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Sophisticated tools for carbon-emissions accounting are coming to market. But are U.S. companies ready for them?
Vincent Ryan, CFO Magazine
June 1, 2009
As a company that sells playground equipment to publicly funded parks and schools, Playworld Systems risks any number of nasty falls. It has to worry not only about governmental agencies that try to protect children from toxic materials but also about community groups that are increasingly using their purchasing power to push eco-friendly agendas. So the company decided that it needed a system to analyze all the carbon impacts of its business, whether produced internally or generated in source materials such as steel, plastic, and aluminum parts. The goal of the effort was to measure the reduction in carbon footprint the company could achieve by replacing carbon-intensive components such as those made from PVC (which it has, in fact, done).
With 75,000 parts needed to make its colorful playground solutions, "greening" the entire Playworld product line could have been a massive project, says Steven Malriat, the company's chief operating officer and CFO. But Malriat found what he calls a credible and "quickly achievable" solution: Climate Earth, a carbon-accounting system that calculates an enterprisewide carbon footprint from a company's internal operations and the commodities it buys from upstream suppliers. "Every dollar of material you buy equals a certain amount of carbon emissions," Malriat says. "It's like having a second set of books."
Carbon emissions loom as an accounting issue not only for companies that deal with government agencies or green-minded civic organizations, of course. The push for a cap-and-trade system is gaining steam in Washington, and in April the Environmental Protection Agency said greenhouse gases contribute to global warming and threaten public health, a stance that could open the door to further limiting carbon emissions under the Clean Air Act. A public comment period is under way, "but it's only a matter of time before companies have to report," says Simon Mingay, global research lead in environmentally sustainable IT at consulting firm Gartner. "Our advice is to start now, save a lot of time and hassle, and do it properly and well."
Software makers are already taking various stabs at developing useful products, but the task is far from easy. Measuring how much carbon is emitted by, for example, consuming a given amount of heating oil is relatively straightforward, but figuring out how much total carbon goes into the production of a widget or service is not. Many believe it can't be done accurately without exhaustive data collection from suppliers. And current debates over which party should get how much credit for various emissions-reducing activities will surely intensify once actual data must be entered into actual systems.
To date, companies have not rushed to implement systems that can support such tasks: among U.S. companies, only 16% have such IT tools, according to a recent Gartner survey, and even in the United Kingdom, where a mandatory cap-and-trade scheme takes effect next year, only 17% have them.
"The first question companies are trying to answer is, What is the source of greenhouse-gas emissions? What's the big number? What is our risk?" says Mingay.
Which is to say, right now companies are not focused on the IT angle, a fact reflected in the tools they use for their initial rough cuts at carbon accounting. BB&T, a $143 billion retail bank, calculates CO2-equivalent emissions using spreadsheets available on the Website of the Greenhouse Gas Protocol Initiative. (The GHG Protocol publishes widely accepted standards for emissions accounting.) Rockwell Collins, a designer of communications and aviation electronics, relies on a third party to collect and manage its electricity and natural-gas usage, based on the invoices it receives from utility companies. In a recent report, the company stated that "we are still evaluating whether greenhouse-gas accounting information will be externally verified or audited in the future."
Hitting the Limits
Many, if not most, large companies, in fact, currently make do with spreadsheets to collect and manage data on on-site emissions (Scope 1, as defined by the GHG Protocol standard), purchased energy (Scope 2), and "other" miscellaneous sources (Scope 3), such as employee business travel and waste disposal.
Spreadsheets, of course, incorporate a host of uncertainties: who filled in the data, was it checked and verified, and what was the source. "Large organizations quickly hit the limits on what an auditor would accept," Mingay says. "As a company begins to capture data across multiple locations, countries, and divisions, it becomes too complicated for spreadsheets," says Srini Pallia, a vice president of Wipro Technologies, which is developing a carbon-accounting tool.
A number of entities are developing more-sophisticated approaches. Climate Earth's system, as one example, uses as its underlying data source Greenhouse Gas Emissions Factors for 480 U.S. commodities and services. The data is partly based on a UK standard, PAS 2050. On the auditability side, Climate Earth incorporates the verifiable, traceable data in a company's financial accounting system and also hooks into ERP software and travel-reservation systems, among others. "We take your [general ledger] trial balance, upload it to our secure servers, and then our software maps every GL line item to a rule that maps it to a carbon footprint," explains Chris Erickson, Climate Earth's CEO.
Climate Earth's method requires some client tinkering. Playworld had to modify its accounting system to break down purchases of materials into categories that correlated with Climate Earth's database, Malriat says. Travel expense accounts were split between air and auto; office supplies had to be identified as paper, plastic, or other materials; and Playworld had to know how the electricity it consumed was generated. The changes took about three months, Malriat says.
Another option is Clear Standards, a Web-based platform available by subscription. Clear Standards tackles the problem of inventorying CO2-equivalent emissions and also helps companies factor the price of carbon offsets into capital investment decisions. If a company is analyzing the prospect of installing solar roof panels on a facility, for example, it might calculate the net present value based on savings on its electricity bill. But Clear Standards adds a financial modeling component that captures the future value of carbon emissions based on published market prices. Cash-flow analysis templates can be applied to the most common energy-efficiency projects.
"Companies will have to assume a price on carbon as they assume a price on oil today," says Clear Standards co-founder Richard Mendis. "A big portion of what these systems deliver is content — the latest emissions factors, standards, and methodologies."
To be sure, the Climate Earth and Clear Standards tools are leading-, if not bleeding-, edge. ERP vendors are entering this market more conservatively. While SAP has announced projects to halve greenhouse-gas emissions from its own operations by 2020, SAP software to track energy consumption and manage environmental risks in supply chains is still in development. Oracle has partnered with ESS, developer of environmental data-gathering software, to offer modules built on its Governance, Risk, and Compliance Manager and Business Intelligence Suite.
Microsoft, meanwhile, launched the Environmental Sustainability Dashboard for its Dynamics AX suite in February. It is targeted to midmarket clients that need to cut energy expenses and comply with the "greening" initiatives of their large customers, like Wal-Mart.
The dashboard draws on financial accounting data, like an AP entry for an electricity bill, to track direct and indirect energy consumption. It monitors relatively few sources of carbon emissions, but for midmarket companies that makes sense. "We came out of the box with only four indicators," says Jennifer Pollard, a senior product manager at Microsoft. "If we tried to boil the ocean and tell customers everything about their environmental impact, the barrier would be too high."
With shifting international standards for measuring and reporting greenhouse gases, and plenty of uncertainty regarding just how U.S. cap-and-trade policies will play out, IT advisers counsel companies to go slow. Says Mingay: "Tread carefully, look for short-term ROI, and be prepared to chuck what you've done in two years and start over."
Why worry about it now at all? "It behooves CFOs to understand how to manage operations to minimize carbon emissions," Mendis says. "CFOs can't control the cost of a kilowatt hour or a barrel of oil — but they can control how much they use." Since there promises to be a steep learning curve around carbon accounting, Mendis adds, companies that take some steps now will gain an advantage.
Vincent Ryan is a senior editor at CFO.