Tag Archives: GHG reporting

New Study from UC Davis Claims Shareholder Value Decreases with Conflict Minerals Disclosure

A new study released last week from Paul Griffin, a professor in the UC Davis Graduate School of Management, claims that shareholder value has suffered in response to past (voluntary) public disclosures on conflict minerals.  The release summary from Phys.org stated:

Griffin and his research team examined 206 companies from December 2010 through March 2012 and found those companies — half who had voluntarily disclosed before the law became mandatory — lost $6.5 billion in shareholder value due to declining equity values. Both disclosing and nondisclosing companies were affected because of the ripple effect in capital markets when uncertainties arise about a particular business practice — using conflict minerals, in this case.

The study methodology claims to correct for other factors possibly influencing stock pricing before and after such disclosures.  Elm’s analysis of the impact of the 2010 Enough company rankings on corporate revenues was cited within the study, although Professor Griffin acknowledged the differing parameters and goals of the respective studies.

We have only begun our review of Griffin’s study (given its timing, our plate has been full with the final SEC rule) and hope to have more detailed commentary soon.

 

EHS Journal Article on Sustainability, Financial Valuation

Recently, Elm posted a piece discussing comments from Kevin Parker, the CEO of Deutsche Asset Management, an investment firm with three-fourths of US$1 trillion under management.

We expanded that original post for EHS Journal, who just published it.  The expanded version dives deeper into trends in the past decade supporting Parker’s assessment of why capital markets are bullish on carbon-intensive investment opportunities even in light of this era of sustainability.

View the article in its entirety here.

PlayPlay

An Inconvenient Reality For Environmental/Sustainability Professionals?

For years, those of us in the environmental/sustainability profession have sought credible ways and metrics for quantifying the economic value of our efforts, activities and programs.  A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics.

Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The problem is that environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the “current quarter” myopia of corporate management, financial markets and analysts.

A recent article on the topic was published in The International News.  The article includes an interview with Kevin Parker, CEO of Deutsche Asset Management (DeAM) on the subject of how capital markets currently view environmental/sustainability risks.  DeAM manages over US$775 billion in assets.

With simplicity, clarity and unquestionable credibility from the financial market viewpoint, Parker made key points in the article and interview:

  • Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis.
  • “The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic.”
  • By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
  • But investors in longer-term debt including bonds will increasingly avoid unsustainable companies … an inexorable trend that will push up their borrowing costs.
  • “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”

Pension investment managers realized this years ago since they emphasize stability and a long-term investment horizon.

But there seems to be far less recognition of this by environmental/sustainability practitioners, as the amount of studies, white papers and pseudo-financial metrics is mounting, with continued emphasis on the equities side of capital markets.  Perhaps the driving forces for this are general economic pressures facing companies are pushing staff to find ways to justify their existence and cost, consultants are trying to come up with that elusive short-term ROI metric for the cost of their services to clients and much of the HSE/sustainability media are vying for limited attention on the part of their readership.

Given Parker’s comments – and the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.

In limited circumstances, financial value of environmental/sustainability initiatives can manifest in material and short-term impacts.  Those instances give practitioners hope of riding those coattails.  But generally, the reality is a little inconvenient.

WalMart’s Hot Air

Yesterday, the world’s largest retailer and its cadre of sustainability advisors released the 61-page Walmart Supplier GHG Innovation Program: Guidance Document.

Elm has read through this document and provides a brief overview of what we think are several important points.  What follows is a combination of excerpts from the document combined with Elm comments.  Not all of these points are implementation “how-to’s”.  Some of our comments reflect potential problems that should be evaluated by suppliers who are impacted by Walmart’s supplier sustainability initiatives.

The program will initially focus on the following product categories:

Animal feed, apparel, candy, cheese, frozen food, fruit, grains, household detergents, meat, media, milk, motor oil, pharmaceuticals, produce, sanitary paper products, snacks, soap & shampoo, soft drinks & beverages, televisions, and vegetables.

GIVING CREDIT WHERE CREDIT IS DUE (TO WALMART)

In past articles, Elm discussed our view there is a true business risk – rather than competitive advantage – to first-mover adoption of GHG reduction programs.  We had anticipated that such risk would be rooted in regulatory requirements.  While that may still be a concern in the longer term, it appears now that the more significant risk relates to Walmart suppliers.  The retailer has specified that no credit will be given to reductions that are not directly related to Walmart’s GHG program, such as reductions required by law or reduction programs that began prior to 2010.

Further, to get a sense of how little the supplier appears to be in the overall process, take a look at the graphic on page 9.  Of the 6 steps in the Opportunities Identification, Prioritization, and Engagement Process, only one (Step 5 – Engage & Implement) includes the suppliers as an “actor” in the process.

Generally, for a project to count towards Walmart’s reduction goal, it can either be a carbon reduction for a product that Walmart sells or a reduction at a facility/process that supplies Walmart.

The reduction achieved must also be “additional” and beyond business as usual (BAU) in terms of emissions accounting. Specifically, the activity must:

1. Demonstrate that the initiative is truly additional, meaning that the action would not have otherwise happened without Walmart’s influence, and

2. That the initiative represents performance beyond BAU, indicating that the improvement is well beyond existing business trends and has the overall impact of emissions reductions within a product category.

Walmart is accounting for carbon reductions that occur by comparing a new product, or change to a facility, to a baseline. The baseline is determined by an assessment of the “business as usual” (BAU) case. BAU is defining what would have been the carbon emissions of a product or a facility if Walmart had not encouraged, introduced, or catalyzed the implementation of an innovation. It is important to note that the carbon reduction claims, rules for quantifying reductions, and monetization within this document are written under current regulatory standards in the U.S. If Federal or other laws change that effects the guidance prescribed in this document, they will be re-assessed at that time. This includes, but is not limited to: public reporting on carbon emissions regulated by the SEC, regulations set by FTC for marketing claims, carbon tax or cap and trade legislation or regulation by EPA, or carbon reporting by EPA.

MORE COOKS IN THE KITCHEN

As if manufacturing sites don’t already have enough folks wandering the production floor and telling them how to make product….

Generally speaking, Walmart can reduce product life cycle emissions by either influencing the development or design of the products them selves and/or by improving the facilities and processes used to make and transport products.

UNDER THE INFLUENCE

The document speaks in terms of Walmart’s “influence” on suppliers in order for GHG reductions to qualify.  The use of such a loose term may create potential conflicts in the future.

For a project to qualify, it must have happened because of Walmart’s influence, showing additionality. This does not exclude projects that were also influenced by other entities, programs, incentives, etc.

The Walmart Project Champion must be able to prove that the project would not have happened at the time it did without Walmart’s involvement. In this project, Walmart’s influence on the project is deemed as “additionality.” Additionality for products means that for a lower-carbon product:

  • Walmart directly influenced the development or redesign of the products, or
  • Walmart influenced the increased sales of the product.

Influencing the product directly means that Walmart engaged with a supplier to design or influence the design of a new product that is more carbon efficient. For instance, if Walmart encouraged a supplier to re-design laundry detergent to have a lighter-weight package than is currently offered, this would be influencing the redesign. If Walmart sought out a new detergent that was concentrated or eliminated specific raw materials that are more carbon intensive to extract, then this would also be an influence of the redesign.

And to further the point above about Walmart’s attempt to become involved at the production floor level:

For facilities and processes, additionality means that:

  • Walmart directly contributed to the improvement of a facility or process, or
  • Walmart influenced energy management.

GET A LIFE (CYCLE)

Product-based reductions require that a complete lifecycle analysis (LCA) be executed by either the supplier or as part of an industry effort. To claim a reduction, the LCA must be compared against a defined baseline of a reference product.   And of course that reference is selected by WalMart.

Reductions may be identified in any phase of a product’s life cycle. A product’s life cycle includes the following primary stages:

  • Raw material extraction
  • Manufacturing
  • Packaging
  • Distribution
  • Usage
  • Disposal

The WalMart Champion must identify a reference product against which to benchmark this product. The reference product may be another product that serves a similar function. As a reference product may vary significantly from the product in question in terms of technology, materials, or size, it is important to compare them on this basic level of function, also known as a “functional unit”. This is particularly crucial for products whose impacts greatly depend on how they are used at the consumer level.

For each product, the Champion must define and describe the methodology used to calculate the baseline and forecasted reduction potentials. The Champion may use a methodology that is best suited for the calculation, but documentation and an explanation is required. Suggested life cycle and corporate accounting methodologies include ISO 14040 and ISO 14064 standards, WRI/WBCSD ’s GH G Protocol Corporate and Product Life Cycle Reporting and Accounting Standards (currently in draft form), and British Standards Institution’s PAS2050 (see Part 5 for additional information).

ClearCarbon will quantify the difference between a “BAU” case and the impact of the project from a product improvement perspective solely. The difference between the two, or the delta, will be calculated at the initial submittal based on projected trends for five years or until December 31, 2015, whichever comes first.

BAU in this context would appear to include any existing GHG programs – or those that become regulatory requirements between 2010 and 2015 – and therefore become incorporated into the baseline, so no credit is given for those reductions.

SHOW ME DA MONEY

Walmart will not resell, retire, or trade carbon reduction claim s under this Program.  Additionally, the carbon reduction claims may not be “exclusive” to Walmart. It may be the case that Walmart will help a supplier, through this Program , to achieve a carbon reduction project that the supplier also wants to report publicly. In this case, both parties (Walmart and the supplier) may state a claim of reduction. Since the reduction is not being sold or traded there is no legal claim over the reduction that would make it exclusive to Walmart or to the supplier. The supplier may monetize (sell, trade, etc) carbon reductions at their discretion, though Walmart will not be involved in these transactions.

But per comments from CEO  from Mike Duke, the supplier should expect Walmart to demand that the economic benefit from monetization be reflected in the product pricing to Walmart.

GHG reductions that come from facility or process based projects require different financial value accounting than product GHG reductions. Quantifiable financial value to customers may include savings to the customer on energy or resource consumption during use of the product, resulting in lower energy bills and lower carbon emissions.

Financial value to the Walmart supplier might include the following:

  • Fuel or electricity savings at a factory or facility level translated into cost savings through industry averages (e.g., average price of kWh x total kWh saved), or
  • Material savings from reduced input purchases or a switch to cheaper materials/inputs.

In some instances either product or project based initiatives will result in a savings to the customer or a benefit to Walmart that are not financially measureable. In these cases, a qualitative description of the positive impact should be included in the worksheets. Benefits to suppliers and businesses may include:

  • Improved business conditions,
  • Public relations opportunities, or
  • Increased positive stakeholder engagement.

The document contains no recognition of or reference to the economic value of EHS risk reductions for WalMart or the supplier.  But beware about claims of financial benefits – as indicated above WalMart intends for those savings to be passed on to WalMart by the suppliers.  Suppliers may find benefits in claiming “savings to the customer or a benefit to Walmart that are not financially measureable.”

THE BIG HOLE

The guidance is written in a manner suggesting that all suppliers manufacture their products at their own facilities.  A massive gap seems to exist relative to contract manufacturing.  Fascinating, given the astounding number of products sold by Walmart that are manufactured in China on behalf of a Walmart supplier.  Perhaps the company has lost sight of the fact that overwhelming cost pressures they impose on their suppliers has driven much of the actual manufacturing off-shore to third party contractors over which the Walmart supplier has no direct operational control.  And what about the overall supply chain GHG impact of the consumer having to more than 1 of a particular item after the initial item breaks/fails prematurely due to poor quality (like my daughter’s new $1 calculator that broke after less than 24 hours after purchasing it at WalMart)? I wonder if the retailer will take responsibility for something like that.

Well, There You Have It…

NYT reports that Washington has abandoned hope of issuing carbon legislation this year, including cap-and-trade.   The inaction is also dragging down regional/state programs as well, including the well-hyped RGGI trading program.  This shouldn’t come as a real surprise to anyone.

But it does continue to increase the business uncertainty surrounding emissions in the US.  Tune in again next year.  Or the year after….

Incubating Environmental “Black Swans” In the Nest

Our last entry discussed the concept of “Black Swan” events, a term created by noted author Nassim Nicholas Taleb to describe an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.

Certainly, risk assessments are predictive in nature and no one can predict the future with complete certainty.  But in our view, one of the best tools available for risk assessments is an open mind.    This can be a challenge in the EHSS world as we generally have engineering and other technical backgrounds.  We have been trained to seek absolutes and eliminate uncertainties.  At Elm, we believe that involving external support helps to identify and explore events (and their related exposures) that are relevant but get “technically rationalized” by internal staff.

With the BP oil spill and the December 2008 Kingston, Tennessee coal ash pond failure, we began thinking about some of the Black Swan events discussed with clients in the past.  Below are a handful of EHSS Black Swan risk events that we have discussed with clients over the past years – and some that are currently on our mind.

  • Radical change in EPA’s regulation of coal ash management (discussed several years before the Kingston event, and vehemently opposed by the client)
  • Catastrophic failure of GHG emissions trading market
  • Dramatic failures/errors in GHG footprint calculation methodology
  • Nationalization of privately-owned CO2 emissions assets
  • Regulation and class-action level public concerns over chemical content of consumer goods
  • Waste disposal liability for and public pressures about exporting electronic wastes
  • Dramatic increase in OSHA/EPA enforcement – frequency, severity and targeted industries/sites
  • Major expansion of pollution exclusions/limitations in insurance policies
  • Increased success of US-based NGOs in successfully obtaining US venue for lawsuits concerning EHSS allegations for non-US sites/projects/activities
  • Unprecedented shareholder and SEC pressure on public companies related to EHSS matters
  • Increased importance of EHSS in supply chains and procurement decisions

Perhaps these seem far-fetched to you or your company.  But if that is the case, the egg of that – or another – Black Swan is quietly incubating somewhere in your organization.

Are Your Internal Accounting Processes Ready for the SEC’s Climate Risk Interpretive Guidance?

Sure, there are some business risks that are readily identifiable to conform to the SEC’s Climate Risk Assessment Interpretive Guidance.  Things like:

  • Property damage from storms and sea level changes
  • Increased costs related to new pollution controls and fuels
  • Changes in customer procurement requirements.

But read about the supply chain constraint that the UK energy company E.ON brought forward in a Reuters report:

Lack of investment in the vessels used to build offshore wind farms could hinder Britain’s ambitions to shift to renewable energy, the head of E.ON UK’s Robin Rigg wind project told Reuters at the operations center in Workington, northwest England.

Britain aims to install 32 gigawatts (GW) of offshore wind by 2020, enough to meet a quarter of the country’s electricity needs, and although there has been investment in turbines factories and ports, a lack of vessels could curtail targets.

“The targets are very ambitious and the supply chain isn’t there for it to materialize. It definitely has to grow,” Ian Johnson, Robin Rigg offshore wind farm project manager said. “Aside from turbines, vessels to install equipment are expensive,” said Johnson adding that a lack of predictability over upcoming wind farm projects in the past had caused a squeeze on construction vessels as builders rush to use the small stock already built.

Vessel builders in the past have asked: “When’s the next project going to come along? Where’s the continuity for me in the supply chain?”

Reliance on third parties – over which you have little control – to implement business plans could be an overlooked risk in the context of the Interpretive Guidance.  Further, entering into long-term contracts or guarantees with third parties to ensure infrastructure for deployment create additional financial risks.

This Week’s Zigzag in the US Climate Regulation Journey

Reuters has reported that the US Senate anticipates bringing the latest carbon emission bill to the floor next week.  Although details are currently sketchy, there are some interesting facets revealed in that article:

–       The bill’s greenhouse gas (GHG) reduction target is 17% by the year 2020;

–       The baseline year for this reduction is 2005;

–       Regional and state-specific GHG cap-and-trade programs would be eliminated and replaced by a federal program.

–       Cap-and-trade for electric power generators would begin in 2012; for manufacturing, the program would begin in 2016;

–       Domestic and international off-sets would be allowable

–       Transportation emissions reductions would be achieved through a motor fuel fee that would hopefully spur various forms of innovation, efficiency and reductions

One glaring aspect of these few details is whether/how companies will get “early action credit” for their GHG reduction efforts achieved prior to this bill’s 2005 baseline year.  Corporations that made major strides in GHG reductions between 2000 and 2005 may find themselves on the wrong end of the “80/20 rule”.  Those who chose to wait for more certainty could be in an improved competitive situation by spending less money to harvest the “low hanging fruit” to hit the 17% target.

McKinsey Study on Sustainability

Last month, McKinsey & Co. published a study titled “How companies manage sustainability”.  The survey was conducted in February 2010 and received responses from 1,946 executives representing a wide range of industries.

The fact that the topic of sustainability is significant enough for McKinsey to conduct this analysis is notable.  The study itself is short and it is easy to distill the major themes presented.

Theme 1:  “Sustainability” has no defined definition

… many [companies] have no clear definition of [sustainability]. Overall, 20 percent of executives say their companies don’t. Among those that do, the definition varies: 55 percent define sustainability as the management of issues related to the environment (for example, greenhouse gas emissions, energy efficiency, waste management, green-product development, and water conservation). In addition, 48 percent say it includes the management of governance issues (such as complying with regulations, maintaining ethical practices, and meeting accepted industry standards), and 41 percent say it includes the management of social issues (for instance, working conditions and labor standards). Fifty-six percent of all the respondents define sustainability in two or more ways.

Theme 2:  What gets measured gets managed, or vice versa

[E]xecutives [of proactive companies] … are more aware than executives at other companies of the metrics their companies track. For example, 84 percent of respondents at engaged companies are aware of whether their companies measure their carbon footprint, compared with 40 percent of respondents at less engaged companies. More importantly, among the group that is aware of what’s being tracked, the engaged companies are far more likely to be tracking relevant sustainability indicators such as waste, energy and water use, and labor standards for their suppliers and consumers.

Theme 3:  Implicit in sustainability leadership within the energy industry is risk management

… senior executives in the energy industry take an active approach to managing sustainability, likely because of the potential for regulation and increasing natural-resource constraints. Indeed, 10 percent of energy executives say addressing sustainability is the top priority on their CEOs’ agendas (versus 3 percent overall), and 31 percent say it’s a top-three priority (versus 22 percent overall). Further, energy executives are much likelier than others to be active in seeking opportunities to invest in sustainability (40 percent versus 28 percent), to integrate it into their companies’ business practices (43 percent versus 29 percent), and to shape regulation actively (29 percent versus 16 percent).

Theme 4:  Risk assessment and quantification is severely lacking

only about 35 percent of executives say their companies have quantified the potential impact of environmental and social regulation on their businesses; only 40 percent feel prepared to deal with regulation in the next three to five years and are personally confident about handling climate change issues.

Failure to reach an agreement in the recent Copenhagen UN Climate Change Conference was seen by respondents to this survey as twice as likely to increase uncertainty (30 percent) related to climate change regulation as to decrease it (15 percent); 55 percent say they saw no difference.

Those of us who have been in the EHS risk management/sustainability world for awhile will not find any of this new information.  But McKinsey’s brand behind this may bring valuable C-level credibility to the need to fill the information gaps.

“Surprised and Concerned” About Illegitimate Government-Sponsored CER Trading?

Environmental Leader has reported

that the Hungarian government sold 2 million previously used CERs, the market became tepid. Then when prices fell from more than 12 euro per credit to less than one euro, trading was suspended on two exchanges, Bluenext and Nord Pool.

The NYT provided more details of the transaction, stating

The credits appear to be part of massive blocks of CERs awarded to Eastern European states and Russia after the collapse of Soviet-era industry.  This created a loophole used by Hungary to reintroduce used CERs back into the market…

Carbon traders said countries like Hungary were exploiting the loophole to earn more money from the carbon trading system than they could by selling the credits that they had previously earned under the Kyoto system…

The traders said at least one other E.U. member state had acted similarly earlier this year.

The EU said they were “surprised and concerned” about the situation.  BusinessWeek quoted others who expressed more urgency about the matter:

“The supply and demand dynamics have been changed,” said Paul Kelly, chief executive officer of JPMorgan’s EcoSecurities unit. While the scope of the problem has yet to be determined, buyers are “questioning the authenticity” of what they are buying.

Unfortunately, this isn’t the only recent development that may cause market participants concern.  This is just the latest in a barrage of credibility and financial damage for GHG emissions trading, including:

  • Last year swindlers robbed governments of about 5 billion euros in revenues — about $6.8 billion — by selling carbon credits and disappearing before paying the required Value Added Tax on the transactions.
  • In January, swindlers used faked e-mail messages to obtain access codes for individual accounts on national registries that make up the bloc’s Emission Trading System, and then used the stolen codes to gain access to electronic certificates that represent quantities of greenhouse gases.
  • In Australia, recent fraud enforcement involved forcing a green power company, Global Green Plan, to purchase carbon credits it had promised to buy on behalf of customers, but never did.  The government is currently pursuing action against carbon capture company Prime Carbon over allegedly misleading claims made by the firm.
  • In Belgium, authorities have charged three Britons suspected of value added taxes (VAT) fraud on CO2 emissions permits.

In the U.S.,  the Regional Greenhouse Gas Initiative (RGGI), a group of Northeastern U.S. states that have a cap-and-trade program for utilities, faced its own demons.

  • The New Jersey government reallocated about $65 million in funds raised in the RGGI auction. The funds were intended for use in developing renewable energy projects, but instead are going to the state’s general fund, Reuters reports.
  • Last year, New York similarly took $90 million from its carbon fund.

So Now What?

Companies with a major stake in the GHG emissions game must conduct a detailed risk assessment of their GHG programs, solutions and exposures.  Given what has developed in the trading market in the past six months, it would be wide to carry out exposure identification, failure analyses, contingency planning and desktop exercises.

Such analyses and assessments may be critical for publicly traded companies in the United States due to SEC’s recent announcement and the newly effective EPA rule requiring reporting of greenhouse gas emissions from fossil fuel suppliers and industrial gas suppliers, direct greenhouse gas emitters and manufacturers of heavy-duty and off-road vehicles and engines.

Lawrence Heim, Director of The Elm Consulting Group International’s Atlanta office, said

Close to 10 years ago, I began posing the question ‘what if the GHG emissions trading market collapses?’  Assuming cohesive legally-enforceable emissions standards existed, the cost proposition presented by emissions trading in comparison to capital expenditures for pollution control equipment was quite attractive.  The impact of a material failure of the trading framework was significant.  This line of thought became incorporated into client risk assessments even back then.

In the US, we can look at the pollution control expenditures related to EPA’s New Source Review (NSR) enforcement initiative to provide insight into GHG control equipment costs.  Of course, NSR enforcement involves pollutants for which there are well-established and commercially-viable emissions control technologies.  We don’t have that luxury with carbon dioxide, which will likely translate into dramatically higher costs.

Further erosion of the viability of GHG emissions trading could have a significant impact on your company.  Please contact us if you would like to understand more about climate business risk assessments and potential risk mitigation options.