The future of carbon reporting

September 23, 2010

Liz Logan and Kangos
— Liz Logan is a partner in PricewaterhouseCoopers’ Sustainability and Climate Change practice and leads the company’s efforts as adviser to the Carbon Disclosure Project. Doug Kangos is a PwC partner who focuses on assisting companies respond to demands of greenhouse gas emissions and sustainability reporting. Any views expressed here are their own. —

Carbon reporting by U.S.-based companies today has broad similarities to financial reporting before the enactment of the Securities and Exchange Act of 1934. Just as market forces and regulation evolved then, so too now are we seeing a similar trend.

We expect that within this decade, more companies will regard carbon as significant and will develop and implement increasingly sophisticated and accurate programs to track, manage and report emissions data. And to the extent that carbon emissions are monetized through, for example, a cap-and-trade system, they will become subject to conventional accounting and reporting, with their demands for high levels of accuracy, reliability and timeliness.

Reporting demands can come from many sources. Procter & Gamble, for example, recently joined Wal-Mart Stores and others in initiating a sustainability scorecard program for its suppliers. While the substance of these programs varies with the nature of each business, the trend is undeniable and serves as a springboard for other manufacturers and retailers to follow.

Based on these early programs, companies should prepare themselves for more data requests in the near term from major customers.

Investors, in particular, are demanding disclosure of companies’ carbon numbers. Investors want to know that the information can be validated in some manner, whether explicitly by third-party assurance or through disclosure of comparable key performance indicators used by management. When necessary, investors will triangulate all the information they can find so as to feel a level of comfort that the numbers seem reasonable.

Building assurances about these measures is a journey that can take companies several years and can consist of a number of stages and starts with assessment and reflection. Doing so enables an organization to gain valuable knowledge about its challenges and opportunities, which can pay off in efficiencies and increased strategic value.

Greater detail, reliability and sophistication in carbon emissions reporting can foster innovation in emissions reduction at every level within an organization, as well as enable executives to more effectively incorporate climate change risks and opportunities into their strategic planning.

What are the indicators that will mark the advancing maturity in carbon reporting? First, regulatory attention. The increasing recognition of the value of carbon emissions data is resulting (or will eventually result) in some kind of regulation.

A second indicator will involve improved methods for tracking emissions data. Many of today’s programs are in the early stages of development, but we can see steady progress. Companies and their advisers (e.g., accounting firms, environmental consultants) are getting more experienced and savvy about monitoring and assessing carbon emissions in increasingly meaningful and effective ways.

Verification can mean a vastly different thing from one company to another. It may refer to a rigorous and comprehensive examination that is carefully attested to, or it may simply consist of a series of interviews and reviews of high-level analytics.

Further, some service providers adhere to strict accreditation standards—that translate into common practices among their peers—while others are not required to do so, depending on whether the statement is obtained from a consultant, an engineer or a certified accountant. The sophisticated investor will look under the covers of a verification or assurance statement to determine its reliability.

A third indicator won’t come from the companies themselves but from their external stakeholders as they seek greater transparency and make greater use of reported information in their investment decisions. Investors, nongovernmental organizations and regulators will get more of the information they really want from companies: the data that matters most. And with each passing year, they will demand higher levels of specificity and objectivity.

Company data and stakeholder demands will gradually align. The actual form that alignment takes will be dictated by markets and regulators, especially if some form of cap-and-trade legislation becomes law in the United States.

Regardless of the path carbon reporting ultimately takes, there are signals now that help us understand where we are headed. Reliability is possible when strong and vigilant boards recognize the significance of the data to the business and integrate it with their strategies.

They create appropriate controls, processes and systems to monitor and measure the data they need. Once this is in place, third-party assurance can enhance reliability for both management and its stakeholders.

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The most significant carbon emitters are not those companies based in the US but their 2nd and higher tier suppliers whom they have no direct leverage.
We will never know the real carbon risk until all stakeholders including the accounting and assurance firms are ready to embrace transparency of their business practices.

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