Whilst climate change can be regarded as truly strategic for many organisations, the reality is that short-term and business critical issues (e.g. the credit crunch, new market development) often crowd out strategy development on longer-term issues such as climate change. This has meant that where approaches have been developed on carbon neutrality or emissions trading, they are largely reactive to immediate or imminent legislative changes in a proactive way anticipating favourable climate change policies for early movers in the market. These short term responses though need to start being supplemented by a more long term strategic consideration of climate change. For those businesses who start to make well-considered investments early on, climate change adaptation represents an opportunity to grow stakeholder value and meet future market, legislative and environmental challenges more easily.

The idea that businesses are thinking particularly in the short term about climate change is borne out by the findings of two recent reports: 

• Ernst & Young’s Strategic Business Risk: 2008 – the Top 10 Risks for Global Business identifies ‘Radical Greening’ as one of the top strategic risks for business. The report notes strong regulatory and consumer interest in climate change and anticipates that physical changes in the climate and policy responses are likely to be more severe than anticipated by many organisations.
• KPMG’s Climate Change Business Leaders Survey interviewed over seventy senior executives from the FTSE 350 and equivalent private organisations. The survey found that although over half the interviewees expect climate change to impact on their strategic development plans and operational management, only a quarter of interviewees had updated or reviewed their business model in order to manage these new challenges. 14% 30% 4% 1% 51%

Consider Greenhouse Gas emissions in the value chain, both upstream and downstream

There is a strong and increasing demand from investors to understand the greenhouse gas emissions profiles of the organisations in which they invest. Investors are particularly interested in quantifying the risk for scenarios where the cost of carbon is introduced in countries where the organisation operates or where its main markets are located. Investors obtain such information, through initiatives such as the Carbon Disclosure Project, the Carbon Principles and a host of specialist research agencies including Sustainable Asset Management (SAM) and Ethical Investment Research Service (EIRIS). Investors expect organisations to have comprehensive greenhouse gas emission accounting methodologies so that they can assess potential business impacts and make sectoral comparisons. Importantly, these methodologies are now beginning to focus on emissions that occur throughout the value chain. For example, instead of a fertiliser organisation only accounting for the emissions from its manufacturing operations, in many jurisdictions, the organisation will soon be expected to report for emissions from the use of its fertilisers. Similarly, a meat producer may, under some schemes, be expected to report for the enteric emissions of its livestock, as well as emissions from transport of the meat to market.

Organisations globally have started to measure and manage Greenhouse Gas emissions in their supply chain but even the most developed of these initiatives are at a rudimentary stage. According to the latest results from the Carbon Disclosure Project, only 60% of Australia & New Zealand’s top 150 organisations have sufficient information to disclose the Greenhouse Gas emissions data from their operations. This suggests a need for change in the way organisations consider emissions, both up and down the value chain.

One driver for such change is the potential introduction of carbon taxes on goods imported from countries which do not have carbon cost mechanisms in place. Whether through direct or indirect inclusion in emissions trading scheme or a carbon tax, organisations in Australasia will need to measure and manage the Greenhouse Gas emissions in their operations, suppliers and products. To support this, New Zealand Government has recently released the guidelines for voluntary accounting of emissions and Australia Government is finalizing National GHG & Energy Reporting System (NGERS). Also, realizing the importance of measuring emissions in the entire value chain, the British Standards Institute are formulating guidelines (known as PAS2050) which are designed to allow organisations to measure the Greenhouse Gas emissions attributable to their products and services.

Consider investment opportunities in emission reduction technologies and techniques

Increased global pressure and the introduction of policies and regulations such as Emissions Trading Schemes in the market have encouraged many businesses to increase their investments in clean energy technologies. According to CDP5, whilst 70% of larger Australian organisations (by market capitalization) had some emission reduction targets, timeframes and implementation of activities to reduce the emissions, New Zealand organisations failed to demonstrate the same degree of progress. In addition, larger organisations had more advanced emission reduction programs than smaller organisations. According to research firm New Energy Finance, new global investments in energy technologies—including venture capital, project finance, public markets, and research and development—have expanded by 60 percent from $92.6 billion in 2006 to $148.4 billion in 2007. The Clean Edge report notes that investments into the cleaner technologies are expected to cross US$250 billion by 2017. Obviously, new commercial opportunities exist for organisations that can develop and prioritize programs for emissions reduction.

Investments in cleaner technologies do offer the opportunity to become involved in commercially attractive stand-alone investments. For example, by reducing value chain emissions through improvements in energy efficiency or becoming involved in emerging carbon markets in Asia-Pacific, the Middle East and Africa. However, caution needs to be exercised with investments in presently non-scaleable, high-cost, low security technologies such as tidal and wave energy, fuel cells, hydrogen energy  lest they pose a challenge to meeting business goals. Also organisations need to be aware of volatility and market risks because clean energy is a global opportunity that is being pursued by many. Staying conscious of new innovations and R&D efforts in the clean energy sector will assist in making well-timed, informed business decisions and investments technologies suitable for long–term, profitable growth that satisfies regulatory requirements.

Consider the physical impacts of climate change on existing and planned assets

For a number of years, leading organisations, particularly those in the energy sector, have included only a cost of carbon into their portfolio assessment and investment analyses. Very few organisations have considered the long-term physical impact of climate change on their business. To a certain extent, this is understandable given the uncertainty in climate models. The contrary view is that the models now provide sufficient certainty on broad climatic trends for organisations to integrate climate-related ‘what if?’ scenarios into their planning. There is a need for business to ‘climate-proof’ themselves, to examine the climate vulnerability of their supply chain, existing resources and customer base. A recent report published as part of the Carbon Disclosure Project via the UK Climate Impacts Programme, The Adaptation Tipping Point: Are UK Businesses Climate-Proof?” identified the importance of adaptation to business, investors and the financial markets, and noted that there was now sufficient information for climate change effects to be incorporated into long-term business decision-making.

At a minimum, organisations should consider integrating climate vulnerability into existing future proofing processes for the planning and design of multi-million dollar infrastructure projects. This means looking at any increase in climate-related hazard, and any climate-driven change in natural resources used by the asset, including changes in the vulnerability of the receiving environment of discharges and emissions. Interestingly, such an approach is already being encouraged for selected projects in developing countries by entities such as the World Bank and the Asian Development Bank. Similar proactive approaches are also being adopted by national and local governments as they develop their awareness of climate effects on natural hazards. This alone is likely to drive change amongst developers and infrastructure providers, with some competitive advantage for early movers.
 
Conclusion

Whilst individual organisations may identify risks and opportunities other than those raised here, organisation executives should consider looking ahead of the imminent regulation and short-term branding opportunities and towards longer-term fundamentals that will both reduce emissions and maintain shareholder value.

© Sinclair Knight Merz
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