Being prepared for climate change is your best competitive advatange

There are some fundamental steps companies should undertake to reduce risks and enhance opportunities under the current global carbon policy. In this article, we will explore the current state of climate change policy and recommend steps to comply and, more importantly, create competitive advantage.

From pledges to actions

The 21st Conference of Parties (COP 21) under the United Nations Framework Convention on Climate Change in Paris was hailed as a success for reaching a historic agreement to tackle climate change and transition toward a cleaner global economy, but the road to limit global warming below the 2-degree Celsius threshold (and possibly pushing to 1.5 degrees) is still challenging and not straightforward.

There is a lot of justified optimism, as an overwhelming number of countries (187), including all the major emitters, have submitted their Intended Nationally Determined Contribution (INDC) in reducing their greenhouse gas emissions.  The same countries now need to move to Nationally Determined Contribution (NDC) and officially consent to be bound by it. To make the agreement effective, at least 55 parties, representing a minimum of 55 percent of total global emissions, will need to go through a domestic political process to ratify it.

At COP22 the focus at the conference will be on the implementation and operationalization of the agreements reached in Paris.

The COP 22 planned for November 2016 in Marrakesh, Morocco, will be the checkpoint to verify the status of pledges, ratifications and commitments. The focus at the conference will be on the implementation and operationalization of the agreements reached in Paris related to carbon markets and carbon pricing, climate finance, how to address losses and damages, and reporting against commitments.

The next COP will represent a fundamental step in bringing Africa into the game, leveraging carbon finance pledges and fostering innovation in energy efficiency and renewable energy to build opportunities for sustainable development of the African economy. A good example of how African nations are progressing is coming from Morocco, the hosting country. Morocco is committed to reducing greenhouse gas (GHG) emissions by 32 percent by 2030 in its INDC and reaching 50 percent of installed energy generation capacity from renewables by 2025. A first important step in this direction is the Noor-Ouarzazate concentrated solar power (CSP) plant, which will be the world’s largest of its kind with an installed capacity of 500 MW in 2018. The first phase of the project has been recently completed.

A role for the private sector

Reducing carbon dioxide emissions is subject to political debate, which can lose sight of the real aim of reducing GHG emissions. This can waste time and lead to compromises that only address part of the problem. However, one of the key outcomes of the Paris COP is the growing role and commitment of the private sector, independent of legislation.

800 of the largest listed companies in the world pledged their support for a legally binding agreement in Paris.

According to a Carbon Disclosure Project (CDP) survey, 800 of the largest listed companies in the world pledged their support for a legally binding agreement in Paris and for an ambitious target of net zero emissions well before the end of the century. One hundred and twenty large corporations, representing combined annual emissions of around 500 million tonnes of CO2, committed to set climate science-based reduction targets; the list includes Coca Cola, Dell, General Mills and Procter & Gamble. Those companies have already published their targets.

Another recent survey from Ernst & Young confirmed that there is a growing consensus in the business community for carbon pricing, with more than 430 companies declaring they have already set a carbon price to use in the internal decision making process.

Fifty four percent of survey respondents agreed that putting a price on carbon is the most effective way to curb GHG emissions. There is a widespread expectation that carbon pricing mechanisms will be implemented soon across the largest economies. Organizations that have been operating in a context where a carbon price has already been in place (e.g. under the EU Emissions Trading Scheme) will undoubtedly realize competitive advantages.

Leading up to the Paris conference, DuPont joined 100 other large businesses in the United States and signed the advertisement “Business backs low-carbon USA”

The pledge demonstrates DuPont’s commitment to do its part in reducing global emissions. From 1990 to 2013, DuPont has been able to decouple growth and emission generation, dramatically reducing the carbon intensity of its productions. As a result of this, DuPont’s production grew by 47 percent, and total carbon emissions went down by 51 percent. DuPont will further reduce its non-renewable energy use by 10 percent per price adjusted dollar revenue compared with the 2010 baseline by 2020. By the same year, DuPont is committed to further reduce its GHG intensity by 7 percent, calculated on the 2015 baseline.

Preparing for a carbon constrained future

What should companies do to prepare for the upcoming climate challenge and to be part of the solution?

Each company, depending on its industrial sector, the countries where it operates and the nature of goods and services provided, will first have to assess its level of direct exposure to the climate risk and look for appropriate responses.

A second aspect to consider is reputation. Companies should ask themselves, “What are our stakeholders (shareholders, investors, employees, local communities, government, peers, customers, suppliers) expecting from us?” Independent from the level of compliance required, there has been increasing pressure from these groups for companies to adopt low-carbon strategies.

Then, “what are the climate risks and opportunities affecting our value chain and how can we create value?”  

The Carbon Journey: From Value Protection to Value Creation

An implementation plan

There are some fundamental steps companies should undertake to reduce risks and enhance opportunities under the current global carbon policy context:

Get the numbers right. A robust carbon inventory, updated on the basis of the most reliable international protocols and emissions factors, is key since “we cannot manage what we cannot measure.” The inventory should be informed by the principles of completeness, transparency, comparability and accuracy.

Design a monitoring, reporting, verification system (MRV). Any carbon reduction strategy needs a system that regularly updates, reviews and allows prompt and accurate reporting of GHG emissions data, normally required for compliance reasons. While external verification and assurance can be required by regulation, voluntary assurance has always proven to be effective as a third-party check of the completeness and accuracy of reported emissions. This can be required by company boards as a risk-control tool, and responds to transparency requirements from external stakeholders. To pass the assurance test, a robust audit trail including evidence, calculation methodologies and assumptions taken should be kept in a documented and systematic way.

Define reduction targets and carbon management systems. A credible reduction commitment should be based on clear and measurable targets. Targets must be achievable and aligned with international policies. Carbon management systems will codify policies, procedures and record keeping to prepare for a carbon strategy.

Develop an adaptation and mitigation strategy. Climate change is already impacting companies’ assets, especially if they are located in proximity to water shores or exposed to extreme weather events. Adapting means considering climate concerns when finding the best location for operations and production facilities, designing more resilient structures and equipment, and having contingency plans in case of unexpected events. An adaptation strategy should start from a thorough risk assessment and budget for investment to protect assets. A carbon mitigation strategy will look at compliance risks and effects of carbon pricing, and define emissions reduction actions. The development of marginal abatement cost curves (MACC) will help decision makers identify initiatives and investment options that obtain the best outcomes for the lowest cost. In an emissions trading context, MACC will help in applying ‘make’ (invest internally in GHG reductions) or ‘buy’ (purchase available credits to comply with legislation requirements) decisions. Investments in renewable energy sources that replace fossil fuel energy generation are a key option to explore. A mitigation strategy can include a trading strategy under emissions trading systems.

Access carbon finance. Carbon finance is increasingly available at a public and private level, sometimes supported by the generation of emissions credits as loan securities. Advanced financial instruments can be activated by international climate finance, especially in developing countries, where there is a need for technological transfer. Available finance will trigger innovation and investment in low carbon technology, and open a wealth of opportunities to savvy carbon conscious enterprises.

Like any organizational improvement, an improvement plan requires step changes in performance that start at the top. The carbon journey needs to be backed by a positive culture and strong leadership commitment; the kind of leadership that is visible through actions and demonstrates that controlling climate change is part of the company’s core values. Resulting from this, the transformation will pervade, and over time a healthy climate-conscious culture will translate into competitive advantage.

This article was originally published on Environmental Leader
Michele Villa is Director and Global Practices Leader at DuPont Sustainable Solutions. An expert at integrating environmental issues into the long-term financial success of organizations, his areas of specialization include identifying risk, improving business performance and implementing best practices for future emissions trading, environmental and health and safety management systems, sustainability programs and waste management.