Perhaps some will claim that the free market is driving the two most popular company actions: sustainability reporting and implementing Energy Efficiency (EE) projects, but my experiences have convinced me that the primary reason for action is growing amount of peer pressure.
To be clear, sustainability reporting efforts began long before it came into vogue, but the sheer numbers of companies annually submitting sustainability reports is staggering, and growing. These reports concern the social, economic, and environmental performance of a company. They used to be good public relations pieces, but they are far more than that now. There is no central convening authority that forces reporting, and the only legitimate explanation of the growing influence that peer pressure has on reporting is growing climate concerns and the lack of satisfaction with international efforts.
I believe that something truly remarkable came from the Paris meetings that led to the Accord: while governments did step up and submit INDCs stating how they intend to meet the objectives, the pendulum swung from the public sector (i.e., government) to the private sector. For the reasons stated earlier, the objectives of the Paris Agreement are impossible to meet, and represent a bridge too far for the governments who will be called upon to make the greatest sacrifices. Like all of these international climate meetings there was a very large private company presence in Paris, and the advocates for massive change to protect the climate are very savvy. These are the same people who were brilliant enough to irrevocably tie a company’s environmental performance to its social and economic performance. For proof of their success I challenge the reader to investigate the side meetings where the advocates and large corporations, along with the Bill Gates of the world gather. One can find a great deal of information at the UN Framework Convention on Climate Change website under the Adaptation Private Sector Initiative (PSI) page.
Organizations such as CERES, a U.S. based nonprofit whose mission is to “mobilize investor and business leadership to build a thriving sustainable global economy,”
and Global Reporting Initiative (GRI), an independent organization that helps “businesses, governments and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruptions, and many others.”
These organizations serve a valuable purpose, if for no other reason than to advance the peer pressure companies apply to each other to publish sustainability reports.
Increasingly, those companies who don’t report are “named and shamed,” which forces more compliance. There’s certainly value in filing reports, as pointed out in numerous publications. Ernst & Young and the Boston College Center for Corporate Citizenship published a paper in October 2016 outlining the history of sustainability reporting, the value of such reports, and the likely future of reporting. In summary, the paper found that sustainability reporting has emerged as a common business practice of 21st-century business. Some of the ways that sustainability reporting has provided value to those companies who do report include: improved reputation; reduced amount of inaccurate information about performance; helped the organization refine its vision or strategy; improved relationship with regulatory bodies and shareholders, led to waste reduction and other forms of savings within the organizations.
There are a number of reporting frameworks being used by companies who do file sustainability reports. The Global Reporting Initiative (GRI) is the most widely used, with over 5000 companies worldwide using its framework. But there are others as well, and now an effort is underway to synchronize and simplify. I do not have the space for a deeper dive on the nuances of reporting other than to say there are many, some are demanding third-party verification, and they are in-depth and very expensive. And, they have all but led to the demise of “green-washing.”
I am most familiar with the energy-related reporting demands, and have assisted many large national and international corporations with completing worksheets that eventually are incorporated into their sustainability report. The energy-related worksheets wanted to know the amount and source of power purchased, and the related emissions from the generation sources. The amount of power purchased for operations is fairly easy to obtain – even if it for a couple of floors in a 50-story building that does not have good submetering practices. However, once power is generated and put onto the transmission and electric grid it is impossible to determine its source—even if it is from renewable energy. To complete the questionnaires a lot of assumptions must be made.
I recall one prospective client that I was called in by the sales person to help convince him to leave his current supplier and move his business to us. His company purchased about $50 million worth of power annually throughout the U.S. He was by far the most interesting buyer I ever dealt with because he was also the company’s sustainability officer. I have not run into such a person since, and unlikely to because those roles require different skills and attitudes, and attract different personalities. [Remember, they rarely talk to each other.]
I knew it would be very tough to beat his current provider’s price, but that wasn’t his main concern. He wanted to know how clean our generation fleet was, and if we were cleaner than his current provider we’d get the business. Like most large providers we owned a large fleet of generation plants (some coal, some gas, and even a few renewable energy plants). As I stated earlier, once the power is on the grid you cannot determine its source. To make matters worse we, like most of our competitors, also bought power off the market from other generators. I explained this to him and he said he understood, but by giving him our fleet average I “was giving him something to hang his hat on.” We didn’t win his business, but it sure was an eye-opening experience that I am positive most providers go through—or soon will—because of sustainability reporting.
To provide an indication of the future of reporting – and the increasing peer pressure—the reader needs to look no further than the 2009 UN-backed Sustainable Stock Exchange (SSE) initiative, “a peer-to-peer learning platform for exploring how exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency—and ultimately performance—on environmental, social and corporate governance (ESG) issues and encourage sustainable investment.” By 2012, five of the world’s 82 stock exchanges had become Partner Exchanges, whereby they voluntarily make a public commitment to promote improved ESG disclosure and performance among listed companies. [Listed companies must report their sustainability actions or explain why they are not taking any such action.] By the end of 2016 there were 62 such Partner Exchanges, representing nearly 70% of global market capitalization. Of the 62 Partner Exchanges, 20 have developed their own guidance on ESG reporting (up 13 in one year), and 12 require listed companies to incorporate ESG information into their listing rules, and another 15 are providing formal guidance to assist listed companies in preparing their ESG reports.
The NASDAQ and other U.S. stock exchanges are considering adopting this voluntary effort. Peer pressure works!
The 2010 Securities and Commission (SEC) interpretive guidance document reiterates longstanding regulations that U.S. companies must address in their public filings “material risks or opportunities.” That document singles out four types of risks that may be material: (i) impact of legislation and regulation; (ii) impact of international accords; (iii) indirect consequences of regulation or business trends; and (iv) risks posed by the physical impacts of CC. These risks are documented in annual (10K) reports under Management Discussions.
Corporate lawyers, officers, and investors have struggled with this because of the lack of clear definitions. For instance, how do you define indirect consequences of CC? The SEC document did seek to clarify indirect costs as “decreased demands for goods that produce significant GHG emissions; increased demands for goods that result in lower emissions; increased competition to develop innovative new products.” It also includes the reputational risk companies face. How do you quantify this? You can’t, but they report anyway!
How serious are companies taking this reporting guidance? From the SEC document: “Information is material and must be disclosed if there is a likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision.” Interpreting that clause makes it easy to see how important the rise of shareholder resolutions, and legal challenges are.
I already mentioned the U.S. government actions regarding suppliers. To take it a step further that every federal agency has to report their Scope 1, 2, and 3 emissions, along with their energy use. They were mandated to develop, implement and report annually on the actions that they must take to meet Federal objectives. To drive home its impact on the private sector one must understand what Scope 1, 2, and 3 emissions are, and how they impact companies.
Simply put, Scope 1 emissions are direct emissions, those that occur onsite or from sources that companies own and/or control such as every energy consuming device in their buildings, along with their vehicle fleets.
Scope 2 emissions are indirect emissions that result from the generation of the electricity, heat or steam that companies purchase. Energy providers are typically asked to help determine this number, and I assisted many companies with these calculations. If you are a Federal agency required to reduce emissions you want to purchase the “cleanest” energy available. This impacts suppliers.
Scope 3 emissions include employee travel and supply chain emissions. Studies show that over 50% of the average company’s carbon emissions are from their suppliers. This forces the most costly actions associated with reporting (including EE efforts, etc.) to be taken by suppliers.
Some people refer to supply chain reporting as the Wal-Mart effect as it was one of the earliest multinational companies to adopt it. Simply put, buyers have the right to inspect supplier’s manufacturing and distribution facilities to ensure compliance. I believe this alone has more impact and authority than any international treaty can ever have. It’s pay-to-play, pure and simple, and it’s the result of peer pressure.
You see where this is going. If governments cannot pass enforceable, meaningful treaties, laws and regulations, and the perceived problem is seen as enormously complicated and expensive (by many), the best path forward is to bring the private sector in as a willing or unwilling partner. Naming and shaming has long been effective in forcing company actions.
I recall a study an ex-employer (energy consulting firm) did concerning Japanese business. It was in the early 2000s. Realize that Japan has no domestic energy supplies. It imports virtually all of its nonrenewable energy. The government has “encouraged” companies to lower their energy use through the years, largely via energy efficiency programs. These programs have been very successful. However, the most important influencer of corporate action was the threat of being publically identified as a noncomplier. Name and shame works!
The entire sustainability effort is complicated and far-reaching, which is why there have been organized efforts by many organizations such as Ceres, and others. It is also a moneymaker for compliance-related companies. Given that, it’s not difficult to see the direction sustainability is going—toward comprehensive supply chain reporting. Once this has been widely adopted—and I believe it is closer than most people imagine—the task of bringing/forcing the private sector into replace government action is complete. There is no turning back.
There are consequences to this, including a major disruption in how all suppliers conduct business. It is obviously tougher for small companies to meet such requirements, and supplier business models are necessarily changing. An example of this is the way energy companies sell power to their customers. In a highly competitive environment found in deregulated markets where the product (i.e., electricity) is distinguished by price alone, companies have no incentive to sell less of their product, and little understanding of what their customers want. Their industry is necessarily evolving from simply being a supplier to being a trusted energy advisor that has the products and services customers need to meet their sustainability goals. This is a disruptive business model that many companies in an industry that historically has not been innovative will not survive.
There are unintended consequences such as the cost to small companies often owned by minorities that provide services to these large companies that are supposed to support locally-owned companies through their sustainability efforts (i.e., the social aspect pillar). By the way, the Paris Accord has fully embraced the human aspect of meeting its objective while reducing poverty and not impacting food production.
There is also a massively disruptive phenomena occurring—that is, the switch from brick and mortar companies (i.e., large physical properties) to Internet purchasing. Some people refer to this as the “Amazon effect.” It is not clear what kind of impact sustainability efforts will have on these companies, but one can rest assured that supply chain reporting will become even more important to companies who supply the goods to these Internet companies.