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Corporate climate change

By Stephen Bernhut
Illustration: Mark Stephen

Executives today no longer regard the environment as a cost to be grudgingly paid; it is now an integral part of business

It was a Tony Robbins-like transformative event, the sort that prompts at least a few audience members to start thinking about switching careers. The audience, however, was not a group of eager individuals intent on releasing the power within. Rather, it was a group of accountants who had come to hear a presentation on the impact that climate change would have on business. “Normally, people come up and ask me very specific questions after a presentation,” says Patricia Hoyte, chief analyst for the Caiteur Group, a sustainability market research and consulting firm. “But at this particular event, two CAs came up to me after I had finished and said that they were going to switch careers and become climate-change consultants.”

Climate change, for a few at least, was once a cause espoused by earnest people handing out quick-printed flyers on street corners. Today, however, information on climate change is presented — to shareholders no less — in smartly designed sustainability reports. For some of the people who prepare those reports, the corporate managers and executives, climate change is no longer anathema, a cost that needs to be grudgingly acknowledged. Today, many corporations view climate change as an issue that, properly managed, can be used to build competitive advantage and capitalize on business opportunities. From the back burner, climate change has moved closer to the top of the agenda, where its impact is about to be felt up and down and across the enterprise.

“Climate change is going to have a major impact on a company from both an operating and financial perspective, and the impact will be felt differently depending on which sector a company is in,” says Hoyte. “For resource sectors such as forestry, the operation-al impact will be huge because it affects their supply chain, their material production, from beginning to end across their entire business model. At the other end you have retail businesses, which will probably be one of the least-affected sectors.”

On the operating front, a company’s willingness and ability to meet emissions targets and to use the system of carbon offsets, cap and trade credits and carbon taxes to its advantage will influence whether a company gets into or out of a line of business, whether it makes infrastructure improvements, whether it reconfigures its entire supply chain and whether it expands to a foreign country. On financial issues, complying with regulations will require changes in the way a company makes financial decisions, how it collects and reports the emissions data it will be required to gather, accounts for the financial impact of that data in its financial statements, especially the notes to those statements and the management’s discussion and analysis, and how it presents and discusses these impacts in its financial disclosure. Finally, a company’s responses to climate change will have a clear impact on its ability to raise capital and how favourably — or not — it is viewed by the investment community.

“Companies are increasingly being scrutinized by investors on the basis of their efforts to reduce and control their carbon emissions,” says Bob Willard, a Toronto-area author who gives presentations on how corporations can use sustainability strategies to enhance their value. “If they are spewing greenhouse gases into the atmosphere, their reputation will suffer and investors will bring enormous pressure on them to clean up their act. We’re seeing that happen more often, from other stakeholders such as consumers, suppliers and large customers as well as investors, and pretty soon that action will interfere with a company’s access to capital and perhaps threaten its market value. The bottom line is share value, and if I were a CFO, this would be a no-brainer. Getting with climate change is a hard-nosed business issue.” As an example, Willard cites the Carbon Disclosure Project (CDP), a UK-based organization representing almost 400 institutional investors with $57 trillion in assets. Every year the CDP issues a request to more than 3,000 of the world’s largest organizations (about 300 in Canada) to measure and disclose their greenhouse gas (GHG) emissions and report their strategies to deal with climate change. “These guys have a lot of clout and can decide that you’re a risky investment because you’re not being proactive on climate change. That is a totally different dynamic than a tree-hugger accosting you for not cleaning up your act. These are hard-nosed investors and all they care about is the value of their investment — this is a business issue.”

Michael Jantzi, whose firm, Jantzi Research, evaluates and monitors the environmental, social and governance performance of companies, adds, “Most of our clients are on the buy side, institutional investors who want to know, for example, if a company is managing its carbon file the way it should be. And they’re only interested in it from an investment point of view: does the way a company manages its carbon file make it a safer investment or a riskier one? For example, companies such as Suncor have already established transparent reporting standards on other aspects of sustainability. You know that their reporting on climate change will give investors a very clear idea of how they are managing their carbon file,” he says. “On the other hand, you have [some companies], whose reporting is not transparent, making it impossible for an investor to know how [they are] handling [their] carbon file. A more recent indicator of how seriously the investment community is taking climate change is that a number of sell-side analysts are now factoring a company’s sustainability performance into their investment recommendations. That’s indicative of the kind of impact climate change is having on companies.”

From the time it began to seep into the public consciousness about 20 years ago, global warming, as it is still sometimes called, was anything but a strategic issue. In fact, the lack of attention and action by public and private agencies was so acute that Sir Nicholas Stern, former chief economist of the World Bank and the author of a 2006 report for the British government on the effects of climate change on the world economy, wrote that climate change “is the greatest and widest-ranging market failure ever seen.” If by failure Stern meant foot-dragging, Canada was among the leaders. It was not until 2007 that legislation was first enacted to control GHG emissions in Quebec, Alberta and BC. And it was only in 2007 that federal emissions guidelines and targets were announced, with the aim of reducing Canada’s overall GHG emissions by 20% by 2020. (The main sources of Canada’s GHG emissions are industry, 52%, and transportation, 25%.) Combined with the fact that some provinces have joined voluntary groups such as the Western Climate Initiative (four provinces and seven states), and that some companies have to comply with regulations in multiple jurisdictions in Canada and in the foreign countries in which they operate, many companies may find themselves in a quandary, hoping that federal legislation will soon be enacted and harmonized with other existing legislation.

Such uncertainty is no excuse for inaction, at least according to some observers. “There’s already enough information out there for people to start making fairly thoughtful, prudent planning decisions,” says Patricia Koval, partner with law firm Torys in To-ronto and co-chair of its climate-change practice group. “They can start by assessing what their costs of carbon will be. Are they going to be onside or offside the regulatory regimes in the places where they produce their products or services, or where they sell them, and will they be affected by the regulatory regimes in the places where their key suppliers operate?” she says. “Secondly, they can measure their carbon footprint and decide whether they should reduce their emissions voluntarily, because there is a business opportunity in doing so, especially from reputational and competitive standpoints. Finally, climate change is creating tremendous opportunities as well as risks. Senior management should be able to identify some of those opportunities and determine whether their company is going to be able to take advantage of them.”

“The easy answer to what a company can do now is to get so far ahead on this stuff that the regulations are irrelevant, that you are way beyond the regulations,” says Willard. “The regulations are just trying to catch up with where you are. But you don’t wait for the regulations to take action — you assume that there will be regulations and you assume that at some point it’s going to start costing you money. As a smart business person you start to anticipate that and cut your dependence on fossil fuels. It’s that simple,” he says. “And not only in your own operation but you start looking at your supply chain, you start looking at your travel, air travel especially; you do a carbon footprint and you start to work on it.”

Scenario-building is another exercise a company can engage in while it waits for regulatory certainty. “Regulatory schemes in different jurisdictions may ultimately have some strong similarities,” says Pat Concessi, a partner and leader of Deloitte’s global climate-change practice. “We’re helping clients develop a range of scenarios that will allow them to look at the low and high end on costs. I can tell you that there is no scenario that includes the assumption that carbon will continue to be free.”

Still another kind of uncertainty will have an impact, in this case on the way a company presents its financial information. “Companies may not be able to quantify the impact of certain climate-change issues on their balance sheets,” says Hoyte. “But at the end of the day, you realize this is going to be your financial statement that is going out, so you don’t want to take wild guesses. Maybe you can’t break down the numbers and say this is the exact impact, but you should be able to explain it in the notes to the financial statements or in the management’s discussion and analysis. And as you build up that historical information and trending, you can start to bring out some reasonable estimates, so that a few years out you can start to reflect that in the numbers,” she says.

“For example, take the case of the mountain pine beetle and the damage it’s done on forestry reserves in British Columbia. It is having a big impact on the future and current supplies of timber. Companies are attributing the spread of the beetle directly to climate change,” Hoyte says. “But for most companies it still doesn’t show up on the balance sheet in any way, shape or form that you or I can make a call from a financial perspective and say here is the impact of the beetle. Right now the public and stakeholders are not asking for that information. But they will be in a few years.”

THE RISKY BUSINESS OF CLIMATE CHANGE

While companies wait and guess what the final federal guidelines and regulations might be, managers can begin preparations by assessing their company’s aggregate climate risk. “This assessment will be driven by a number of factors. First among them is the risk posed by the proliferating number of applicable, or soon-to-be applicable, greenhouse gas [GHG] emission regulation mechanisms, including emissions intensity reductions targets, emissions caps and carbon taxes,” says Patricia Koval, partner with Torys law firm in Toronto and co-chair of its climate-change practice group.

“The cost of compliance for a company, particularly where that involves multilayered regulation [Canadian federal and provincial GHG emissions regulation regimes and carbon taxes] in multiple jurisdictions [i.e. including other jurisdictions in which the company owns assets, carries on business or sells its products or in which its supply chain exists] may be significant,” she says.

Koval, who is also chair of the World Wildlife Fund (Canada), adds that management should also assess related risks. These include physical risk, or the potential exposure of a company’s assets and properties to damage from climate-change-induced weather effects; litigation risk, for example, from personal injury or property damage caused by a company’s alleged failure to adapt its properties or assets to climate-change-related effects; reputational risk and competitive risk, as a result of the perception of customers or clients to a company’s action, or lack of it, on climate change; and financing risk, as investors and lenders weigh their decisions in light of their assessment of a company’s climate risk.

Climate change is also having an impact on a company’s internal operations. “Many companies don’t have the necessary IT systems that will allow them to capture and report their emissions completely and accurately,” says Christine Schuh, associate partner and leader of PricewaterhouseCooper’s Canadian climate-change services group in Calgary. “They just don’t have the infrastructure necessary to manage this sort of data appropriately. Financial systems have evolved, and the one that should be used is usually a very nice database-type system with appropriate financial controls in place. Greenhouse gas data, not in all but in many cases, are captured on spreadsheets, which are not a very secure or robust environment. So when it comes to reporting this information, which will be turned into money sooner or later for many companies, the company doesn’t have the necessary data management controls in place.” When it is in spreadsheet format, it is difficult to provide the required assurance since that environment has inherent limitations, Schuh says. “When we help companies look for the appropriate IT system we look for security and data-management controls that are appropriate. We are looking for interfaces that a user could use quite easily, but that also allow them to interface well with their operational systems, so that they can monitor parameters such as production.”

While there are many packages out there, she says, there is not yet one that dominates the market. “I think it’s going to turn out to be like financial systems, where there are several IT solutions, but it depends on what you do as to what package is appropriate for you.”

The one person who should have ultimate responsibility for emissions reporting — and all other reporting requirements for climate change — is the CFO. “The bar for disclosure and reporting climate-change data and information is being raised and it is being placed directly at the door of the CFO,” says Toronto-area CA Alan Willis, an independent consultant on corporate governance and sustainability. “When a company is considering its options for adapting to the actual or expected effects and impacts of climate change, there will inevitably be financial implications to assess. CFOs and their staff will be expected to estimate, consider and then inform and advise management what the implications are.”

Climate change will — or should — impact CFOs another way too. “They’re going to have to get out there a lot more — out of their offices — and speak to the people in various operating areas of the company,” says Hoyte. “There’s a desperate need for financial executives to bring accuracy and detail to what’s happening in climate change, and to be able to project what the financial impact on the company will be,” she says. What’s happening now is that companies’ environmental departments are speaking like accountants and financial executives simply because the finance departments aren’t involved. “In fact, they’re not interested. So you have environmental people talking about carbon accounting when they shouldn’t be. A CFO must understand that he or she — or someone from the department — has to get involved.”

To understand the CFO’s relative detachment from climate-change discussion, one need only observe the recent involvement of directors and CEOs in discussions and decisions about climate change. According to Hoyte, many executives began to take climate change more seriously about 10 years ago, when companies started to hire dedicated sustainability managers, partly in response to environmental government regulations and industry association requirements. The managers, in turn, began to produce sustainability reports, which were usually incorporated into the company’s annual report and documented the company’s performance and actions on environmental issues and corporate social responsibility. Today, many companies produce a stand-alone sustainability report, and some, such as Suncor Energy, even produce a separate report on climate change. A further indication of the respect climate change has earned is the inclusion of senior managers dedicated to sustainability on the executive team.

Numerous surveys and reports show that climate change is being taken seriously. For example, a 2006 CDP survey of 280 Canadian companies published by the Conference Board of Canada showed that 65% of companies surveyed had elevated climate change to the board level by giving directors oversight responsibility for climate-change strategic risks. Almost three quarters have put a senior executive and/or an executive management team in charge of climate-change risk management.

As for accountants and climate change’s impact on them, it is impossible to know if at least a few more accountants have decided to switch careers and become climate-change consultants. One thing is for sure: carbon — and accounting for its uses, emissions and costs — has become a key word in everyday accounting practices, giving accountants numerous opportunities to add value and play a more important role. One key responsibility for accountants will surely be the risk management of carbon. For example, they will have to estimate the commercial risks of future carbon constraints and their likely effect on corporate performance and shareholder value. Other opportunities for accountants to play a role in climate-change-related issues include:

A survey last year by JustAccountancyJobs.com, a UK online job board, found that 85% of 180 finance professionals believe they will become involved in calculating carbon offsetting at their firm in the future. Only 11% of accountants are now involved in offsetting accounting. “Carbon offsetting is accountancy’s next big challenge and developing the skill set needed to navigate this exciting new field could be make-or-break in an accountant’s career,” says Sacha Deakin, account manager at the firm.

THE BUSINESS CASE FOR SUSTAINABILITY

To be sure, climate change has its skeptics, from those who label its arguments as junk science to those who paint it with the same brush stroke of rejection as they do any topic under the heading Sustainability.

The skeptics probably never met Bob Willard, an author who helps corporations avoid risks and capture opportunities associated with sustainability issues. “I’ve looked at about 200 case studies,” says Willard, who got his PhD in sustainability three years ago and worked in different management positions at IBM for 34 years. “My research shows that by integrating sustainability strategies into the fabric of their business, large companies can increase profit by a minimum of 38% over five years, and small and medium-sized companies can increase their profit by a minimum of 66% in the same time frame. Being socially and environmentally responsible does not impede business success; it accelerates it by avoiding risks and adding to the bottom line. Plus, the environment and society reap co-benefits from responsible business operations and products. It’s a win-win proposition,” he says.

Where do the bottom-line benefits come from? “The sustainability business case has suffered from a severe case of myopia. It’s been way too narrow, looking almost exclusively at savings on companies’ energy, water, materials or waste-handling bills,” he says. “Eco-efficiencies are important, but those savings at manufacturing and commercial sites are just two of seven potential areas of benefit. Others are in the human resources area: reduced recruiting costs, reduced attrition costs and increased employee productivity. All three are realized when current and prospective employees’ values resonate with the company’s values — they are proud to work for a company that is making a responsible contribution to society and the environment.”

The sixth benefit area, Willard says, is increased revenue as customers vote with their wallets to buy from good corporate citizens and new markets are opened up with innovative products and services. A seventh and final benefit comes from slightly better insurance rates and borrowing rates from insurers and bankers who see responsible companies as better risks. “When all seven benefits are quantified in a holistic business case, the rationale for acting becomes readily apparent.”

The CICA has provided guidance for disclosure on climate change and other environmental issues for some time. For a chronology of CICA’s climate change and sustainability initiatives go to http://www.cica.ca/download.cfm?ci_id=36165&la_id=1&re_id=0. The two most recent documents are Building a Better MD&A — Climate Change Disclosures; and Executive Briefing — Climate Change and Related Disclosures, which can be found on the CICA’s website at www.cica.ca.

Stephen Bernhut is a Toronto-based freelance writer