The CEO guide to carbon

(Conclusion)

 Internal audit and independent assurance

Carbon emissions and energy reporting can have a range of potential audiences. Each of these audiences will gain increased confidence if an internal and/or third party review of the report is available.

Internal audit teams may need to be supplemented with a carbon emissions specialist who is not involved with the underlying systems and report compilation.

The internal audit function can enhance the quality of carbon emissions data. Internal audit can assess the design and operation of emissions data collection and processing systems and report findings to management and the audit committee.

Third party assurance of the reporting can make the investment in carbon reporting more valuable, particularly where the assurance is provided using a recognised standard. The credibility of the report, and its review processes, can give confidence to external stakeholders that the reporting was prepared with transparency and rigour. In many cases this will be more valuable than the investment required for the assurance processes.

Business opportunities leadership for reducing emissions

Reducing greenhouse gas emissions requires both bottom-up innovation and topdown leadership. The technical knowledge needed to identify better processes and performance is often already held within an organization.

In such a situation, the CEO can play a key role in establishing the vision and goals and then the structures and responsibilities that promote innovation. This might include:

• engaging managers and staff on the importance of efficiency

• assigning accountability for reporting and managing each item of energy consumption.

• rewarding energy saving initiatives with incentives to individual staff and business units

• ensuring some of the savings are returned to business units for reinvestment

• having a robust evaluation process for capital expenditure on emission reduction projects

• using realistic energy price forecasts (where the business case for energy savings initiatives is assessed using rising rather than historical prices).

Managing energy costs

Energy costs are likely to continue rising and managing these costs will therefore become a more valuable activity. A useful tool for undertaking this is to prepare a marginal abatement cost curve for your organisation. This tool provides a way of evaluating investment priorities for implementing actions that save energy and emissions.

Innovation and opportunities in a low carbon economy

The emerging low carbon economy will provide many great opportunities for business in Asia Pacific. Government, consumers and other businesses are now looking to understand how climate change affects the competitiveness of businesses and where there is room to gain an advantage.

Businesses need to understand the carbon intensity of their products and services and analyse the potential low carbon substitutes that may affect customer demand. This low carbon substitution can bring new market share.

Substitution with low carbon products could occur in many areas such as:

• gas heating replacing coal heating

• marine shipping instead of air freight

• timber materials substituting for steel in construction

• marketing locally sourced food instead of long distance freight

• using recyclable packaging material.

A key competitive advantage comes from being able to offer your customers the ability to understand, and then reduce their supply chain emissions. Increasingly large multinationals in many sectors are seeking suppliers who can support these requests.

Procurement specifications are being updated to incorporate these requirements. This is particularly true for companies that have consumer facing reputations to protect such as banks, and retailers of fast-moving consumer goods.

Product design innovations that reduce lifetime emissions are being increasingly sought by consumers. Repackaging to reduce the use of paperboard and plastics is often a very visible low-carbon innovation.

Accessing finance for low carbon growth

CEOs need to consider these finance sources when considering their international growth options. Financing clean development on greenfield sites in the growth areas of Asia Pacific will be cheaper than retrofitting the existing sites in developed nations.

Mechanisms to transfer this finance for these greenfield sites can be used to pay for emissions reductions. The two most common carbon finance mechanisms are managed by the United Nations. These are known as the Clean Development Mechanism (CDM) and Joint Implementation.

These finance sources have already driven significant investment in the Asia Pacific region. Over 75 percent of all CDM projects to date have been hosted in Asia Pacific countries, mostly in China and India with a substantial number in Indonesia and Malaysia.

Clean Development Mechanism (CDM)

The Clean Development Mechanism (CDM) allows for revenue to be received for projects that reduce carbon emissions in developing countries. These projects could be partly financed by polluters in a developed country.

Activities, such as reducing energy use or switching to a cleaner fuel source, may generate offset or carbon credit income from carbon reductions. The CDM was established by the United Nations as a way of transferring finance and technology from developed to developing nations.

Approved projects in developing countries generate “credits”, or Certified Emissions Reductions (CERs),that can be purchased by developed countries, or companies in these countries, to meet their domestic carbon emission permit liability.

Joint Implementation (JI)

Joint implementation is a similar mechanism to CDM except that the project for investment is in a developed country that already has a UN-approved emissions cap under the Kyoto Protocol.

Emissions management is no longer an optional issue for business, it is core to future growth and financial performance. There are substantial changes occurring in government climate change policy across Asia Pacific. Whilst the policy timetable is uncertain, there is a clear trend. Every CEO needs a strategy to deal with climate policy impacts and to be able to clearly explain this to shareholders.

Many large global companies are already acting on climate change. Well-known retailers and manufacturers are looking to enhance their profits through energy savings and by seeking better performance and transparency from their suppliers. These consumer-focused businesses have recognised that market expectations have changed. Consumers are demanding more sustainable products and services and their expectations will continue to mature. Brand value can be exploited by early movers and can be lost by those who have to catch up.

Considering the climate policy impacts of longer term decisions such as acquisitions, mergers and joint ventures is now an essential responsibility for any successful business leader.

(Jennifer Westacott is a Partner for Advisory Services of KPMG Australia. Jack Holden is a Senior Manager for Advisory Services of KPMG Australia.

This article is an excerpt from Advisory Services publication, “The CEO Guide to Carbon: Emissions reporting and management in Asia Pacific”.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email Henry D. Antonio at [email protected] or [email protected]. Henry D. Antonio is a Partner for Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.)