The omnibus federal spending package signed into law by President Bush in December 2007 included the following sentence:
"Of the funds provided in the Environmental Programs and Management account, not less than $3,500,000 shall be provided for activities to develop and publish a draft rule not later than nine months after the date of enactment of this Act, and a final rule not later than 18 months after the date of enactment of this Act, to require mandatory reporting of greenhouse gas emissions above appropriate thresholds in all sectors of the economy of the United States."
Although brief (at least by government standards), the impact of this single sentence will be long indeed, as it sets the stage for sweeping changes in American industry. According to senior consulting engineer John Norton of global services firm MWH, Inc., "Ultimately, this tiny section of H.R. 2764 will have significant implications for our economy, our country and our planet."
And although this -- like similar reporting requirements in the past -- might initially appear nothing more than another in a long line of bookkeeping burdens, forward-thinking industrial managers can likely use the resulting data to reduce costs, drive efficiencies at their facilities and operations, and potentially even open up new sales opportunities.
Importantly, Norton says manufacturers should also realize that this law will make data-based claims by U.S.-based manufacturers easy to investigate, giving consumers the power to differentiate between green claims and green reality. "This new requirement has considerable potential to drive change by enhancing public awareness, and facilitating public decision-making with relevant information," he observes.
Norton's artfully phrased point is well-taken -- both the new regulatory hurdle and the ensuing market change will be data-driven, and will depend in no small part on every manufacturer staking out the parameters of responsibility for the environmental impact of their products. The end result of this process is known as a "carbon footprint," and the overwhelming industry consensus is that it's time to come to grips with what it is, or risk being crushed underfoot as the market marches forward.
What is a Carbon Footprint?
According to Matt Banks, World Wildlife Fund (WWF) senior program officer for business and industry, "carbon footprint" is the popular term for the greenhouse gas (GHG) emissions generated by the activities of an entity such as a manufacturing plant, or a set of manufacturing plants. The more technical term for a carbon footprint is a "greenhouse gas emissions inventory," which includes all greenhouse gases (such as methane, nitrous oxide and HFCs), in addition to carbon dioxide, that contribute to climate change.
The Carbon Disclosure Project's massive fund portfolio is matched only by its unwavering commitment to green shareholder activism.
In a strictly metaphorical sense, every person on the planet is a stakeholder in the climate change debate. In a very real sense, the 385 institutional investors (and the $57 trillion in assets they manage) that make up the Carbon Disclosure Project are among the biggest stakeholders.
According to CEO Paul Dickinson, the CDP makes an annual practice of sending out climate change-related disclosure information to over 3,000 listed companies globally. "This information request asks them to disclose their greenhouse gas emissions and their assessment of risk and opportunity associated with climate change," he says. "It also requests that they report on their strategy regarding climate change." Interested companies can report through the CDP online system at www.cdproject.net.
Once those questions are answered, the next step in the "footprint path" is to report those emissions to key stakeholders. Without government carbon reporting legislation yet set in stone, most experts agree that the fundamental standards for greenhouse gas reporting are the GHG Protocol standards developed by a joint effort of the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI). California, long regarded as the cutting edge of environmentally minded legislation, follows the GHG protocol, says Norton. "The state agencies responsible for implementing California's state-level greenhouse gas emissions law based a considerable portion of their proposed requirements on the GHG Protocol standards," he observes. As goes California, so goes Congress. Therefore, in the interim between the mandate getting funded and getting implemented, many agree that manufacturers should aim to meet this global standard.
Why Document Your Footprint?
According to history, the Greek temple of Apollo at Delphi is reputed to have had two inscriptions above its door: "Know yourself" and "Nothing to excess." In many ways, the exercise in establishing, reporting and working to reduce a carbon footprint pays homage to both of these principles.
"For many companies, this is the first time they've considered what their emissions actually are," says Paul Dickinson, CEO of the Carbon Disclosure Project. "Collecting this information can be extremely informative and acts as the first step on the path to carbon management."
Top pressures compelling adoption of a "green strategy"
|Corporate Social Responsibility||74%|
|Cost of Doing Business||31%|
|Power Usage Restrictions||10%|
|Source: Aberdeen Group|
With its aggressive supplier mandates, major retailers like Wal-Mart are leading their partners, willingly or not, into the future of manufacturing. However, even in the absence of government or supplier mandates, many industry experts agree that the exercise makes sense for reasons that range from extremes of logic (identifying areas for cost reduction) and into areas that actually resemble faith-based reasoning (issues of employee morale, recruiting and retention).
Taryn Fransen, senior associate at World Resources Institute, says there are four main business reasons WRI routinely gives manufacturers looking to make the case to fund a GHG inventory program.
According to Fransen, the first one is the easiest: simple cost avoidance. "A comprehensive emissions inventory involves most aspects of a business's manufacturing processes, energy use and transportation infrastructure," she says. "By measuring emissions, businesses realize opportunities to improve efficiency and generate significant cost savings, and reduce energy use and emissions."
The second involves getting ahead of the carrot/stick curve of the market and the law as they continue to shape each other. "Federal regulation to address climate change is inevitable," Fransen warns. "Companies that develop and implement climate change strategies now will gain a competitive advantage as the economy adjusts."
A third reason, carbon risk reduction, has more to do with long-term planning than the next budget meeting, she says. "Developing climate change strategies now will help identify the risks that companies face -- and the opportunities for new markets and products -- that may result from a carbon-constrained economy."
Finally, Fransen says the intangibles matter, as a strong carbon footprint policy "can improve a company's public image and enhance corporate social responsibility." Fransen and others point to the comparative success of recruiting efforts by companies with environmental credibility as a long-term benefit that can't yet be accounted for easily on any balance sheet.
The 'How' of Carbon Footprinting
With only three main "scopes" of reporting, the GHG Protocol sounds much simpler than it actually is. These three scopes entail different boundaries at which companies can measure their emissions, depending on their policies and regulatory requirements. Scope One emissions consist of emissions from sources owned by the company (building heat, manufacturing and most transportation), while Scope Two involves emissions from electricity purchased from the grid. Scope Three extends into the business's value chain.
Although the overarching process has undeniable benefits, the devil is in the details, says Lawrence Heim, senior vice president of Marsh USA. The process may ruffle some internal feathers as manufacturers "face internal disagreements on the overarching direction of the measurement results," according to Heim. He recounts a client who got caught in the struggle between operations that wanted to demonstrate its current emissions were as low as possible and senior management who understood the potential long-term value of a more conservatively established emissions baseline.
Because of conflicts like these, it is commonly understood that both the plant floor and the corner office must be on board for the carbon footprint exercise to work, says Joe Wolfsberger, vice president for environment, health and safety at Eaton Corp. While establishing a corporatewide GHG inventory at a huge, diversified manufacturer has been challenging, Wolfsberger says that the management team's biggest accomplishment has been the gradual and ongoing replacement of an atmosphere of nominal compliance -- and punishment for noncompliance -- with a growing activist mentality.
Wolfsberger believes that at its root, carbon impact reflects corporate culture, and changing one without the other isn't sustainable in any sense of the word. "In the past, we didn't necessarily reward people even for compliance," he says. "Our attitude was, 'Have you filled out your paperwork yet?'" As a result, the company sometimes dealt with "Heim's dilemma": skewed data from managers who were trying to "game the compliance system" for short-term, quarterly gains, rather than aiming at enabling longer-term value propositions.
Although he admits that the era of compliance is slow to subside, Wolfsberger says that the idea of "changing our expectations from reducing impact to improving the lives of employees and customers" has begun to take hold across Eaton's business culture, and is making the footprint process easier and more comprehensive along the way.
It's All About the Data
However, manufacturers know well that even simple compliance can be a hassle, and removing data-based barriers to facilitate these cultural and process changes can be difficult for those looking to go above and beyond the call of the law, says John Hoekstra, director of sustainability services for purchasing consultancy Summit Energy. Before implementing a set of disorganized tactics, he says manufacturers should follow a well-defined, yet flexible strategic plan to guide the documentation and reporting of carbon footprints.
Seven steps Hoekstra suggests are as follows:
- Know your goal and the road ahead. Formalize a road map for your program that identifies current and future regulatory requirements by geography and design an inventory with the road map in mind.
- Set a realistic baseline. Retroactively understand your operations and determine if it's possible to compile a historical emissions inventory that meets data materiality thresholds.
- Define your boundaries. Bite off what you can cost-effectively chew. Quantifying Scopes One, Two and especially Three emissions can be a challenge, but make sure to include the assets under your equity share or your operational/financial control and the associated emissions scopes required to meet your reporting program objectives.
- Map out all of your sources. Invest the effort and resources to identify each facility, asset and potential emissions source. A third-party certifier will want to confirm that all potential sources are included if regulatory or voluntary commitments are made.
- Make appropriate assumptions. Where available, identify ways to calculate emissions that ensure completeness, but balance level of detail. Use engineering judgment to make determinations about extent of data required to put together a comprehensive inventory cost-effectively.
- Centralize your data management. Data management processes are a critical piece to ensuring a robust, consistent emissions reporting program. Utilize a central repository for all activity/usage data.
- Be flexible. As regulatory developments occur or market opportunities arise, organizations must be able to modify and enhance reporting processes and systems to meet new objectives.
Eaton decided to begin their baseline in 2006 because they were confident about both the data itself and the vetting of the processes behind the scenes that were "generating and rolling it all up," Wolfsberger says. "At a plant level we've been doing ISO 14000 back to 2000, but as a corporation we really weren't able to aggregate verifiable data until 2006," he explains.
For Eaton, the process of front-end footprint documentation and reporting is being arranged to dovetail with a back-end data standardization initiative that involves a new, more unified hardware and software platform. However, even though Eaton is in the midst of installing a corporatewide database and reporting applications to automate the footprint process, at this point Wolfsberger admits that the effort is "a fairly manual process" that requires some care and feeding from individual managers to track emissions on a regular, monthly basis rather than on an individual campaign basis.
Like Hoekstra, Wolfsberger maintains that a strong software strategy is key to success. "We purchased a lifecycle analysis application that we're rolling out (and) we have existing applications that we're going to sunset and move into a unified system." The job is especially tough as Eaton's data, like that of many manufacturing operations, has all too often lived in user spreadsheets and siloed databases, only available for collection through a time-consuming, somewhat morale-sapping (and progress-impeding) process. The new initiative will "knock down many of those walls," asserts Wolfsberger, and "will put hooks into multiple databases, our Access databases, our HR database, our departments and organizational charts and job classes."
Data will come from outside sources as well. "We also have a service we use from our energy purchasing consultants," he notes. "They're providing us our energy usage from our bills, and that data will get tied directly into the single system as well."
John Davies, vice president of analyst firm AMR Research's Sustainability Forum, has seen a number of manufacturers embark upon this journey of a million numbers, often beginning the process with a single manufactured product. He reports a client who performed an "exhaustive" lifecycle analysis of the carbon footprint of a 12-pack of glass bottled beer. From this analysis, the brewer found that 68% of the product's individual carbon footprint was attributable to supplied materials and of that, only 6% was related to hops, malt and adjunct. The majority was associated with packaging such as cartons, labels and glass with the glass bottles accounting for an astonishing 56% of the carbon footprint of the 12-pack.
Through a similar exercise in 2005, automaker Ford Motor Co. found that only 8% of its North American carbon emissions resulted from its actual manufacturing operations -- the rest stemmed from the impact of the vehicles out on the road. And while this type of counterintuitive data certainly doesn't absolve the manufacturer from mitigating its Scope Three impact, a rigorous carbon footprint process should illuminate where the largest environmental impacts are, as well as the important corollary, such as where the best opportunities for footprint reduction might lie.
'When' and the Art of Carbon Footprinting
In many ways, this issue has exposed a rift in the U.S. manufacturing community. There are as many manufacturers staunchly opposed to any sort of carbon emissions regulation as there are those eagerly lobbying for tougher restrictions. The lines are often drawn based on company size and markets, as many large manufacturers have a global market-sized reason to simplify and standardize the reporting process.
There are also some who believe the entire issue of reducing carbon emissions is based on "junk science" and therefore a waste of time and money. The irony of this argument is that it in itself wastes time and money when that effort could be better spent in looking at the types of inefficiencies that lead to higher energy bills, and then focusing on strategies aimed at reducing production costs.
"It really doesn't matter whether you believe in climate change or not," says Brian Murphy of industry advocacy firm The Washington Group. "The reality is, there will be winners and losers in the carbon-constrained economy, so what matters is whether manufacturers prepare their companies, and their industry, for the policy shifts that are coming that will surely alter the competitive landscape."
While Eaton's Wolfsberger acknowledges the difficulty of meeting these new expectations, he urges other manufacturers to remember that establishing a carbon footprint is an ongoing process, not a single event. "This whole concept of a carbon footprint is evolutionary," he says. "You look at what's available, look at what's got the most significant impact, where is your data, and look at the boundaries where the good data ends. Then you push those boundaries a little further every year."