Are you positioned to thrive in a low-carbon world?

Putting a price on carbon will change how we do business at a fundamental level. Putting a price on carbon will profoundly change day-to-day life in the developed world.

There will be winners and losers. Which are you? How can you tell what path you are on? What can you do about it?

Few leading businesses now doubt the impact that climate change will have on their operations. In 2008, more than three-quarters of the top 500 global companies (with a combined market capitalization of over $22 trillion) responded to a request from the Carbon Disclosure Project for information about their greenhouse gas emissions.
Look Beyond the Numbers Get on the Right Path

How a price on carbon will impact your organization cannot be reduced down to one number. Two organizations, both with a million tonnes of quantified CO2e emissions, may have entirely different carbon risk profiles and require entirely different strategies to successfully mitigate their risks.

Carbon risk is a rich mosaic of many different kinds of risks. Carbon affects all aspects of an organization and it does so in different ways. Not truly understanding your carbon risk may be inconsequential at one end of the spectrum, but catastrophic in another case. Our risk framework is multi-dimensional and identifies 6 crucial categories of carbon risk: operational, regulatory, supply, reputational/brand risk, economic risks that cut across other types of risk, and data risk and uncertainty (chart).

Consider these examples: Risk-tree

  • If you are a consumer products business selling products through a retail channel, you may be required to package using 100% recyclable materials with high post-consumer recycled content. This may seriously damage the profitability of your product and make your price uncompetitive. It may also take you 12 months to redesign your packaging and build a new supply chain.
  • If your organization puts on events, and your carbon position isn't certified and your track record is spotty, you may be barred from the best venues. Is your brand at risk?
  • If your business relies on distribution in the U.S. using trucks, what are the risks that your trucking supplier will not be able to adapt to EPA legislated fuel efficiency upgrades to its fleet? What if it goes under? If you rely on rail for inbound shipment to warehouses, how will the more fuel efficient rail carriers deal with growing capacity limitations in key corridors? Will you have to relocate your manufacturing operations? Are your operations and supplies of key materials at risk?

Following 4 core principles will help you get on the right path to successful long-term carbon risk reduction:

  1. Carbon risk is not Scope 1&2.

    Scope 1,2 and 3 are GHG (Greenhouse Gas) Protocol definitions. They are an attempt to give organizations direction in setting useful boundaries for their carbon emissions responsibilities. In practice, however, these initial frameworks have limited utility.

    With a price on carbon, your Scope 3 (supply chain) is someone else’s Scope 1. An excellent rule of thumb is: if something hits your financial statements (i.e. you pay for it), then you need to consider its carbon risks. So start with your operating budget and 10-year plan.

  2. Carbon risk is more than carbon accounting and sustainability reporting.

    Developing a comprehensive carbon footprint and reporting is the right place to start. Having a robust energy and carbon price forecast is also helpful. These are important pieces of the carbon risk puzzle. But only pieces of the puzzle. It is a big, complicated puzzle. Counting emissions alone doesn’t say much about your overall exposure.

    The key is to have real visibility. You will want to be able to pull it apart and look at it from many different vantage points. You will want flexible visibility.

    To enable flexible visibility you will need to capture carbon risk information at the micro level. In addition to consumption figures and other hard numbers, you will want to capture a range of metadata that characterizes the different kinds of carbon risk. Then you can roll it up, cut it any way you like, to get the view that helps you develop a plan for footprint and carbon risk reduction.

  3. Carbon risk is not just for the board room or finance team

    Carbon risk isn’t just a macro issue for the board room or senior financial team. It is also an issue that will affect every aspect of your business, and in different ways.

    You will want to involve lots of people from across your organization to get a handle on your carbon risk. Involve people who have access to detailed operational knowledge and specialized data. Just the quality of your operational data alone is a key risk. If your data is +- 50%, you could be hiding serious risk that may materialize when you are least able to develop effective alternatives.

  4. Carbon risk is not a spreadsheet

    Reducing carbon risk is a process, not a spreadsheet. While it is tempting to “start playing around with a model”, the longer-term negatives far outweigh the initial perceived benefits. Reducing carbon risk is all about innovation. Innovation at the macro and micro levels of your organization. And innovation over time. Some risks and solutions will be obvious, others will be counter-intuitive and some will surprise you (and hopefully your competitors!).

    The world of carbon is intimidating. You could easily spend vast amounts of time researching highly technical issues. Spend your time innovating. Do not spend your time researching and chasing bugs. Get started right now!

Trucost estimates Carbon risk. of $93 billion for S&P 500 companies for direct emissions only, representing 5.5% of combined EBITA. The carbon exposure more than doubled to $190 billion when also counting first level suppliers.
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