Approaches to Business Strategies for Climate Change - Coursework Example

Companies that manage and mitigate their exposure to climate-change risks whilst seeking new opportunities for profits will generate a competitive advantage over rivals in a carbon-constraint future 2008 Introduction Companies are faced with a global situation in which their activities are directly linked with environmental issues and climate change. Almost all climate change models predict that the global mean temperature would rise by 2-5oC from pre-industrial levels to somewhere between 2030 and 2060. Some more recent studies predict temperatures to rise even beyond 5oC, which would be something that the world has not experienced since the Ice Age. The temperature rise is primarily due to greenhouse gas emissions, as much as 85percent is composed of carbon dioxide emissions (Stern Review, 2007). Besides natural emission of carbon dioxide, human-induced emission of carbon dioxide causes most of the greenhouse gas effects, resulting in climate change. The largest sources of carbon emission are coal, oil and gas burnt in power plants, automobiles and industrial facilities for the production and processing of mineral, metal and petroleum-based products. Simultaneously, deforestation and land use for urbanization and cultivation, leading to a break in the process of carbon sequestration, by which trees and plants absorb or remove CO2, is also halted or slowed down. Climate changes is predicted to result in a self-triggering process since it would in turn allow plants to soak less carbon and hence release large amounts of methane, another greenhouse gas. Besides, rising temperatures would reintensify the water cycle, thereby increase water scarcity and put the world at risk of sudden and large temperature changes and droughts (Stern Review, 2007). Besides, rise in water levels would increase risks of floods, displacing millions of people and destroy the animal habitat and hence the ecosystem. Environmental panels, governments and institutions have developed a market based solution to address climate change through a carbon trading system in which companies are provided with financial incentives to mitigate their exposure to carbon emissions. However, many countries, including the United States, which is responsible for one-third of greenhouse gas emissions, have not adopted the market-based solution yet. Hence, there is a combination of market-based system, which provides direct financial benefits to companies involved, as well voluntary programs, which result in cost-saving to businesses. In this paper, I will discuss both approaches to business strategies for climate change: 1) through the market-based system in which companies can earn carbon credits, and 2) a voluntary system that reduces costs to businesses adopting innovative strategies to reduce costs on electricity, water and waste disposal. The latter strategy may also be directed by government regulations, like for instance in the United Kingdom. Market-based solutions to climate change Market-based policy solutions like tax or trade have been proposed to control climate change. Both environmental tax or trade contribute to public revenues of countries hence advantageous for national economies. Various trading schemes are operational, like the European Union carbon trading scheme. The Kyoto Protocol, the 1997 international treaty that came into force in 2005, has enabled the 141 signing developed countries to put the carbon cap and trade system into practice. The United States is the only industrialized country and which accounts for one-third of greenhouse gas emissions that has not yet ratified the Kyoto Protocol. The carbon trading system provides businesses in developed countries opportunities to earn carbon credits by setting up production facilities with clean technologies. In addition, according to the treaty, the countries that emit less than the specified quota till 2012, will be able to sell carbon credits to countries that exceed the quota. At the national or regional level, specific policies have been developed, for example the acid rain mitigation program in the United States (Stern Review, 2007). In theory, the price mechanism by providing a trading system is considered a better process to control pollution than a carbon tax system that would impose quantitative restrictions. In the carbon trading system, businesses find it more beneficial to mitigate carbon emissions so that they can earn carbon credits through trading. Not surprising, many successful companies have declared themselves ‘carbon-neutral. The list of companies include those from various industries, like news baron, Rupert Murdoch’s BskyB, financial institutions like HSBC, Goldman Sachs and Swiss Re and industrial giants like General Electric (Economist, 2006). The fastest growing and industrializing economies in the world are now in Asia, particularly China. With large-scale infrastructure growth as well as developing to be a global hub for automobile production, China’s environmental problems are also increasing. Hence, it provides opportunities for companies in the west, which have already reached a higher level of industrialization, to earn carbon credits from Chinese companies Various studies have been made to study the “business as usual” scenario, that is, what would happen to emissions in the absence of a carbon-constraint. The investors would obviously prefer a less carbon-intensive scenario but since there are uncertainties regarding the future of emissions, such studies provide a baseline for comparison of financial benefits that companies might derive from reducing their exposure to emissions. Some studies in the United States have found that most baseline studies overestimate emissions, thereby increasing the precautionary requirements for companies (Manne & Richels, 1993). For the carbon trading system to be successful, it is essential that businesses spend on Research & Development and produce Clean technologies, particularly for power generation and industrial production and processing of metals, minerals and petroleum products which emit the most carbon. Companies can also export such technologies to the developed world through their subsidiaries and other companies and in turn earn carbon credits. Since there are uncertainties of climate change effects of carbon emissions, a carbon pricing and trading system is not enough unless it is supported by the development of carbon-constraining technologies and policy orientations on environmental issues (Stern Review, 2007). Voluntary programs with or without government intervention In an article based on empirical analysis of organizations, Kolke & Pinske (2005) found that it is possible for companies to address climate change issues at the company level (internal), through cooperation with competitors or at the supply chain level (vertical). From a study of FT Global 500 companies, the authors found that multinational companies (MNCs) follow various strategies to tackle climate change on their own since the Kyoto Protocol has not been universally ratified. Business managers have the choice to either adopt innovative strategies to reduce emission or a compensatory strategy through carbon trading. Kolke & Pinske (2007) found that European and Japanese companies typically influence governments of host countries – and not home countries – to move towards market-based solutions, or compensatory strategies, to climate change. On the other hand, U.S and Australian firms followed voluntary or self-regulatory programs towards emission reduction. Voluntary programs towards green businesses involve innovative ways to reduce electricity and water consumption and sending less waste to landfill that would otherwise result in land degradation. Green architecture, using recyclable material thereby minimizing the use of natural resources, efficient heating and cooling systems that minimize wastage of energy and installation of renewable energy sources like solar panels and wind turbines, reduce the energy and water consumption. At the same time, such architecture reduces running costs for commercial buildings. Schendler (2002), however, found that green businesses have not been very popular because the economic benefits from such businesses are usually over-estimated. Hence, voluntary environmental programs that businesses undertake are usually ordained by law or induced by publicity imperatives. Policy frameworks for climate change The recent UN Conference on Climate Change held at Bali developed an action plan by countries in order to cooperate by and beyond 2012 to develop strategies for reducing carbon emissions on a long term basis. Appropriate policies should be put in place in the developing countries in order to implement sustainable development supported by clean technologies, financing and capacity building of clean industries. Countries should policy approaches to provide incentives to reduce deforestation and forest degradation. A mix of market-based solutions as well as voluntary and policy-directed solutions was proposed. For all policies, international cooperation was deemed essential for vulnerability assessment, prioritization of action plans, financial assessment, response strategies, capacity-building and integration of national plans and global objectives. The conference also suggested that the developed countries supported the least developed countries in this aspect (UNFCC). The global policy framework is intended to develop national policies that would provide incentives and regulations for businesses to mitigate their exposure to carbon emissions. Businesses can be provided market-based incentives through carbon trading or even cost-saving opportunities by imposing carbon taxes. Besides, companies should also realize the potential for cost saving through voluntary programs that would reduce their energy and water bills and also costs related to sending waste to landfill. Some countries have established environmental reporting as an accounting practice thus incorporating environment responsibility as part of the companies’ business objectives. There are direct costs of reporting environmental impacts since it requires appropriate environment management systems, employment of specialist staff, internal auditors and external verifiers, publication and distributions costs and a potential ‘reporting risk’. On the other hand, there are indirect costs associated with not reporting environmental impacts. For example, the company would then have inferior environment profile than its competitors, resulting in loss of markets, investors and other possible benefits like projection of the companies’ commitment to continuous improvement on environmental issues, assurance to investors and lenders over long term sustainability, minimization or possibilities of regulatory intervention, improved access to supply chain, positive publicity, etc. (UNCTAD, 2000). UNEP and SustainAbility of UK have together developed a set of 50 parameters of disclosures on environmental reporting, which may be categorized broadly as 1) organizational, management policies and issues, 2) input/output inventory, 3) finance, 4) stakeholder relationship and partnership, 5) sustainable development and 6) report design (UNCTAD, 2000). In 2005, the UK government issued guidelines for reporting of Key Performance Indicators (KPI) related to emission to air (through greenhouse gases, acid rain, eutrophication and smog precursors, dust, ozone depleting substances, volatile organic compounds and metals), emissions to water (nutrients and organic pollutants, metals), emission to land (pesticides and fertilizers, metals, acids and organic pollutants, landfill, incinerated and recycled waste, radioactive) and resource use (water, natural gas, oil, metals, coal, minerals, aggregates, forestry, agriculture). The Operational and Financial Review (OFR) that was applicable till then was replaced with the new guidelines that was applicable to the 1290 quoted companies. However, only a handful of companies report on all aspects of their environmental impact, that is energy, water, waste and toxic substances. The guidelines, intended to save costs for the companies as well as lead to long term environmental impacts, assumed that 80 percent of businesses were likely to have at the most 5 environmental issues. Typical areas in which costs could be saved are use of raw materials and supplies, water, energy, transport and packaging and sending waste to landfill. Efficient risk management reduces insurance costs as well as tax liabilities. According to estimates of the Environment Agency, UK companies can save GBP 2-3 billion, or 7 percent of profits by adopting waste minimization strategies (DEFRA). Not only do environment best practices save costs thereby increasing profits, it gives signals to investors and analysts over sustainability of the businesses. The 22 KPIs identified The Environment Agency found from their research that there is a positive correlation between good environmental practices and financial performance. Although 89 percent of the companies discuss some aspect of environmental concerns in the annual reports, the information is inadequate for the purpose of shareholders. Only 24 percent of the listed companies make quantitative disclosures and only 11 percent link it to financial consequences. Only 10 percent of the companies report on waste, water/energy use and climate change in annual reports and even fewer reports these in quantitative terms (Environment Agency). Companies feel that environmental costs incurred on treatment of waste products, clean up of damage, environmental audits and administration, fines and penalties for non-compliance, compensation to third party damages, etc. do not lead to immediate financial benefits to the businesses. Yet, many companies have taken up pollution-mitigating steps to avoid adverse publicity. For example, some banks have also cleaned up contaminated land to overcome the adverse publicity even though there were no direct financial benefits to the banks. In 1997, British Petroleum reported in its annual report the environmental liabilities associated with the decommissioning of certain production facilities (UNCTAD, 2000). Conclusion Thus, most countries and companies, particularly in the western industrialized world, are faced with a carbon constraint situation. Carbon emissions are already beyond danger levels and required to be mitigated early in order to check global warming and climate change that could in turn lead to roadblocks to sustainable development. Electricity generation and industries that produce and process mineral, metal or petroleum based products are the largest producers of greenhouse gases that lead to climate change. This has prompted many countries, except the United States that is the largest emitter of greenhouse gases, to sign the Kyoto Protocol that has established a system of carbon credits. In this system, companies are provided with financial incentives to mitigate their exposure to carbon emissions. Companies that mitigate pollution thus can earn carbon credits which can be traded with more polluting countries either in the industrialized world or the industrializing one. However, since the Kyoto Protocol has not been universally ratified, voluntary programs, and not market-based solutions like carbon trading, are also prevalent. Many companies adopt voluntary emission mitigating strategies to reduce costs. Reduction of electricity and water consumption and lower waste production through recycling and innovative business policies like green architecture, make good business sense while also contributing to climate change issues. This is in addition to the positive publicity that provides intangible benefits to the companies. Many companies in the United Kingdom realized their corporate social responsibility quite early and have begun environmental reporting in addition to management and accounting reporting. This shows that companies benefit from mitigating pollution and report their activities in this regard to investors and the public. Works Cited Department of Environment, Food and Rural Affairs (DEFRA), Environmental Key Performance Indicators: Reporting Guidelines for UK Businesses, 2006, http://www.defra.gov.uk/environment/business/envrp/pdf/envkpi-guidelines.pdf Economist, Companies and Climate Change, June 8, 2006 The Environment Agency, Accounting Standards Board – Financial Reporting Exposure Draft – Reporting Standard 1: The Operating and Financial Review. http://www.environment-agency.gov.uk/commondata/acrobat/responseasbdraftofr_1009625.pdf Hawken, Paul, Amory Lovins and L Hunter Lovins, Natural Capitalism, Boston: Little, Brown and Company, 1999 Kolke Ans and Jonatan Pinske,, Business Responses to Climate Change: Identifying Emergent Trends, California Management Review, Vol 47, Number 3, 2005 Kolke, Ans and Jonatan Pinske, Multinational Political Strategies on Climate Change, Business and Society, Vol 46, No 1, 2007 Manne, Alan S and Richard G Richels, CO2 Hedging Strategies: The Impact of Uncertainty on Emissions, 1993, http://www.accf.org/publications/reports/sr-econimp-altem.html Schendler, A, Where’s the Green Business, Harvard Business Review, June 1, 2002 Stern Reviews of the Economics of Climate Change, 2007 http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm UNCTAD, Accounting and Financial Reporting for Environmental Costs and Liabilities, Workshop Manual, 2000, http://ecolu-info.unige.ch/recherche/supprem/content/unctad/reference_material/CAET-UNCTAD-MANUAL.pdf UN Framework for Convention on Climate Change, Bali Conference, 2007, http://unfccc.int/meetings/cop_13/items/4049.php Read More