The green cost code

Sir Nicholas Stern’s review of climate change published in October 2006 was, according to Tony Blair, the most important document about the future that he’d read since becoming prime minister almost ten years earlier. “The world cannot afford to wait,” he said.

But what do finance directors think? Do those at the helm of UK business think the government is tackling the root of the issue, or do they think it’s being used as an excuse to raise taxes and gain political support? And, perhaps most important, what, if anything, are businesses doing to help?

According to our reader survey, the majority of finance directors believe the revenue raised from so-called green taxes will go towards other issues as well as tackling climate change. A staggering 85% believe this to be the case. But our research also reveals poor levels of understanding among some respondents about the things they can do to help improve their company’s environmental impact.

While 63% of respondents in companies with revenues greater than £100m say that green issues are considered from the outset of company decisions, this plummets to just 35% in companies with revenues of less than £100m. And it is among this latter group where much of the battle against climate change will take place.

Worryingly, government incentives don’t even hit the radar of the companies we surveyed. Just 1% claim they are engaged in green activities because of government incentives. Rather, companies get involved because of good, old-fashioned business reasons – to grow the bottom line and to improve their image.

A big problem facing finance directors is that a lot of them want to do something for the environment, but are not sure how. And information does not seem to be easily obtainable.

For example, the government introduced a climate change rebate, which allows certain organisations to gain rebates against their climate change levy. While this looks good on paper, according to one finance director it’s more fairytale than fact. While the FD’s company was eligible for the climate change rebate, it had been trying to join for more than a year. “However, the reality is that trying to get a rebate out of the DTI is like getting blood from a stone,” the finance director said.

Separately, one finance director pointed to the potential holes in the existing system that result in the UK’s environmental policies making Britain less competitive, while at the same time not improving the global environmental impact.

“Carbon taxes are rising to such a level that the cost of UK manufacturing is such that we are at a huge competitive disadvantage when competing on a global market,” the FD said. “Loopholes in the policy encourage the running down of UK manufacturing in order to sell carbon and use the proceeds to open up manufacturing operations in the Far East [where there are] little or no pollution regulations. This is certainly the case in the ceramics industry and we are seriously thinking of doing the same.”

Such a candid statement offers a stark warning to policy-makers: the problem will only be tackled effectively if, as in the Stern review, the economics of such policies are considered from the outset. According to the Stern review, if we don’t spend 1% of global GDP on combating climate change now, it will cost the world 20% of its GDP in the not-too-distant future.

The finance director above who was thinking of moving to the Far East was discussing carbon trading (its formal name being the European Union Emissions Trading Scheme ), which was set up by the countries that signed the Kyoto agreement in 1997 and incentivises companies to keep on top of their greenhouse gas emissions. At present, it covers only the larger polluters in industry, but the government plans to include a further 5,000 organisations, from banks to universities, within the next year.

In its simplest form, carbon trading is essentially a cap set by the gover nment on how much GHGs a company can emit (measured by the tonne and monitored by the Environment Agency). Companies that do not use their full entitlement can then sell their surplus to companies that go over their allowance.

In 2006, the Environment Agency penalised four companies for failing to account for their carbon emissions during the first year of the scheme, fining each company £27 for each tonne they emitted above their agreed limit. However, as the above example shows, the policy will only be globally effective if it is a truly global policy – something which John Howard, prime minister of Australia, has proposed.

Mixed opinions
Opinion on whether carbon trading will play a significant role in how businesses cut down on their emissions is mixed. Smaller businesses feel it is not worth paying much attention to, with one finance director in a company with revenues of less than £100m saying it would do nothing but “relieve your conscience”.

Not surprising, however, the opinions of FDs in companies with revenues of more than £100m seem to be that it’s worth exploring. “Carbon trading will influence the decisions of our customers and therefore promote change in our business model,” said one.

More practical methods for making companies more environmentally friendly were extremely varied. Only recruiting employees from within a 10-mile radius of the workplace, reducing waste by ensuring lights and computers are switched off, and turning the air conditioning down were all common and practical suggestions. As one respondent wrote: “We need to think of the environment in the same way as we now think of health and safety.”

And it seems that the education battle is being won even if the practical one is not. Almost 85% of respondents across companies of all sizes said that environmental issues were either “very” or “quite” important to their organisations. Just 5% of companies with revenues of less than £100m and 1.7% of those above said they weren’t important at all.

Green taxes
Taxation is often considered a key battleground in the green war, so, perhaps predictably, it didn’t take long for Chancellor Gordon Brown to jump aboard the bandwagon with new green taxes announced in the pre-Budget report just weeks after the Stern review was published.

But, while almost 85% of respondents don’t trust the government to spend the cash raised from green taxes solely on green initiatives, the economic impact of further taxes does not seem to be an issue with everyone. As one finance director said: “If it is the most important issue facing humanity, why does the Prime Minister say it won’t do anything to damage business? We appreciate that some of the measures may be unpopular initially, but what is the government doing to take the electorate on a journey to the right decisions?”

However, another FD had a different take on the government’s environmental policies, calling them haphazard and confused, and saying that it looked more like “a tax-raising scheme rather than any real concern for the environment”.

This begs the question of whether tax is the best way forward in the battle against climate change. Not so, according to many respondents, with technology often being seen as a way to tackle the problem. And, it seems Gordon Brown agrees, having dedicated a proportion of his budget to science labs around the country. It is something the private sector has also cottoned on to, with the much-publicised $3bn (£1.53bn) investment by Richard Branson into research for renewable technologies as part of Virgin’s cor porate social responsibility scheme.

Lead by example
Some have suggested that the government is not doing enough to convince the greater polluters of the world to follow its example. While Kyoto set a legally binding greenhouse gas reduction target on the UK of 12.5%, this is small fry compared with the staggering amount of greenhouse gasses that are emitted by some other countries.

“Britain should act unilaterally if necessary, but action will only be truly effective if the US, China and India sign up,” said one FD. Which is not such a far cry from the truth when, at the time of going to press, Dallas-based utility company TXU was soliciting banks such as HSBC and Barclays for a loan to open 11 coal-fired power plants, which would result in greater C02 emissions than the total of several countries, including New Zealand, Denmark and Sweden.

It is clear that the problem of climate change and the environment is fraught with difficulty. It is a global problem, which can really only be addressed from a global perspective. However, there is real cause for optimism. It seems that finance directors are seeing the business benefits of going green – and it’s the economic issue that we must get right if we are to successfully combat the problem.

As one finance director said: “If we accept that climate change is happening and detrimental (and it would be too big an experiment to wait and see), then altering our attitudes and behaviours can’t start soon enough. It is going to need strong, brave leadership to engender that kind of shift. At the moment, government is too timid, too much in thrall to the power of business and the economic system, giving us too little, too slowly in terms of addressing the issue.”

So, over to you, Mr Brown.

Additional reporting David Rae