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Sustainability Moving Up Management’s Agenda

Posted by Fereidoon P. Sioshansi on the September 4th, 2008

From the September 2008 issue of EEnergy Informer.

Environmental issues are showing up more often on more corporate radar screens.

Up until recently, environmental issues were viewed as something you complied with if there was no way to ignore them or get around them. More importantly, companies would grudgingly comply after trying everything else. It was a reactionary response.

In the last few years, environment and sustainability, have ascended to become significant issues on par with marketing, product development, IT, HR and other critical business functions. Large corporations are increasingly trying to anticipate critical environmental issues before they are regulated and position themselves or respond proactively. This trend can be expected to gain momentum with growing concerns about climate change especially for companies with big carbon footprints.

Growth in sustainability resolutions

The number of shareholder resolutions on environmental issues has nearly doubled since 2004, according to RiskMetrics Group Inc. and shows signs of continued growth. Mindy Lubber, President of CERES, a coalition of environmental activists, claims that a quarter of Fortune 500 companies in the US now have a board committee responsible for monitoring and reporting on environmental issues – up from 10% only 5 years ago.

It makes perfect business sense. Just as corporate boards establish special committees to monitor company’s exposure to, say, financial or investment risks following a major loss, so it is with environmental issues. Many companies with significant environmental exposure find themselves ill equipped to respond to rapidly changing environmental issues and public perceptions now taking center stage in many parts of the world.

Environmental board committees come in all variations. Most are set up as an advanced warning system. While an improvement compared to the purely reactionary strategies of the past, such committees are primarily focused on handling PR and window dressing. But in a growing number of more enlightened corporations, the committees are given broader responsibilities to actually chart the company’s future strategies towards cleaner and more environmentally benign products, operations, logistics and services.

In a growing number of companies, an annual sustainability or corporate responsibility report is produced, documenting the companies’ environmental charter, its carbon footprint, water and energy consumption and waste products. While many of these efforts also have a significant PR component, some are more substantive, with specific goals to reduce energy, water, waste and increasingly focused on reducing carbon emissions.

The electric power sector, a huge consumer of primary fuels and water and a significant emitter of greenhouse gases, has joined the fray. American Electric Power (AEP), based in Columbus Ohio, was among the first to identify the need for a high-profile governance committee. It is recognized among the most effective among some 100 global businesses surveyed by CERES.

The decision to form the committee, however, was not entirely voluntary or accidental. AEP is the country’s largest coal user and greenhouse gas emitter. In 2003, a public-employee pension fund was considering a shareholder resolution asking AEP how it would respond to potential future carbon legislation. To defuse the matter, AEP management formed a special committee to study the issue. The AEP committee, chaired by Lester Hudson, receives biannual updates from AEP’s CEO, Mr. Michael Morris, and oversees the company’s annual sustainability report.

PG&E Corp., the parent of Pacific Gas & Electric Company (PG&E) also publishes an annual environmental sustainability report. PG&E’s report card is significantly cleaner than that of AEP. With no coal plants of its own, significant amounts of hydro, nuclear, renewables and clean-burning natural gas, PG&E is on one end of the scale – and under its CEO, Peter Darbee, it is striving to get even greener.

PG&E's generation mix

Similar disparities can be observed among carbon-heavy oil majors. While oil business – by definition – is based on getting massive amounts of fossil fuels to markets, oil companies nevertheless try to distinguish themselves in the public eye. The largest, ExxonMobil Corp. has consistently shown its insensitivity on environmental issues, until recently not even bothering to do window dressing. Its management spent considerable effort to defeat a shareholder resolution that merely asked management to set specific goals for GHG emissions. It ignored the issue even after 31% of its shareholders supported the measure.

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