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.

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.

Addressing climate change and other environmental issues requires real action at the facility and process level –  just creating product labels may not be effective

Walmart’s product environmental labeling aspirations went public in the New York Times and the Wall Street Journal last month and sent ripples of fear and excitement considerably more widely.  Excitement for software and service vendors who anticipate a lucrative business supporting Walmart’s  product labeling program.  Fear for its 100,000 suppliers who will be required to generate the detailed data needed for Walmart’s environmental labels. Walmart will soon be sending an initial survey to all its suppliers with questions regarding their sustainability practices.

Walmart plans to develop labels based on a standardized index  of the environmental impact of every product on its shelves. This ambitious project demands that Walmart’s suppliers develop accurate and defendable estimates at the SKU level of the  greenhouse gas emissions,  water consumption, air pollution, and other measures for all the inputs required to source, manufacture and ship their goods. Walmart’s Chief Merchandising Officer John Fleming made clear that it would require participation from suppliers across the board.

In designing environmental initiatives, there is a need to pragmatically consider what’s achievable, what’s desirable, and what is likely to actually make a difference to the environment.  Rushing to force a product labeling agenda too quickly will result in a lack of standards and expectations, and potentially lead to disappointing  outcomes and a great deal of consumer confusion.

Transformation from the Grinch to the Gentle Green Giant

Walmart’s sustainability program has been transformational for the organization and delivered huge cost savings and performance improvements. It has created a virtual love affair with previously adversarial environmental lobby groups and a new relationship with the customer.  Their programs have been holistically implemented across the global organization.  Best practices in logistics, refrigeration, lighting, energy efficiency and packaging have prompted many to consider the Arkansas Grocer’s transformation to be the model of successful corporate sustainable transformation. Walmart’s vast supplier network and huge scale, approaching 8% of US retail sales, means that it has the power to change industry norms and practices not just in retail but also upstream in the value chain, in consumer goods industries.

But even the largest retailer in the world can stick their neck out too far  in the confusing and complex world of product labeling. It’s great that Walmart is thinking ambitiously and comprehensively about environmental information, but I forecast that it will ultimately be unpopular and unsuccessful if pursued at a store-wide SKU level as currently planned.

Sacked (and Stacked) in the In(store) Zone

Here are some key issues that deserve evaluation prior to the implementation of product labeling.

Who has their eye on compliance costs?

Pepsico UK told us last year that the cost of carbon footprinting their highly publicized Walkers potato crisps (chips for Americans!) was well in excess of $40,000 and took more than four years to complete – for one SKU.  Moving forward they are anticipating costs on the order of $10,000 to $12,000 per SKU.  At 20,000 to 25,000 SKUs per typical supermarket that’s a $250M task just for carbon – and Wal-Mart Supercenters carry over 100,000 SKU’s.

What about the full product life cycle beyond the manufacturers control?

The full environmental impact of goods is frequently strongly influenced by consumer actions.  More than half of the embodied carbon within an Apple MacBook Air for example is associated with downstream energy usage and disposal.  The carbon footprint of Proctor and Gamble’s cold water tide can be reduced by a third if used at 30°C instead of 40°C, and reduced by a further third if used in France where low carbon nuclear electricity dominates grid supply.  Should the labeling be based on cradle-to-gate versus cradle-to-cradle lifecycles? How will they change as consumers adapt their behavior with new environmental awareness?

Who will be able to judge environmental claims and performance?

An environmental label is not directly comparable to a nutritional label.  A challenge to the accuracy of a nutritional claim can be readily verified via laboratory analysis of the contents concerned.  There is no scope for direct back-calculation and tracking of carbon or environmental information once labeled and on the shelf.  And the labels are trying to hit a moving target, because environmental impacts change as companies adjust their sourcing and processes. Manufacturing supply chains are dynamic and evolving systems whose impact or footprint cannot be quantified in a singular value.

Lets not forget the consumer.

Most of the more recent European research in this area indicates that significant (c. 44%) and increasing numbers of consumers would switch to greener products even if they carry a higher price tag.  At the same time, 78% of consumers indicated an awareness of carbon labeling but only 20% saw it as a positive development – it is hard to make the case that this issue is being driven by pull from end customers.  Most report confusion in their attempts to interpret carbon labels at the granulated product level; green branding seem to be more of a market force at the company level – like  the Body Shop, Wholefoods, Apple and Dell.

What should be the functional unit for analyzing corporate environmental performance?

With limited budgets should firms spend much or all of it cataloguing and labeling performance on a product by product basis or actually invest in doing something about it?  Manufacturers pursuing ongoing process and production improvement can rightly expect that the benefit over time will reach throughout the supply chain and through multiple SKUs.  So should we not be tracking, evaluating and benchmarking corporations at the corporate, or at least, facility level? We think so.

At AMR Research we have been analyzing the increasing environmental agenda in manufacturing for some time.   Picking a small subset of SKUs to deep dive into full life cycle impact assessment has merit and will deliver knowledge for process improvement. Labeling of all SKU’s is overkill, however.  The compliance costs associated with the exercise have been mentioned above.  Pepsico were able to reduce energy use (and potential emissions) by more than 11% based on the knowledge they gained in the footprinting exercise. The actions taken by Pepsico depended on this detailed and rigorous  knowledge, not a simplified aggregate environmental rating. Moreover, this knowledge can be rolled out where applicable throughout their snack food lines without subjecting each SKU to the same detailed and rigorous analysis.

Forcing portfolio-wide cataloguing at the SKU level may well siphon funding away from reinvestment in efficient technologies and processes. As energy price volatility continues to increase and continuous improvement forces year-on-year searches for waste and resource reduction, we can reasonably assume that all SKUs under some company or process or production line will over time benefit from the process improvement and investment. In any case, labels at the SKU level require estimating and allocating company and facility level environmental impacts, generating data that are not always useful for management trying to reduce these impacts.

Falling Off the Shoulders of Giants – the Future of Environmental Information Should be Where it can be Accurately and Effectively Traced at the Corporate Level

Environmentally responsible products are produced by environmentally responsible organizations.  Green brands reside at the corporate level, and only rarely with specific products.   Walmart’s decision to drive its supply chains to environmental labels at the SKU level is beyond the level of production utility, of achievable accuracy given limited resources, and of utility to consumers – green or otherwise.  What is key for the future is the collection of accurate and transparent environmental information that is not just meaningful for consumers but helps management to take the necessary action.

The smallprint of the Walmart program, which has been less widely circulated, plots a 5+ year course for a green index which migrates from a supplier-based evaluation to a product-based one.  There is much merit in pursuing environmental performance at the supplier level.  Walmart, like all successful corporations in the newly emerging economy, will wish to do business wherever possible with like-minded, sustainable and environmentally cognizant organizations.  They and their supply chain partners should converge on an appropriate and rationally-based level of environmental information – fixed at the corporate and plant level to ensure transparency and ongoing environmental and sustainable performance.  SKU-based commitments  promise to deliver high compliance costs, out of scope and inaccurate data, and market confusion.