NEW YORK (
) -- Tougher environmental and greenhouse gas regulation is on the horizon for the U.S., spurring an evolution in corporate accounting that publicly-traded companies will need to embrace in order to survive.
Executives of global corporations such as
Royal Dutch Shell
have seen the writing on the wall in the form of tougher environmental regulations in Europe and are already using environmental performance data to make multi-billion dollar operational and investment decisions.
Corporate environmental initiatives certainly aren't new, but the way that businesses capture, track and manage their sustainability performance is -- thanks to a crop of new software products offering carbon accounting and sustainability management programs. Taking their cues from traditional accounting software programs, greenhouse gas software products monitor a company's energy usage and carbon consumption as seriously as conventional accounting programs track input costs and sales metrics.
"Just because carbon cap and trade legislation didn't make it through the Senate, it doesn't mean this stuff is dead," said Paul Baier, vice president of sustainability consulting at
. "There's still a lot being done about carbon emissions especially at the Fortune 500 company level."
Baier authors an annual report on enterprise carbon accounting, or ECA, a term that has grown to encompass the tracking of other environmentally sensitive materials such as water and waste. In his third and most recent report, released in January 2010, Baier forecasts that global unit sales of ECA software will grow exponentially to 250 units this year and 1,500 units in 2011 from roughly 50 units in 2009.
Companies within the burgeoning segment range from startups like
to stalwarts like
. Baier identifies a list of emerging leaders within the sector to help companies differentiate between the 60-some software vendors -- each of which cater to the needs of different types of customers and their diverse goals. In the 2010 report, Baier named
as this year's emerging leaders based on financial standing, product/technology strength, vision and the number of customer deployments.
Environmental data tracking has caught on in the U.S. even though greenhouse gas regulations are lax compared to countries that adhere to the Kyoto Protocol or the European Union Emissions Trading System due to the global nature of modern business. Since companies like
already have to complete detailed reports and comply with carbon restrictions in certain regions where they operate, many also participate in voluntary reporting programs in the U.S. such as the Carbon Disclosure Project. Companies that may have been stalling until tougher restrictions are enacted, no longer have the luxury of waiting since businesses are increasingly pressuring their partners to clean up their acts.
has taken a lead role in the retail sector. In July 2009, the world's largest retailer launched a sustainable product index that establishes a single source of data for evaluating the sustainability of its products. The initiative will be enacted in three stages beginning with a survey evaluating the sustainability efforts of its 100,000 global suppliers. Top tier U.S. suppliers were asked to respond by Oct. 1. Wal-Mart also aims to create a global database on the lifecycle of products and an easy-to-understand sustainability rating system that customers can use to make informed purchasing decisions.
"Major corporations are basically saying, 'we're going to have to be transparent about all of this so if you want to do business with us, you're going to have to give us transparent information on waste, resources and carbon,'" said Chris Farinacci, chief marketing officer of Hara. Farinacci pointed to similar emissions disclosure mandates from
Procter & Gamble
"Companies are now being asked about their performance as a requirement of doing business with them," said Scott Bolick, vice president of sustainability strategy at SAP.
In February 2010, the Securities and Exchange Commission released a set of guidelines for public companies regarding climate change disclosures. According to the SEC, shareholders are increasingly aware that limited natural resources and pending climate change legislation pose significant risks to public companies. The SEC noted that even companies that aren't big emitters could be impacted if business partners are forced to significantly raise prices in response to environmental costs. Although the SEC has required companies to disclose the costs of environmental litigation and complying with environmental laws since the 1970's, the Commission encouraged companies to pay closer attention to climate change risks when they prepare their disclosures.
"In identifying, discussing and analyzing known material trends and uncertainties, registrants are expected to consider all relevant information even if that information is not required to be disclosed, and, as with any other disclosure judgments, they should consider whether they have sufficient disclosure controls and procedures to process this information," the release said.
Enviance CEO Larry Goldenhersh said the move basically signaled that carbon "has moved from a compliance data point to a finance data point."
Shareholders have been applying their fair share of pressure as well. Cost savings are another motivator that ECA software vendors tout since carbon consumption is directly linked to energy usage, and reducing energy means lowering costs. Despite the obvious benefit, cost savings largely emerged later as an incentive.
"Five years ago, corporations were primarily focused on brand management. Shareholder pressure was the primary motivator when these companies came to us and said that they needed a way to monitor this stuff," said Dave Rath, CEO of ProcessMap. "Some of that is still there but now it seems to be less of a focus on brand management and more about making sure they have the intelligence through the data to make smart cost management, environmental and operational decisions."
Rath, who counts
among some of the firm's clients, said, "Now I think our customers are a lot more business focused in terms of optimizing cost. Plus, because our customers are global, they are looking at carbon from a financial perspective. You either have an asset or a liability."
"They know it's just a matter of time before the U.S. falls into step with everyone else on cap and trade," he added.
Scott Bolick of SAP recalls the impetus that helped SAP realize that sustainability management solutions needed to become a core offering, as they did in December of 2008.
"Our customers began to ask us about greenhouse gas, energy management and sustainability performance tracking systems. At the same time, interestingly enough, we began to get a lot of questions from our partners about our own sustainability performance," he said.
"Ultimately, we realized that we reached a tipping point. Sustainability has become essential to business."
The biggest challenge of enterprise carbon accounting remains quantifying usage -- a crucial step before the companies can start modeling efficiency options, reducing usage and monitoring their progress.
Currently, most companies use spreadsheets to monitor carbon emissions, but as Paul Baier points out, spreadsheets not only lack the sophistication needed for the coordination of data from multiple sources, but also make accurate, verifiable and timely data reporting extremely difficult.
ECA software programs, on the other hand, eliminate data gathering, the most labor-intensive part of the process, by providing automatic real-time reporting with data validation that also red-lights any unusual readings that could signal an error. Data sources are easily identifiable and physical documents such as invoices can be easily downloaded by third-party auditors to verify the information. Some programs also feature instant report capabilities, report deadline e-mail reminders and automatic filing, access to global databases for easy comparisons, scenario running, and automatic updates to the system when regulations go into effect.
For growing companies, the decision to invest in ECA software becomes an easy one, according to Dave Rath who said ITT basically outgrew its homegrown system when it turned to ProcessMap.
Scott Bolick of SAP recalled a similar situation with
, an oil and gas company that grew through acquisitions and didn't have consistency on carbon data across all its new assets. So the company turned to SAP for a solution.
As ECA executives point out, resources are becoming more scarce. As they do, investors will become more and more interested in what companies are doing to minimize their risk. Already, several companies release regular carbon reports that make year-over-year performance comparisons, and if recent SEC moves are any indication, nonfinancial data points like carbon emissions will eventually appear in 10-K filings.
"At this point, carbon management is beyond a regulatory issue," said Philippe Tesler, co-founder and CEO of Enablon North America. "It's important for risk management and directly tied to a company's bottom line. It presents another way that executives can strengthen and optimize their businesses."
Written by Melinda Peer in New York
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