Growing Your Company While Reducing Emissions

Emission reduction targets are at the centrepiece of any credible green business policy but as many firms are now discovering, setting the right target is far more difficult than it first appears.

With growing numbers of companies having had emission targets in place for a number of years, the realization is dawning that simply setting a 20, 60 or even 80 percent emission target in line with the latest political or scientific consensus can soon result in unexpected levels of complexity followed by significant PR headaches.

What happens to that target if, for example, you acquire a new company, or sell off part of your operations, or even happen upon a new product that goes stratospheric?

You are quickly left with an emissions target that is either unattainable or meaningless – and a step designed to display an enlightened attitude to corporate responsibility becomes little more than a handy stick with which environmentalists can attack you.

It is a dilemma that became apparent to telcoms giant BT when it began to assess how to apply its emissions reduction target for its U.K. operations to the entire business.

“We set an absolute target of cutting emissions from U.K. operations by 80 percent on 2006-07 levels by 2016,” explains Chris Tuppen, director of sustainable development at the company. “We then wanted to set a similar target for our international operations, but the problem was that in 2006-07 we had virtually no emissions outside the U.K. Now we have 200,000 tonnes of emissions from an international business growing at over 20 percent per year, but you can’t really set a precentage target for cutting emissions when your baseline is zero.”

It is a problem familiar to almost every firm that has set itself an emissions target, according to Paul Dickinson, chief executive of corporate reporting lobby group the Carbon Disclosure Project (CDP). “People have been really struggling with the idea of how to bring down emissions without surrendering growth,” he explains. “There is a sense that if you emit 1 million tonnes and set a target of cutting that by 5 percent that’s fine, but if you then go out and buy another company that emits 1 million tonnes, the whole process is stuffed.”

Faced with exactly this problem as a consequence of its plans to significantly expand its international operations, BT asked its sustainability advisory board to develop a means of “normalizing” its emissions target to account for this growth without diluting its effectiveness.

“We looked at all sorts of options such as measuring CO2 per unit of turnover, or per employee, or per bit of information processed,” recalls Tuppen. “They each had some merit but the problem with these metrics is that first, you don’t know at which level you should set the target and second, it becomes difficult to benchmark your performance against others.”

In the end it was a suggestion from Jorgen Randers, a Norwegian sustainability expert and co-author of the influential green business book, “Limits to Growth,” to link emissions with a company’s contribution to GDP that provided Tuppen and his team with the answer to these problems.

The result is the Climate Stabilization Intensity (CSI) model, which BT unveiled to much fanfare last week.

Tuppen admits that at first glance the CSI metric can appear intimidatingly complex, but in essence it is a relatively simple means of linking a firm’s carbon emissions to its financial performance, allowing organizations to seamlessly adapt targets such as acquisitions or divestments that lead to a change in the company’s circumstances.

The metric takes as its starting point the calculation that, based on global emissions in 2008 of 47 gigatonnes of CO2 equivalent, each pound of GDP results in 1.67kg of CO2 equivalent being emitted. From here BT was able to apply the carbon reduction scenarios mapped out in the Stern Report to work out the extent to which CO2 per unit of GDP needs to be reduced to reach the goal of cutting emissions from developed economies by 80 percent.

“If we assume the world economy will grow at the same rate it has done since 1980 and we know what is required in terms of emissions reductions, we can work out the level of carbon intensity that developed economies have to reach,” explains Tuppen. “Based on our calculations, we need to reduce the CO2 intensity of the U.K. economy by 9.6 percent a year, which is a rate fast enough to deliver absolute cuts in emissions even as the economy grows … if every business reduces carbon intensity at that rate, they are making a fair contribution to meeting the 80 percent target.”

To apply the model at a corporate level, all a firm requires is data on its carbon footprint and its contribution to GDP. “A company’s contribution to GDP is known as its value add, and is equal to its EBITDA [earnings before interest tax, depreciation and amortisation] plus employee costs or turnover minus bought-in costs and services,” explains Tuppen, adding that once a company has both that figure and information on its carbon footprint it is relatively easy to map the emission reduction curve it needs to follow.

What elevates the CSI above being a rather dry exercise in environmental economics is the extent to which it provides firms with that ability to link their environmental and financial performance, allowing them to set more realistic emission reduction targets in the process.

“As a business it allows you to undertake acquisitions or organic growth because when you grow you acquire both value add and CO2,” observes Tuppen. “If you buy a carbon-intensive company you can apply the model and find out how much harder you have to work to bring it into line with the rest of the company.”

This is exactly what BT has done with regards to the expansion of its international operations, mapping out an emissions reduction strategy that expects to see emissions from its expanded non-U.K. operations rise up until 2016, at which point it intends to begin to curb emissions at a rate in line with the rest of the business.

The other key benefit of the CSI is that if it is applied widely enough it begins to enable useful comparisons between different firms’ carbon performance. Currently, most attempts to compare the relative performance of firms’ carbon emission reduction efforts are hampered by differences in their size or the starting point against which they are measuring. But by measuring a firm’s carbon intensity and the rate at which it is reducing that carbon intensity you should get a fairer understanding of their relative performance.

Whether companies will sign up to a reporting model that is bound to reveal that some sectors have far higher levels of carbon intensity than others remains to be seen. But, those concerns aside, there is little doubt that BT has hit on a means of setting emissions targets that delivers the flexibility business leaders require with the emission reductions climate science demands.

By James Murray

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