I was intrigued yesterday morning when I heard the Virgin Radio (France) host saying that mobile owners pay €70 a month to power their smartphones, ipods, tablets and laptops. It turns out this number relates to the annual cost but the point is no less alarming. The average household spends around €1,400/year on energy of which some €900 relate to electricity. According to the French Environment and Energy Management Agency (ADEME), 14% of this electricity relates to recharging phones and other devices – a very high figure which exceeds even the share of lighting that comes to 12%.
The agency warns that most of this power is wasted when the phone is left to charge overnight, even when it is turned off. The residual power that is wasted when devices are plugged in represents a pure waste equivalent to two nuclear power plants operating permanently at full capacity and a cost of €2 billion.
Imagine what could be achieved if such funds were invested into speeding the transition to a clean energy future.
Some smart ideas:
Most phones can be charged in two hours – leaving them to charge overnight is costly and wasteful.
The 25th edition of the Krynica Economic Forum (Poland), the “little Davos of CEE”, took place a few weeks ago. After the opening with the Polish, Croatian and Macedonian Presidents on building a Resilient Europe, I took part in a panel organized by “The European Alliance of Companies for Energy Efficiency in Buildings” (EuroACE) on the economics and energy security aspects of renovating European buildings. A most timely topic as most buildings are energy colanders, and hence account for 40% of energy used in the EU – where more then half the energy is imported at a cost of €400+ billion.
Adrian Joyce. Archives of the Economic Forum, Krynica, Poland.
EuroACE’s Adrian Joyce reminded us that over 75% of European buildings have a very low performance level, and are a major source of energy waste and economic instability given Europe’s reliance on foreign energy. Yamina Saheb, from the Joint Research Centre of the European Commission, pointed to the economic opportunity for growth, job creation and side benefits like better air quality, health and productivity, key elements for prosperity and wellbeing in a sector that contributes 7% of EU GDP and 12 million direct jobs, adding that an ambitious renovation programme could create another 5 million jobs by 2030.
Oyvind Aarvig, from the Norwegian Ministry of Local Government and Modernisation, stressed the need to renovate existing buildings given that 80% of the buildings in 2050 have already been built. He raised the challenge of urban sprawl and renovating is not enough; we must also increased building density intelligently to create sustainable communities where people want to live. Andre Delpont, from the Bordeaux-Euratlantique Public Planning Authority, concurred that energy efficiency coupled with densification in large-scale urban regeneration projects is key to attracting investors.
Archives of the Economic Forum, Krynica, Poland.
The city of Krakow, one of Europe’s most polluted cities because of coal burning, is opting for large-scale energy retrofits aiming to improve efficiency by 50% and co-financing its €500 million program through European Structural Funds. For Witold Smialek, Advisor to the Mayor of Krakow, the biggest obstacle is inability of owners and tenants to contribute their small contribution to the project and that is slowing down progress but in the end, he feels this can be resolved. Over 80% of Polish buildings have more than 25 years and are in need of renovation according to Oliver Rapf, Executive Director of the BPIE, meaning that the economic and social potential in renovating the building stock in the country is enormous. He commended the ambitious works in Krakow as an exemplary project that other Polish cities should replicate.
I commented that appropriate building technologies, including insulation, windows and lighting, can significantly reduce energy requirements and thereby costs, while boosting energy security in Poland and Europe. Replacing the 6,500 windows in New York’s Empire State building with energy efficient windows was one of the key elements that helped reduce energy consumption by 43% and saved $4.4 million annually with a payback of 3 years. The potential for the renovation of buildings, both in Poland and in the world is enormous.
Energy Utility Resistance
Attila Nyikos, from the Hungarian Energy and Public Utility Regulatory Authority, warned that reduced energy consumption meant lower revenues for energy utilities, as they must amortize massive fixed costs on a lower sales volume leading to higher energy rates for consumers, adding that occupants suffer while buildings undergo renovation works. He gave examples where owners refused free renovations because they wanted to avoid the inconvenience.
When renovating a district, densification is key to attracting investors
Selecting the right timing for an energy retrofit and implementing integrated solutions is crucial to improve ROI
Multiple benefits can be important drivers (air quality, etc.) an inspire ambitious projects
Mixing local and EU funds is an effective answer to lack of upfront financing
To release the significant potential tied up in the existing building stock in Poland (and in the EU!) t is time to act. We need to start the work now (with proper planning), without delay!
Another important consideration is the need to align the interests of all parties involved. It is obvious that energy utilities will not promote effective energy efficiency programs if their profits depend on their volume of sales. Similar dilemmas exist between owners of building and tenants – owners will invest in measures to reduce energy bills if they see a real benefit for themselves. Regulatory measures (decoupling) can overcome such problems and are increasingly being deployed in America where utilities share part of the savings they generate for their customers. This sounds like a good starting for policy makers.
The media were all over the “dramatic” increase in oil prices that rocked the markets last week. But at $40 a barrel, even the biggest one-day increase in five years (10%) only is a meager $4. Not even a blip in the decline that has took crude prices from $146 in 2008 to the low forties (down $104 or 70%+). As expected by analysts, the downward pressure soon returned and oil finished the week only $2.66 or 6% up (image source: ValueWalk).
Cheap oil for car drivers?
With 60% of global oil consumption used for transport (70% in the USA), it makes sense to focus on what cheap oil mean for drivers. But a closer look shows that little of the crude oil fall has trickled down to the price at the pump. Only 20% in the UK, 18% in France and just slightly more in the USA, but still only 32%.
Taxes keep gasolines prices high
Taxes makeup the largest chunk of gasoline prices in most countries – 60% in the UK and France. Even in places with lower fuel taxes like the USA, Canada and Australia, the decline at the pump was only a fraction of the crude oil price drop (32% in the USA). Because of taxes, cheap oil only resulted in marginal savings for households and business.
There are exceptions. Some countries keep fuel prices artificially low. Iran and Saudi Arabia spend up to 9% of their GDP to subsidize fuel and offer fuel at 7 cents/liter. But with their state budgets under pressure from falling oil revenues, these policies are being phased out in Gulf countries but also in Indonesia, India and Venezuela. Drivers should get ready for hefty price hikes in the near future.
Major incentive for fuel efficiency
High prices at the pump provide individuals and industry with compelling reasons to improve fuel efficiency. In Geneva, in just a few years, the number of hybrid taxis (mostly Toyota Prius) has grown from close to nothing to 400 (out of 1,400 taxis in total). Most of them run on multiple shifts so they are on the road 24 hours a day, seven days a week. They are reliable, typically reaching 300-350 thousand km with little maintenance. But the main reason behind this phenomenal explosion is economic. With a consumption of 5 l/100km, taxi drivers claim that fuel savings pay for the car.
Similarly, Amsterdam Airport bought 160 Teslas because the economics of electric cars are so compelling. Even in the US where fuel is cheap ($0.76/liter), taxi companies are opting for electric cars boasting patriotism as they lower America’s reliance on foreign oil.
Fuel Efficiency Standards and other Incentives
Mandatory fuel efficiency standards are speeding up the revolution. France gives FEE-BATEs on new car purchases (rebates for clean cars of up to €10,000 financed by fees on dirty vehicles). Such schemes are boosting fuel efficiency of new cars in Europe by about 3% per year.
In the USA, fuel efficiency also improves (more slowly) despite a lack of regulations:
Now federal legislation will speed this up. Under CAFE (Corporate Average Fuel Economy) corporations must double the miles/gallon of their fleets (car and trucks) within a decade:
Private Sector Leadership
Truck of the Future by Walmart (2014), Peterbilt
But the private sector did not wait for regulators. 10 years after committing to double the fuel efficiency of its 6,500 strong truck fleet, Walmart has achieved a spectacular 84% improvement in fuel efficiency over its 2005 baseline.
Transportation companies are also innovating in ways that go well beyond cost reductions. Thanks to its e-bike service, UPS increased the number of daily pickups and deliveries because they can ride on pedestrian streets, zip through traffic and find parking anywhere – avoiding many of the frustrations of city driving. In addition to the cost improvements and the leap in productivity, their staff have never been happier.
Even the military, guilty for 1.9% of US oil consumption, has joined the efficiency race committing to get completely of oil by 2040, and pushing Detroit to supply electric vehicles with no compromise in terms of price, safety, comfort and performance.
Carmakers are speeding ahead
Just a few years ago Detroit and most manufacturers were dismissing electric cars as a distant illusion. But the landscape has changed dramatically, largely thanks to the Tesla revolution. “Hybridization, plug-in hybrids, or pure electric vehicles – this is a must for everyone… and the car company not able to keep up will disappear” said Rupert Stadler, Chief Executive of Audi earlier this year.
The end of Oil?
“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” declared Sheikh Zaki Yamani, former Saudi Arabian oil minister three decades ago. Ali al-Naimi, the country’s current oil minister, said that his kingdom will eventually not need fossil fuels and planned to become a “global power in solar and wind energy” and export electricity instead of fossil fuels. With a glut in oil supply, fuel efficiency that will shrink demand and Mr Naimi’s belief that “solar will me even more economic than fossil fuels”, the end of The Oil Age may be closer then we think.
This is the first in a series of articles on Cheap Oil and its implications.
When Dr. Somthai started his waste recycling business in 1974, with 1,000 Thai Baht (30 US Dollars) and an old pickup truck, no one took him seriously. He literally became the laughingstock of Phitsanulok, a city of 800,000 located 400km north of Bangkok. But look who is laughing now. Over the last four decades, Dr. Somthai built his recycling business into a global empire with over 700 branches in Thailand and around the world, including Laos, Cambodia, Malaysia, Japan and even the United States. Not only has his Wongpanit Group become a major global player, his vision and charismatic personality have made him a leading international figure in terms of environmental stewardship, as a social entrepreneur, and, as a savvy, uncompromising and innovative business leader.
Waste is Gold
Waste management is a growing challenge in Thailand. A problem that only becomes more daunting as population grows and becomes more affluent. When waste was only organic it was easy to manage. But today, plastics, metals and toxics accumulate in landfills, overwhelm expensive and polluting incinerators, and threaten to contaminate water resources. Dr. Somthai offers a solution that diverts waste from landfills, incinerators and the environment, creates local employment and provides valuable commodities to industry at prices that help improve their competitiveness. By turning waste into resource, he transforms a problem into an opportunity for the environment and for society.
Gold & platinum rings from recycled electronics
“There is no waste on this planet, only misplaced resources”, he says. “When looking at landfills most people see trash. I see valuable assets waiting to be mined! Recovering metals, plastics and other assets from landfills is much more efficient then mining the Earth for ores or oil. Reusing aluminum from scrap saves 95% of the energy needed to mine aluminum in the first place. The leverage is extraordinary!”
In his flagship ISO 14001 certified (since 2001) Phitsanulok plant, Dr. Somthai employs 250 people and can process 500 tons of trash every day. He buys waste from industry, landfills and individuals through 50 collection points scattered across the city. The waste is weighed, the purchase price determined based on the going rates and the payment is made immediately in cash.
He even has a catalog with 220 categories of items with prices for many categories of trash to encourage recycling.
A Global Market for Commodities
The prices of metals, plastics and all other commodities depend on global markets that Dr. Somthai monitors continuously. He prominently displays the daily prices for key commodities at the entrance of the center.
His four decades in the trade have helped hone his instinct for where the prices are heading. Akin to a professional commodities trader in London or Geneva, he takes positions, stocking up when he expects prices to go up or liquidating his stocks when prices are heading south. The recent drop in the price of oil had a negative impact on most products. This is why diversification is so important. His ability to recycle various kinds of waste helps spread his risk across a wide range of commodities. By adjusting his purchase price when markets are down he can always offer competitive prices to his customers while maintaining sustainable margins, whatever the market conditions.
Highly Skilled Labor
This labor-intensive trade is particularly well suited for developing countries with high unemployment and low wages. In Thailand it represents a significant source of income for the poorest of the poor. It is estimated that in the urban areas of Asia and Latin America up to 2% of the population depends on waste picking for their livelihood.
It would be a mistake however to think that this labor force is unskilled. Waste pickers are highly competent at identifying wastes with potential for recovery. The added value comes from sorting, cleaning, processing and organizing the transport of the waste in volumes that will make them commercially attractive for the domestic or international markets.
Take plastic for example. There are hundreds of plastic types. Each category must be identified, segregated by kind and color. Any impurities must be removed before processing (sorting, cleaning and chopping into flakes) so that the end product can have value. Any label on bottles of caps of a different plastic must be removed. Plastics must also be sorted according to their density (high HD or low LD) and their color. Each worker specializes in a particular type of material. Any turnover is problematic because training takes a long time and is expensive. Clearly, this is no project for amateurs.
Manufacturers of packaging also cause significant problems when they fail to properly design their products. Many fast moving consumer goods have labels that are glued – this makes them difficult (sometimes impossible) to remove. But responsible companies are taking notice. Pepsi-Cola in Thailand has partnered with Wongpanit and agreed to pay an extra Baht for each kilo of recycled plastic but also to design its bottles to make them easy to recycle. Many manufacturers, despite their eco-labels and thick CSR reports fail to do this, which hampers recycling efforts and leads to overflowing landfills and incinerators. Dr. Somthai encourages these companies to follow the lead of Pepsi-Cola and the authorities to establish standards.
A Social Enterprise that is Part of the Community
In addition to providing local jobs and protecting the environment, Dr. Somthai values the importance of being a constructive force in the local community. Believing that the current generation is largely lost, he concentrates his time on young people, the leaders of tomorrow. He provides training in schools and once a week buys waste from the students, providing them with an income while teaching them the economic value that can be found in waste. Similarly, he works with local monasteries that donate waste that he processes and donates money to fund scholarships for young people to be able to attend University.
A Global Perspective
Delegations from around the world constantly visit Wongpanit. On the morning of our Swiss delegation visit there was also group from Japan, where Wangpanit already has two franchises. They wanted to meet the visionary man who started this business two decades before the first Rio conference, at a time when few people took environmental matters seriously. But today still, many believe that environmental stewardship is expensive and uncompetitive. Dr. Somthai has been disproving this myth for the last 40 years. Showing that the linear consumption model of extract-consume-dispose is outdated and that more circular models of consumption are needed. By turning waste into gold, Dr. Somthai provides the economic and social rationale for the creation of zero-waste economy. A message that has come of age.
The Geneva delegation for the Swiss visit to Wongpanit was organized by the Honorary Consul to Thailand, Mr. Armand Jost, founder and president of S3Bi, a Geneva-based enterprise focused on assisting professionals in their career transition and its directors, Mark Giannelli, who is writing a thesis on “Waste Management in Developing Countries” at the Universities of St-Gall and Business School Lausanne (BSL). His Excellency, Ambassador Chalermpol Thanchitt from the Royal Thai Embassy in Bern (Switzerland) accompanied the delegation, as well as Dr. Gilles Bernard, Founder and CEO of Charity Consulting in Jumpol, Thailand, who is planning to develop such a project to create employment in the North of the country. My heartfelt thanks to Armand Jost and S3Bi for making my participation possible and to our hosts, Dr. Somthai Wongcharoen, Wimonrat Santadvatana and the entire team at Wongpanit for welcoming us so generously.
Ten years ago, while buying lipstick at the stand of a leading luxury cosmetics brand, I asked if I could bring back the empty packaging for reuse by the company. The surprised saleslady answered, “I am sorry Madam, we do not practice such things here”. Today, premium brands like Guerlain, encourage their customers to return product packaging (empty perfume bottle, etc.), which is then transferred to special centers for sorting, recycling and recovery.
Luxury and Sustainability
Before luxury brands began to be identified with large corporations – fashion houses that spend billions on marketing – they were associated with family values, cultural heritage, precise-craftsmanship and timelessness (jewelry and watches that are passed on from generation to generation). Today, we must add the ecological and social innovation necessary to ensure a sustainable future. Customers actively support this process by demanding more responsible behaviors from their favorite brands. The global emergence of social and environmental awareness represents the most important cultural transformation of the twenty-first century – to which the luxury sector must provide leadership if their brands are to retain their prestige – an essential element in the DNA of luxury brands.
A Luxury Sector with a French Flavor
Luxury Industry revenues reached €210 billion in 2013 with French brands accounting for 25% of sales. The LVMH Group continues to lead the sector with revenues of €29 billion in 2013. Given this scale, the behavior of the industry has a major impact and through its leadership it can become a catalyst for driving aspirations of more eco-conscious lifestyles.
In 2013, the LVMH Group (Louis Vuitton Moët Hennessy) invested €17.3 million in environmental protection – including waste management, water recycling, soil and noise pollution reduction, and projects to support biodiversity. Investments in efficient buildings, internal training and the sponsorship of environmental initiatives are budgeted separately.
Supply chain monitoring, eco-design, energy efficient lighting, certification of business processes, ecosystems protection, materials recovery and sustainability audits are all integrated in the various brand strategies that are specific to each business sector: Wine & Spirits, Perfume & Cosmetics, Fashion & Leather Goods, Watches & Jewelry and Selective Retailing.
Without Nature there is No Business
Luxury brands are now building their core image around caring for society and the environment. Wanting to preserve their beauty and appeal, they must (as many already do) provide a persuasive narrative for their contribution to alleviate social and environmental concerns. Global warming, deforestation, resource scarcity, pollution of air, water and soil, endangered species and environmental degradation disturb the favorable conditions that have allowed the industry to develop and thrive. As LVMH Group CEO Bernard Arnault says, “LVMH owes a lot to nature”. And the business case for sustainability is made even more compelling because “green solutions” benefits extend beyond image building, they can also improve the bottom line through efficiency and cost reductions.
In the production of Belvedere vodka, a brand of Polish descent, distillery Polmos Zyrardów has converted its power generation from oil to natural gas and improved its energy efficiency through a heat recovery system. The energy generated is now used in the production re-heating process. With these solutions, carbon emissions were reduced by 36 percent or 2 thousand tons, the equivalent to the consumption of 850 thousand liters of gasoline, like removing 900 cars from Polish roads. In 2012, LVMH launched a program to optimize energy consumption using LEDs in its boutiques, using technology from Philips Lighting amongst others – reducing the Louis Vuitton Maison power consumption by 50% since 1995. In addition to lower power bills, the shops have better possibilities in terms of “play of light” to showcase products.
Companies also benefit from recycling. LVMH created its CEDRE platform (Centre Environnemental de Déconditionnement et Recyclage Ecologique) to optimize the recovery and processing of waste generated in the production, distribution and recycling of its product packaging but also the waste from various events (exhibits, fashion shows, etc.). In 2013, it recovered around 1,600 tons of glass, paper, wood, metal and plastic.
The Hennessy Maison has been modernizing its vehicle fleet – more then 20 percent of its cars are now green (electric and hybrids). Charging stations have been installed at the factories and employees received eco-driving lessons, which helped reduce fuel consumption, accidents and maintenance costs. At Sephora, a fleet of electric trucks serves distribution centers located in French city centers, reducing costs and urban pollution.
Veuve Clicquot Champagne casing made of potato starch and paper
The best strategy in terms of image and brand building in the luxury sector remains environmentally and socially responsible marketing. It is difficult to conceive a more compelling example for the imagination of wealthy eco-consumers then the fully biodegradable isothermal Veuve Clicquot champagne casing that is entirely made of potato starch and paper. Meanwhile, emotions-based cosmetics Maison Guerlain, engaged its brand in the protection of bees – the essential pollinators that are critical to healthy ecosystems. Through its Orchidarium research platform, Guerlain also supports the restoration of tropical forests – the natural habitat where orchids grow – passing along essential know-how to organizations that are involved in the collection of these flowers. Hennessy is also engaged in the protection of woodlands. The timber used for the production of cognac barrels comes from sustainably managed forests that are certified by FSC (Forest Stewardship Council) and PEFC (Programme for the Endorsement of Forest Certification).
Guerlain – Celebrating 160 years of Commitment to Bees
Promoting advances in science is also important for Belvedere. Since 2005, it has worked with Lodz University of Technology to develop research programs in biotechnology and to help attract the best graduates.
Bvlgari: Certified Responsible Jewelry Council label
Human rights stewardship is also important. Especially given the growing awareness of the social costs associated with precious metal and stone mining in the Third World. Responsible jewelry manufacturers became particularly vigilant in this area for fear of being associated with “blood diamonds”. Since 2005, Bvlgari has obtained the Certified Responsible Jewelry Council(RJC) label, certifying the implementation of responsible ethical, social and environmental practices in its supply chain. Since 2012, Louis Vuitton is also RJC certified.
Louis Vuitton also developed stringent environmental audits of its supply chain. There is also the implementation of ISO14001 with environmental assessment for transporters and warehouses.
LVMH works to reduce environmental impacts by designing quality products that are long-lasting and easy to repair. The durability and longevity of luxury goods contrasts with the planned obsolescence that is incorporated in fast moving consumer products.
Given the development of modern science, technology, and an awakening global consciousness, we realize that we can (and must) avoid repeating the mistakes of the past. Luxury brands enjoy global recognition and prestige, and we aspire to be associated with them. Aspirations are a critical element. If we want a better life and for meaningful leadership to come from the luxury sector, we better pay attention to what we buy and invest ourselves in asking the right questions. This is best path towards setting a new standard of sustainability for the industry and beyond.
2013 was the worst year ever in terms of insurance losses from extreme weather in Canada: torrential rains and flooding caused over $1.7 billion in insured damage in Alberta while flash floods in Toronto cost $940 million in payouts. But with over $5 billion of damages each, the 2001/02 coast-to-coast drought and the 1998 ice storms are the most expensive disasters in Canadian history. So extreme weather events associated with climate change are already impacting Canada and are expected to intensify in coming years. Clearly, Canada is highly exposed to the impacts of climate change and yet it ranks low in terms of vulnerability. How can this be?
Developing Countries Disproportionately Impacted
When looking at climate change vulnerability we must consider not only exposure but also sensitivity and the ability to adapt to those consequences. While Canada is increasingly experiencing these impacts, like most rich and developed countries it has a high adaptive capacity that helps mitigate the outcomes. So even the most devastating events, despite their substantial impacts, have left Canada’s infrastructure largely intact. Hence, despite their climate change exposure, the overall vulnerability of Canada, the United States and Europe is low compared to the regions of extreme risk in Africa, Asia and in Central America. To illustrate, the President of Honduras said Hurricane Mitch in 1998 had set the country back 50 years in terms of economic development (1.5 million homeless – 20% of the population, 70% of the transportation and water infrastructure was damaged, etc). This is why developing countries will disproportionately feel the effects of climate change.
A New Era of Global Vulnerability
In 1800, only 3% of the world population lived in cities. The proportion is now 50% and growing – especially in developing countries. Many of the fastest growing megacities with the highest concentration of infrastructure and people are in “extreme risk” locations. A quarter of the world population lives in low elevation coastal areas that are at risk from the consequences of sea level rise. We are entering a new era of global vulnerability in terms of human lives and infrastructure.
Preparedness is Key
Emergency preparedness is a key factor in reducing risk and mitigating against the consequences of natural hazards. Developed and developing countries must work together to reduce the exposure of the most vulnerable and help prepare for future climate impacts.
For anyone interested in learning more about this topic natural disasters the McGill University online course is highly rated and strongly recommended.
It is hard to overstate the importance of standards. In many ways, they represent the essential ingredient that allows us to function. But famous disasters remind us that we cannot take this for granted. In 1999, NASA lost its $125 million Mars Climate Orbiter spacecraft after a 10-month, 400-million kilometer journey to Mars because some of its engineers used the metric system while the others used the imperial measurement system. As a result, when the spacecraft entered the Mars atmosphere at an altitude of 60km, instead of the 150km required, it disintegrated. The disaster cost $330 million, caused major embarrassment to NASA and a serious blow to the American space program.
This is why the work of the Geneva-based International Organization for Standardization (ISO) to develop and promote standards is so important and why I was pleased to learn about ISO’s growing commitment to climate change and why I am happy to join ISO’s NEXTGen Global Climate Change initiative for young professionals from around the world. This 6-week program is focused on what needs to be done, how international standards can help and how young professionals can get involved. The global kickoff took place last week (August 6, 2014) with an online Google+ Hangout that is available on YouTube for those who missed it.
While the project is forward-looking, a historical perspective on how standards can help reduce carbon emissions is useful and the success story of energy efficiency standards for household appliances is a case in point. Let’s look at refrigerators for illustration. Why? Because they are constantly on and typically represent the most energy hungry item in a home.
Between the 1950-70’s refrigerators have more then doubled in size but their energy use increased almost fivefold. How is this possible? Marketing departments wanting to increase the available inside space decided to cut down on insulation. A product “innovation” that caused skyrocketing energy consumption. Countrywide, this trend would have required 175 GW (gigawatt) of electricity today. But thanks to almost four decades of energy efficiency standards, America now needs less then 15 GW. The difference represents the equivalent of eliminating 400 large coal power plants.
Context is important. The 1973-74 oil-crisis saw barrels of oil go from $3 to $12 and energy efficiency became recognized as critical for energy independence and national security. California introduced the first wave of mandatory efficiency standards in 1978 and over the years, efficiency standards became the driving force for innovation and continue to do so. Initial objections by industry of rising prices and adverse economic impacts did not materialize. To the contrary, prices fell by two-thirds and industry welcomed new standard as an opportunity to market improvements and boost sales. This process of continuous improvement has helped innovation, competition and profitability while creating jobs. The new products are not only cheaper for consumers they also offer a better environmental performance which is a win-win for everyone.
As chair of the ISO Climate Change Technical Committee (ISO/TC 207/SC 7), Tom Baumann is well aware of the importance of standards to help corporations manage their greenhouse gas emissions for environmental stewardship but also to manage risk and improve business performance. This is why over 3,000 corporations and 800 institutional investors with assets under management of $92 trillion are already partnering with the Carbon Disclosure Project for their carbon footprint management. Blackberry’s Kelly Killby agrees that ISO standards have helped improve environmental and business performance. Thanks to the implementation of ISO standards, Blackberry has reduced waste to landfills by 90% in 2013 and reinvested the cost savings into other sustainability initiatives.
Climate change represents the defining challenge of our generation and will require the cooperation of all sectors of modern society: private enterprise, government and civil society. Given that it is crosscutting, it will mean that all professions will have to work together with a common sense of purpose and a shared understanding of what needs to be achieved. We know that reducing emissions is possible at the individual, organization and community levels. According to Johnathan Fung, moderator of the ISO Climate Change Group, the challenge now is how to scale-up solutions for climate change mitigation and adaptation for regional and global impact. A process in which standards will play a critical role. This will be one of the objectives of NextGen during the next six weeks. Young professionals from around the world are most welcome to participate and contribute.
We have been very slow in recognizing the true relationship between nature and the economy but economist Robert Costanza figured out that the value of the services that nature provides us (for free) are far greater then what we previously thought and even exceed the value of the global economy. In 1997, Costanza conservatively estimated that “ecosystem services” (clean water, clean air, pollination…) where worth far more then the global GDP. This realization helped dispel the myth that we need a strong economy to “afford” to protect the environment. In fact, it is the other way around. We depend on nature and so does the economy. Hence we should aim to enhance and improve the state of the natural world that sustains us.
Bees for pollination
Unfortunately, we are not moving in the right direction. Costanza just updated his 1997 study (see Global Environmental Change) and it turns out the total value of global ecosystem services fell by $20 trillion (14%) between 1997 and 2011 (from $US145 trillion to US$125 trillion a year). This compares with a 2011 global GDP of just $US75 trillion. “Nature is not just a pretty place. Nature is a big and important part of the real economy which adds to human well-being,” says Costanza. The drop was partly due to the loss of tropical forests, wetlands and coral reefs. Tropical forests declined by 642 million hectares between 1997 and 2011, while deserts had grown by 234 million hectares. (more on land degradation)
In Australia, where Robert Costanza is now based, ecosystem services were estimated to be worth around US$5 trillion ($5.4 trillion) a year, compared to GDP of around US$1.5 trillion.
We urgently need better measures of human progress to overcome the limitations of GDP and of the traditional Profit and Loss statement. Flawed indicators lead to dysfunctional and shortsighted decision-making that can undermine the natural capital we depend on. Think of the newspaper commentaries by J.P. Morgan Chase that economic activity surrounding the BP oil spill in the Gulf of Mexico outweighed its negative impacts, timber companies saying that forests have no value until they are cut down (Fletcher Challenge in British Columbia, Canada) ignoring the impacts on soil erosion, nutrient loss, fisheries, biodiversity, etc.
Environmental degradation is mainly an unintended consequence of industry and commerce activities but it does not necessarily need to be so. There are compelling examples of innovative approaches where protecting natural environments and economic considerations have been reconciled. In New York, protecting the Catskills watersheds North of the City has helped avoid $6 to $8 billion in capital investment into chemical filtration and hundreds of millions in operating costs. It turns out that watershed protection was a far better investment then chemical water treatment. Similarly in Munich, it was cheaper to subsidize organic agriculture to keep the water clean then to invest in chemical filtration. The city provides 320 million liters per day thanks to natural soil filtration. Munich has the cheapest water in Europe and also one of the cleanest – it contains 10 times less nitrates then the European norms.
The Costanza study provides policy makers with powerful arguments to protect watersheds, forests by recognizing their benefits in a way that traditional economics tends to ignore. Given the large-scale environmental degradation (see Millennium Ecosystem Report), policy makers must encourage practices that help restore and enhance natural capital while condemning destructive activities. The clock is ticking.
The report was written by scientists and economists from the Australian National University, Wageningen University in The Netherlands, the University of Denver in the United States, the University of South Australia, the University of Pittsburgh in the United States, and the University of East Anglia in Britain.
Few are aware that business tycoon and philanthropist John D. Rockefeller, who became the richest person in recent history, started his career at 16 as an accountant. His diligence, uncommon ability to “see everything and forget nothing” and exceptional understanding of business financials allowed him to build his oil empire by making every major decision on the basis of precise to-the-penny financial calculations. “I charted my course by figures, nothing but figures” said John D. His success underscores the importance of accurate and reliable financial information for business leaders to make the right decisions.
Accounting Records, the Military and Sustainability
Recognizing the importance of relevant and reliable financial information, former Undersecretary of Defense Sherri Goodman said that “You can’t manage what You don’t measure” and called for better monitoring of energy use and full tracking of the Department of Defense (DoD) carbon footprint with the aim to get the US military off oil by 2040. But where did this determination to move away from oil come from?
An important element is the realization of the growing number of casualties in convoy operations that deliver fuel and water to the battlefield. The other is economic and has to do with the way fuel costs were accounted for. Historically, fuel purchases were recorded at their purchase price, say 2 to 3 US$/gallon or 0.50 to 0.80 US$/liter. More recently however, the military started looking at the “fully burdened cost of fuel” – that includes the cost of buying, moving and protecting fuel until it is ready to be used in the battlefield. In remote areas these can be hundreds of times higher than the purchase price. Figures of US$600/gallon (US$158/liter) and more have been reported.
With delivered fuel costs representing up to 36% of the total operations budget in Afghanistan, one can understand that energy efficiency has become a top priority for the military. A priority that lowers risk while generating dramatic cost savings. In one example, $95 million was invested in Iraq to insulate tents and temporary infrastructure reducing the need for cooling during daytime and heating at night. This measure saved US$1 billion in 2010 alone and removed the need for 11,000 fuel trucks. For more see Energy Security, America’s Best Defense.
The Need for Business Leadership
Yvo de Boer & Adam Koniuszewski
Business has a key role to play when it comes to sustainability. Of the largest 150 economic entities in the world, more then 59% are not countries but corporations and our most pressing sustainability challenges are largely caused by the way businesses operate and the impact of the products they sell. But today only business has the capacity and the ability to provide solutions to these problems. According to former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) and KPMG Special Global Advisor on Climate Change and Sustainability Yvo de Boer, “The bulk of the solutions to environmental degradation and climate change must come from the private sector”.
And forward looking businesses, including some of the world’s largest corporations like IBM, Dupont, Walmart and world leading carpet-tile manufacturer Interface, have profitably embarked on the path towards sustainability. Interface Founder Ray Anderson said that: “The business case for sustainability is crystal clear and we are pressing ahead with our sustainability initiatives as fast and as far as we can because it has proved to be so good for business”. From the beginning of their sustainability journey, greenhouse gas emissions per unit of production are down 71% (since 1996) and profits are up. In Ray Anderson’s words:
– “Costs are down, not up, dispelling that myth
– Products are the best they have ever been because sustainable design has opened up a wellspring of innovation
– People are galvanized around a shared higher purpose
– And the goodwill of the marketplace is just amazing!”
Check out as Ray Anderson shares his passion for sustainability with George Stroumboulopoulos:
The Interface journey began by attacking waste and diverting the savings to invest in reducing carbon intensity while developing innovative business processes and products. Proper accounting records and monitoring played a central role. Accountant Buddy Hay led this part by implementing the EcoMetricsTM measurement system to track all the materials and energy inputs and all outgoing products, waste and pollution. He says that: “When implementing sustainability programs, you have to measure, understand and articulate the drivers of success. This requires the same rigor and thinking used in financial accounting but applied to natural resources and environmental impact”. Improved tracking allowed Interface to reduce waste to landfills per unit of production by 95% since 1996, and to avoid millions of dollars in costs. This helped fund additional sustainability efforts while rewarding shareholders with a 444% share price increase (5 year period ending Dec 31, 2013).
The Prince of Wales and Accounting for Sustainability
Concerned that our current measures of profit and GDP are providing the wrong signals to leaders in business and government, His Royal Highness The Prince of Wales has embarked on a global project with the accounting profession to help embed sustainability into the DNA of business organizations. Through his Accounting for Sustainability (A4S) Project, The Prince of Wales aims to demonstrate the business case for organizations to embed sustainability into their operations, develop thetools and build the capacity for action and create an enabling environment for change. The objective is “To help ensure that we are not battling to meet 21st century challenges with, at best, 20th century decision-making and reporting systems.” And by working with the A4S Accounting Bodies Network representing two million accountants around the world, The Prince’s Accounting for Sustainability Project is helping the profession to overcome the false choice between business success, environmental sustainability and the development of human happiness and wellbeing.
A4S Executive Chairman, Jessica Fries, knows the importance of involving Chief Financial Officers in the process of building sustainable business models: “The A4S CFO Leadership Network is the first grouping of its kind to bring together leading CFOs to explore their role in developing practical approaches to integrate environmental and social issues into financial decision making. There is a growing commercial imperative for businesses to take these factors into account if they are to future-proof their organisations; and there is now clear evidence that companies which address environmental and social issues in a strategic manner can deliver improved commercial returns.”
Another area of focus is how to account for natural and social capital. One organization that has really helped to highlight the importance of better accounting for natural capital is PUMA, the global sport-lifestyle company. Jochen Zeitz, the company’s then CEO, conceived the development of PUMA’s Environmental Profit and Loss account: “We understand the importance of healthy ecosystems to the future of our business. We have embarked on a journey to develop an enterprise and supply chain wide view of our environmental impacts in monetary terms, so that we could take these impacts into account strategically and embed them in our business decision making processes.”
Valuing Natural Capital in the Montreal Region
David Suzuki and Adam Koniuszewski
Few realize that some of the greatest biodiversity hotspots in the Province of Quebec, are located in the Greater Montreal Region and are at risk from urban sprawl. The David Suzuki Foundation issued a report that valued the ecosystems services of a greenbelt that would protect 19% of the greater Montreal territory to be worth $4.3 billion per year! This work helped convince the Communauté métropolitaine de Montréal to create this greenbelt as part of its new urban plan and the Government of Québec to invest $150 million for its protection.
“With the robust analysis and quantification that the accounting profession can provide, we can better understand the value of natural capital and the importance of preserving and enhancing ecosystems and natural habitats for the greater benefit of our communities” said Quebec Chief Scientist, Rémi Quirion.
Sustainability reporting and the risk of Greenwashing
Despite the growing interest in CSR and sustainability reporting, the surge in revenues for accounting firms is not without risks. Professor of Social and Environmental Accounting at ESSEC Business School in Paris, Dr. Charles Cho, has published numerous studies on these topics. His particular field of interest is accounting and the public interest. Dr. Cho warns that “The recent proliferation of the ‘sustainability’ buzz, particularly within the business community, should certainly not become an avenue for opportunistic strategies and behaviors. We really need to pay close attention to what makes it substantive versus what is likely to become a mere symbolic representation—unfortunately, the latter happens more often than the former. A typical example is the production of stand-alone sustainability or CSR reports—recent mounting evidence has been provided that most of the information contained in these reports is generally biased, selective, trivial and sometimes misleading. Nevertheless, they provide a ‘legitimate’ shield, or a veil, on what is really happening inside organizations. Therefore, such reports should at least be monitored by a set of enforceable regulations, but it is far from being the case.
As for the role of the accounting profession—I remain skeptical on certain aspects such as the Big 4 public accounting firms seeking the next sustainability or CSR report assurance/audit engagement (this type of service is exponentially growing and one does not have to be Nobel Prize winner to understand that this is another great, highly profitable consulting opportunity for the Big 4). However, I am now more convinced that there are potential avenues for accountants, especially management accountants, to make a meaningful contribution to the sustainability agenda, notably by utilizing their technical skills to measure and report on real social and environmental impacts of organizations.”
Concordia University Professor, Dr Michel Magnan, FCPA, FCA, agrees that significant aspects of corporate sustainability reporting are symbolic rather than substantive. But in his view: “There has been progress in the quality of such disclosure over the years among European and North American firms. My research with colleague Denis Cormier shows that such reporting is relevant for market stakeholders (investors, analysts) when a firm exhibits good environmental performance (as measured by objective metrics) but comparability across firms and reliability of disclosed information are still major issues. One has to keep in mind that even for financial reporting, with strict regulatory enforcement and formal standard setting, there are still discussions as to comparability, relevance and reliability!
Another major issue is the scope of sustainability reporting: i.e., when do we stop? For instance, when looking at greenhouse gas emissions for a dairy confectionary company such as Nestlé or Danone, how far do we go to capture the emissions underlying the production process? Do we include the methane emitted by the cows that produce the milk, or even the process by which they get fed (which is often highly mechanized and polluting as well)? In my view, this is the next stumbling block for sustainability reporting to take off.”
“With the evolution towards a `materiality-focused` sustainability reporting, not only are we currently auditing (internally and externally) to provide accurate and reliable information, but our sustainability practices are also allowing organizations to better understand the material issues that relate to the overall strategy of the organization. With early stage moves towards Integrated Reporting, we anticipate an increase in the need for these services that are currently being provided across Quebec, Canada and internationally.” – Luc Villeneuve, FCPA, FCA, President, Deloitte Quebec.
Accountants and Sustainability
More then a century has passed since John D. Rockefeller retired from running his oil empire but the importance of robust and relevant accounting and financial information is more important then ever. The new global context, the state of the environment and the accelerating depletion of natural resources, present immense and unprecedented challenges and opportunities. Our ability to create economic systems that promote and reward businesses for restoring and enhancing natural environments, for conserving resources and for eliminating pollution and waste will help define our future prosperity. The accounting profession, the preferred provider of unbiased, relevant and reliable information, is ideally positioned to speed up this transition.
In this regard, Mr. Daniel McMahon, FCPA, FCA, President and Chief Executive Officer of the Ordre des CPA du Québec, mentions the strategic direction for 2013-2015 adopted by the Board of Directors : “ The Order aims to be recognized for the key role it plays in Quebec’s economic and social development and intends to highlight the role CPAs play in sustainable development. “
Other links of interest: CPA Quebec, Global Reporting Initiative (GRI), Center for Social and Environmental Research (CSEAR), Sustainability Accounting Standards Board (SASB), AICPA & Sustainability
About the Author: Adam Koniuszewski, CPA, CA, CFA is a Commerce Graduate from Concordia University in Montreal. He started his career with Big 4 Accounting-firm Deloitte & Touche in Montreal and London (UK) before continuing his international career with a global corporation (North America, Europe, North Africa) where he gained experience in strategy and business development, planning and risk management, corporate and government affairs. Adam has now joined the world of civil society where he works in the field of sustainability. He is a public speaker at international forums on global sustainability challenges and their business and financial aspects. Adam is also involved in several social and charitable initiatives.
Originally published in 1993 by entrepreneur and environmentalist Paul Hawken. Ray Anderson, the founder of billion-dollar modular carpet manufacturer Interface, credits the book for causing him to experience a “spear in the chest moment” that transformed his perspectives on business and ecology. With help from Paul Hawken who became an advisor to Interface, Ray Anderson and his team embarked on a journey to reinvent the carpet business and become the world’s leading corporation in terms of sustainability. He found that this was not only good for the environment but also good for business: “Profits are up not down, products are the best they have ever been, and the goodwill of the market place is amazing”. This edition of the book contains the Interface story and is dedicated to Ray Anderson who passed away in 2011 at age 77. Here is his TED talk where he describes how reading Paul Hawken’s “Ecology of Commerce” in the summer of 1994 allowed his reformation from plunderer of the earth to America’s greenest CEO:
For Paul Hawken, environmental degradation, climate change and resource depletion, erode the natural capital on which life depends and in turn the economy that nature can support. He provocatively says that: “Business contains our blessing.During all these years we may have been asking the wrong question.Instead of asking how to save the environment we should have asked how do we save business?”
Are we cutting the branch we are sitting on?
Paul Hawken believes that market forces can help restore habitats and ecosystems by reflecting “externalities” in the price of goods and services. This would not create any new costs but properly reflect the costs of pollution and waste that are currently borne by society (the tragedy of the commons) to where they originate. Market forces will then reward the greenest businesses in a way that would benefit society and the economy. Ultimately businesses should operate in a way that is inspired by nature (bio-mimicry), move away from the industrial-age linear economic model (sometimes described as “cradle to grave”) and create a circular economy (“cradle to cradle”) to help restore natural capital and ensure the prosperity of current and future generations.
A must read for entrepreneurs and environmentalists alike.