15 November 2021
Article

Clean Future. Starting Points for Decarbonizing Your Business

European Union’s carbon regulation made Russian export companies think about decarbonizing their business. Irina Gaida, director of Energy Center at Moscow School of Management SKOLKOVO and teacher for the program “Transition 4.0”, outlines the starting points for achieving carbon neutrality.
Clean Future. Starting Points for Decarbonizing Your Business

Russia’s largest trading partners, such as European Union, China, Japan, and the U.S., have already voiced objectives to achieve carbon neutrality by 2050–2060. Decarbonization efforts are already made at industry level. And the companies that are uneager to reduce their carbon footprint face increasingly strict requirements from investors and creditors and see the Carbon Border Adjustment Mechanism (CBAM) imposed by the EU, which is essentially a tax on importing carbon-intensive products.

Mistakes made by Russian companies

Greenwashing. To avoid losing profit, large Russian businesses have already started moving towards decarbonization. But a blind desire to comply with all the requirements imposed by investors, banks, or government results in many companies resorting to greenwashing—that is, claiming achievements that in reality do not lead to carbon footprint reduction. That only has an opposite effect—the financial community becomes ever more demanding of companies that undermine its trust. So the first rule goes like this: do not try to deceive investors or creditors—they will be able to uncover the fraud. In some cases, it is better to do nothing instead of hand-waving and promising the moon, as eventually you will have to explain yourself.

Not heeding the jurisdiction. If the company is listed on the London Stock Exchange, it is the London Stock Exchange requirements that must be met in decarbonization strategy rather than exclusively those imposed by Russian regulators. Study the requirements of financial institutions that you are planning to work with.

Calculating carbon footprint under Russian legislation. Some companies define their greenhouse gas emissions using Russian norms, but those are not fully drafted in terms of carbon footprint calculation. Therefore, provisions concerning greenhouse gas emissions oftentimes only consider methane. In reality, however, the company’s carbon footprint turns out to be much higher.

Source: istockphoto.com

Organizing work inadequately. The objective to decarbonize business should be initiated by management. It should be driven from the top, and achieving that objective should be included among work performance criteria for senior and middle managers. Decarbonization efforts should not boil down to one single department, for example, investor relations department or production department. All of the company’s units should pursue the same objective—if someone undermines it, you will have lost your time in vain.

Starting Points for Decarbonizing Your Business

The first thing the company will have to do is define its carbon footprint and its constituent elements. Calculations are done across three scopes: Scope 1 covers direct emissions from product manufacturing, Scope 2 covers emissions from the generation of electricity needed for the production site, and Scope 3 includes indirect emissions, for example, goods transportation or company’s waste that ends up in dumps. Indirect emissions are quite difficult to calculate, but when you are only starting out with your decarbonization efforts, these can be put off into the future.

The second step is choosing your objectives. You do not want objectives that are a priori unattainable. Doing that is going to undermine your reputation in the future. Look at your industry counterparts to understand how you can keep up with them or maybe even outdo them. Another reason why choosing your objectives is important is that it allows you to get an idea of why and for whom the company is going to reduce its carbon footprint. This helps create a structure and build an understanding of what standards should be used, how often reports should be made, and how customer and investor relations should look like.

Source: istockphoto.com

The third thing is understanding your priorities through the investors’ eyes. Investors want to see the dynamics right from the first year on. The most effective way to decarbonize your activities is to reduce direct emissions. Not all the companies are ready to significantly cut their greenhouse gas emissions, which is why it is better to opt for energy and resource efficiency. You do not have to go all out on solar or wind energy—raising your production energy efficiency will produce a comparable result. When you get that issue solved, then you can start thinking about buying energy from renewable sources.

What standards are out there? 

Today, an important role is played by non-profit organizations that develop standards for voluntary disclosure of financial and non-financial information. The most respected among them is the FSB Task Force on Climate-related Financial Disclosures, TCFD.

As far as disclosures on greenhouse gas emissions go, the Carbon Disclosure Project, CDP, is to be taken into account. CDP methodology is used by a lot of the world’s companies for making reports.

Non-financial reports on companies’ sustainable development are governed by several standards. The most well-known among them are the Global Reporting Initiative, GRI, and the Sustainability Accounting Standards Board, SASB.

Anyway, a unified non-financial reporting system is around the corner. The same holds true for greenhouse gas emissions reporting. Plus, the disclosure methodologies above are voluntary for now, but at some point they or their analogues will become mandatory both on behalf of banks and investors and on behalf of government regulators. So a company that complies with international standards will have no trouble living through the changes.

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