[author: Steven Andersen]
Introduction: Strategic Carbon Management
The corporate world is experiencing significant growth in the need for carbon management services. Within the diverse field of environmental and sustainability services, the top sustainability issue that companies are looking to address is how to reach net-zero carbon emissions by 2050. Carbon management involves the measurement, reporting, and reduction of greenhouse gas (GHG) emissions which is vital for any company with a net-zero ambition. The prioritization of net-zero and carbon management is driven by a mix of regulatory, investor, and market drivers.
On the regulatory front, most nations have committed to net-zero by 2050 to uphold the goals of the Paris Climate Agreement and ensure that global warming does not exceed two degrees Celsius. More than 190 countries have adopted the Paris Agreement, and 14 countries have already enshrined this commitment into law. Another 30 countries have committed to net-zero GHG emissions in policy. The remaining nations have either made declarations in support of net-zero or have had discussions on legislating net-zero targets. Translating carbon reduction targets at a national level into tangible reductions across the economy creates costs for industry. Industrial regulation to reduce GHG emissions can be implemented in the form of mandates or market-based carbon pricing regulation. The former compels emissions abatement; the latter incents emission abatement so companies can avoid paying higher taxes. In either case, carbon abatement presents additional capital and operating costs for organizations, and increased cost presents risk for organizations.
Investors are also pushing organizations toward decarbonization even where there is not a regulatory drive. This investor pressure is driving companies to implement carbon measurement, monitoring, and reporting programs while simultaneously implementing emissions abatement projects. According to McKinsey’s special report on the net-zero transition, measurement of GHG emissions and climate finance are two key enabling skills that will increasingly be needed as the net-zero transition progresses. Investors are also pushing for standardized disclosure of carbon emissions and climate risk. While mostly voluntary today, it is expected that carbon-related financial disclosure frameworks will become mandatory in the near future. Many countries and regions are already developing mandatory reporting frameworks that will give investors a clearer picture of a company’s climate risk exposure. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations, for example, has been endorsed by over 1,000 organizations worldwide, including regulators, investors, and companies.
The transition to net-zero by 2050 is also challenging traditional market drivers for goods and services. This is creating opportunities for companies to pursue new lines of business that are set to grow in a net-zero world. Almost a quarter of the world’s largest publicly traded companies have committed to net-zero GHG emissions according to a report by the Energy and Climate Intelligence Unit. With this comes the acknowledgement that carbon intensive products and production process need to be phased out over time. However, this new business reality also creates a financial opportunity that is so massive that a whole new sector of carbon technology start-ups is being created. Further, the US government’s Inflation Reduction Act (IRA) will inject $800 billion into the commercialization of decarbonization solutions, creating significant tail winds and new sources of revenue for low carbon products. Considering this capital influx, new companies are emerging across themes: energy, climate adaptation, green fintech, carbon accounting and offsets, and fundamental scientific research.
With government, investor, and market forces firmly behind the net-zero trend, carbon management is becoming increasingly important to companies’ bottom-line profit. As organizations execute their current budget and planning cycle, carbon management should be central to strategic capital allocation. Those that act now to mitigate risk and capitalize on low carbon opportunities can position themselves for long-term success.
Responsibilities of a Carbon Management Professional
Foundation of Carbon Management: Measurement and Reporting
Some areas of carbon management are already integrated into large and energy intensive companies. One such mature area of carbon management is the measurement, monitoring, and reporting of carbon dioxide and other GHGs. GHG quantification can be categorized into two main methods: 1) direct measurement and 2) analysis of fuel inputs. There is a range of tools and techniques that can be used for each of the two methods that we will not detail here but suffice it to say that the methodologies that guide GHG quantification can be complex. Quantification documents published by regulators are often hundreds of pages long. It can take years to become fluent in GHG quantification methodologies and understand the nuanced differences from one jurisdiction to the next. Once GHGs are measured and reported, companies will shift their focus to verification and assurance. Measurement and reporting are the foundation of carbon management, so it is no surprise that many companies start their decarbonization journey here. In addition to direct emissions reporting, some companies may want to differentiate their products by carrying out a lifecycle GHG emissions analysis. Such an analysis, which demonstrates a product's low-carbon credentials, has the potential to yield premium pricing opportunities.
Advocating for Effective Carbon Regulation
Key Areas of Carbon Integration
Integration is a general and encompassing term that refers to three carbon-related topics: strategy, investments, and targets. These focal areas are key to assessing a company's climate-related financial risk. While these are discrete topics, they are interdependent. This necessitates multi-disciplinary work across the strategy, investment, and target-setting processes.
Carbon Risk Evaluation and Planning
If a company is serious about reducing GHG emissions, carbon management needs to be considered at the strategy table. The strategy process for any organization involves assessing strengths, weaknesses, opportunities, and threats. Carbon-related risks are often identified as a key threat and drive risk management activities. These activities often become embedded in company strategy. Carbon management professionals can bring insight on how to best track standards and benchmark best practices related to low-carbon policy scenario analysis and carbon-related financial risk.
Risk evaluation often employs the use of scenario analysis. The goal of scenario analysis, as it relates to carbon risk, is to assess financial performance and strengths in a world that transitions to net-zero. Different scenarios may represent different pathways and timescales to meet the net-zero objective. Scenarios will have differences with respect to carbon regulations, energy costs, and consumer behavior. Managers may choose to use already-developed, third-party, low-carbon scenarios, such as those developed by the International Energy Agency’s World Energy Outlook. Alternatively, managers may choose to develop their own low-carbon scenarios that detail impacts to their specific business exposures.
In addition to risk identification and scenario analysis, carbon management professionals provide guidance on the inclusion of carbon-related considerations to inform company strategy and business plans. They also support awareness across the company of carbon-related issues and their impact on business goals. This could include, for example, the identification of new products or services that reduce company exposure to carbon risk and working with project teams to bring this new line of business to the market.
Climate Related Financial Disclosures and Communications
Innovative Carbon Trading Strategies and Optimization
Carbon management professionals can also leverage voluntary carbon markets to help organizations meet their emissions reduction goals at low cost. Core competencies here include sourcing, project diligence, contracting, and coordinating delivery. Credits in the voluntary market may, one day, be eligible for compliance purposes. These pre-compliance trading opportunities can be particularly lucrative, especially in opaque and illiquid markets. Active participation in these markets can also give the organization better insight into carbon market supply and demand fundamentals to support the economic analysis of commercial opportunities that may generate offset credits.
Enhance Sustainability: How to Integrate Carbon Market Management
Regardless of where you are on your journey, carbon risk management starts with accurate and timely data. This is the starting point for developing insights into the carbon profile of your business and developing a plan for mitigating your operational footprint. The good news is that there are a variety of tools at your disposal that can help you to quantify, measure, and assess your climate-related risk.
Independent carbon management professionals can help your organization with carbon measurement and reporting, policy analysis, GHG management (including developing strategy, investment criteria, and targets), disclosure, and carbon market activities. Effective risk mitigation can be a strategic differentiator for your business. With investors, stakeholders, and financial regulators increasingly looking at carbon emissions data, environmental and sustainability professionals have never been more important.
Acknowledgments
We would like to thank our colleague Steven Andersen for providing insight and expertise that greatly assisted this research.