Durban makes adaptation a priority for business

The Durban Platform agreement on climate change has been welcomed, if only because expectations were so low.  Of course, it is just an agreement to agree something by 2015, and to do whatever is agreed by 2020.  But is this just a bit of political positioning, or does it hold important messages for businesses in the UK?

Floods in Thailand wreaked havoc on supply chains

Durban is an important “heads up” for businesses all over the world.  Some countries not previously committed to emissions reductions under Kyoto have now said they will definitely agree something in the next few years – including China, the world’sbiggest emitter.  For energy-intensive businesses competing head on with companies in developing countries, this may be good news.   For those firms in countries that will now have to commit, it may sound worrying.  However reducing energy intensity is good business – and because the change is some way off, those companies have an excellent opportunity to invest thoughtfully now, save money, and be ready for 2020.

In Europe, emissions are already regulated, and governments are using grants, taxes, and other powers to encourage industries to become more efficient.  Does this mean that there will be no particular change for firms in the UK and on the continent?

The biggest news for companies here (and big-ish news for firms everywhere) is that global emissions are likely to keep rising for some time.  A view from a growing number of experts suggests that this means we might face a narrower set of options by 2020: either to cut emissions much more dramatically than if we started now, and at enormous cost, or to risk temperature increases of greater than 2C.

On the assumption that the world will not opt for dramatic, extremely expensive emissions cuts, firms face an imperative to work now on adaptation, even though the exact impacts of 2C+ warming, and their timings, are still uncertain.  There are a number of tactics companies will be pursuing to mitigate the risk of more frequent extreme weather events and their impacts.  For example, some will relocate facilities away from areas at risk of floods and hurricanes.  Others may invest further in back-up solutions to deal with everything from power failures, to transport shut-downs, to extensive supply chain disruptions.

If your firm has an emergency planning process, now is the time to make sure it covers all the predicted impacts of climate change for your region, with an understanding of the potential severity and likely timescales involved.  If you have no such process, it is more urgent than ever that you get started.  Adaptation to an environment of growing risks is now a clear priority for business.

Which retailers are most efficient?

Retailers are under considerable margin pressure, so you would expect them to take any measures possible to reduce cost.  Much work has focussed on labour productivity, or getting more sales per staff person, for example by introducing self-checkout.  However there is still much to be done on resource productivity.

A recent data set on leading retailers’ greenhouse gas emissions, sales, and employee numbers shows a wide variation in labour productivity and sustainability.  Interestingly, the most labour efficient retailers are also the most emissions efficient – no company is just “green” or solely focussed on automation or scale.

CVS (a pharmacy retailer) and Costco (a warehouse club) exceed their peers on both measures, but amongst the others there are some interesting differences.  Walmart and Tesco do not achieve the labour productivity of Kroger (a leading US supermarket), but both are significantly more efficient on greenhouse gas emissions.  This is probably no accident – both Walmart and Tesco have made bigger commitments to reducing emissions.  

Tesco aimed to reduce energy use by 50% from 2000 to 2010, versus Kroger’s target of a 30% reduction over the same period.  Walmart gave themselves just 4 years to achieve a 30% reduction (from 2005-2009), and they aspire to supply their stores with 100% renewable energy.

There are big savings for retailers who make efficiency their priority.  Improved lighting systems, daylighting, energy controls, heat recovery, behavioural change, and many other approaches can reduce costs significantly, often with a 2-3 year payback period.  For any firm in the retail sector, sustainability in terms of a reduced carbon footprint should have a leading role in their effort to thrive in these challenging times.

Why your waste costs 20 times more than you think

Waste disposal costs are rising.  Heightened attention is being turned to dealing with it cost-effectively, diverting it from landfill and getting the best possible income stream from recycling or re-using it.  This attention to waste is a good thing.  We want to reduce the cost of it, to make our businesses more competitive.  However the truth is that most managers are missing 95% of the cost of their waste.  If your facility’s waste costs were 20 times higher than you thought, what action would you take?

The answer is obvious – you would stop trying to maximise the recycling and re-use value of your waste stream.  Instead, you’d try to stop producing it in the first place.

Let’s look at a hypothetical manufacturing company[i].  Imagine a firm that produces high quality ready meals.  Our firm has operating costs of £50 million a year, and runs two shifts a day.  They produce 500 tonnes of waste per year, and it costs them £100 per tonne to dispose of it (fees and handling costs).  So this firm believes that its cost of waste is £50,000 per year.  This is significant enough to get attention, but at just 0.1% of total cost, it is not the highest priority.

Now, imagine that each day, an average of 10 minutes of each 8-hour shift produces waste.  This takes two main forms: 

• Occasional quality failures (e.g. too little product in one tub, or a run with wrong dates)
• Planned waste, while a new run is started, and the machines are adjusted to get the machines aligned perfectly

So for an average of 20 minutes per day (10 minutes for each of two shifts), the facility is producing waste.  That’s roughly 2% of a 16 hour day.  In other words, 2% of the operational time, and therefore 2% of the operational cost (electricity, people, facilities costs, materials, etc) is waste.  In a facility that costs £50 million per year to run, that’s a cost of £1 million, spent on producing product that will never be sold.

This is just a hypothetical example.  Is it typical?  In fact, this is close to the average for the UK economy as a whole.  As I’ve reported elsewhere, DEFRA estimates there are £23 billion of resource efficiency savings with a year payback or less, just waiting for firms to take advantage of them – about 1.6% of GDP.

A million pounds of a £50 million budget is a substantial sum – it could be better spent holding off the next round of unwanted redundancies, investing in new capital equipment, or developing new products.  If this were your firm, wouldn’t you do whatever you could to stop the waste?

So... just how much of your operational time each day is spent producing waste?

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[i] This could apply just as well to a service company.  For example, in a call centre, it might include outbound calls to wrong numbers, and times when the computers or phone lines are down.

Do more with less – and save £23 billion

That, at least, is the conclusion of a DEFRA study published in March.  It found that for very little cost, UK businesses could produce just as much as they do today, while saving £23 billion in costs.

Given our current economic troubles, it is surprising that this hasn’t been headline news.  The topic is called “resource efficiency.”  The UK government has been trying to encourage firms to improve their resource efficiency by providing advice and grants, and even the European Commission has urged firms on, claiming that “Increasing resource efficiency will be key to securing growth and jobs”.

These claims are entirely realistic.  There are multitudes of case studies available through government agencies and in business school texts, and of course many cases have never been documented.  Just tackling the production of waste products alone – without considering any other efficiency savings – could produce big savings to the bottom line.

The fact is that the funding interventions from the government have so far been very small – less than £100 million per year of the Business Resource Efficiency and Waste scheme.  However, they indicate big potential – every £1 spent by the government achieved an average £1.64 in additional sales and £3.20 in cost savings – and those are the benefits in just one year.  Unfortunately, the budgets for this work are now being cut.

As the ENDS Report has observed, “government will have to depend on businesses stepping up their own efforts independently, without relying on public funds for advice and support.”  Increasing landfill taxes are meant to encourage firms to address their inefficiencies, but waste handling costs represent only a tiny fraction of the true cost of waste.  Moreover, there are many more inefficiencies that have nothing to do with the waste stream.

When so many companies have tackled their waste stream, why have so few put the same energy into efficiencies – that is, into not producing the waste in the first place?  It’s often no one’s job – we assume our employees will identify and eliminate waste if they can, but no one is tasked or measured on this.  And why not?  Well – since the cost of producing waste, or working inefficiently, is almost never measured, those in charge don’t realise it deserves an explicit place in their management structure.

For those companies that grasp the opportunities in resource efficiency, the prize will be higher profits, greater security, and growth.  The government will no longer take the lead, though it is a wonder that it was ever necessary.  Given the size of the prize, it is time more firms put resource efficiency on the CEO’s agenda.

Why your business customers want you to cut carbon

Recent research from The Carbon Trust reveals a potentially unsettling truth for the B2B market: multinationals are not just addressing their own greenhouse gas emissions.  They are also increasingly including carbon in their selection criteria for suppliers.  Within three years, the vast majority will do so – only 10% say otherwise.

Why this move – is it part of these multinationals’ attempts to look green?  The report ascribes the trend to “shareholder pressure”.  Are these shareholders investing in an increasingly ethical way, or are they looking for financial value?  I would suggest the latter - in other words, this isn't a fad.  It's part of a trend towards shareholders actively looking after the value of their investments.  Suppliers should take note.

It is not only shareholders who know that low carbon can translate into good value.  Sourcing professionals look for signs of quality and efficiency to ensure that they are getting the best goods at the best price.  Low carbon emissions signal efficiency – that a supplier is using less inputs for the same output.  That will translate into a sustainably lower cost structure, from which the buyer hopes to benefit.  Multinationals are sourcing low carbon because it’s often cheaper, and is likely to get even more competitive if fossil fuel costs rise further.  Shareholders and management want to know that their companies are managing for value.

A quote from Chris Harrop of Marshalls plc is particularly revealing: “By choosing suppliers of responsibly sourced goods not only do we cut carbon emissions but invariably there are cost and efficiency gains to be had, which all adds up to a strong competitive advantage.”  Perhaps it’s nice to be green, but it’s good business to be cost competitive, and paying attention to carbon in the value chain helps firms solidify this advantage.

So, suppliers now have another reason to address emissions, if cost competitiveness itself were not enough.  Multinationals will be expecting suppliers to report on, and compete on, greenhouse gas emissions.   Their suppliers will be asking the same questions right down the supply chain.  If your business customers are not already asking you to reveal to your carbon footprint, they soon will.

Carbon offsets vs carbon reduction – which is the better investment?

Carbon prices are at an all time low.  What does this mean – and should a business thinking of buying carbon offsets be worried about investing in them?

Carbon offsets are purchased by individuals or firms to offset the emissions they produce in their activities.  The emissions aren’t being taken away of course; the idea here is that somewhere in the world, a project to reduce emissions by the equivalent amount will go forward because this money has been granted to it.  That is supposed to put the project into the black – the UN will only approve offsets if the project would not be financially viable without the money the offset brings in.

Offsets can include landfill methane power generation. Photo: D'Arcy Norman /
Creative commons

The problem right now is that offsets are in low demand, at least partly as a result of the recession.  At the same time, supply of offsets is rising, as more and more projects are approved by the UN.  There is no shortage of companies willing to propose projects, but at current prices, most of these will barely cover their costs.   High supply and low demand have made this one of the worst performing commodities this year.

However, this is not a problem for the buyers of offsets.  In fact, if you are buying in order to become carbon neutral, it has never been cheaper to do so.  So should every firm that aims for carbon neutrality start focussing on offsets to accomplish this?

This is not necessarily wise.  Carbon offsets cost money, and provide no direct return – you have to buy them again next year.  Carbon reductions – for instance reducing waste, energy consumption, and so on – does provide a return, as the cost reductions come year after year.  Like offsets, they may cost money, though many are free or have a payback period of months.  However, even the costly investments do at least have a return, which carbon offsets do not.

On the other hand, some environmental investments will never be profitable.  To take an extreme example, solar panels on a north-facing roof in the UK are unlikely to turn a profit.  How can a firm decide which investments to make, and whether to pursue offsets as well?

A popular tool for selecting green investments is the marginal abatement cost curve.  The vertical axis shows the net present value or cost of the project per Kg of emissions reduced, while the horzontal axis has the total amount of abatement per year.  Investments are ordered by value, with those that create the greatest financial benefit per unit of carbon reduction on the left.

Those projects with a positive net present value are the obvious priority. As for the projects with negative net value, some will be attractive to firms that will gain sufficient indirect value from carbon reductions (morale, reputation, etc).  Those opportunities with a net cost lower than carbon offsets should clearly be favoured next. For projects with a greater net cost than offsets, the strategy should switch to purchasing these instruments instead.  The chart on the right summarises the decision process.

Offsetting is most valuable to firms that have already have a powerful programme of continuing carbon reductions, and who will benefit from the reputation effects of achieving full carbon neutral status.  However, if a firm’s emissions per unit of sales or output are not falling, then there are almost certainly direct carbon reduction options waiting to be uncovered.  In addition to being environmentally sound, these projects are financially more sustainable than offsets.

Reporting and green tourism – what happens when consumers know?

Emissions from tourism matter – they account for around 5-14% of total global emissions.  Developed countries produce considerably more GHG emissions per capita than developing nations, and one reason among many is the availability of time and money for leisure. 

Carbon emissions from leisure pursuits is a sensitive issue.  On the one hand, denying people air travel or even the experience of a heated swimming pool would be politically unrealistic.  On the other hand, consumers themselves are becoming increasingly interested in their personal impacts, and consumer goods companies from Puma to Unilever have been quick to respond, by reporting their impacts and showing annual improvements and innovations.

The same cannot be said of the leisure industry.   Few report on their emissions at the corporate level – but the rare leaders who do suggest some interesting conclusions.  Figure 1 shows emissions from a selection of firms in transport, holidays, casinos and hotels.   Two dimensions are relevant: emissions per customer, and per unit of spend.

For an individual trying to reduce their discretionary carbon footprint, the emissions-per-customer metric is highly relevant.  For example, a luxury hotel stay (measured on a room-night basis – HKS and Intercontinental) is clearly less green than a stay at a holiday park (Centre Parcs and Holidaybreak).

For a company looking to produce a more efficient product and deliver more value to their customers, the dimension of emissions per unit of revenue is most relevant.  For example, compare the two hotel groups, Intercontinental and HKS (Hong Kong and Shanghai), both targeting the high end of the market.  HKS is likely to keep costs low by reducing energy consumption relative to revenue, presumably without changing the quality of the experience.  This will help them boost their financial surplus, which can be invested in services their guests actually value.

At the moment, consumer tools like GoodGuide.com focus on goods rather than services.  Given the importance of leisure to global emissions, change cannot be far off.  When these tools are available for holidays, travel, and other leisure experiences, those companies that have already invested in their own sustainability – and reported transparently – will be the first to benefit.