Companies are surprised: Opportunities to reduce CO2 are more plentiful than expected
When the Trump administration withdrew from the Paris Climate Agreement in 2017, a group of U.S. businesses, local governments and other organizations formed the “We’re Still In” coalition, pledging to meet America’s commitments under the pact and to demonstrate that the country isn’t abandoning the fight against climate change.
Not very long ago, corporate participation in such an effort might have been surprising. The risks posed by climate change seemed too distant and the cost of cutting greenhouse gas emissions seemed too great. Many businesses were reluctant to take action, or even to take seriously the threat of a warming planet.
Now, after another year of record high temperatures, fires, flooding and severe storms, more and more businesses are coming off the sidelines. Activists, customers and, especially, investors are pressing companies to reduce their carbon footprint.
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Simply getting a handle on climate-related business impacts is an important first step. To that end, CDP, an independent, not-for-profit organization, quizzes companies annually on behalf of their investors about carbon-producing activities, the financial and operational risks posed by climate change and what they’re doing to prepare for the transition to a low-carbon economy.
Such disclosures are increasingly important to investors, regulators and the public at large. But benefits to the companies aren’t always obvious. Measuring and reporting on emissions can be costly and time-consuming, and some are worried the opportunities for reducing them might be limited, particularly after the easy “low-hanging fruit” has been plucked.
A paper by Ohio State’s Christian Blanco and UCLA Anderson’s Felipe Caro and Charles J. Corbett suggests otherwise. Their research, based on interviews with companies that take part in the CDP disclosure process, found that participants experienced far more benefits than they expected, both in their operations and strategically. They uncovered more opportunities for cutting emissions, and new occasions for reductions continue to pop up as companies look for them, especially among suppliers.
“Although we cannot deduce from our sample whether the average firm will experience such greater-than-expected benefits, we can conclude that such benefits, when they occur, are more diverse than often realized,” the authors write in the paper, published in Business Horizons.
CDP, formerly the Carbon Disclosure Project, is part of an effort, along with the Global Reporting Initiative, Greenhouse Gas Protocol and others, to promote “governance by disclosure,” which aims to influence corporate behavior by gathering and publishing information about companies’ carbon emissions and other climate-related practices.
Founded in 2000, CDP is now backed by more than 525 banks, pension funds, insurers and other investors. More than 6,000 companies around the world answer its extensive annual questionnaire. CDP information feeds into Bloomberg terminals and is integrated into various indices of low-carbon investments. Increasingly, the information supplied to CDP and similar initiatives is being used alongside traditional financial metrics by investors in assessing companies’ long-term valuations.
In their paper, Blanco, Caro and Corbett sought to gain insight into the views of companies that participate in the CDP reporting process. In early 2013, a team of MBA students working under the authors’ supervision and in collaboration with CDP spoke with representatives of 38 companies in seven countries, focusing on industrial and materials companies because they tend to have higher emissions and more experience with reporting. The authors also included a handful of information-technology companies in their survey.
The researchers asked companies why they responded to the CDP queries, how they use the information they collect, what emissions-reduction initiatives they undertook, how the success of those efforts compared with their expectations, and whether they gained any other benefits from participating in the disclosure process.
Demand from investors was the chief reason companies took part, while some said they were motivated by a desire for cost cutting and the need to meet legal requirements. Still others cited interest among their customers, including companies that were doing their own climate reporting.
Disclosure is worth little if it doesn’t lead to actual cuts in greenhouse gas emissions, which overall have ticked upward in the last couple of years. Among those surveyed, researchers found, emissions reduction proved greater and longer-lasting than expected. Industrial companies were able to make core operations run more efficiently, while materials concerns expanded their use of renewable energy; one said it had more than 200 emissions-reduction projects delivering more than $275 million in savings. IT companies trimmed their carbon footprints by reducing travel, purchasing green power and making data centers run more efficiently.
A big question about emissions-reduction efforts is whether the benefits decline over time after companies make the easy changes — pick the low-hanging fruit. Many interviewees thought so, saying, for example, “The obvious has already been done.”
On the whole, though, more respondents said they continued to find more ways to reduce their carbon footprint. While 15 of the 31 companies that answered the questions said they found more or many more opportunities to cut emissions than when they first began reporting to the CDP, only seven reported fewer. IT companies in particular saw the greatest increase; a third said they had identified many more potential emissions-reduction projects. “It’s not uncommon for firms to find ways of improving processes once they start measuring environmental impacts,” the authors write.
Operational efficiencies were welcome. But more than a third of the companies, 37 percent, said the main benefit from collecting and reporting climate change information came from improvements in their brand and reputation. That value is reflected in who uses the information: 55 percent of the companies said it was used by public relations and communications staff, and 37 percent said marketing departments used the data.
The study also supported findings from other research: A company’s supply chain may offer the greatest potential for reducing its carbon footprint.
CDP and others divide a company’s emissions into three categories. Scope 1 emissions are those that come directly from a firm’s operations, such as factories or vehicles. Scope 2 are indirect emissions from the electricity and other energy the company purchases. Scope 3 emissions come from the production of purchased materials, travel and commuting by employees, or from customers’ use of a product.
Squeezing carbon emissions from supply chains may represent a big opportunity for companies, but the size of that potential generally isn’t well known. In a 2016 paper, Blanco, Caro and Corbett sought to measure what isn’t counted by comparing CDP disclosures with another method for measuring environmental impacts in the economy.
Bearing the unwieldy name Economic Input-Output Life Cycle Assessment, or EIOLCA, the method can give a more complete picture of the average energy and raw materials consumed in the course of making a product. For example, a life cycle assessment of an automobile would account for the steel, rubber and plastic and energy that goes into manufacturing the car.
In their study, the authors estimate that on average, large U.S. companies that reported Scope 3 emissions to the CDP in 2013 captured only 22 percent of the emissions. (But note that there is no legal or other requirement for firms to disclose Scope 3 emissions at all, so this is not a criticism of those firms that do choose to disclose some of their Scope 3 emissions.) Some companies and industry sectors have been more successful at identifying emissions from their upstream suppliers, the researchers found. For instance, Cisco, the network computing company, in 2013 estimated that supply chain emissions amounted to 79 percent of its total carbon footprint, up from 27 percent in 2010. Despite its vast supplier network, Cisco was able to capture a larger share of Scope 3 emissions by surveying suppliers and adding emissions from upstream transportation and distribution.
“Without the understanding of upstream emissions, firms may miss out on the most cost-effective carbon mitigation strategies,” the authors write, “especially given that such a large portion of emissions come from the supply chain.”
While the sample in the latest study is small, the lessons are clear: Pay attention to supply chains. Recognize that disclosure addresses multiple audiences, from the board and chief executive who use the information for strategic decision making to the PR reps who tout the company’s commitment to sustainability. And don’t underestimate the value of disclosure just because the benefits can’t be known ahead of time.
Bing (’86) and Alice Liu Yang Endowed Term Chair in Management; Professor of Decisions, Operations and Technology Management
Charles J. Corbett
Professor of Operations Management and Sustainability; IBM Chair in Management
About the Research
Blanco, C., Caro, F., & Corbett, C.J. (2017). An inside perspective on carbon disclosure. Business Horizons, 60(5), 635–646. doi: 10.1016/j.bushor.2017.05.007
Blanco, C., Caro, F., & Corbett, C.J. (2016). The state of supply chain carbon footprinting: Analysis of CDP disclosures by US firms. Journal of Cleaner Production, 135, 1189 ndash;1197. doi: 10.1016/j.jclepro.2016.06.13