Carbon on Company Balance Sheets?

Despite the fizzle after the great fanfare of the Copenhagen Summit, many companies remain intensely focused on the strategic implications of climate change. Some believe that a requirement to monitor, report and reduce their carbon emissions is coming and is just a question of time. Indeed, some observers believe that carbon accounting is destined to be embedded in the core of enterprise systems, with carbon emissions tracked continuously and treated like any other balance-sheet item.

I recently had the opportunity to speak with David Abood, Managing Director, Sustainability Services North America and Climate Change Solutions Global Lead at Accenture, the consulting and strategy firm. In his experience, the attention companies are putting on carbon accounting, tracking and reporting varies according to the risk and opportunity they attach to it. Companies that see themselves “in the cross hairs” of future cap and trade programs are, as you might expect, paying close attention. For instance, Accenture is being asked right now by major companies that would be “capped entities” (bound, under proposed cap-and-trade legislation, to limit carbon emissions) to do company-wide system implementations to handle the requirement of detailed tracking of carbon emissions, or to do carbon analytics as a managed service.

But even companies that are not destined to become capped entities are getting increasingly engaged, he says, whether due to pressure from their customers or from organizations like the Carbon Disclosure Project. He expects the CDP to push for increasingly granular emissions tracking over time. This will inevitably drive more detailed reporting by the growing number of reporting companies and eventually their supply chain partners too (as I’ve noted here).

Accenture has made a substantial investment in building a capability to help clients cope with climate change. The firm has some 200-300 people in its Sustainability Services practice and around 2000 people company-wide with a focus in this area alongside their principle functional or industry expertise. The company has done an analysis of the “whole software market” around carbon accounting, Abood says, and are working with SAP, Carbon Networks and IHS, among other potential partners.

So, is the day at hand when most companies will track carbon emissions continously, and integrate emissions reporting into core financial and operational reporting? Not quite. Abood says that vision is “in everyone’s sights” but ackowledges that no one has yet “cracked the code.”

If you have a point of view on where carbon accounting is headed, please consider leaving a comment.

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1 Comment

Filed under carbon, emissions, Supply chain, sustainability

One response to “Carbon on Company Balance Sheets?

  1. 12.01.10
    On January 27, 2010 the SEC voted to provide “interpretive guidance” to existing disclosure requirements as they related to climate change without taking a position on the subject (Shapiro, 2010). Examples of mandatory reporting factors include the impacts of legislation and regulation, impacts of international accords, indirect consequences of regulation or business trends, and the physical impacts of climate change. In other words, some assessment of the risks and opportunities associated with climate change is required under existing regulations because that information is critical to investors. Because existing EU or pending U.S. regulations regarding carbon emissions now have an impact on “a company’s risk factors, business description, legal proceedings, and management discussion and analysis” ( ¶3), the SEC henceforth expects those impacts to appear in company filings.
    Trucost (2006) provides an example of how carbon emission disclosure can radically alter perceptions available from an annual report. Under the 2006 guidelines, the 25 utilities that reported a profit all ignored the externality of emissions, which they were legally entitled to do at the time. Under SEC guidelines, only those companies actually paying for or selling carbon credits would legally be able to include those transactions on their financial statements. All others would be required to include a risk and opportunity assessment for various future regulatory environments. However, given that cap-and-trade is established in the EU, will shortly begin in California, and is being considered on a national scale in the U.S., it seems that prudent management would include some discussion regarding the strategy required to most efficiently position the companies for cap- and-trade that must and should be presented in their annual reports. At the very least some consideration of future or pending legislation would provide a more accurate picture of the future cash flow of those companies with carbon emission.
    Utilities, refineries and industrial facilities operating in California will begin a cap-and-trade system in 2012, just one year away, in an effort to achieve a 15% reduction in GHG emissions by 2020 (Roosevelt, 2009). As mentioned in the Trucost report, given certain conditions, those utilities that find that they can most easily reduce emissions will do so as long as the price of carbon stays above the investment level of improvements. They can then sell their credits to those utilities that cannot or choose not to invest in lower emission technology.
    Under SEC regulations, it is the fiduciary responsibility of management to discuss these options and report their activities, whether pro-active or reactive, in the appropriate sections of the annual report. However, it would be short-sighted for management to concentrate just on carbon emissions as prudent financial risk management requires capital structure that anticipates future risk. It is the responsibility of the company to not only share material information with investors, but to seek out for its own sake all those ESG factors that affect cash flows, insurance exposure, litigation, liquidity and asset management, to list just a few.
    Roosevelt, M. (2009, November 24). California pushes cap-and-trade plan. Los Angeles Times. Retrieved from http://latimesblogs.latimes.com/greenspace/2009/11/california-cap-and-trade-plan.html.
    Shapiro, K. N. (2010, January 27). SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change. U.S. Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/press/2010/2010-15.htm.
    Trucost (2006). Carbon Disclosure Project Report 2006. Carbon Disclosure Project. (p.29-32). Retrieved from http://www.calstrs.com/newsroom/2007/cdp_elecut265_final_report_
    electronic.pdf.
    Terry John Gibson, RLA
    MBA of Sustainable Business Student
    Marylhurst University

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