There was a great in depth article in June HBR, about how companies can “future proof” their climate impact and business strategy ,and importantlymore and more companies have started their journey.
The article goes into great depth on how companies can approach the challenge with different strategies. What sits behind this, is the risk mitigation required associated with changing regional and global climate polices and rapidly developing technologies. This is rightly getting on the boardroom agenda. There are essentially 3 ways in which governments can price carbon in order to start driving the correct company behaviours with respect to climate, the environment and sustainability. The simplest is a carbon tax where a government taxes a company on the tonnes of carbon it produces. Secondly there are “cap and trade” programmes, where the objective is to limit the aggregate quantity of emissions (the cap). The government then divides these into allowances (a quantity of COx that can be emitted) which can be either bid for, or donated dependent on the company or entity historical emissions and bounded by certain criteria. Companies must meet these allowances, but these can be traded or offset in secondary markets. Finally there is the approach where the “price” is implied by regulation. This is where a government can apply compliance costs without actually putting an explicit price on carbon.
So if you are a large company or international business, you need to understand these different scenarios and where they apply to you. Given the complexities, it is not always easy to understand, especially as policies can change as well as raw material and energy prices. One way is to look at Internal Carbon Pricing (ICP), as a means of mitigating the risk. There are many ways of calculating this, but companies need to find a relatively simple way to do this in order to compete in a business world, which is rightly trying to reduce its carbon footprint.
There are secondary benefits of this approach, as in addition to mitigating direct financial risk it will get leaders and staff more focused on reducing the carbon at the outset of any factory development or significant project. It should create a mindset of efficiency and a reduction of process waste, such as physical waste on a production line, which consumes more energy than it needs. This is in addition to any emissions or effluent savings. ICP should help drive the selection of the most energy and process efficient equipment, in addition to optimised process design. Having completed a number of large engineering and construction projects, I historically factored in efficiency improvements into the project ROI and NPV (Net Present Value) calculations. With the advent of ICP, this is an opportunity to look at these projects more holistically.
Companies need to start thinking more “inside-out” , i.e. utilising the skills on the inside to deal with external factors (out) such as carbon footprints and government regulation. ICP, will give them the opportunity to do this. At L2S, we are trying to educate business leaders to think this way. A fully aware and engaged workforce will deliver better results and business sustainability.
Reference Aldy & Gianfrate HBR May-June 2019