While some companies are stepping forward on climate change policy, many others have remained quiet.
WRI worked with the UN and several esteemed partners on a Caring for Climate report to create a common standard for engaging corporate responsibly in climate policy debates. The guide represents a baseline for action and transparent reporting.
The way companies report on their financial status has changed little since corporate accounting standards were first created 80 years ago. Yet the world they operate in, and the risks and opportunities they face, have changed almost beyond recognition.
Global population has soared from two to seven billion, with human and manufactured capital now in abundance. Natural capital, on the other hand, has become scarcer and more precious. Once-plentiful forests, food, water, wetlands, minerals and metals are in short supply, creating supply chain and operational risks.
Today, a global coalition of regulators, investors, companies, and accounting organizations launched a new integrated reporting framework in six major cities, which aims to address this gap. The draft framework from the International Integrated Reporting Council (IIRC), based on input from 85 pilot companies and more than 50 investors, represents a much-needed milestone in the evolution of corporate reporting.
Over the past month, we’ve discussed some of the key barriers that prevent companies from truly integrating sustainability considerations into their long-term strategies. Countless companies across the world struggle with these obstacles, such as: capital budgeting processes that fail to account for sustainability initiatives’ benefits; financial teams whose goals don’t align with those of the sustainability teams; and uncertainty about how to implement metrics that properly account for external environmental costs.
A handful of companies, however, are starting to identify effective ways to break these barriers down. Johnson & Johnson now allocates $40 million a year to a special fund that directs capital to greenhouse gas reduction projects, helping to lighten its environmental footprint while proving these projects generate good returns. AkzoNobel and Alcoa have elevated the role of the Chief Sustainability Officer in capital budgeting decisions to ensure the company is spending money to achieve financial and environmental results. And Natura is accounting for the environmental impacts of its suppliers and including those costs in its supplier selection process.
David Roberts at Grist, the online environmental news organization, commented on Twitter last week that “people talk about ‘externalities’ like they are just bad vibes or something. But that money is real money. Those costs are real costs.” How real is that money? Dr. Pavan Sukhdev, author of The Economics of Ecosystems and Biodiversity and Corporation 2020, claims that these “externalities”—or costs to society from carbon emissions, water use, pollutants, and other byproducts of business activities—are more than $2 trillion.
Putting a financial value on these environmental costs can help businesses make better informed decisions about how they manage their environmental risk. Not all companies recognize this—and even fewer actually know how to value these externalities correctly. But a few corporations are starting to show us the way.
The private sector is a crucial partner in advancing sustainable development, and bilateral aid agencies are grappling with ways to learn from and leverage the activities of companies and markets. As the worlds of business and of aid increasingly intersect—and as development budgets are reined in even as demands on them grow—the pressure is to do more in partnership with the private sector. The real challenge, though, is to do better.
This was the headline message from a recent roundtable discussion with representatives from nine bilateral donor agencies and invitees from the private sector, co-organized by WRI and the International Institute for Environment and Development (IIED) in London (see notes from the roundtable).
Both sides desire a strengthened relationship. Donor agencies see the private sector as an indispensable partner for improving the effectiveness and efficiency of aid. Agencies are looking for important sources of ideas, technology, and financing to scale up development solutions.
One example is the Africa Enterprise Challenge Fund (AECF), which is funded by the Australian, British, Danish, Dutch, and Swedish aid agencies. AECF is improving livelihoods of poor people in rural Africa by supporting innovation and new business models to help small-scale farmers adapt to climate change and promote investment in the generation of low-cost, clean, renewable energy.
Private sector actors seek clearer policy signals and more consistent support from donor agencies, particularly in understanding and navigating local politics. They also seek opportunities to develop new products and new markets, benefiting from the “de-risking” role that the public sector can play.
A large, multi-national company likely spends hundreds of millions of dollars every year on new projects. How these projects are designed, constructed, and operated clearly impacts costs in the short-term, but also poses huge implications for a company’s “sustainability footprint” in the long-term.
A major challenge is that most corporate sustainability experts within a business are not involved in capital budget requests at the outset. A company’s financial leaders make investment decisions with upfront costs and projected revenues in the front of their minds. They are far less likely to take into account a project’s potential environmental risks and benefits. Not coordinating financial and sustainability decisions can lead to projects that are cost-efficient to build today, but may not hold up to sustainability pressures over their lifetime. For example, a company might invest in a factory that is inexpensive to build, but then realize that it’s in a location that locks them into buying only fossil fuel-based energy sources.
As companies tackle environmental sustainability initiatives—such as developing a climate change strategy—early steps involve getting the CEO on board and committing to public goals. But the process doesn’t stop there. In fact, that’s only the beginning. Companies also need to find the money to implement projects and make good on the promised goals—all while delivering financial results.
Finding the Money: A Case Study from Johnson & Johnson
Finding the funds for environmental sustainability initiatives can be a tall order, especially since many companies’ sustainability decisions are made separately from its financial ones. Johnson & Johnson experienced this conundrum firsthand. Back in 2004, the company had a public greenhouse gas reduction target, but was not on track to reach it. Although the emission-reduction projects it identified could save energy and operating costs, managers were having difficulty getting approval for the capital they needed. Core business priorities like new product development were competing with the money the company had earmarked for its sustainability efforts.
Managers, therefore, decided to re-think the way the company allocates internal capital. Johnson & Johnson started putting aside $40 million each year for “win-win” projects—greenhouse gas (GHG)-reduction initiatives that also reduce operating expenses, such as solar photovoltaics. Projects like these sometimes require more upfront capital, but benefit from more predictable returns and lower operating costs than conventional energy systems. The strategy reduces the company’s risk exposure over time and lowers its operating budget.
Fast forward to today and this approach has enabled Johnson & Johnson to reduce its GHG emissions by more than 138,000 metric tons through projects that have an average return of 19 percent. This emissions-reduction is equivalent to the electricity use of approximately 21,000 homes. The company met its initial GHG-reduction target in 2010 and renewed its commitment with a new 20 percent absolute reduction target by 2015.
This is Part One of a five-part blog series, “Aligning Profit and Environmental Sustainability.” Each installment will offer solutions for businesses to better integrate environmental sustainability into their everyday operations. Look for these posts every Thursday for the next four weeks.
Implementing corporate environmental sustainability strategies is increasingly becoming standard practice. For example, more than 300 of the S&P 500 report their greenhouse gas (GHG) inventories each year to the Carbon Disclosure Project, and companies from the Fortune 100 and S&P Global 100 are investing billions of dollars to reach renewable energy procurement targets. Some companies are going further and taking steps to reduce the environmental impact of their products, services, and supply chains.
Despite this encouraging progress, a confluence of global environmental challenges is putting more pressure on corporate environmental sustainability strategies to get to scale quickly. Not enough global businesses have integrated environmental sustainability into their long-term decision making. And, as it stands today, existing practices are not enough to protect the natural resources that society and businesses depend on.
WRI examines this gap between existing corporate sustainability practices and the environmental protection needed for the 21st century in our new report, Aligning Profit and Environmental Sustainability: Stories from Industry. We interviewed sustainability managers from AkzoNobel, Alcoa, Citi, Greif, Johnson & Johnson, Mars, Natura, and Siemens to better understand why strategies that are good for both business and the planet are not getting to scale.
We identified four barriers in these discussions, as well as ways companies can overcome them:
As we enter 2013, there are signs of growth and economic advancement around the world. The global middle class is booming. More people are moving into cities. And the quality of life for millions is improving at an unprecedented pace.
Yet, there are also stark warnings of mounting pressures on natural resources and the climate. Consider: 2012 was the hottest year on record for the continental United States. There have been 36 consecutive years in which global temperatures have been above normal. Carbon dioxide emissions are on the rise – last year the world added about 3 percent more carbon emissions to the atmosphere. All of these pressures are bringing more climate impacts: droughts, wildfires, rising seas, and intense storms.
All is not lost, but the window for action is rapidly closing. This decade--and this year--will be critical.
Against that backdrop, experts at WRI have analyzed trends, observations, and data to highlight six key environmental and development stories we’ll be watching in 2013.