Although tax season just ended, addressing climate risk and sustainability should remain at the forefront of every CxO’s mind. Why? It’s about potentially missing significant opportunities to increase efficiencies and reduce costs through improved internal processes and controls, reduce risks across all areas of operations, drive innovation, and build resiliency into your firm.
The Securities and Exchange Commission guidance published in February 2010 about disclosure of climate risk is intended to highlight the concern management has about the risk they see. Any quantification of that risk is expected to be stated in the financial statements as compliance costs or unforeseen capital expenditure required for compliance of new regulations or due to physical impacts, such as flooding.
While the SEC expects to see additional clarifying text in 10-K filings, it does not for the moment aim to go beyond requesting clarifying text for the sake of investors. However, firms that take a step back to look at their organizations’ systems and address climate risk across the firm will find considerable opportunity to increase efficiencies, improve risk management, drive innovation and strengthen resiliency.
Climate risk and sustainability touch on every aspect of an organization. Internal controls and Sarbanes Oxley compliance concern firms of all sizes. For both climate risk and internal controls, increased transparency is a virtue. Transparency facilitates risk management and mitigation by identifying problems before they occur. Similarly, transparency can also provide insight into inefficiencies in processes and structures that add cost and perhaps even add risk.
Better still, highlighting areas of inefficiency can drive innovation internally towards reducing those inefficiencies as well as externally, identifying new markets and opportunities for the firm. Perhaps most importantly, increased transparency facilitates stakeholder engagement internally and externally, which is critical for success of such a program.
There are a growing number of stories about firms large and small that have realized significant benefits from improving energy efficiency or changing the shape of their suppliers network. Nearly without fail, firms that have embarked on this journey have received excellent returns on their investment in a relatively short time frame, with the cost savings exceeding the initial investment. For instance:
- A November 2009 benchmarking report by Aberdeen showed that best-in-class manufacturers reduce their emissions by 30 percent, outperform goals for operating margin by 19 percent, and achieve 89 percent overall equipment effectiveness. These best-in-class organizations also reduce their energy consumption 24 percent while laggard firms increase their energy consumption six percent.
- Dong Energy, a large European electric utility recognized the imperative of its climate risk. This shaped its core goal to move in a single generation from an 80 percent fossil-based asset portfolio to an 80 percent renewable-based asset portfolio.
- Johnson and Johnson spent $1 million on sustainability and energy efficiency improvements. They had an IRR of 16 percent.
- The owners of the Empire State Building spent $14 million dollars on energy efficiency retrofits for the building, projected to save $5 million in energy costs annually. That’s an IRR of 37 percent.
- For United Parcel Service (UPS) metrics are everything. They spent $1 million to calculate their carbon footprint. Since UPS drives 3 billion miles annually, every avoided mile means an avoided 15,000 tonnes of CO2 fleet wide and significant fuel savings. Knowing how to optimize their logistics to balance their costs, footprint, and customer needs is absolutely essential to their business strategy. Truck freight is four to six times more fuel-efficient than airfreight, and rail is four to six times more efficient than trucking. Pumping by US water utilities is responsible for three to four percent of total U.S. energy consumption.
- IBM has calculated that if U.S. water utilities implemented dynamic pumping, they could save around 10 percent of total energy consumption.
- 1E, a software firm has determined that the United States could save $2.8 billion by turning off PCs at night. Another $4 billion could be saved turning off under- or unutilized servers.
- Microsoft believes that within three to five years, sustainability will be a differentiator and quite possibly a competitive inhibitor or driver. As a result, the company is approaching sustainability like it has security, with a senior executive team that examines all aspects of operations and development. This process is changing Microsoft’s relationships with developers and customers.
By addressing climate risk small and mid-sized firms can reap these same benefits and protect the future of their business — whether public, closely or privately held. It is important to keep in mind that the benefits of transparency and stakeholder engagement far exceed the initial discomfort about increased openness. Since transparency builds credibility and brand, it can help firms meet regulations and perhaps exceed compliance.
The result is good for consumers, investors and the firm itself. Find the silver lining in this rain cloud of compliance. Take advantage of this opportunity to future-proof your firm by improving risk management and internal controls, reducing inefficiencies, and driving innovation.
Thomas L. Rosenberg is principal sustainability strategist for EVI, an integrated global climate change firm providing sustainability and risk management advisory, carbon advisory, and finance and technology solutions. He can be reached at email@example.com.