clear that climate will remain a dominant trade theme between China and the U.S., the world’s No. 1 and No. 2 greenhouse gas emitters. For business, this means that a new policy landscape on emissions will take shape, with potential impacts on regulatory regimes in both countries as well as transnational issues, such as supply chain emissions.

The following guide offers insight into what you can do to ensure that your company is positioned for success in this rapidly changing climate.

Anticipate: Understand the Emerging Landscape

Upcoming legislation has the potential to reshape the way U.S. businesses use energy resources, both at home and abroad. Two key issues will determine whether China and the U.S. move toward meaningful cooperation on climate issues in the near future. The first is whether China accepts emissions-reductions targets; the second is whether the U.S. Senate passes a Waxman-Markey bill that China does not perceive as overly restricting Chinese imports.

China’s current climate programs are limited to the promotion of energy efficiency, and the country’s leadership shows little sign of moving toward carbon-dioxide emissions caps, despite pressure from the U.S. On the U.S. side, domestic manufacturing lobbyists are creating pressure for an eventual cap-and-trade law to contain measures to protect the U.S. from inaction by China. Watch these relationships as the bill goes through markup by July 31 and through committee by September 18, in preparation for a fall vote.

If Waxman-Markey passes, the Senate likely will vote in December on a global climate treaty brought back from Copenhagen by chief U.S. climate negotiator Todd Stern. To secure ratification, perceived leadership by China will be even more important. According to Sen. John Kerry, D-Mass., the 60 votes required for cap-and-trade are within reach, but the 67 votes needed to ratify a treaty will be nearly impossible without more significant commitments than China has signaled so far.

China — which has consistently positioned itself as a developing economy that cannot afford to cut emissions — even as it pushes other countries to make sharp cuts — knows that as the largest global emitter, no climate treaty will work without it. And while negotiators undoubtedly will continue to take a tough line in the build-up to Copenhagen, there already have been signals that a deal can be reached. After his June trip to Beijing, Stern said he expects China to commit to stabilization of long-term emissions around 450 parts per million, as well as a target year for peak emissions.

To stay apprised of possible new commitments by China, follow China’s evolving 2011 to 2015 five-year plan, watch ongoing meetings this summer between Stern and China’s climate change envoy, Xie Zhenhua, and pay attention to whether coalitions of industrialized and developing nations are able to agree on reduction targets as the G-20 meeting in the U.S. approaches.

A thornier issue is how the two countries will manage emissions in value chains that cross their borders. In March, China’s head climate negotiator, Li Gao, famously asserted that the U.S. should take responsibility for emissions that happen in China due to the significant volume of goods produced in China for the U.S. market. Then in June, when the U.S. House of Representatives added mandatory carbon import tariffs for countries like China to Waxman-Markey, China’s Vice Foreign Minister He Yafei firmly stated that his country opposed that possibility. President Obama has said he prefers to avoid such measures, but others have pointed out that tariffs could strengthen the U.S. negotiating position as the Senate tries to develop a politically feasible bill.

Assess: Know Where Your Company Stands

Regardless what happens in the near-term with U.S. legislation, bilateral relations with China, and the Copenhagen negotiations, companies should assess how their markets, operations and supply chains will be impacted by potential new policies and regulations, which may include price and market mechanisms, financial incentives, and technical requirements.

All signs indicate that over the long-term, climate change and related policy responses will push prices up for carbon-derived energy. The key question for global companies is whether climate policy will evolve in a smooth and comprehensive way, or whether pockets of local opposition will spark balkanized schemes. The former scenario is most conducive to efficiency and low-transaction costs, the latter more likely to lead to gaming and continued erosion of public trust. So, when considering your company’s exposure, think not only about the direct cost of carbon, but also overall market stability and the risks of an uncertain policy regime.

A related issue is the establishment of border measures, which are aimed at addressing cross-border emissions or “leakage,” while applying even trade pressures to both sides. If border measures are passed through Waxman-Markey or other legislation, don’t count on a trade war, but do expect the World Trade Organization (WTO) to permit them. The WTO is likely to treat cap-and-trade the same way it treats value-added taxes, with border taxes allowed if they reduce distortions. When assessing your exposure, make sure you are aware of where your supply chains cross borders, especially those associated with energy-intensive production.

Act: Take Informed, Decisive Action

It is in the interest of business to promote strong climate policy, both to insure against potentially disastrous long-term consequences and to support innovation and entrepreneurship. An informed analysis should include a full picture of potential policy impacts, including the costs of inaction. Economists agree that, in net present value terms, the costs of ignoring climate change are much worse than those expected to arise from mitigation efforts, such as short-term spikes in energy prices (which will be temporary as companies invest in low-carbon alternatives). Also, be wary of analyses that use overly simplistic calculations of policy costs to assess climate policy. If and when you do decide to influence Waxman-Markey’s undecided senators (PDF), you may be most influential if joining forces with existing groups, such as U.S. Climate Action Partnership or Business for Innovative Climate and Energy Policy — or by working with BSR and other players in the field to create other kinds of momentum.

Waxman-Markey in the U.S. Senate: Will It Pass?
Passing the Waxman-Markey bill through the U.S. Senate requires 60 votes, and as of early July, there were 45 supporters and 23 undecided voters, mostly industrial state Democrats and Republicans. Winning over the 15 voters needed to reach 60 will be no small task, and there are a number of perspectives on what it will take.According to U.S. climate expert Joseph Romm, the key is portraying the bill as the single most important vote that senators, who see themselves as historic figures, will ever cast. New York Times columnist Thomas Friedman says the solution is threefold: Obama must hit the speech trail, young people must organize public events, and ultimately Republicans must understand that conservation and conservatism are related.

In more practical terms, it will also help if flexibility is built into the bill, as was done to aid its passage in the U.S. House of Representatives. In addition, issues that go beyond cap-and-trade, such as nuclear energy and the potential impacts on agriculture, may need to be addressed.

In the end, the Senate is likely to be a more challenging environment for this bill than the House because rural voices, which so far have been un-supportive of cap-and-trade, are amplified. Also, given the highly partisan nature of the dialogue and rhetoric so far, Republicans may be wary of lending their support.

On the other hand, says Sen. Jeff Bingaman (D-N.M.), most senators are at least persuaded that the science is clear and requires a policy response. The political analysis website the Daily Kos has published a preliminary vote-by-vote assessment that predicts failure, so the one sure thing is that the next few months will be a difficult test of the political skills of Senate leaders and President Obama.

Companies with operations in China should take the time to share with employees, partners, and other members of the business community why climate change is material to your business, and the importance of the U.S. and China making joint commitments. You can help take a lead in transparency by supporting and joining a regional or national climate registry (PDF). Finally, given the upward price pressure of carbon-based energy, consider collaborative opportunities to work with facilities and suppliers to increase energy and carbon efficiency.

Increased awareness of the direction climate policy is headed in both the U.S. and China is beneficial for business planning, as changes in energy subsidies or incentives and cross-border emissions regulation all carry significant financial implications. Understanding the international dialogue and positioning by each side will help you predict upcoming regulatory shifts in both countries, and will create the opportunity for informed action to influence policy. As Waxman-Markey winds its way through the Senate en route to the White House, don’t lose sight of the effects this bill may have for your business far beyond U.S. borders.


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.

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.