Dinosaurs Beware

Friday, February 1, 2008 - 11:04

Today's challenge for all levels of business to embrace the new sustainability world order is ignored at their peril. This includes developing leading solutions against those far-sighted competitors taking us into a new age. By Deborah Tarrant

Indisputably, 2007 is remembered as the year environmental sustainability went mainstream. Globally it became an incendiary issue for governments, a top agenda item for boards of smart-thinking multinationals and a key focus for academics as they escalated their research efforts. Heavens, Australia ratified the Kyoto Protocol.

Many corporates and smaller enterprises that had been too busy taking care of business, and focusing on the short term, awoke to the issue with a jolt.

The message was clear: dinosaurs beware, climate change is real. It is happening and it is not going to fix itself. Overwhelmingly, negative climate impact poses the greatest single threat to our planet – by far outstripping previously perceived threats of terrorism or nuclear proliferation. For organisations and corporations inevitably engaged in self-interest and looking to their future competitiveness, it presents a tangible and possibly monumental risk if not appropriately addressed, both in terms of reputations and operations.

In short, environmental sustainability became the issue that corporate leaders, politicians and bureaucrats would ignore at their own peril.

A convergence of drivers put climate change front of mind: there was the vehement outpouring of former US presidential hopeful Al Gore with the release of the documentary An Inconvenient Truth; the findings of the Stern Report in the UK, which provided the economic context – it will cost far more (by a ratio of 20:1) to fix up climate change than it will to prevent it; and the Intergovernmental Panel on Climate Change, a group of the world's foremost academic researchers, confirmed the science – global warming is a happening thing, and much of it is caused by human activity.

Carbon dioxide from greenhouse gas (GHG) emissions produced by burning fossil fuels for energy sits in the atmosphere for around 100 years. In short, we'll be living with the legacy of the past century for the next one; to stop the ongoing damage everyone needs to act fast.

The United Nation's Secretary-General Ban Ki-moon, pre-empting the UN Climate Change Conference in December 2007, noted the issue is now at the centre of the global political arena and called on the international community to live up to the commitment of world leaders to tackle climate change. On cue, around the globe in the past 12 months, convincing, often graphic, and sometimes horrific evidence appeared.

In Europe, hundreds died in heatwaves and many abandoned their habit of flying south for summer because the weather in their immediate vicinity was hot enough. A row ensued over who owned the North-West Passage in the Canadian Arctic as the polar ice cap continued melting faster than predicted. In Australia, what was called a drought seemed more likely to be a long-term reality, and water went from being a natural element to be splashed around in to a precious commodity for restricted use in many parts of the nation. A row over control of one of our major water systems, the Murray-Darling Basin, ensued.

Climate change featured in 4777 reports in Australia's major newspapers in the first six months of 2007, compared with 917 in the same period the year before.

A tangible measure of the traction this issue had gained emerged in the recently released results of the Carbon Disclosure Project that surveys the FT500 global companies. In 2007, 77 per cent of companies responded and, of the world's leading companies that perceived climate change to present a commercial risk, 95 per cent had already implemented a GHG reduction program.

Corporate carbon footprints have become a hot conversation topic as high-profile corporate leaders like Rupert Murdoch took a stand, trailing the early adopters of the trend, in announcing News Corporation would become carbon neutral.

Australia – long criticised for declining to ratify the 1997 Kyoto Protocol – has a mixed scorecard on this issue, presenting as a leader in some areas, such as developing technologies with the energy sector, but coming late to planning an emissions trading scheme and exploring mandatory targets.

Enter the mainstream

While heads may be spinning at the shifting paradigm created by environmental sustainability, experts in the field insist it's definitely not before time. "My personal view is we have about 10 years to turn this around," says Ian Porter, who spent 18 years as a policy analyst and senior manager in the Victorian Government's environment and energy portfolios before becoming a consultant with the Nous Group. His informed voice is one of many in a strong chorus: organisations must make environmental sustainability core to their business strategies now.

Previously, this was a sideline issue. Under the umbrella of triple-bottom-line reporting or corporate social responsibility, it was given to corporate affairs departments to manage. Along with other sustainability actions, such as community volunteering, it was feel-good stuff; a way of retaining and attracting environmentally-aware employees.

This appeal remains; indeed, a KPMG survey of Australian companies voluntarily producing sustainability reports shows the majority still claim they do it for the benefit of staff. But now it's just one reason for organisations to embrace climate change concerns at their strategic hearts. "It's not an add-on anymore. There's an expectation from shareholders and customers, in marketplaces and boardrooms that businesses will change," observes Porter.

Reputation is important for all employers, but even more urgent now is the impact that environmental sustainability will have operationally on an organisation's competitiveness and costs.

A powerful persuader is ESG (Environment Social Governance), the preferred acronym of financial analysts for the criteria they use to assess companies for the long term.

"ESG hones in on strategy, risk management and creating sustainability frameworks that generate long-term economic value, it has replaced the old community-focused CSR," says Margaret Smylie, a partner in KPMG's sustainability practice.

"Pressure is coming from outside organisations. Everyone is talking about climate change, so it has mainstreamed the ESG discussion where previously it was niche," she says.

ESG evaluation is causing the re-pricing of risk, a daunting prospect for operators in industries with high-carbon footprints. "There's a potential shift in value between sectors, which is complex in Australia where we are so export oriented and so heavily reliant on natural resources," explains KPMG Partner Rob Hogarth.

The early lessons

Perhaps not surprisingly, many of the frontrunners in ESG are in the banking and finance sector, which is witnessing at close range the escalating significance of sustainability. Way ahead of the pack are ANZ, NAB and Westpac, while IAG quickly turned green with the realisation that the majority of its claims related to climate issues.

Companies are linking it to what they are trying to achieve as a business. "Early lessons indicate the right approach is for organisations to look first to their own strategy, then look at the environmental impact and what can be changed operationally," says Hogarth. There's a huge variation across sectors and definitely no one-size solution. "How an insurance company will tackle this issue will be totally different from the approach used by a miner," he says.

"Plenty of companies are taking it very seriously and some have been extraordinary in the progress they have made," insists Porter. The Australian Greenhouse Office currently lists some 700 businesses and industry bodies who have signed up for the Greenhouse Challenge Plus, a cooperative partnership between government and industry aimed at reducing emissions and accelerating energy efficiency, integrating these issues into business decision making, and providing more consistent reporting of greenhouse gas emissions levels.

However, Porter believes there is a large group of companies spanning the industry sectors that form a second tier. "These are companies that have only started thinking about climate change issues in the past 12 months and are still working out how to position themselves," he says. Then come the laggards, those who refuse to recognise the problem and its consequences, for which the forecast is starting to look bleak.

Feeling the heat

Such organisations should start feeling the heat shortly. As Hogarth points out, the trailblazers' attentions are already turning to the sustainability of their supply chains.

The climate/carbon issue has an upside and a downside. There are real risks for some organisations in terms of increased costs; and there's no doubt energy will cost more in the future. Current debate is over who will pay for the increased cost of power, with a high expectation that it will be the user.

"What we're looking at is a potential shift in values for generations: Who pays for this? Today's generation or tomorrow's, because yesterday's didn't," says Hogarth.

Australia's emissions trading scheme will swing into action in the next three to five years, way behind the European Union Emission Trading Scheme introduced in 2005 or the Chicago Climate Exchange that began in 2002. However, our slow start may mean our scheme is more comprehensive in its approach, say the experts.

Under the scheme, large emitters will be required to hold permits to emit GHG and, while some permits will no doubt be allocated freely, not all will be.

Most affected will be businesses involved in energy generation and supply who will be required to purchase permits at auction to emit. "Costs may be passed on to some extent – but the questions are: by how much? And, at what risk to profitability?" asks Porter.

Many have long been on the case. Origin Energy, for example, has been diversifying dramatically and pushing Green Power (renewable energy and gas-fired power) while reducing its own emissions in plants across the country.

High energy users – particularly businesses in the manufacturing sector and industries such as aluminium, steel, paper, petrochemicals and cement – also face a serious threat from looming higher energy prices and are looking at how they can change their processes to reduce electricity use.

While businesses in this sector may have to purchase permits, they may also have to bear the costs passed on by their electricity suppliers as an increase in prices.

The upside

The best-positioned companies are those that will see emissions trading as an opportunity, and those engaged in producing renewable sources of energy. Companies with the capacity to reduce and/or offset emissions – for example, energy innovators such as wind farms, solar and geothermal energy generators and land managers or reforestation projects – will potentially be able to offer new products and services into a carbon market.

Those involved in water conservation and recycling are also in the front-line to succeed in the new sustainable world in which, logically, no organisation will go untouched.

The major upside is in innovation, for which Australia has a strong history. Some are already creating new products and looking at their use of resources to reduce their carbon footprints. An iconic case of a corporate that moved fast on seeing its industry outlook is BP, with its re-branding to Beyond Petroleum by offering a range of more environmentally friendly energy products (solar energy and cleaner fuel), reducing emissions by setting up an internal emissions trading scheme, and engaging, across their company and outside, in pushing the sustainability agenda.

As companies reconsider what they produce and how they produce it, the good news is that the process is, in some cases, reducing costs.

Technology leader Intel, for example, an early adopter of sustainability practices currently positioned as the No. 1 tech company on the Dow Jones Sustainability Index, may have invested $US19 million in energy conservation projects over the past six years, but last year alone saw $US15 million in savings, reports its Director of Corporate Responsibility, Dave Stangis.

Strange ironies

Strange ironies are emerging, such as large car manufacturers who are working very hard to minimise their own carbon footprints while still producing petrol-guzzling, six-cylinder vehicles.

Environmental sustainability definitely hit its tipping point in the corporate real-estate market in the past year, says Simon Carter, National Leader of Innovation at Colliers International, a firm representing both owners and occupiers. He describes something akin to a revolution as property companies and tenants send signals to their stakeholders with green fit-outs and buildings.

"Big property companies, such as Lend Lease and Stockland, see it as brand positioning, a hallmark of quality, which attracts the leading tenants who see occupying a green building as an important strategic tool," he says. "From now on, every new building in a capital city CBD will have a green rating," Carter predicts.

And one of the clear benefits of occupying premises with the increasingly commonplace chilled beams, in place of airconditioning, and natural light is the cost-saving aspect, as well as the message it sends, he explains.

New career directions

Not surprisingly, the new focus on sustainability is also generating new career directions within organisations as they build capabilities to measure, innovate and shift their emphasis. In tandem, a new range of consultancies has been spawned to measure everything from air pollution to resources management.

As we deal with the urgency and enormity of the changes required, it's hard to draw a perspective on the brave new world we are entering. The revolution is global and society-wide. Individuals as well as organisations will be reviewing many of the prevalent practices that have grown with industrialisation.

The concept of rampant consumerism, for instance, what we consume and how, is now up for grabs. The notion of offsetting carbon emissions has been embraced by the travel industry with the ability to offset emissions from flights now being offered to passengers of all major Australian airlines.

What's missing in the current anxious and urgent debate, concludes Mike McAllum of management consultancy Global Foresight Network, is that creating the new world should be fun. "Everyone seems to be focused on the costs and the inconvenience," he says. "When redesigning our future with new products and production processes with fewer resources will create better economic outcomes. Even if you don't believe in climate change, the discipline of doing that makes good business sense."

With its geographical position and strong trading relationship with emerging economies such as China, Australia also has a leadership role to play, argues McAllum who is concerned by "the fortress mentality or management myopia" he has detected. "We have a stewardship role, not just for ourselves but to help other countries like China create their frameworks and have their conversations."