Friday, August 31, 2012

The proposed GRI G4 GHG Emissions draft - explained

The plot thickens. After presenting the G4 Exposure Draft available for comment between 25th June and 25th September, the GRI has now published what it's calling Thematic Revisions, for public comment between 14th August and 12th November. I think that's what they call eating the elephant in two easy slices. Of course, the CSR Reporting Blog is here and ready with our analysis of one of the two new Thematics  - Greenhouse Gas Emissions - to make your life a little easier.  The other one (Anti Corruption) will be the subject of my next post.

First, download the draft GHG Thematic document here. It's 55 pages. Get them all. You're gonna have your work cut out as you go through this document.

According to the draft, the proposed revisions align with the GHG Protocol, jointly released by the World Resources Institute and the World Business Council for Sustainable Development, and the ISO 14064 Standard. The proposed GHG Emissions Indicators are fully aligned with the GHG Protocol’s grouping of emissions into three subsets (Scopes 1, 2, and 3), as well as the ISO 14064 grouping. Energy Indicators have been modified to align with the GHG Emissions Indicators and intensity Indicators were added for both energy and GHG emissions. More about intensity later....

Specifically the draft contains:
  • New disclosures and guidance for the Energy and Emissions Aspect (Environmental Category)
  • Edits to Indicator EC2 (Economic Performance Aspect, Economic Category)
  • Edits to Indicators EN3 – EN7 and Indicators EN16 – EN20 (Energy and Emissions Aspects, Environmental Category)
  • New indicators under the Energy and Emissions Aspects, Environmental Category
Before discussing the changes in detail, it might be worth listing the new EC2, EN3-7 and EN16 -20 and new indicators proposed in this section. First point to note is that 11 indicators now becomes 13 indicators, and this includes two intensity measures, energy intensity and GHG emissions intensity. As promised, more about that later.

  • CORE EC2: Financial implications and other risks and opportunities for the organization’s activities due to climate change
  • CORE EN3 Direct energy consumption
  • ADD EN4 Indirect energy consumption
  • CORE G415 Energy intensity
  • ADD EN5 Reduction of energy consumption
  • ADD EN6 Reductions in energy requirements of products and services
  • CORE EN16 Direct greenhouse gas (GHG) emissions
  • CORE G416 Energy indirect greenhouse gas (GHG) emissions
  • CORE EN17 Other indirect greenhouse gas (GHG) emissions
  • CORE G417 Greenhouse gas (GHG) emissions intensity
  • ADD EN18 Reduction of greenhouse gas (GHG) emissions
  • CORE EN19 Emissions of ozone-depleting substances (ODS)
  • CORE EN20 NOx, SOx, and other significant air emissions
So what's different? Intensity, as we've seen.  But more about that later.

GHG Protocol framework
A key difference is the clarification in definitions for energy and emissions reporting. The GRI has aligned itself with the leading carbon reporting standard - the GHG Protocol in which direct and indirect energy are classified into three scopes of emissions.
  • Direct Energy > Scope 1 emissions
  • Indirect Energy > Scope 2 emissions
  • Other Energy > Scope 3 emissions

You probably already know this, but for those of us who are not environmental experts, it does take some getting your mind around. Scope is a classification of the organizational boundaries where GHG emissions occur.
  • Direct (Scope 1) refers to emissions are created by sources owned or controlled by the organization. For instance, a coal-powered power plant which makes electricity.
  • Indirect Energy (Scope 2) refers to emissions resulting from the generation of the electricity, heating, cooling, and  steam that is purchased by the organization. Scope 2 emissions occur at facilities which are owned or operated by other organizations. For example, using electricity purchased from the coal-fired power plant (probably via a national grid) is classified as Scope 2, because the emissions were generated in producing the electricity and not in your organization.
  • Other Indirect  Energy (Scope 3) refers to emissions resulting from the organization’s activities, but are not created by the organization. This includes emissions from outsourced activities, such as the transportation of goods by haulage companies using vehicles that are not owned or controlled by the organization.
In other words, most companies report fuel and coal as direct energy sources and purchased electricity as an indirect energy source. In environmental reporting, the  energy source and what you do  with it is less important than where you do it. If the emissions occur in your factory, cue Scope 1. If they occur in someone else's factory, cue Scope 2 and if they happen on the bus to work or on a truck to China, cue Scope 3 (provided you don't own the bus or the truck).  

The John Lewis Partnership CSR Report for 2011 contains a good graphic that makes this all crystal clear:

Which emissions to account for: Control or Equity
The key to defining what to count is the precise scope of where emissions occur. On the face of things, it sounds straightforward, but in practice, there are two definitions are available: the equity or control method.

The control method calls for a company to account for the total GHG emissions from operations over which it has control, whether this be financial or operational control. It does not account for GHG emissions from operations in which it owns an interest but has no control. In other words, if you lease a factory, and you run it, and all the people working there are your employees, and all the materials used in the factory are sourced by you, and the final output is your products, then you have control.

The equity method calls for a company to account for GHG emissions from operations according to its share of equity in the operation. For example, if you have a 51% financial share in an operation, or even a lower financial share but full management control, you would report your emissions proportionately, according to the percentage share, and not full control.

This is an important distinction and must be applied consistently throughout the entire reporting spectrum. It could significantly change the level of emissions reported, so watch for the fine print when you are reading reports.

Alignment is Good
Closer alignment with the GHG Protocol (which is also used as the basis for CDP reporting) clearly makes sense, and hopefully will encourage greater comparability in energy and emissions reporting. At present, there are still wide variations but some do it well. ENEL, the energy company, for example, reports  for 2011 in classic textbook G4 style:

ENEL 2011 reporting EN3

ENEL 2011 reporting EN4

ENEL 2011 reporting EN16 Scope 1 Emissions

ENEL 2011 reporting EN16 Scope 2 emissions

ENEL 2011 reporting Scope 3 other emissions

Oh, did we mention intensity ?
G4 includes two new indicators relating to Energy Intensity (G415) and GHG Emissions Intensity (G417). This is a way of normalizing consumption and impacts to a common denominator which may be financial ($ of revenue), human (per person), physical (per square meter of factory or office space, or per vehicle) or per product (units sold, units produced) or, in fact, any other factor that you can imagine which is relevant to your business (or which makes your numbers look better than the absolute numbers). In most cases, my experience tells me, the intensity figures will always look better than the absolute figures - companies use more and more energy and generate more and more emissions, but on a per something basis, they proudly show a major reduction.  Take these examples:

Air China reports in the 2010 Corporate Responsibility Report on fuel consumption and carbon emissions by PTK (per ton/kilometer), stating that they have achieved "remarkable results" as they have reduced fuel consumption PTK by 6.6% in 2010 versus 2009. We do not know what the total fuel consumption was during this period.

Delhaize, the Belgian supermarket chain, shows fabulous energy intensity results per m2 sales in the company's 2011 CR Report. A 7.5% percent reduction over three years. (It is not clear whether this is all three Scopes, but I assume just Scope 1 and 2)

Delhaize 2011 reporting on emissions intensity
Delhaize does not disclose the total number of carbon emissions. Delhaize also reports to the Carbon Disclosure Project and you can access their report (after several clicks and registration on the CDP website) but you will find that the 2011 report covers 2010 data, and is therefore not comparable to the CSR Report 2011 period. After a quick calculation, I note that Delhaize absolute Scope 1 and 2 emissions increased by 3%, using 2008 as a baseline. Turning an increase into a decrease is the power of the intensity measure. This might have been achieved by increasing some prices, changing the sales mix or recording some currency adjustments and wow, suddenly the carbon emissions performance looks actually quite positive.

NH Hoteles 6th's CSR Report includes both absolute emissions and intensity rates per guest per night. Absolute emissions fell by 8.82% while intensity emissions fell by 11.9%.

What did NH Hoteles choose to highlight in its reporting narrative ? Intensity, of course.

CapitaLand's Sustainability Report for 2011 also shows a similar picture, in one handy graph.
Again, you can see that on an absolute basis, there is an increase of emissions by 39% since 2008 but intensity on a square meters basis reduces by 11.1% since 2008. CapitaLand's emissions target is an intensity target reduction of 20% by 2020, but there is no absolute target.

BT uses yet another model for calculation of emissions intensity and that is emissions per GBP million value added - which is EBITDA plus employee costs.  This formula is what BT has called its Climate Stabilization Intensity Target - a measure of carbon emissions in relation to its (financial) value added as a company and the contribution it makes to a country's GDP. Hmm. Make more profit, improve your carbon emission performance. BT's absolute emissions reduced 53% versus their 1997 baseline, and intensity improved by 61%.

What would be interesting to know is what specific factors contributed to this intensity improvement. BT report that they have improved energy efficiency, invested in renewable energy generation and purchased low-carbon energy. Wonder how much of what went into that 61%? And how much was a change in profit and employee costs?

Ericcson, on the other hand, report a different type of intensity. According to Ericcson's 2011 CSR Report, the carbon dioxide emissions associated with the lifetime operation of delivered products totaled approximately 24 Mtonnes in 2010. This is the measure used for carbon intensity. Don't worry about the fact that while carbon intensity was reducing every year, absolute emissions were increasing by 8% between 2008 and 2011.

Procter and Gamble have a lofty goal, stated in the P&G 2011 Sustainability Report: of powering their plants with 100% renewable energy. In the past few years, however, total carbon emissions (Scope 1 & 2, Scope 3 is off the radar) have increased  by 5% in 2 years. This doesn't prevent  P&G from proudly displaying the intensity figures:

As you can see, P&G refers to intensity per unit of production. Hmm. Now would that be a 5kg pack of washing powder, or a tube of Crest toothpaste, or a pack of Eukaneuba for dogs Denta Defense®, a type of micro-cleaning crystals that help reduce tartar by up to 55%?

Enough of intensity. By now you get the picture. Carbon emissions can be normalized to practically anything at all, depending on what a company wants to manage or what it wants to show to the world. In almost every single case you can find, intensity measures will always beat absolute measures. If only the planet would respond to intensity and become more sustainable. If every company were emitting carbon emissions relative to the number of expense claim-forms submitted, or the value of bottle-caps sold or the number of emails sent per hour, we might find carbon reporting much more interesting but it would hardly be saving the planet. If only we could become more sustainable by becoming less intense.

Why would the GRI choose to add two intensity measures to the G4 reporting framework? The GRI says this: "In combination with an organization’s absolute GHG emissions, disclosed with Indicators EN16, G416, and EN17, GHG emissions intensity helps to contextualize the organization’s efficiency, including in  relation to other organizations."
Normalizing energy consumption or carbon to financial values - turnover, sales or profit - or to other operational values - may be a way of comparing the performance of companies of different size in a similar sector. The carbon footprint of a cellphone is comparable whereas the manufacturers of cellphones may be very different in size and scope of operation. This might help investors (the ones who understand) to make decisions. Similarly, whatever the normalization factor, if a company consistently uses this to benchmark its own performance, it can be a management assessment and decision making tool. However, the trick is in the selected normalization factor. If such a factor has no direct relationship to whatever causes or influences the level of emissions, it may simply be a way to present good-news numbers. If my operations are the same size and my turnover increases because of a price-hike, or a change in currency exchange rates, I may still be generating equal or more carbon emissions but all of a sudden, my intensity plummets. We will have to be vigilant of the way that intensity measures are used in reporting, and ensure they are never  a replacement for absolute measures.

Some Less Intense General Points
The environmental disclosures as with, I think, all other disclosures in the proposed G4 framework are not time-specific. This means that the reporting company could report data only for the declared reporting period. I believe it would make sense to require organizations to present 5 years data on these critical data points. Of course, those who do not have 5 years data cannot do this. But of the many companies who have been producing sustainability reports over the years do have the data available (and several already include this). As we look at sustainability with a long-term lens, it is often frustrating when companies report only current and prior year data. We should require a little more perspective in G4.

Similarly, I believe that the G4 could be tightened up by requiring explanations of how performance has been achieved. For example, it would make sense, if energy consumption has decreased by 20%, to know what the organization has done to reduce this. The G4 proposals  in the updated EN5 (Reductions in energy consumption) and EN6 (Reduction of energy requirements in products and services) require listings of the reductions achieved but not a full explanation for HOW they were achieved. Adding such information would be helpful both for internal review and for external stakeholders. Companies who have made serious efforts to reduce carbon emissions should be able to say what actions caused the reduction. Unless it was all a lucky strike!

The Last Word (it's not intensity)
Overall the new GHG Reporting Thematic Revision tightens up environmental reporting and makes several aspects both clearer and less overlapping. G4 also ups the stakes a little (a lot). The G4 framework requires reporting on all three scopes of carbon emissions as core indicators (EN16, EN17, EN18). This is also the case in G3 (EN16 and EN17), but in G3, companies had the option to report at Application Level B or C, reporting Scope 1 and 2 emissions under EN16 and avoid Scope 3 emissions in EN17. With G4, every company which includes climate change as a material issue will be required to report all three Scopes in order to be In Accordance with the G4 framework. Sounds like there's gonna be a lotta scrambling around for data going on, and suppliers of goods and services to In Accordance reporters are going to feel the heat.

Whew! Glad that's covered. I hope  Anti-corruption is not so complicated. Watch this space.

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices Contact me via   on Twitter or via my business website (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

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