The UK was responsible for one of the only few groundbreaking commitments that were made by governments at Rio+20. UK Deputy Prime Minister Nick Clegg announced that as of April 2013, all companies listed on the main London Stock Exchange (LSE) will be required to report their greenhouse gas emissions.
“Counting your business costs while hiding your greenhouse gas emissions is a false economy,” Clegg said. The directive will apply to about 1,600 listed companies and might be extended to all large companies in the UK after it is reviewed in 2015.
First of its kind, the new reporting requirement is representing everything we hoped to see in Rio – straightforward policy with a clear timetable and vision that levels the playing field for companies. Together with the decision to make shareholders votes on executive-pay structures binding, it puts the UK in the forefront of sustainability regulation. Moreover, it has the potential to become a real game changer. Here are five reasons why:
1. Critical mass – the directive will increase the number of the LSE-listed companies reporting on their emissions to 1,600 from the current 400. This figure can increase significantly if it is extended in 2016 to cover the roughly 24,000 large companies in the UK.
Even if it won’t go that far, it is still an important breakthrough that will introduce carbon measurement and management to many companies and sectors that have been lagging behind so far, and indirectly influence other companies that might not be included in the directive, but won’t want to stay behind competitors that do need to report under the new regulations.
2. First reporting, then reducing – the new directive is more than just a disclosure measure – it is an attempt to bring companies to reduce their carbon footprint. Clegg said it himself, according to the Guardian, noting that the move is part of a drive to encourage companies “to measure and so begin to manage their impact on the environment in a bid to improve their performance and reduce their stress on the natural world.”
The concept of reporting will lead to managing and eventually reducing carbon emissions makes sense, though it’s not always the case – if you look at the CDP reports, you see that even companies that do report don’t necessarily understand the need to, and benefits of, accelerating actions to reduce emissions. Last year, the CDP reported that only 44 percent of the companies that responded to its Global 500 survey have decreased their absolute emissions compared to 2010 due to emissions reduction activities.
Still, if the directive will eventually result in significant GHG reductions, this might become a proven method to effectively reduce carbon emissions without going into the hurdles of standard policy options, such as cap and trade or carbon tax that right now seem to be unimplementable in most countries.
3. Regulation > Voluntary schemes – If and when the new directive achieves significant results in terms of carbon management and reduction, it will provide more proof, to anyone who still needs it, about the superiority of regulation over voluntary schemes when it comes to making a difference. This is a very good example of this rule, as the voluntary carbon disclosure scheme that the CDP created is one of the most successful one can find. In less than a decade, it created almost from nothing a culture of carbon disclosure and got thousands of companies worldwide to report on their emissions.
Yet, as impressive as the CDP’s achievements are, in absolute terms it’s still a drop in the bucket. To make a substantial impact, you need regulation. However, it’s important to note that this regulation would probably not have happened without the seeds the CDP sowed in the last decade.
4. It’s worth reporting – We have growing evidence that the financial benefits for companies that disclose their carbon emissions outweigh the costs. The Carbon Trust worked over the last decade with 75 percent of the FTSE 100 and carbon-footprinted hundreds of companies globally to help identify risks and opportunities. “This work has resulted in 38 million tonnes less carbon emission and £3.7bn costs saving for the companies we have worked with,” the company reported.
Yet, I have the feeling that companies still don’t buy it and see carbon disclosure not just as a headache but also as a cost rather than a benefit. Given the magnitude of the new directive, it has the potential to provide the evidence that will finally convince companies that disclosing their carbon footprint will benefit rather than hurt their bottom line.
5. Investors need data – We can’t expect investors, like the ones baking the CDP, to take into account carbon emissions in their decision making without proper data. Right now, the available data is far from being sufficient, but the directive has the potential to change it, providing investors with the information they need. If investors will start using it, giving preference to companies with lower emissions, this can be a real turning point providing companies with a significant incentive to reduce their emissions.
Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Business School, CUNY and the New School, teaching courses in green business and new product development.