A change in the climate Is business going green?graphics.eiu.com/upload/portal/climate.pdf · to human suffering, the economic effects could be immense. The UK government’s Stern

A change in the climateIs business going green?A report from the Economist Intelligence Unit

Commissioned by

© The Economist Intelligence Unit 2006 1

A change in the climate Is business going green?

A change in the climate: Is business going green? investigates the state of corporate efforts today to deal with the threat of climate change, focusing on what action is or isn’t being taken to reduce carbon emissions.

The report was commissioned by UK Trade & Investment (www.uktradeinvest.gov.uk), the UK government’s international business development organisation, which supports businesses seeking to establish in the UK and helps UK companies to grow internationally.

The Economist Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Unit’s editorial team executed the online survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor.

The research drew on two main initiatives:● The Economist Intelligence Unit conducted a major

online survey of senior executives from around the world during March and April 2007. In total, 634 executives took part in the survey.

● To supplement the survey results, the Economist Intelligence Unit also conducted in-depth interviews with seven senior executives from a range of industries and regions.

Paul Kielstra was the author of the report and James Watson was the editor. We would like to thank all the executives who participated in the survey and interviews for their time and insights.

May 2007

Preface

2 © The Economist Intelligence Unit 2006


Executive summary

Carbon dioxide and its role in climate change have rarely been more topical, nor has the news been so alarming. The release of the latest report1 from the Intergovernmental Panel on Climate Change in stages throughout 2007 will continue to focus minds, with the first instalment predicting potential average temperature increases of as much as 6.4º C and sea level rises of as high as 43 cm by 2100. In addition to human suffering, the economic effects could be immense. The UK government’s Stern2 report predicts that a temperature increase of 5º C could cut global GDP by 10%. At worst, that figure might reach 20%.

Uncertainty remains over the likely degree of change: in the very best case it, and the resultant impact, might be minor. Nevertheless, signs that governments intend to act, including with tighter regulation of business’s carbon emissions, are widespread. In March the EU committed to reducing its CO2 output to 20% below 1990 levels by the year 2020. The UK also released a Climate Change Bill, which promises a 60% reduction by 2050, while a May Day summit gathered pledges for action from hundreds of business leaders. Across the Atlantic, the US Supreme Court has ruled that the country’s Environmental Protection Agency (EPA) not only could regulate CO2 as a pollutant, but needed to

justify scientifically not doing so. Meanwhile, Congress is debating legislation on CO2 emissions.

The public apparently backs action: a recent worldwide poll by the Chicago Council on Global Affairs indicated that huge majorities in every sampled country considered global warming either an important or critical issue.

So what is business doing? Amid these rapidly escalating concerns, this report considers how the corporate sector is preparing for the coming carbon-controlled world. Based on a survey of 634 business leaders worldwide, its key findings are as follows:

● Business is not keeping up with the changing public mood. Less than 10% of executives admit that their organisations monitor their overall carbon footprint and just 18% have a carbon reduction plan in place. Although these numbers look set to rise rapidly, nearly one-half of firms have no intention of implementing carbon-reduction plans within the next three years.

● Business is reacting to reputational risk, not exploiting business opportunities. Consumer behaviour, environmental campaigns and investor demands are doing little to drive change in this area, although the investor community is starting to adjust. Niche markets exist that exploit carbon concerns, but the major factor motivating business is reputational. Tod Arbogast, director for sustainable business at Dell, a US PC maker, believes that “customers have consideration for companies that lead” on carbon issues. Neil Campbell, CEO of Walkers Crisps, a division of Pepsi, a US food and beverages firm, adds that “doing the right thing will have some sort of competitive advantage”.

● Companies do not expect the costs to be high. Businesses engaged in carbon reduction are spending only about 0.6% of their operating expenses in this area. By 2010, more than half (55%) of these

Who took the survey?A total of 634 executives worldwide took part in this survey. Respondents were split between manufacturing, energy, transport and other heavy indus-tries (46%) and service-based businesses, such as banking, healthcare and information technology (54%). Around 31% of respondents were based in western Europe, 28% in the Asia-Pacific region and 26% in North America. A total of 42% of respondents were C-level executives, including 152 CEOs, managing directors and presidents. In terms of size, firms were split roughly evenly between those with revenue above US$1bn (37%) and those with revenue below US$500m (39%); the balance of companies had revenue between US$500m and US$1bn.

1 Climate Change 2007, Fourth Assessment Report, Intergovernmental Panel on Climate Change, Paris, 2007

2 Stern Review on the Economics of Climate Change, HM Treasury, 2006



executives expect these efforts to either impose no costs on their business, or else result in a net positive impact, mostly through savings on energy bills and increased sales for enhanced brands. Just 10% think it will have an overall negative impact on costs, with the balance unsure.

● Companies starting out on carbon reduction face a steep learning curve. The number of firms with plans to reduce their CO2 output is rising rapidly, with much experimentation taking place. Hopeful projections about cuts have to be balanced against the lack of experience and difficulties involved in establishing best practice in such a fast-changing field. Expectations about carbon offsetting, and even some basic unanswered questions about who is primarily responsible for what carbon, suggest a lot of effort will be required before large numbers of companies are able to pursue rigorous, effective policies.

● Government has a crucial role to play. Government regulation is the single largest factor in shaping how companies address carbon issues.

Moreover, companies involved in carbon reduction want government to create a clear framework. Without this, corporate efforts will suffer from uncertainty about what is expected or required. A market-based system to price carbon, such as a well-run carbon trading scheme, is likely to be the most effective arrangement, according to survey respondents.

When it comes to carbon emissions, there is little in the way of an established corporate response today. Those companies that have taken the first steps, measuring their energy consumption and perhaps even making some tentative cuts, are in a relative minority. However, this report suggests that much more effort is likely to be made over the remainder of this decade. Encouragingly, one in five executives polled for this report say that their companies already have a director who is specifically responsible for the firm’s environmental impact. By 2010, one-third polled say they will have such a person. However, any progress made by business to cut the impact of carbon emissions will be governed primarily by how rapidly governments can implement appropriate legislation that creates incentives for change.



Lose carbon now, ask me how

Cutting your company’s carbon impact: five points to consider

1. Carbon reduction is not an add-on. It needs to form part of an overall environmental programme, otherwise neither the environment nor stakeholders relations will benefit. Tod Arbogast, US PC maker Dell’s director for sustainable business, says, “Carbon is a component of environmental leadership, not the component”. In his industry, for example, chemical use and recycling issues are just as important.

2. Securing detailed knowledge of your total carbon impact is essential.

● First, it is central to properly targeting carbon reduction programmes. Companies increasingly have to consider not just the CO2 produced in their own operations, but that arising from their supply chains and use of their products once sold. Leading firms are still working out best practice for this sort of measurement and are learning just where their efforts could have the biggest impact. When measuring the carbon footprint of a bag of Walker’s Crisps, CEO Neil Campbell was surprised at the size of the percentage that agricultural inputs accounted for.

● Second, measurement of carbon output requires detailed accounting. Dr Patti Wickens, environmental principal at mining company De Beers, says a great degree of rigour is required to do this properly.

● Third, carbon offsetting is a minefield. Understanding what constitutes genuine offsetting, or even finding reliable partners, requires very thorough due diligence if companies are to be safe from reputational disasters.

3. Carbon reduction is about more than just energy efficiency. Matthew Gorman, group sustainability manager at UK airport operator BAA, says the internal strategy is to first avoid carbon emissions where possible, then to invest in technology that will reduce them, and finally to consider possible ways to offset them. Efforts must also stretch beyond the company. All the firms interviewed for this report were focused beyond their own operations and cooperating with suppliers, energy providers, consumers and other industries to find ways to lower everyone’s CO2 production.

4. Use carbon reduction as a way to look for savings.Executives interviewed for this study all noted the financial savings possible through good carbon reduction programmes—and not just from energy efficiency. As businesses review processes to make them more carbon efficient, they can also make them more cost effective. In Mr Campbell’s words, it can lead to “win-win” situations.

5. Communicate your efforts to the market. Mr Gorman notes the importance of communication in carbon reduction efforts, both to internal audiences and external stakeholders. Not only is it the key to getting employees to help with reducing CO2 output, more generally “There’s no use doing lots of good things if you don’t tell people about them”.



A lack of action in a changing worldDespite various high-profile corporate carbon-reduction efforts, this survey reveals that businesses are generally only starting to address this issue, and too many are ignoring it. Currently, only 10% of respondents monitor their overall carbon footprint—including their own direct impact, the carbon needed to produce their inputs, and the effect of their products—and a similar number monitor carbon emissions from direct operations, but 32% have no plans to undertake any carbon monitoring, including measuring simple energy efficiency. The balance either only monitor some aspects of their carbon emissions (15%), or their energy efficiency (18%), or else they plan to start doing something within the next three years (10%).

More telling still than mere measurement is the lack of action. Only 18% of companies surveyed are currently trying to reduce their carbon impact. Although 28% hope to start such programmes in the next three years, 45% have no intention of doing so

in the future. Moreover, the nature of these efforts, both planned and in place, is generally limited. Over one-half of firms (54%) have been trying to improve energy efficiency—although even here 15% have no plans to do so. Other ideas, such as modifying supply chains, have distinctly minority appeal, and reducing business travel or discontinuing or changing products with a large carbon impact are particularly unpopular. As for investment practices, carbon implications are an important consideration for only a small number of companies deciding on acquisitions or joint ventures. Despite all this, nearly 40% of firms say that the carbon effects of new investments in equipment, plants or technology are a “major” or “moderate” consideration.

The worst emitters, heavy industries, are doing slightly better, but even among these 24% had no plans to monitor their carbon output and 42% had no plans for carbon reduction. Unavoidable awareness of the problem is the main explanation of this slightly greater performance. When respondents reported on use of various specific carbon-reduction strategies, after factoring out the large number of “non-applicable/don’t know” replies, the replies for heavy industries differ very little from the average, with increasing energy efficiency the only truly popular approach.

Too many companies are simply unprepared for a transformation in regulatory and public expectations. Fully 62% do not even have a director with specific

Which of the following best describes your company’s efforts to monitor its carbon impact? (% respondents)

We do not monitor our carbon emissions or overall carbon impact and have no plans to start doing so

We do not monitor our carbon impact or direct emissions, but we do measure our energy efficiency

We monitor some aspects of our carbon impact or direct emissions, but not comprehensively (eg, only in some business units, or only in some markets)

We comprehensively monitor our direct carbon emissions (eg, from our own operations, from corporate vehicles), but not our overall carbon impact

We comprehensively monitor the overall carbon impact of our activities (eg, supply chain activities, uses to which our products or services are put)

We do not monitor our carbon emissions or overall carbon impact, but plan to do so within the next three years

Don’t know

Source: Economist Intelligence Unit survey, 2007.

32

18

15

10

10

10

6

Does your company have a scheme in place to reduce its carbon impact, or does it plan to put a scheme in place within the next three years? (% respondents)

No, we have no plans to put a scheme in place within the next three years

We plan to implement a scheme within the next three years

Yes, we already have a scheme in place

Don’t know


45

28

18

9



responsibility for environmental impact. Matthew Gorman, group sustainability manager for BAA, an airport operator in the UK, advises that carbon reduction, in the UK and Europe, “is a fast-moving agenda”. As a result, “staying in touch with rapidly evolving stakeholder views is important”. Bill Reilly, former EPA administrator and adviser to Texas Pacific Group in its recent buy-out of TXU Energy, notes that in America “sensitivity to carbon has really grown” and business has begun to understand this. “It is rare to find a company that has a large output of CO2 that is not sensitive to its public image,” he says. Protecting that image will require action as well as concern.

Drivers of changeOne reason for the muted response of business to this issue is that, whatever the public as citizens might say, their response as consumers is less consistent. Most firms simply do not think that their existing carbon footprint will affect current or future market positions, and a mere 10% see it as a liability. Similarly, few firms expect major carbon-related opportunities. Only 15% consider marketing opportunities a leading benefit of carbon reduction, and just 7% believe it is a way to differentiate premium-priced products.

This is not simple myopia. Several of the companies interviewed in depth for this study that are making significant efforts on carbon reduction have had a similar experience. David Hone, climate change adviser at Shell International, notes that “because people need the energy products that we produce” there “isn’t a great deal of consumer pressure anywhere”. Mr Campbell believes that the benefits of Walkers’ recent adoption of carbon labelling on its packaging will not arise from simple competitive comparisons of the amount of carbon associated with any particular product, but in other ways, such as enhanced brand reputation.

Carbon-conscious market opportunities do exist, which some companies are attempting to tap, such as airlines that offer carbon offsetting arrangements, and train companies such as Eurostar that advertise that they will be carbon neutral from November this year. According to our survey, 16% of companies are considering use of “for-profit carbon offsetters”—such as The CarbonNeutral Company in the UK, Terrapass in the US and Climate Friendly in Australia. This would make a substantial market if all do—although concerns about the potential failings of offsetting could dent this. The success of Toyota’s hybrid cars is a striking example of the potential here, and Shell’s renewables business is growing rapidly, although neither approaches the volume

What overall carbon reduction goals does your company currently have in place to be achieved by 2010 and 2015, if any? (% respondents)

No plan in place

1-10% reduction

11-20%

21-30%

31-40%

41-50%

More than 50%

Complete carbon neutrality

Don’t know

Goal for 2010 Goal for 2015


4741

7

10

16

9

63

4

2

3

1

1

2

4

23

3

19



of both firms’ traditional product sales. Moreover, certain consumers do have a significant impact. Mr Arbogast pointed to the US federal government’s environmental performance criteria—which determine which firms Washington procures from, and which affects billions of dollars in spending each year. This does not change the overall perception—whether

clear-sightedly realistic or lacking vision—of muted change in spending habits: whatever the US government’s purchasing behaviour, far more North American companies (63%) see carbon policies as having no effect on market position than their peers in other regions.

The direct influence of environmental activists on business attitudes towards carbon issues is also underwhelming. Just less than 30% of respondents report that they have an important impact on carbon-reduction decisions, but almost the same number say that the campaigners have little or no effect, although larger companies are more sensitive here. However, attitudes do vary across regions, sometimes surprisingly so (see box Global concern, regional differences). While these figures are not negligible, those for measuring the impact of consumer attitudes (38%), government regulations (50%), or internal beliefs on appropriate corporate behaviour (40%) are higher.

One possible reason is that environmental groups do not focus on climate change everywhere. Mr Gorman says climate change and CO2 emissions have been among the top concerns raised by environmental activists with BAA for some years. Dr Patti Wickens, environmental principal at De Beers, an international mining company, explains that her company began carbon-reduction efforts as a result of its global scanning of future issues of importance. Previously, its environmental stakeholders and critics were far more likely to focus on other issues, such as rehabilitation practices.

Activist influence, however, is not straightforward, extending beyond the impact of particular campaigns. Survey respondents ranked enhanced credibility with environmental stakeholders and campaigners as one of the leading benefits of carbon reduction (among the top two at 29% of companies), behind only increased credibility with the general public and tied with enhanced brand reputation. The influence that environmentalists can exert on public opinion,

How much effect do each the following have on decisions your company might make regarding carbon reductions? Chart shows respondents that selected 1 or 2 from a scale from 1 to 5, where 1=Significant impact and 5=No impact. (% of respondents)

Existing government regulation

Consumer expectations in developed countries

A desire to prepare for/stay ahead of the curve of expected regulation

Associated costs

Consideration of the requirements of appropriate corporate conduct

Campaigns/activism by environmental groups

Employee expectations

Consumer expectations in developing countries


26 24

21 26

15 24

15 22

13 27

11 20

9 24

8 18 20

Which possible benefits from carbon reduction are most attractive to your company? Select up to two. (% respondents)

Enhanced environmental credentials with the broader community

Enhanced environmental credentials to stakeholders, and activists

Enhanced brand reputation as a means of customer retention and expansion

Enhanced employee morale/loyalty

Reduced regulatory risk/compliance with regulations

A marketing opportunity for our products/services

A product differentiation tool (eg, by allowing customers to purchase carbon neutral products at a premium price or regular products at a lower one)


37

29

28

21

15

7

18



politicians and regulators, rather than on companies directly, is of particular interest to business. In the recent proposed buy-out of TXU, the purchasers’ negotiations with two environmental groups to gain the latter’s support indicates how important activist opinion has become in certain situations.

The TXU purchase is also a sign of change in the investment markets. Until recently, it had shown little concern about high carbon output—and about

40% of surveyed companies still indicate that carbon plays very little or no role at all in their decisions on investment in other firms, whether domestic or foreign. Investors, however, may be growing more averse to the risks arising from CO2 emission. Mr Reilly says he is “honestly not sure that capital markets have thus far had much influence”, but senses change. Mr Hone also believes it is now “very clear that the investment community is interested”. He

Global concern, regional differences

This survey indicated some marked regional variations in business’s approach to carbon issues. North American companies are far less active in CO2 reduction than others. For example, 44% of executives from that region say that their firms did not intend to monitor any aspect of carbon output in the future, compared with an average of 32% overall, whereas 56% had no plans to reduce their carbon impact, compared with 46% globally.

Perceptions about costs and markets partly explain this variance. Although more North American companies see carbon-reduction efforts as likely to produce net benefits rather than costs, the margin of difference between the two (5%) is far lower than the global figure (13%). North American companies are also far more likely to believe that their carbon policies have no effect on their domestic or foreign market positions.

More important, however, is the degree of government regulation. A similar proportion of companies across all regions—about 40%—have voluntary motivations behind their carbon reductions. Where North American firms differ is in the percentage acting to meet existing or

anticipated regulatory requirements: 23% compared with about 30% in other regions.

The higher percentage of businesses acting under constraint in other parts of the world may account for an anomaly that muddies the picture. The North American companies pursuing carbon reductions had significantly higher average goals than their peers elsewhere for reductions by 2010 and by 2015, typically by about 10% more.

The situation, however, is not static. Several interviewees mention a growing sensitivity to carbon in the US. Tod Arbogast, Dell’s director for sustainable business, characterises America “as gaining in momentum with respect to recognising the challenge”. If that recognition leads to increased voluntary efforts above regulatory requirements, the country’s companies could start to take a global leadership role within the business community.

Interestingly, that leadership does not necessarily come from Europe, despite the EU’s efforts in the area. Perhaps the biggest surprise of the survey is that Asia-Pacific respondents are taking these issues most seriously of all. Firms from the region lead even Europe in terms of the percentage that are monitoring energy use, enacting a range of carbon-reduction strategies, and in particular in the impact that carbon issues have on their investment decisions. Moreover, Asian firms are far more likely to see benefits arising to their companies from

carbon reduction, and, in another surprise, pay more attention to environmental activists.

These findings seem to contradict the most compelling vision related to carbon in the region—huge volumes of pollutants spewing out of Chinese, and to a lesser extent Indian, coal-powered factories in the rush to development. This is a very real problem: the International Energy Agency recently predicted that China would surpass the US to become the world’s largest CO2 producer by “this year or next year”, according to its chief economist, Fatih Birol. The survey results, however, are a reminder that Asia’s story is extremely complex. In a global poll conducted by the Chicago Council on Global Affairs, for example, 69% of Australians, and even 42% of Chinese, call global warming a pressing problem that should be tackled now—even if at significant cost.

Russell Pullan, a director of new energy and clean technology ventures for Nomura, a Japanese financial services firm, explains that “you have to look at each country differently”, because of the wide variety of political and economic factors at play. Whatever the current situation, Asian governments are concerned. Mr Pullan believes that “at a national level, countries like Japan, India and China are taking this issue very seriously. Clearly it is an issue that could affect stability and their place in global alliances.”



points to initiatives such as the Carbon Disclosure Project (CDP), a group of 280 of the world’s largest institutional investors with over US$41trn in assets which collectively sign requests to leading companies for disclosure of greenhouse gas emission levels. The CDP has seen tremendous growth, doubling in size in the last two years, an indication of shifting sentiment that companies will increasingly have to take into account.

Whatever the equivocal impact of consumers, activists or investors, the deeper force prodding companies to change is concern over reputation. Respondents considered the biggest benefit of carbon-reduction enhanced environmental credentials within the broader community (37%), and after that improved brand reputation (29%). The underlying assumption is that carbon footprints affect public attitudes to whole companies, something that is harder to measure but potentially far more valuable than sales of specifically green products. Mr Gorman, for example, believes that public reaction to behaviour in this area affects the “wider societal licence to operate and grow. Companies need to be proactive.” Mr Reilly, in similar language, notes that performance on carbon issues is now in America “potentially a determinant of permission to do business in some respects”.

On the flip side, if responsible behaviour on carbon is likely to be necessary in the long term to do business, taking a lead also brings positive benefits. Messrs Campbell and Arbogast believe that “doing the right thing” will result in some kind of competitive advantage. In other words, leading companies are starting to act because they are increasingly expecting the public—and therefore politicians and regulators—to punish those who do not address carbon footprints and look positively on those who do.

Counting the cost or counting the profitOne surprise finding of this survey is how little a difficulty cost presents in carbon-reduction efforts.

Many respondents simply rely on their programmes to pay for themselves. Nearly twice as many believe that their company’s efforts to reduce its carbon impact will bring a net benefit as opposed to a net cost (30% compared with 16%), with the rest uncertain or thinking the result won’t obviously tip either way. However, for those firms that have already made some carbon-cutting effort, 17% have seen a net positive impact on their bottom line, compared with 11% who complained of higher costs. More striking, however, is that 35% expect profits to improve within three years because of such programmes, compared with just 10% who fear a lower net income. Within the heavy industries sector, the proportion of respondents expecting a rise in profits increased to 40%, compared with 11% who are concerned about it being a cost.

The actual outlay also suggests that the financial risk is not currently great. Of those companies that actively try to reduce their carbon and measure the cost of that reduction, most spend less than 1% of operating expenses in the process. Fully 60% of firms for which the question was applicable expect to make at least part of this back through efficiency

Does your company consider its efforts to reduce its overall carbon impact to be a net benefit or a net cost to the business?(% respondents)

Net benefit (eg, through increased sales, improved brand perception)

Neither a net benefit nor a net cost

Net cost

Not applicable/Don’t know

30

23

16

30




gains, and 47% believe that increased sales from improved brand reputation would help. But about four in ten respondents simply did not know what their companies had spent, or said that their company did not measure this.

Detailed interviews back these findings. Messrs Hone and Gorman point out that energy efficiency programmes in particular bring overall savings. According to Mr Gorman, “there is a surprising amount of low hanging fruit in terms of savings you can make if you incentivise the business”. Such easy carbon savings lead to economic ones. Mr Campbell says that in general, it is “a win-win situation”. As he puts it: “When you reduce energy, you reduce your costs. There are elements of carbon reduction that might add costs” such as trial investments, but “so far these are the minority.” It is precisely this cost-saving element that, as Mr Arbogast notes, lets companies such as Dell consider carbon reduction within its supply chain. Although he thinks there is “long journey ahead” in this area, “as we drive efficiencies, it has a direct positive impact on our suppliers’ bottom lines”.

A steep learning curveFinding best practice for carbon reduction is still in its infancy. The few firms that have strategies in place are largely focused on energy efficiency. But the proportion of companies pursuing lower carbon emissions is set to increase by 150% in the next three years. Moreover, a wide range of strategies—focusing on everything from supply chains, operations and the impact of products—are likely to at least double in popularity over the same period. These companies,

What percentage of your company’s operating expenses goes toward carbon reduction? (% respondents)

None

0.1-0.5%

0.6-1%

1-1.5%

1.6-2%

2.1-2.5%

Greater than 2.5%

Our company does not measure this

Don’t know

23

17

6

6

1

2

27

17

2


What impact has your company’s efforts to cut carbon (if any) had on its bottom line? And what impact do you anticipate it making in three years’ time? (% respondents)

Net positive impact

No impact

Net negative impact

Not applicable/Don’t Know

TodayIn three years’ time

1735

20

10

36

11

3637




although still a minority overall, have substantial goals in mind: planning an average reduction in CO2 output of 24% by 2010 and 34% by 2015—comfortably ahead of various government goals for society as a whole.

But the problem with these projections, as with those about overall cost, is that carbon reduction has a steep learning curve. The degree of ongoing innovation shows that even leading companies are still finding their feet.

Many executives interviewed for this study noted that carbon strategies are part of broader corporate environmental policies. Dr Wickens from De Beers, however, explained that they are more than just simple extensions of these. Whereas environmental rehabilitation is specific to local conditions, carbon emissions requires universal accounting with a “rigorous basis”. This rigour is particularly important in identifying where exactly carbon reduction is most needed. Both Walkers and Dell, for example, found that emissions from suppliers, and in the latter case those from consumers, were a bigger constituent of their carbon footprint than their own operations. Serious carbon reduction required going beyond simple energy efficiency.

As companies learn more about their carbon footprints, a variety of innovative techniques to address the issue are appearing. Walkers is introducing, for the first time in the UK, a carbon label on its packaging that shows the product’s entire carbon footprint broken down into the source of emissions. Dell recently started its Plant-A-Tree programme, which allows customers purchasing a computer to pay for reforestation that takes carbon out of the atmosphere equivalent to the amount created in making electricity to run their new computer. The scheme also allows those not purchasing a computer to buy carbon reduction. All the early signs are that these schemes are having a positive impact, at the very least in one their goals: raising awareness. Nevertheless, it is still far too early to start drawing lessons from them, or from a host of

other experiments, regarding overall best practice.One area of particular uncertainty is carbon

offsetting. Although about twice as many respondents agree than disagree that it is a temporary solution (38% compared with 20%), those engaged in carbon reduction expect its importance to grow rapidly. It already accounts for 7% of efforts today and this figure will double by 2010. Business, however, may not fully appreciate the difficulties. Over one-half of those companies looking to engage in offsetting expect at least part of their efforts to be internal, such as getting employees to plant trees. Proper offsetting, however, as Dr Wickens notes, “is complicated”. It requires a rigorous calculation of the true carbon benefit, of whether similar actions would have occurred anyway without the project, and of any collateral impacts of such activity. These unintended consequences range from planting the wrong kind of tree for carbon reasons and inadvertently destroying native vegetation to introducing low-carbon energy-generating equipment that is inappropriate for local development. Also, concerns have been raised about the potential for fraud in this market, such as the sale of carbon offsetting credits for nonexistent projects or for projects that would have happened anyway.

Expertise is necessary. Outsourcing to NGOs appeals to one in five companies, whereas 16% plump for for-profit offsetters. In both cases, however, examples of shoddy practice makes choosing a partner

Carbon offsetting is a temporary expedient, not a long term solution

My company’s carbon reduction efforts are made for CSR or reputational reasons, rather than improved business efficiency

Employee resistance to certain carbon reduction strategies (such as reduced air travel) makes carbon offsetting an attractive option


How strongly would you agree or disagree with the following statements? Chart shows respondents that selected 1 or 2 from a scale from 1 to 5, where 1=Strongly agree and 5=Strongly disagree.(% of respondents)

21 17

8 14 21

5 13 21 1



difficult. Mr Gorman, whose company sees offsetting as a potential part of its strategy, says there is a “need for guidance to avoid confusion in this area” and BAA is “watching the UK government consultation on best practice”. BAA, however, like many firms with a lot of experience in carbon reduction, is looking eventually to market-based carbon trading—despite the problems current arrangements face—as the best long-term solution for dealing with those carbon emissions that simply cannot be eliminated, a practice that only 17% of companies currently expect to pursue.

Practical difficulties aside, probably the biggest complication in addressing carbon reduction is that, as businesses are increasingly encouraged to look beyond the carbon emissions of their direct operations to their overall carbon footprint, some very basic matters remain undecided. As Mr Hone explains: “If you buy a car, you have an unavoidable footprint. So who is responsible: the driver, the automobile manufacturer who doesn’t offer an alternative model, or the fuel producer because it couldn’t come up with anything better?” A real world example applies to De Beers. Its Tanzanian operations have a lower footprint than similar South African ones because the electricity supplier to the former happens to have a nearby

hydroelectric generator, while very little South African electricity is based on renewables. So how much of the difference is De Beers responsible for, as opposed to its South African electricity supplier? As part of its energy and climate change strategy De Beers will review options for use of renewable energies, just as Walkers is trialing wind turbines on an experimental basis. But should they?

Too few businesses may be addressing carbon issues, but one factor that is delaying action is this lack of clarity on where responsibilities might begin and end. These are ultimately regulatory questions.

If your company engages in (or is considering engaging in) carbon offsetting, which of the following approaches does it pursue (or expect to pursue)? Select all that apply.(% respondents)

Internal efforts (eg, getting employees involved in tree planting)

Through a charitable/not-for-profit third party carbon offset provider (eg, a non profit-making independent organisation that engages in independent carbon reduction activities)

Through a carbon offset exchange system or market (eg, buying/selling carbon credits on a market)

Through a for-profit third party carbon offset provider (eg, a profit-making independent organisation that engages in independent carbon reduction activities)

Other

38

21

17

16

2




The role of the stateThe private sector is not known for its love of red tape. But when it comes to the carbon problem, however, companies are looking to their governments to lead.

Regulation has a marked effect on company carbon policies. Compliance with existing rules is the factor with the single biggest impact on survey respondents’ efforts: one-half of all firms consider it to have a significant or moderate impact. Staying ahead of possible new restrictions is similarly important to 39%. Compliance in and of itself is also listed as a leading benefit of carbon reduction by 18% of firms. And the effect of regulation is particularly pronounced

among heavy industries—those most likely to need to reduce CO2 emissions. The corresponding numbers for this sector are 55% who rank the impact of existing regulation high, 48% who say the same for future ones, and 25% who consider compliance a key benefit.

When governments get things wrong, it can delay progress. The over-issuance of carbon credits, for example, has left the European Emissions Trading Scheme with such low market prices that it provides little incentive for companies to reduce. The same fate threatens the UN’s Clean Development Mechanism. However, the survey indicates that appropriate government action would move business much more quickly towards greater efforts. At the

Making friends of energy producers and environmentalists

The recent private equity offer for TXU Energy, a Texas utility company, by Texas Pacific Group and Kohlberg Kravis Roberts is notable for several reasons. At US$45bn, should it take place, it would become the largest such deal in US history. But what is perhaps most striking about the deal is the role played by environmental concerns.

TXU had become, in the words of Bill Reilly, a former EPA administrator and adviser to Texas Pacific Group on the deal, “a poster boy for irresponsible carbon expansion” with a US$10bn plan to build 11 coal-powered generating plants. Among its leading critics were two US environmental non-governmental organisations (NGOs): Environmental Defense and the Natural Resources Defense Council (NRDC).

In approaching the deal, the purchas-ers “determined that we would not do that investment without the support of the main environmental organisations”, explains Mr

Reilly. They therefore negotiated an arrange-ment that, in return for the NGOs’ approval of the deal, the purchasers would scrap eight of the proposed plants, find renewable alterna-tives for the foregone capacity, and spend US$400m over five years on demand manage-ment and energy efficiency.

The politics of the deal were compli-cated. Corporate America and the envi-ronmental movement have a history of tension. Mr Reilly explained that, although Environmental Defense had negotiated agreements with companies before, NRDC had never done so and had a reputation for being more aggressive. Having both involved in the talks not only improved the overall deal, but provided each NGO with protection from being singled out by other, potentially hostile environmentalists. Indeed, a cam-paigner from another organisation that Mr Reilly never thought would negotiate with a company told him, “you made it very difficult for us to criticise you”.

The proposed deal has already brought changes. Mr Reilly has had requests from other utilities for advice on potential groups with which to start a dialogue—and for help in translating what they are saying. He also points to several small deals that have

involved talks with NGOs. Just as important, he believes that the agreement has led to a “sea change” for environmentalists, making “it respectable for them to negotiate with coal”—an important practical point when over one-half of US electricity comes from that fuel. With both sides seeking better dia-logue, Mr Reilly believes that environmen-talist involvement in relevant business deals will only increase: “the cascade has begun”.

Business should welcome the discussions, as NGOs can bring far more than enhanced credibility with the general public. Dell, a US-based PC maker, runs its Plant-A-Tree programme, for example, with two NGOs: the Conservation Fund and CarbonFund.org. According to Tod Arbogast, Dell’s director for sustainable business, the reason makes basic business sense: across its operations, the company “looks to partner with industry lead-ers to help us in areas where Dell doesn’t have expertise”. It is working with the NGOs because “they are the experts, understand the com-plexities and have infrastructures themselves. We don’t want to reinvent a competency which is not core to Dell.” As business comes to terms with carbon issues, it should look to environ-mental activists as a potential resource rather than simply an opponent.



moment, only about one in ten firms are acting primarily to meet government restrictions on CO2 emissions, whereas 16% are acting to prepare for tougher rules expected to arrive later. Action by the rest is largely voluntary. A significant majority say that their companies would greatly increase, or even kick-start efforts, if presented with government actions, no matter whether a carrot, such as tax incentives (71%), or a stick, such as increasingly rigorous regulations (69%). Only one in ten firms consider themselves sufficiently ahead of the curve to not need to react to tighter rules.

Meanwhile, regulations provoke surprisingly little concern from business. When investing in foreign countries, for example, most respondents do not consider a tight regulatory regime on carbon a particular advantage or drawback for now, although many expect this to change. Among those expressing an opinion, however, slightly more view such arrangements as an attraction rather than as a problem, because they make everyone play by the same rules.

In July 2006, 13 British companies even asked their government to introduce a stricter framework. Mr Gorman explains that BAA and others were trying to break free from a “Catch-22: Governments tend to feel limited in their ability to introduce new policies for reducing emissions because they fear business resistance, while companies are unable to take their investments in low carbon solutions to scale because of lack of long-term policies.” Mr Hone—Shell was

also in the group advocating changes—agrees that the regulatory environment is “essential”. As he says: “For our own longer-term investments, it is better to know now rather than have the framework appear later on.” Once the rules are set, companies can decide what to do.

To what extent do you agree or disagree with the following statements? Chart shows respondents that selected 1 or 2 from a scale from 1 to 5, where 1=Strongly agree and 5=Strongly disagree. (% of respondents)

Appropriate tax incentives would lead us to consider/greatly increase our efforts to cut carbon impact

Government regulations to reduce our carbon footprint would lead us to consider/greatly increase our efforts to cut our carbon use


41 30

39 30

In considering foreign investments, which of the following apply to your company? (% respondents)

...neither an attraction nor a drawback now, but likely to be so in the near future

...an attraction, because potential competitors will need to have similar standards to our own

...neither an attraction nor a drawback now, and unlikely to be so in the near future

...a drawback, because they increase our potential operating costs there

...a drawback, because of the requirements it might impose on our global business

Not applicable/don’t know

25

17

15

11

28

5




ConclusionScientists calculate a 60% uncertainty in predicted global temperature increases. The foreseeable impact of CO2 on the political sphere is far clearer. As governments seek to reduce national output of CO2, business will be called on to do its share.

Companies have not yet risen to the challenge. But the public expects it. Although consumer choices do not yet strongly reflect this, reputation and brand damage await firms that do too little, and investors show signs of starting to appreciate this. Given the relatively small net costs, it makes sense for firms to raise their game now.

Carbon reduction is a complicated area, with many experiments and innovations taking place. Entrepreneurial companies will be far better prepared when governments bring in tighter carbon restrictions and are far more likely to find ways to tap into new markets when consumer choices become more closely aligned with the concerns of the public as expressed to their political representatives.

The latter have a key role to play too. If business is to take carbon reduction seriously, it needs a clear set of rules within which to work. Without a proper regulatory framework, with market-based incentives to reduce CO2, carbon reduction will never become the integral part of business operations that it needs to be if it is to have a positive effect on climate change.


Appendix A change in the climateIs business going green?

AppendixDuring March and April 2007, the Economist Intelligence Unit surveyed 634 executives from around the world. Please note that not all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to some questions.

In which region are you personally based? (% respondents)

Western Europe

Asia-Pacific

North America

Middle East and Africa

Eastern Europe

Latin America

31

28

26

6

5

4

Which of the following best describes your title? (% respondents)

CEO/President/Managing director

Manager

SVP/VP/Director

Head of Department

Head of Business Unit

Other C-level executive

CIO/Technology director

Board member

CFO/Treasurer/Comptroller

Other

24

21

13

10

9

6

5

4

3

7

What are your main functional roles? Please choose no more than three. (% respondents)

Strategy and business development

General management

Finance

Marketing and sales

Operations and production

Risk

Information and research

IT

Customer service

R&D

Human resources

Supply-chain management

Legal

Procurement

Other

37

37

21

20

14

11

9

9

8

7

4

4

3

3

3

What is your organisations global annual revenue in US dollars?(% respondents)

Under $100m

$100m – $250m

$250m – $500m

$500m – $1bn

Over $1bn

38

9

9

7

37


Appendix A change in the climate

Is business going green?

What is your primary industry? (% respondents)

Industry and agriculture

Energy and natural resources

Manufacturing

Transportation, travel and tourism

Automotive

Construction and real estate

Chemicals

Logistics and distribution

Agriculture and agribusiness

Aerospace/Defence

Services

Financial services

Professional services

IT and technology

Telecommunications

Government/Public sector

Healthcare, pharmaceuticals and biotechnology

Education

Entertainment, media and publishing

Consumer goods

Retailing

13

12

11

10

9

7

5

5

4

4

4

4

3

3

3

2

2

1

1

Which of the following best describes your company’s efforts to monitor its carbon impact? (% respondents)

We do not monitor our carbon emissions or overall carbon impact and have no plans to start doing so

We do not monitor our carbon impact or direct emissions, but we do measure our energy efficiency

We monitor some aspects of our carbon impact or direct emissions, but not comprehensively (eg, only in some business units, or only in some markets)

We comprehensively monitor our direct carbon emissions (eg, from our own operations, from corporate vehicles), but not our overall carbon impact

We comprehensively monitor the overall carbon impact of our activities (eg, supply chain activities, uses to which our products or services are put)

We do not monitor our carbon emissions or overall carbon impact, but plan to do so within the next three years

Don’t know

32

18

15

10

10

10

6

Does your company have a scheme in place to reduce its carbon impact, or does it plan to put a scheme in place within the next three years? (% respondents)

No, we have no plans to put a scheme in place within the next three years

We plan to implement a scheme within the next three years

Yes, we already have a scheme in place

Don’t know

45

28

18

9



Which of the following carbon reduction actions is your firm taking, or considering taking within the next three years, if any?(% of respondents)

Currently doing Planning to do within three years No plans to implement Not applicable/ Don’t know

Improved energy efficiency (eg, automatically powering off computers or lights after hours)

Increased usage of local suppliers (eg, to reduce carbon impact of supply chain)

Reducing business travel, especially by air

Switching to renewable energy supplier

Reducing carbon impact of company vehicles (eg, by switching to cleaner technologies)

Conducting an external audit of energy use with a view to reducing usage

Adding specific labels to products to promote energy efficient items

Changing products/services offered to reduce their carbon impact

Modifying global supply chain to improve energy efficiency

Discontinuing high carbon products/services

54 25 15 7

24 16 39 22

20 15 54 10

19 21 41 19

19 26 40 15

15 25 42 18

14 18 40 28

14 22 41 23

13 20 38 29

9 18 44 30

1 Major consideration 2 3 4 5 No consideration Not applicable/ Don’t know

Investment in new plant, equipment and technology

Location of new facilities

Investment in other companies, either through buying equity or creating joint ventures

Investment in other countries/regions

Acquisition of other firms

When making investment decisions within each of the following areas of your company, to what extent does your firm take into account the likely carbon effects of that decision?(% of respondents)

18 19 18 9 19 18

12 18 17 12 25 16

6 13 17 11 29 25

6 13 18 10 30 23

5 11 17 13 29 25




What overall carbon reduction goals does your company currently have in place to be achieved by 2010 and 2015, if any? (% respondents)

No plan in place

1-10% reduction

11-20%

21-30%

31-40%

41-50%

More than 50%

Complete carbon neutrality

Don’t know

Goal for 2010 Goal for 2015

4741

7

10

16

9

63

4

2

3

1

1

2

4

23

3

19

Which of the following best describes your company’s motivation when engaging in carbon reductions? (% respondents)

Voluntary, to reach our internal corporate goals (eg, regarding brand reputation)

Not applicable – We don’t plan to make carbon cuts

Voluntary, in anticipation of future regulatory changes

Necessary to meet existing regulatory requirements

Voluntary, to achieve some form of external environmental/sustainability certification

Don’t know

30

26

17

11

10

6

In considering foreign investments, which of the following apply to your company? (% respondents)

...neither an attraction nor a drawback now, but likely to be so in the near future

...an attraction, because potential competitors will need to have similar standards to our own

...neither an attraction nor a drawback now, and unlikely to be so in the near future

...a drawback, because they increase our potential operating costs there

...a drawback, because of the requirements it might impose on our global business

Not applicable/don’t know

25

17

15

11

28

5

In considering your position in both existing and potential markets, are your current carbon policies and near term plans an asset, a liability, or neither? (% respondents)

An asset (attract consumers)

A liability (deter customers)

Neither/ Don’t know

Existing markets Potential future markets

3437

11

53

10

56



What proportion of your overall carbon improvement efforts are accounted for by carbon offsetting, if any? And what proportion is this likely to be by 2010? (% respondents)

None

1-20%

21-30%

31-40%

41-50%

61-80%

81-100%

Don’t know

Today By 2010

5232

20

7

15

3

32

3

2

2

1

1

1

3126

1 Strongly agree 2 3 4 5 Strongly disagree Not applicable/ Don’t Know

Carbon offsetting is a temporary expedient, not a long term solution

My company uses carbon offsetting as a last resort rather than as an easy way to meet its targets

Cheaper offsetting would lead us to use it more and reduce our search for carbon reductions within our own activities

My company’s carbon reduction efforts are made for CSR or reputational reasons, rather than improved business efficiency

Employee resistance to certain carbon reduction strategies (such as reduced air travel) makes carbon offsetting an attractive option

How strongly would you agree or disagree with the following statements? Rate on a scale of 1 to 5, where 1=Strongly agree and 5=Strongly disagree.(% of respondents)

21 17 16 9 10 27

10 10 16 8 10 48

9 18 18 10 8 37

8 14 21 10 11 35

5 13 21 14 11 37

If your company engages in (or is considering engaging in) carbon offsetting, which of the following approaches does it pursue (or expect to pursue)? Select all that apply.(% respondents)

Internal efforts (eg, getting employees involved in tree planting)

Through a charitable/not-for-profit third party carbon offset provider (eg, a non profit-making independent organisation that engages in independent carbon reduction activities)

Through a carbon offset exchange system or market (eg, buying/selling carbon credits on a market)

Through a for-profit third party carbon offset provider (eg, a profit-making independent organisation that engages in independent carbon reduction activities)

Other


38

21

17

16

44

2




Which possible benefits from carbon reduction are most attractive to your company? Select up to two. (% respondents)

Enhanced environmental credentials with the broader community

Enhanced environmental credentials to stakeholders, and activists

Enhanced brand reputation as a means of customer retention and expansion

Enhanced employee morale/loyalty

Reduced regulatory risk/compliance with regulations

A marketing opportunity for our products/services

A product differentiation tool (eg, by allowing customers to purchase carbon neutral products at a premium price or regular products at a lower one)

Other


37

29

28

21

15

7

3

15

18

Which of the following strategies has your company used (or does it plan to use) to cover the costs of any carbon reduction work it has engaged in, or plans to engage in over the next three years? Select all that apply. (% respondents)

Generating savings from improved carbon efficiency

Increasing sales through improved brand reputation

Offering distinct “green” products/services at a premium price

Absorbing the cost internally through reduced profit margins

Charging higher prices for our products/services overall

Other

41

32

20

15

1

23

What percentage of your company’s operating expenses goes toward carbon reduction? (% respondents)

None

0.1-0.5%

0.6-1%

1-1.5%

1.6-2%

2.1-2.5%

Greater than 2.5%

Our company does not measure this

Don’t know

23

17

6

6

1

2

27

17

2

Does your company consider its efforts to reduce its overall carbon impact to be a net benefit or a net cost to the business?(% respondents)

Net benefit (eg, through increased sales, improved brand perception)

Neither a net benefit nor a net cost

Net cost


30

23

16

30



How much effect do each the following have on decisions your company might make regarding carbon reductions? Rate on a scale of 1 to 5, where 1=Significant impact and 5=No impact. (% of respondents)

1 Significant impact 2 3 4 5 No impact Not applicable/Don’t Know

Existing government regulation

Consumer expectations in developed countries

A desire to prepare for/stay ahead of the curve of expected regulation

Associated costs

Consideration of the requirements of appropriate corporate conduct

Campaigns/activism by environmental groups

Employee expectations

Consumer expectations in developing countries

26 24 17 9 10 16

21 26 15 6 13 19

15 24 20 12 11 18

15 22 25 12 7 19

13 27 24 8 10 18

11 20 24 12 18 16

9 24 23 15 13 16

8 18 20 13 21 21

What impact has your company’s efforts to cut carbon (if any) had on its bottom line? And what impact do you anticipate it making in three years’ time? (% respondents)

Net positive impact

No impact

Net negative impact

Not applicable/Don’t Know

TodayIn three years’ time

1735

20

10

36

11

3637

Does your business have a director specifically responsible for the firm’s environmental impact? (% respondents)

Yes

No, but we plan to appoint one within the next three years

No

Don’t know

21

12

62

5




How significant have the following been (or still are) in discouraging and/or stopping your company from involvement in carbon offsetting schemes? Rate on a scale of 1 to 5, where 1=Significant impact and 5=No impact. (% of respondents)

Lack of regulatory requirement

Associated costs

Lack of management focus or concern about carbon issues within our company

Lack of employee focus or concern about carbon issues within our company

Lack of commonly accepted verification standards

Disbelief that the technique works in practice

Worry about number of schemes that have received bad publicity

Opposition from some environmental organisations has reduced impact of long term PR benefits

1 Significant impact 2 3 4 5 No impact Don’t Know

24 22 16 5 18 15

19 28 18 8 13 14

18 21 18 11 17 15

13 17 24 14 19 14

12 24 22 7 19 17

10 16 23 13 21 17

5 14 23 14 27 18

4 12 22 15 26 19

To what extent do you agree or disagree with the following statements? Rate on a scale of 1 to 5, where 1=Strongly agree and 5=Strongly disagree. (% of respondents)

1 Strongly agree 2 3 4 5 Strongly disagree Don’t Know

Appropriate tax incentives would lead us to consider/greatly increase our efforts to cut carbon impact

Government regulations to reduce our carbon footprint would lead us to consider/greatly increase our efforts to cut our carbon use

It is fair that governments increase tax incentives for carbon reduction, because the burden of society’s carbon reduction should not fall so heavily on business

41 30 14 5 3 7

39 30 15 5 4 7

28 28 21 7 7 9

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper.

About the Economist Intelligence UnitThe Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of over 500 analysts, we continuously assess and forecast political, economic and business conditions in 200 countries. As the world’s leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.

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Documents

A change in the climate Is business going green?graphics.eiu.com/upload/portal/climate.pdf · to human suffering, the economic effects could be immense. The UK government’s Stern