The CEO guide to carbon (Second of four parts)

The most abundant greenhouse gas is carbon dioxide. It is mainly generated through the burning fossil fuels and from clearing forests. Other sources of greenhouse gases include farms mine leakage (methane), fertilizers (nitrous oxide), and smaller quantities of very potent greenhouse gasses from specific industrial processes.

Which sectors are most exposed?

Businesses with exposure to these activities need to spend time understanding their position. Sectors that are likely to be affected by government placing a price on carbon emissions include energy, mining, construction, manufacturing (especially steel, aluminium and cement), agriculture, food processing and forestry, and transport and logistics. There is a strong case for CEOs in these sectors to conduct further assessment of business impacts and their exposure.

Group 1: Heavily impacted organizations

The most heavily affected companies are those that have both new costs and compliance obligations. These are businesses with a carbon-intensive activity in a country which imposes a carbon emissions trading scheme or tax and will have to comply with obligations such as carbon emissions reporting, trading schemes or carbon taxes. In Asia Pacific, such measures are in place, or proposed, in Australia, China, India, Japan, New Zealand, South Korea and Taiwan.

Carbon-intensive companies typically operate in the following sectors:

• Electricity generators

• Heavy manufacturing

• Some mining

• Oil and gas.

Group 2: Large supply chain impacts

Other businesses that are large energy users in a country which imposes a carbon emissions trading scheme or tax face price increases as their energy suppliers meet their compliance obligations. These are typically found in the followings sectors:

• Large-scale retail

• Manufacturing

• Food production

• Property and construction

• Transport and logistics

• Some mining.

Group 3: Voluntary participants

Voluntary participants are not obligated to be involved but choose to participate as they see new business opportunities.

These opportunities could include companies who create offsets (or credits) from energy savings or forestry projects in countries such as Cambodia, China, Taiwan, Indonesia, Laos, Malaysia, Philippines, Papua New Guinea, Vietnam, Singapore and Thailand.

Financial institutions who provide permit trading and price hedging services would be another category of voluntary participant.

Group 4: Limited supply chain impact

Companies that have low greenhouse gas emissions and relatively low energy consumption should face limited impact from carbon policies. There may be some limited new compliance requirements for these entities. The primary impacts will come from the higher costs of carbon-intensive goods and services such as packaging, freight and increased energy costs.

Overview of collection and reporting of emission data:

Mandatory reporting

Reporting of greenhouse gas emissions and energy use, at a company level or even at facility levels, will be required to underpin any government action to reduce greenhouse gas emissions.

Many governments have already introduced mandatory reporting for carbon and/or energy use. There are also requirements from regional and local governments that need to be considered.

A system for reporting emissions gives governments a sound basis for further policy measures to reduce emissions growth. Clearly, any business with operations in a country with mandatory reporting obligations will need to comply or face legal risks.

Each reporting system will specify the thresholds that may apply and the sectors that need to report. Business will need to calculate their emission levels to understand if they are over the reporting thresholds.

Voluntary reporting

Voluntary reporting of carbon emissions is a useful first step to understanding your position. It can be used to give investors and customers some confidence that carbon liability is understood and being managed.

The most widely used voluntary reporting formats include the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI).

Reporting carbon emissions can also be a useful way of engaging employees via a Corporate Social Responsibility (CSR) initiative on an issue that many of them will be concerned about. It will highlight areas for individual contributions and provide a baseline to measure performance improvements over time.

Customers are increasingly keen to understand carbon intensity in their supply chain and examples exist of retailers exerting pressure on their suppliers. A credible report and responsive reporting system can help satisfy these expectations.

Governance

Responsibility for the collection and processing of carbon emissions data for most companies usually lies with an operating executive or environmental officer. Sometimes it is within the CFO’s responsibility.

Some key questions for CEOs in these situations include:

1 Who interprets the relevant regulatory requirements in each area of the entity’s operations?

2 To what extent should the CEO ensure that the CFO is overviewing the collection and processing of carbon emissions data?

3 Who should approve the results of the carbon emissions data collection and processing?

4 Who should sign-off on the accuracy of the data to enable the CEO to sign off on any external report?

5 Who should ensure any carbon emissions financial liabilities are adequately recorded and disclosed?

A useful analogy is the responsibilities involved with managing and controlling inventory. Carbon emissions data should, wherever practicable, be managed as part of the existing business reporting systems rather than as a stand alone system.

To be continued

(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 hantonio@kpmg.com or manila@kpmg.com. 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.) –Jennifer Westacott and Jack Holden (The Philippine Star)