As most scientific opinion indicates - and our own experiences of increasingly extreme and unseasonal weather confirm - global climate change is now a fact rather than a hypothesis. But many businesses across the spectrum, from SMEs to multinationals, have still to get to grips with it, not only the effects on carbon dioxide emissions trading - the EU Emissions Trading Scheme came into operation last month - but also in the much broader terms of business risk and corporate reputation management.
In conjunction with the Carbon Trust, gathered some of the most progressive companies in the field, together with representatives of the socially responsible investment community, to examine what businesses can do to reduce their carbon emissions and why it makes good commercial sense to do so.
GWYTHER, MT To start with, I'd like Tom to explain what the Carbon Trust is and what it hopes to achieve. I admit that we have not done as much in MT on this subject as we should have, but with emissions trading coming in, it will be on a lot of people's minds this year.
DELAY, CARBON TRUST The Carbon Trust is an accident. The Government decided to impose a form of carbon tax known as the Climate Change Levy some years back. Business and industry responded aggressively, saying: 'No way are we having another tax.' The chancellor agreed to make the measure neutral to business, providing a number of quid pro quo compensations, including reductions on NI contributions, tax breaks for energy-efficient equipment and the creation of an independent body, the Carbon Trust, run by business to help business address climate change.
So we're totally independent of government, although we are entirely funded by it. We have about 80 employees today, only two of whom are former civil servants, so culturally we come almost entirely from the private sector. We're midway between business and government interests and can act as a bridge between the two.
We're investing over £60 million a year into this area, rising in the next three years to just over £90 million. Our mission is to help people reduce carbon dioxide emissions. We help business and public-sector organisations to develop commercial low-carbon products and services. We're not great believers in subsidy. A lot of what we do is proving that you can make money from large private investment once the case has been made. I personally get fed up by politicians asserting time and time again: 'This is good for your business.' Okay, show me. Where are the returns?
Some of the world's leading companies seem to tackle the issue of climate change by treating it as something in risk management rather than the 'save money, save energy' area. So we went about developing a carbon management product that is probably unique in that we have had successful trials with over 50 leading UK companies, 16 of them in the FTSE-100. We're starting to share the mechanisms worked through with the 50 pilot companies. We've discovered lot of ways of mitigating the risks, and put together a suite of products that we'll be running out over the next two or three years.
GWYTHER, MT There are those, particularly in the US, who do not accept the existence of climate change. Recently, I heard an adviser to Bush, Myron Ebell from the Competitive Enterprise Institute, say on Newsnight that the whole thing is simply a myth designed to hamper American competitiveness.
FELGATE, CARBON TRUST All scientists are now in accord that something is going on and climate change is a real issue. I believe that climate change is happening and that the scientific evidence supports me. But even if I were wrong, can businesses ignore the issue; it is a risk they cannot afford to take.
MONAGHAN, CO-OPERATIVE FINANCIAL SERVICES We have tried to turn whatever we do into a proper opportunity in the marketplace. If you don't produce something substantial, how can you turn it into a unique selling proposition?
When we looked at our own operations in 1998, we made the decision to go to 100% green electricity right away; we felt 10%, 20% or even 30% would not make any customers join us. We're interested in creating some clear blue water between us and our competitors.
For our two million customers, the number one reason for joining the Co-operative Bank is ethics and the environment, above quality of service and location of branches - the norm for the rest of retail banking, where ethics and the environment would account for less than 1%.
The other interesting thing is that we find it difficult to buy green electricity these days. We've gone from a situation where everyone says that it is out there but too expensive, to one where you cannot find it for love or money. We've even signed an eight-year deal with an electricity supplier to guarantee that we get the electricity. When BT made a commitment to go all green, it mopped up in one go 15% of all the renewable energy capacity in the UK. The Co-operative Group, our parent, has made a commitment for 10%. Two businesses there have just swallowed up virtually 25% of all the green electricity in the country.
HONE, SHELL INTERNATIONAL For us, it's a much bigger issue. It started off as really a licence-to-operate issue. As a large emitter on our own, but also very much in the carbon cycle, we had to start looking at the responsibility we had. Globally, we emit something like 115 million tonnes of CO2 per annum, which is quite a lot.
But we're moving on to where the world's energy demand is moving and how that is starting to change. If you want to be an energy company in the middle or at the end of this century, you have to be more diversified than just fossil fuels would let you be today. That is what it comes down to: where do we want to position the company over the next 50 years?
GWYTHER, MT What have you done in your organisation to help energy efficiency?
Give us some examples of measures that you've taken over recent years that others could emulate.
HONE, SHELL Measures included setting energy efficiency targets for all the businesses; setting ourselves the target of ending the venting of methane at production sites; and, following on from that, the end of flaring at production sites. Venting of methane has ended now, but flaring has another few years to go.
From an energy efficiency point of view, we have an in-house consultancy called Shell Global Solutions. It has developed a suite of energy efficiency programmes that are now being rolled out to schedule across all of the Shell refineries and chemical plants globally. It's an intensive energy audit that goes on across the facility; we follow up projects and invest in operational changes. Part of this has been done in response to the EU Emissions Trading System, but it's also running in the US, Singapore, Australia and places where there are no specific, direct targets yet.
GWYTHER, MT Andy, can you tell us what you have been up to at Severn Trent?
WALES, SEVERN TRENT We're a significant emitter, although not quite on the level of Shell; we produce around two million tonnes of CO2 a year - 0.3% of total UK emissions. We have to take on that responsibility and there is a reputation issue here. But there is also an opportunity. We generate about 5% of the UK's renewable electricity, and we hope to generate more. It's good to hear that there are customers for it. Principally, we use the methane from landfills - we turn most of it into renewable electricity.
In addition, the water industry is going to feel the impact of climate change first, in terms of increased floods and droughts and the way that our infrastructure will have to cope. We will face floods that used to happen once every 50 years occurring once every five years.
WOODHEAD, VODAFONE We emit just over a million tonnes a year worldwide, and 95% of that is energy consumption in operating our base stations and associated equipment.
It is really part of our CSR agenda. From talking to our stakeholders, we find that while environmental and energy issue may not be number one or two on the list, they are in the top five or six issues for us. And it makes sense from a cost point of view to introduce energy efficiency measures to the operation of our network. There's also the impact on brand reputation and we need to take that seriously.
BROOK, MORLEY ASSET MANAGEMENT A lot of analysts are not remotely up to speed with the issue of climate change. One of our analysts was looking at the impact of the EU Emissions Trading Scheme and rang a major broking firm and said to the utilities analyst: 'I'm looking at the impact of climate change on the utilities sector.' This analyst said: 'Would that be political climate or economic?' So he said: 'No, climate climate, as in the weather.'
WAYGOOD, INSIGHT INVESTMENT I've worked in this area for about 10 years and I've seen huge change in the analysis environment, but Clare is right: most brokers, on both the buy and sell side, do not fully appreciate the impact that climate change will have on listed companies.
The Green Paper we had last year on energy sets out ambitious targets, which I'd support, for a 60% reduction in CO2 emissions by 2050. In the last 18 months, we've spoken to all the companies around the table about the possible impact of climate change on their businesses in terms of both opportunities and risks. It's no accident that the firms here today are among the leaders in their sectors and are looking at the risks of climate change in their business. The leadership of the board on climate change within their companies is crucial. We are now looking to firms with significant exposure to these risks to replicate the best practice framework that has evolved in the past five years.
GWYTHER, MT What if I run an SME with 30 or 40 people in this country. What can I do?
FELGATE, CARBON TRUST The real benefits are quite a lot larger for SMEs, because energy savings are simple things to make and they have real return. An SME can be making a 10%-15% reduction on its energy bill without any investment.
Furthermore, the investment required for a 20%-25% reduction will pay back in two years or less and, looking at the long term, 30% savings are possible.
If every employee in an SME turns the light off when they leave their workplace, that can have a phenomenal effect. We worked with a programme in the hospitality industry focusing on medium and small hotels. We found that when a chef came in at 9am to do lunch, every oven and stove was turned on and left that way until first cooking at about 11.45am. It was unnecessary, but was the way things were done. Empowering employees to make that change can be hugely beneficial. There are other anecdotes about leaving the showers on in hotels so that you can clean the rooms more easily and wasting all the hot water. It is not rocket science; there are many simple things you can do.
The negotiating position of SMEs with the utilities is probably weaker than that of the larger organisations, so they are feeling the real impact of energy price changes.
GWYTHER, MT Let's talk about the EU Emissions Trading Scheme. David could you give us a guide for what it means now it has come in?
HONE, SHELL In practice, it affects any facility in Europe with boilers or furnaces with an energy rating of more than 20MW. That covers all large manufacturers that generate their own power; it would also include some of the very large hospitals, for example. It has nothing to do with people who just use electricity.
Formally, every one of those facilities got an allocation of carbon allowances on 1 January and can emit an amount of CO2 equivalent only to the number of allowances it holds. To get around the issue of not holding enough or too many, the allowances are tradable. If you cannot reduce your emissions or you want to emit more, you would have to buy some more on the market, and if you reduce your emissions or have more, you sell in the market.
DELAY, CARBON TRUST We are all in a learning phase, which is likely to be the case for the next three years. It's unlikely that the carbon price is going to be particularly high, because the allocation plans have been fairly generous right across Europe, so there will be relatively few countries and companies really up against it.
This has put back the setting of harder targets to the second phase. The issue will have to be resolved, because the Kyoto targets legally have to be met. We have not gone hard with the targets for the first three years; we are going to have to get a lot harder in the next phase.
WALES, SEVERN TRENT We've had a carbon management model in the business since 2002 to help us understand the flows through our business. We track all the carbon that comes in through our waste company and through sewage, the energy we use and our transport emissions, and then where it goes afterward.
Over the last 12 months with the Carbon Trust, we ran scenarios through that model to understand the emissions of our business going forward to 2020. We found that certain pieces of legislation - good environmental legislation that we support for its direct purpose, which is to improve water quality or recycling - will have an impact in terms of increasing our emissions as a water and waste supplier. We expect this to be the same right across our sector.
GWYTHER, MT Paul, do you think there is the political will in this country to do more?
MONAGHAN, CFS Not yet. I am worried that this is quite a rosy conversation. I don't think everybody who tackles the climate change agenda will be a net beneficiary; there will be big winners and big losers. Society may be better off, but some will feel a lot of pain. Over time, the big energy producers and the fossil fuel producers and extractors will feel more pain. They have to, because the low target we've set ourselves in Europe of 8% by 2010 does not look like it will be met; people are hurting already and we're nowhere near the 60% target alluded to as necessary over the next 40 years.
We're talking about a complete change in the way we conduct business. Switching off photocopiers, lights, etc, will not do it even for the 8% target, because of the underlying consumption in business. The price of electricity, gas and fossil fuels across the board will not decrease; in all likelihood, it will incrementally increase. What does that do for your business?
I think business is realising on an intuitive level that it needs to play around with the agenda, so that it can respond more fully when the need comes. If climate change continues at the rapid pace forecast, we'll see a change in political will. If we start seeing major droughts in the US, more hurricanes, etc, even the Americans will start to ask their leaders: 'Why haven't you done something about this?'
WAYGOOD, INSIGHT INVESTMENT I agree that carbon is now an asset. The market expects the target price per tonne of carbon to be under EUR10, but Dresdner Kleinwort Wasserstein suggests that that the national allocation needs to come down throughout Europe by about 30 million tonnes, to create a cost-per-tonne of EUR15. The market needs to be near that level to drive through good CO2 management.
BROOK, M.A.M. We're not going nearly far enough. More apocalyptically, certain climate change experts say that even if we do everything now, the process is already in place and we get into a Day after Tomorrow scenario.
GWYTHER, MT Tom, one of the expressions that you use is that this is a 'new industrial revolution'. It is not just tinkering around the edges, but a fundamental change in the way we go about living and doing business.
DELAY, CARBON TRUST Yes, but remember this is a 50-year game and what you do in the first 10 years is not what you will be able to get away with in the last 10. As a quick stat in 2002, five companies - Shell, BP, Exxon, RWE and Eon - between them invested just over £56 billion in hydrocarbon-based assets. That is their core business and not a surprising figure, but it does give a sense of scale when people start talking with enthusiasm about a £10 million incentive or a £2 million investment. It is a massive shift.
It's particularly difficult for the very large companies involved to decide how to address the short-term concerns of investors when you have a 50-year plan, which has to be to replace hydrocarbon with low carbon-based fuels as the lead business. How do you explain that to investors who look at quarterly results?
BROOK, M.A.M. What all investors look at, whether socially responsible or mainstream, are the issues around quality of management. What issues like responses to climate change and management vision and strategy in this direction are useful for is giving investors a good indication of whether management is on top of the business in all its potential aspects and risks, and how far into the future it is capable of looking. Perversely, some of these very long-term issues can be very useful short-term indicators.
GWYTHER, MT Do you think we'll get more stick and less carrot from this government?
WAYGOOD, INSIGHT INVESTMENT We have seen a lot of voluntary initiatives undertaken and that is all very welcome, but voluntary action is not going to deliver a 60% reduction by 2050. I anticipate within the next five to 10 years much stronger action on fiscal interventions and more regulatory interventions. If that is the case, companies that manufacture and listed companies that provide lower carbon or renewable energy products are going to do much better than they have done in the past decade.
GWYTHER, MT David, what will Shell be doing when the oil runs out? Presumably, you have planned for that.
HONE, SHELL The oil will not run out. The Stone Age did not end because we ran out of stones. Major step changes are happening, which is why we won't run out of oil tomorrow. In the last five years, we and a number of other companies have developed oil sands in northern Canada. There is in the region of a trillion barrels of oil trapped just under the surface; that's on the same scale as Saudi Arabia.
Nevertheless, we will see a change in the energy system. At Shell, we try to look 50 years ahead with energy scenarios. There are plenty of pointers to say that by 2050 we can have a hydrogen economy; by 2050 we can be on a stable trajectory in terms of CO2 in the atmosphere; by 2050 we can envisage a higher percentage of renewables but still lots of fossil fuels being used; by 2050 we can have implemented carbon capture and geological carbon storage on a large scale. That's why we as a business see this as fundamental to our long-term existence.
GWYTHER, MT Garry, let's just go back to our SME. What will it do differently in 2025?
FELGATE, CARBON TRUST We will not save the planet by switching the lights and the photocopiers off, although that's a good start. SMEs will be ultimately driven by profitability. Cash is number one and profit number two. I think the days of a cheap energy market are probably gone; therefore, SMEs will continually focus on reducing their inherent costs.
DELAY, CARBON TRUST The one thing that probably will happen in the next 20 years is that consumers will buy from very different places. The legitimacy of this issue as a consumer driver will take off. We know there's a massive rise in media coverage of this topic and that people are starting to understand how they can influence carbon emissions both for themselves and the businesses they consume from. This could mean a major shift in the global markets.
It is only a matter of time before somebody says: 'Should I really be eating green beans from Kenya flown in at great cost when reasonable alternatives are available from Somerset?'
MONAGHAN, CFS We do a thing every year called the Ethical Purchasing Index and it's widely regarded as an authoritative barometer of purchasing in the UK. In some markets, it has been a phenomenal success; for example, 60% of white goods - fridges, washing machines, etc - are now grade-A energy efficiency, and free-range eggs now have a 40% market share. In some areas it has really worked; in others, it cannot get above 1%-2%. What it shows is that sometimes the market works and it can be left to its own devices, and sometimes it does not, and that is where you need more legislation.
Climate change will not be uniform throughout the UK. The north of England is going to get even wetter, and in terms of flood risk that is tremendous.
One of the practical things businesses can do is engage with the regional implications, particularly if making long-term investments in property. They should consider this in relation to flood risk insurance cover, because if you are in a flood plain now, things are only going to get worse and rapidly. In France, the government has legislated to force the insurers to offer insurance.
We talked about political will. Under the Labour government, CO2 emissions have increased, which is quite a telling statistic, particularly when this government takes to the international stage and starts berating others.
WOODHEAD, VODAFONE Coming back to the ethical consumer debate, I think part of the problem is that the messages we're giving out to consumers are not consistent. We're not making enough direct links between climate change and purchasing habits. You mentioned free-range eggs and white goods; they all have quite a high media profile.
The media has a role to play in getting messages across for consumers to pick up on and alter their behaviour.
GWYTHER, MT Now back to Tom for a call to arms and a short winding up.
DELAY, CARBON TRUST Two things really matter. The first is that climate change is a reality, that we do know how to address it, and it is well within our capability collectively to solve the problem and mitigate climate change. But we must recognise the need to do that and be honest and upfront about it.
The second thing is a worrying tendency to associate addressing climate change with cost and disbenefit. The overwhelming evidence is that if you do it right, it is actually a benefit to your business. There are businesses that will be winners and businesses that will be losers, but if you look across the economy as a whole, the overwhelming picture is a very positive one.
People also keep talking about energy prices going up and environmental issues in the same breath. They should not be. The energy price rise in the UK is almost entirely to do with structural changes in the UK energy market; it has almost nothing to do with the ETS in Europe or anything else in terms of the environment. We should avoid talking about environment and cost in the same breath, because it just sets us off in the wrong direction.
There is an issue about media coverage. I was astonished that Myron Ebell got the coverage he did, because he was talking rubbish. There's a natural tendency whenever there is a pro and anti to show one of each, but we are in a situation where it is 98 against two. Let's keep the proportion in the media coverage accordingly, and let's start talking about the solutions rather than whether it is happening - because it is.
To find out more about what your business can do to improve energy efficiency, cut fuel bills and reduce carbon emissions, contact the Carbon Trust on 0800 58 57 94 or visit www.thecarbontrust.co.uk/energy