Greenhouse gas (GHG) emission reduction objectives, based on scientific work, are now being formalized in international treaties and the “carbon budget” notion is starting to gain State-level traction. However, even though companies are now obligated to submit reports on their GHG emissions to authorities, these practices remain poorly resourced and investment in the reporting process is too often overlooked considering the (underestimated) benefits expected by these organizations.
Furthermore, the concept of budgeting for these emissions, as is done for instance for companies’ finances, has not yet made it to actual practice. What approach should then be adopted to ensure appropriate and effective Carbon Budget reporting?
At Business & Decision, we have chosen an approach that enables both the standardisation of corporate GHG reporting and the reconciliation of environmental data with financial data.
But first, let us look at it all in context: What are these commitments made by governments? Which companies must report on their carbon footprint and to whom? Are current efforts a sign of trends to come? Afterwards, I will follow this up with a presentation of some solutions that we are currently developing in order to provide companies with the most suitable GHG emission reporting system that can be made available to them.
International agreements on mitigating climate change
Thanks to international awareness raised by numerous appeals from the scientific community and various citizen movements, many Heads of State now subscribe to climate change theories.
Their involvement in environmental protection has led to the creation of the United Nations Framework Convention on Climate Change (UNFCCC) which is the main international agreement on climate change. It is one of the three Conventions adopted during the 1992 Rio Earth Summit and has been ratified by 195 countries to date. Its initial aim was to help countries collaborate in order to limit the increase in global temperature and climate change, and combat the adverse effects thereof.
The Council addresses two important issues associated with the UNFCCC:
- The ratification of the Doha amendment to the Kyoto protocol, which covers the second commitment period, starting in 2013 and ending in 2020
- The Paris Agreement – the new global climate change agreement grouping all parties to the UNFCCC, its ratification, implementation and entry into force in 2020
The Kyoto Protocol
Ending in 2020, many countries decided not to sign this protocol (the USA for example), chose to abandon it along the way, or did not renew their commitment for the 2013 – 2020 period. Consequently, it ultimately only binds a limited number of countries that account for 14% of global greenhouse gas emissions. However this agreement is now null and void and the Paris Agreement has become the benchmark for national commitment to limiting greenhouse gas emissions.
The Paris Agreement
It is per se a commitment made by participating countries to reduce their GHG emissions by a given date in order to limit the increase in the planet’s global temperature.
For more information on the Paris Agreement, watch this short video, also available with extra details on the European Union website.
ETS: EU Emissions Trading System
The EU ETS is the world’s first international greenhouse gas emissions trading scheme. Companies that are reducing their greenhouse gas emissions can issue allowances on the market – with the ton of CO2 equivalent (tCO2) valued at a certain amount – which companies exceeding their carbon emission limits then have an obligation to purchase.
The ETS is reserved for certain sectors only and these sectors are defined by the gas they emit:
- carbon dioxide (CO2) released from:
- power generation and heat production
- energy-intensive industrial sectors, namely oil refineries, steel mills, and iron, aluminium, metal, cement, lime, glass, ceramic, pulp, paper, cardboard, acid and organic chemicals production in bulk
- commercial aviation
- nitrous oxide (N2O) from the production of nitric acid, adipic acid, glyoxal and glyoxylic acid
- perfluorinated hydrocarbon (PFC) from the production of aluminium
Not all companies can thus participate in the EU ETS. Nevertheless, this market is proof that virtuous circles can be created and that it is imperative that companies operating in the above-mentioned sectors accurately monitor their emissions.
For companies not participating in these markets, there are other benefits to tracking GHG emissions that we will address later.
Environmental reporting framework
There exist nowadays environmental reporting methods that vary according to sector, but some of them are officially recommended to generate reports on private or public groups’ GHG emissions. The two of particular interest to us today are the GHG Protocol and the Bilan Carbone ©.
These two methods are namely used to submit reports to the State regarding the evolution of groups’ GHG emissions.
Some groups also choose to undertake emission reduction initiatives of their own volition. We will present one such initiative hereafter: the Science Based Target.
It is an internationally recognised carbon emission accounting method. For more information on the subject, please visit ghgprotocol.org.
Bilan Carbone ©
Designed by the Association Bilan Carbone, this method is the most widely used in France by both private and public groups to prepare GHG emission reports and submit them to the ADEME.
ADEME and legal reporting obligations with respect to greenhouse gas emissions
This must be done by all companies employing more than 500 people, every 4 years, and must cover scopes 1 and 2, the third one being optional.
Companies that report this data every year are entitled to ISO certifications, and must have those to be able to participate in the EU ETS market.
Voluntary initiatives by major groups: the Science Based Target example
As mentioned earlier, some groups have decided on their own to work together on initiatives, as is the case of the Science Based Target.
What is it? It is a commitment made by companies to reduce, sometimes quite drastically, their greenhouse gas emissions. Each of them defining a target emission threshold with respect to a baseline at a given moment, as well as the time frame to achieve these objectives.
Structuring departments to address the climate issue
So, when companies do opt for reporting, which departments are involved in the reduction of GHG emissions and who does the reporting?
CSR (Corporate Social Responsibility)
Departments in charge of companies’ CSR are responsible, amongst others, for communicating information regarding the company’s greenhouse gas emissions.
Management Control and Finance Department
The Management Control and Finance Departments validate the coherence of investing in efforts to reduce a company’s greenhouse gas emissions but do not possess the appropriate tools to perform monitoring tasks by cross-referencing financial data with GHG emissions.
Moreover, innovating to reduce a company’s carbon footprint is something that all departments can do, but we will not dwell on the various initiatives that can be taken by R&D, procurement, logistics, factories in the case of manufacturers, facility management…
That being said, without an efficient measuring tool that helps establish a link between an innovation expense and an impact on the group’s or company’s carbon footprint, it is hard to assess any real progress made. For instance, if a company merely calculates its carbon footprint every 4 years to meet legal requirements, the drive for innovation and the assessment of its impact are not regular enough to allow the company to plan expenditure necessary for its deployment.
Innovations in line with carbon budgeting
Many initiatives are being developed and causing a market evolution that is making GHG emissions control a must for companies.
Below are two prime examples that highlight this market evolution and the importance of efficient greenhouse gas emission tracking tools for industrial groups.
Yuka, OpenFoodFacts, and volume retailing
Today, applications that help consumers check the nutritional quality and composition of products that they are buying have created a means of exerting pressure on food groups and volume retailing. Alternative product recommendation algorithms are influencing producers’ and distributors’ strategies. The most salient example being Intermarché’s decision to modify the composition of no less than 900 products in order to make it more viable in these applications.
One brand has even gone as far as to display its carbon footprint on its products. In conjunction with efficient comparison applications, this creates for companies the need to closely monitor their emissions and to manage them in such a way as to remain competitive.
Credit cards with emission allowances
Sweden is currently implementing a credit card system which integrates the carbon footprint notion. Each purchase is allocated a certain carbon footprint depending on the product bought. The experiment goes as far as imposing an emission limit per consumer. From that moment on, during the purchase process, the consumer has little choice but to compare products’ carbon footprint.
Here too, it is in companies’ best interest to equip themselves with carbon footprint assessment systems in order to anticipate market trends and potential new regulations.
Managing GHG emissions using EPM
Now I will explain how to standardise GHG reporting processes through a few use cases.
What is the “carbon budget” project?
Today, very few industrialised data collection tools are used by major groups’ CSR departments to coordinate data entered at various organisational levels (shops, factories, headquarters…).
We recommend that expertise used in the Financial area be leveraged to standardise the environmental reporting process.
Doing so will help companies deal more efficiently with environmental reporting. The gain in productivity should range from a few days to dozens of days for the CSR department and location managers responsible for relaying the data to CSR.
Financial systems should also be linked to greenhouse gas emission assessment systems in order to give new responsibilities to group financial departments who will have to perform financial as well as environmental tracking tasks by cross-referencing the information.
Finally, data visualization, the last link in the chain, should give pride of place to data analysis and storytelling about GHG emissions, using interfaces that include clear monitoring indicators enhanced by additional calculations that help analyse their evolution from year to year.
Benefits of the “carbon budget”
Evolution of the Management Control function
This approach thus represents both a technical contribution to the data collection issue, and an evolution of the management control function which will henceforth include work on both aspects, in relation to CSR services.
Indeed, it is management control that will be able to determine, through the budgeting tool, which innovations yield the best return on investment in financial and environmental terms. Budgeting both notions in the same system will make using innovation to reduce GHG emissions conceivable. And all this, whilst remaining competitive on the market and optimising these investments.
Shorter deadlines and higher reporting frequency
Shortening private and public groups’ carbon footprint reporting deadlines will help them closely monitor their emissions and take note of the evolution of these metrics year after year.
It is also possible, and even essential, to create monitoring indicators for carbon offset initiatives implemented by the groups.
Benefits in terms of image and trust
Each company setting up a “carbon budget” will be able to communicate and prove its progress in terms of GHG emission reduction, thus reaping significant benefits in terms of brand image with customers and trust with investors.
Anticipating regulations and compliance
Since regulations are always evolving, at both the national and European level, the tool will help anticipate market changes as additional norms are bound to be introduced in light of climate constraints and the approaching end of commitment periods. It is clear that stricter regulations deserve serious upstream consideration and in this regard, the “carbon budget” is the ideal compliance tool.
Going towards even more accurate systems to overcome the GHG reduction challenge
The carbon budget system is essentially a system that uses data obtained from heterogeneous sources and industrialised entries to measure GHG emissions.
It is a first step towards a more accurate system including modules with numerous possibilities: product formulation for manufacturing, food processing, the fashion industry…; module for the precise calculation of employee trips; logistics module; ideas that could help achieve the finest granularity possible with respect to assessing a group’s greenhouse gas emissions are legion…
There is only two simple questions that you should ask yourself: is your organisation ready to meet the climate change challenge? Will it be able to achieve the ambitious goals set by the Paris Agreement? Each brick being laid seems to be a step further in this direction: so, will you be part of the adventure?