Carbon Counting Confusion

September 29, 2009

By David L. Levy

Carbon comes in many forms: depending on how the atoms are arranged, carbon can be a tough brilliant diamond, a rigid bucky-ball, a super-strong nanotube, soft graphite, or a lump of coal. These forms have very different properties and uses – diamonds are not the best fuel for generating electric power. Similarly, carbon measurement and disclosure comes in various shapes and sizes, from the Carbon Disclosure Project to product-level carbon footprints to Enterprise Carbon Management Systems. Yet the various modes of carbon measurement have very different goals and intended audiences, causing considerable confusion amongst firms and potential users of carbon information. This is going to impede the adoption of carbon information systems that are most crucial, those designed to manage and reduce emissions.

carbon faces

The Carbon Disclosure Project (CDP), a non-profit UK-based organization, launched its 2009 report in late September with great fanfare. The report is impressive in many ways. It’s based on a detailed questionnaire sent to companies that includes topics such as greenhouse gas (GHG) emissions, risks and opportunities to the reporting company, programs to address corporate emissions, and the assignment of managerial responsibility. With seven years of data, CDP claims to hold the largest database of primary corporate climate change information in the world.

CDP’s strategy has been to leverage the influence of institutional investors to pressure companies to voluntarily disclose their carbon-related activities, on the premise that this information is important in assessing asset values and predicting financial performance. The CDP has now signed up 475 investors with a total $55 trillion under management. CDP states that over 2,000 organizations in 66 countries around the world now measure and disclose their greenhouse gas emissions and climate change strategies through CDP. The headline 2009 report focuses on the “Global 500”, the 500 largest corporations in the FTSE Global Equity Index Series, which in June 2009 had a combined market capitalization of US$15.5 trillion. CDP achieved an 82% response rate for this group. These are impressive numbers indeed.

The CDP has certainly helped to spread familiarity and acceptance for carbon reporting and disclosure in the corporate world. Yet it is questionable how much CDP has actually contributed to emissions reductions. First, the investors who sign up do not undertake any commitment themselves (unlike the similar but smaller CERES INCR project). As Charles Morand writes in his Alt Energy Stocks blog post “Climate Change & Corporate Disclosure: Should Investors Care?”:

in 2008, worldwide investments in “sustainable energy” totaled $155 billion. That’s about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply.

Second, and more important, CDP does not generate data that is useful for reporting companies to measure and manage their GHG emissions at the facility, process, or product level. Neither is it adequate for compliance with EPA’s new rules for mandatory carbon reporting, or for carbon trading under ETS, RGGI, or a future national US system. These require carbon information systems, analogous to cost and management accounting systems, designed specifically for these purposes. But the goal of CDP is primarily to pressure corporations to wake up to climate change and pay attention to carbon. It’s simply not designed as a carbon management tool. True, CDP has been evolving under the guidance of the accounting firm PricewaterhouseCoopers, but the problems are structural. Charles Morand points out that “The problem with the CDP is that it’s really an activist organization parading as an investor group.

As with the Global Reporting Initiative (GRI), CDP is designed for a dual purpose: to assess and rank corporate social performance, and simultaneously to institutionalize the disclosure of social and environmental information useful for investors. I’ve recently been involved in academic studies of GRI and CDP (click links to download papers) and after interviewing many of the stakeholders involved, the message is clear. The information is simply not very useful, at least in its current form, for the reporting companies, for investors, and even for environmental NGOs. The reporting systems are put together by awkward coalitions of companies, NGOs, and professional accountants and consultants. As a result of the compromises made along the way, they tend to be too broad and vague. For example, the CDP section on risks and opportunities simply asks companies to write some text in response. There is no format for strategic appraisal in any systematic sense.

There is a rapidly growing market for corporate carbon management systems that attempt to cover multiple purposes. The London-based consulting company Verdantix recently released a proprietary report on carbon management software from vendors such as CarbonView, Carbon Hub, ESS, Greenstone Carbon Management, Hara, IHS, PE International, SAP and SAS. The report notes that “Many Board members would be horrified at the low quality and poor verification of carbon emissions data that is released into the public domain through channels like the Carbon Disclosure Project.” A recent spate of acquisitions demonstrates the spike of interest in this area: SAP bought Clear Standards in May 2009, while EnerNOC bought eQuilibrium Solutions in June. (Update 1.20.10: see NYT article on Groom Energy report).

These software packages aggregate emissions data from multiple sources across a company and integrate carbon price projections for planning purposes. But these systems are very immature compared with financial and management accounting systems, or Enterprise Resource Management systems for logistics and inventory control. While carbon management software systems might be useful for generating data needed for compliance purposes and for CDP-style public reports, they will not realize their potential for management control of carbon till they are better integrated with traditional corporate software systems. Verdantix provides examples of very high rates of return from implementing carbon management, but many companies will likely find the short-term gains to be as elusive as those from Total Quality Management; there are considerable hurdles to system-wide implementation, from confusion and data problems to inertia and even resistance.

One important driver for carbon management and reporting systems is the trend toward product labeling. While already well underway among major European retailers such as Tesco, Walmart jolted its 100,000 strong supplier base with an initiative announced in June to provide a label for every product on its shelves with environmental impact information (see the New York Times and the Wall Street Journal). Walmart will soon be sending an initial survey to all its suppliers with questions regarding their sustainability practices. This project requires that Walmart’s suppliers develop accurate estimates at the SKU level not just of the greenhouse gas emissions, but also of water consumption, air pollution, and other measures for all the inputs required to source, manufacture and ship their goods. As Stephen Stokes of AMR Research wrote in an earlier Climate Inc. post, Sticker Shock, this could prove hugely expensive, divert funds from investments in cutting carbon, and still not provide the information necessary for managing carbon effectively. Moreover, consumers seem either indifferent or confused by the various labels out there.

If CDP is geared toward aggregating carbon information at the corporate level, product labeling aims to allocate these emissions to individual products. Most carbon data has been generated with external audiences in mind, consumers, NGOs, and regulatory agencies. There has not been nearly enough attention to the needs of management for intermediate level information that is designed to help manage carbon and reduce costs at the facilities and process level. Whether enterprise carbon management systems can really serve these multiple needs remains to be seen.

4 Responses to “Carbon Counting Confusion”

  1. David, what about open source type software to handle various aspects of carbon (and water) accounting? Far be it from me to deny a healthy profit to any IT consultancy or software development firm that wants to make a buck — but, hasn’t the efficiency and flexibility of the open source model been pretty much proved out over the last ten years?

  2. I don’t claim to be an expert on software development – my sense is that open source has worked well for generic or stand alone products, or where the interface standards are well defined, like my Firefox browser.
    Carbon management and accounting systems for larger companies need considerable tailoring for each implementation, as well as integration with existing financial and logistics systems. I’m sure there’s a place for open source carbon mgt software for smaller companies, just as there is for shrink wrap accounting software such as Peachtree and Quickbooks.

  3. David, Great article. Your conclusion: “Most carbon data has been generated with external audiences in mind…not …to help manage carbon and reduce costs…” is right on target. I think it was Stephen Stokes who wrote about ‘internalizing carbon’ as a cost of business. That should be the focus of carbon accounting software. The external reporting is still too nebulous. While some adapt the WRI’s GHG Protocol, there is too much leeway in disclosure for the benchmarks to be meaningful.

    Maybe formal adoption of GHG Protocol will be the only realistic outcome of Copenhagen.

  4. […] a comment » David L. Levy on Climate Inc. comments on the state of carbon reporting.  The various modes of carbon measurement have very […]