Month <span class=August 2015" src="/wp-content/uploads/2014/04/cropped-office-building-secondary-1.jpg">

Month August 2015

Data Management Concepts for Sustainability – Part 2

The SSC Team August 13, 2015 Tags: , Strategic Sustainability Consulting No comments

This article was written as an expansion of our white paper “Choosing Sustainability Management Software for your Business” published in July 2011.  If you’re looking for information on how to make your software selection, check out the full article.  If you just want to make sense of this particular topic, keep reading.  Whether you like this article or not, we want to hear from YOU so that we can continue to provide the best insight for YOU, our readers…  

Our series on Sustainability Software continues with “Data Management Concepts for Sustainability”.  In this article (Part 2 of 4), we’ll continue introducing and defining key Data Management terms (read Part 1 here).  Our end goal with this series is to enable YOU, as the Business Leader, to feel more comfortable in a technical discussion related to the various areas of Data Management, especially as related to the care and feeding of Sustainability Software packages. Being able to “talk the talk” is the best defense in the technology wilderness.  Just remember, at the basis of any technical term is a common sense business notion, and staying grounded to this notion will help keep your conversations from drifting astray.

Data Modeling

This term is most commonly associated with Data Warehouse design, but is relevant to the construction of any database.  If you elect to design and build your own Sustainability Software you will find the design of its underlying database (Data Modeling) to be one of the most labor intensive steps in the process, and because Sustainability is a rapidly evolving concept, it will seem that the database changes are boundless.

Data Modelers are not only IT-savvy, but are required to be subject matter experts in the business functions of the company.  Data Modeling usually starts with vocabulary lists which are organized by a discipline called Taxonomy.  These lists are then translated into abstractions called Logical Data Models which ideally constitute the rigorous definitions of, and relationships among all the data elements required for the enterprise to function.  Then magic happens and database administrators interpret the Logical Data Models into real databases in software products such as Oracle, DB2 or SQL Server.  There are software tools like ERWin and ERStudio that assist both the modelers and DBA’s in doing this.

These are lofty goals indeed and can be expensive to implement especially if you purchase expensive tools.  Additionally, in a rapidly changing environment it can be difficult for the Modelers to keep pace with the Entrepreneurs, but if your Business requires databases to function, their models (designs) must either be purchased from vendors or created by the home team.

Since Analysis Paralysis can be costly, we encourage you to “buy” vs. “build” the database for your Sustainability Software, especially given the wide variety of SaaS solutions available in the market today.  For small to midsized companies, this is by far the most cost effective option.  If you elect a SaaS approach, all these issues will be completely hidden from view and their expenses will be shared among all the system’s users as part of the overall licensing cost.

Data Storage & Archiving

This is where the ongoing cost kicks in.  Hardware for data storage is at an all time low and trending downward, but the software licenses required are costly to buy and to maintain going forward.  Both must be periodically patched and upgraded which requires a sophisticated IT Infrastructure team.  These costs and hassles furnish more strong arguments for SaaS. 

There are also potential standards clashes with bringing in special purpose software.  For example, SQL Server is an excellent database platform for a small to midsized company, but the Sustainability package you love most might be based on DB2 and Cognos.  The benefits of the new system could easily be outrun by the cost of this big company software alone.  Remember the notion of Total Cost of Ownership, wherein it often turns out that ongoing costs exceed the installation costs dramatically.

This is the area of Data Management concerned with backups, disaster recovery, test environments, complex operational change control, etc.  Bear in mind that Sustainability is an emerging venture and that commercial and governmental influences are afoot to undermine your investment, no matter which way you start out.  It’s best to adopt the conservative approach unless your industry has specific special needs that package software has not yet addressed.

If you feel you must support your own Sustainability Software on your own premises with your own team, then make platform compatibility one of your highly loaded criteria.  If you have a SQL Server shop, try to adapt to a SQL Server-based package if possible.

One final significant consideration: regardless of who maintains the data storage servers, you will be at least partly responsible to assure all data privacy and audit best practices are followed.  If these are not contemplated in the initial setup, it is possible you will enjoy fines and audits that will eventually motivate the re-design of the storage systems (or migration to a SaaS solution!)

(TO BE CONTINUED…) 

Now that you’ve read this article, tell us what you think!  And be sure to check out the full white paper.

Data Management Concepts for Sustainability, Pt. 2

The SSC Team August 13, 2015 Tags: , , , , , , , , , , , , , Strategic Sustainability Consulting No comments
This article was written as an expansion of our white paper “Choosing Sustainability Management Software for your Business” published in July 2011.  If you’re looking for information on how to make your software selection, check out the full article.  If you just want to make sense of this particular topic, keep reading.  Whether you like this article or not, we want to hear from YOU so that we can continue to provide the best insight for YOU, our readers…   Our series on Sustainability Software continues with “Data Management Concepts for Sustainability”.  In this article (Part 2 of 4), we’ll continue introducing and defining key Data Management terms (read Part 1 here).  Our end goal with this series is to enable YOU, as the Business Leader, to feel more comfortable in a technical discussion related to the various areas of Data Management, especially as related to the care and feeding of Sustainability Software packages. Being able to “talk the talk” is the best defense in the technology wilderness.  Just remember, at the basis of any technical term is a common sense business notion, and staying grounded to this notion will help keep your conversations from drifting astray.

Data Modeling

This term is most commonly associated with Data Warehouse design, but is relevant to the construction of any database.  If you elect to design and build your own Sustainability Software you will find the design of its underlying database (Data Modeling) to be one of the most labor intensive steps in the process, and because Sustainability is a rapidly evolving concept, it will seem that the database changes are boundless. Data Modelers are not only IT-savvy, but are required to be subject matter experts in the business functions of the company.  Data Modeling usually starts with vocabulary lists which are organized by a discipline called Taxonomy.  These lists are then translated into abstractions called Logical Data Models which ideally constitute the rigorous definitions of, and relationships among all the data elements required for the enterprise to function.  Then magic happens and database administrators interpret the Logical Data Models into real databases in software products such as Oracle, DB2 or SQL Server.  There are software tools like ERWin and ERStudio that assist both the modelers and DBA’s in doing this. These are lofty goals indeed and can be expensive to implement especially if you purchase expensive tools.  Additionally, in a rapidly changing environment it can be difficult for the Modelers to keep pace with the Entrepreneurs, but if your Business requires databases to function, their models (designs) must either be purchased from vendors or created by the home team. Since Analysis Paralysis can be costly, we encourage you to “buy” vs. “build” the database for your Sustainability Software, especially given the wide variety of SaaS solutions available in the market today.  For small to midsized companies, this is by far the most cost effective option.  If you elect a SaaS approach, all these issues will be completely hidden from view and their expenses will be shared among all the system’s users as part of the overall licensing cost.

Data Storage & Archiving

This is where the ongoing cost kicks in.  Hardware for data storage is at an all time low and trending downward, but the software licenses required are costly to buy and to maintain going forward.  Both must be periodically patched and upgraded which requires a sophisticated IT Infrastructure team.  These costs and hassles furnish more strong arguments for SaaS. There are also potential standards clashes with bringing in special purpose software.  For example, SQL Server is an excellent database platform for a small to midsized company, but the Sustainability package you love most might be based on DB2 and Cognos.  The benefits of the new system could easily be outrun by the cost of this big company software alone.  Remember the notion of Total Cost of Ownership, wherein it often turns out that ongoing costs exceed the installation costs dramatically. This is the area of Data Management concerned with backups, disaster recovery, test environments, complex operational change control, etc.  Bear in mind that Sustainability is an emerging venture and that commercial and governmental influences are afoot to undermine your investment, no matter which way you start out.  It’s best to adopt the conservative approach unless your industry has specific special needs that package software has not yet addressed. If you feel you must support your own Sustainability Software on your own premises with your own team, then make platform compatibility one of your highly loaded criteria.  If you have a SQL Server shop, try to adapt to a SQL Server-based package if possible. One final significant consideration: regardless of who maintains the data storage servers, you will be at least partly responsible to assure all data privacy and audit best practices are followed.  If these are not contemplated in the initial setup, it is possible you will enjoy fines and audits that will eventually motivate the re-design of the storage systems (or migration to a SaaS solution!) (TO BE CONTINUED…)  Now that you’ve read this article, tell us what you think!  And be sure to check out the full white paper.

Data Management Concepts for Sustainability – Part 1

The SSC Team August 11, 2015 Tags: , Strategic Sustainability Consulting No comments

This article was written as an expansion of our white paper “Choosing Sustainability Management Software for your Business” published in July 2011.  If you’re looking for information on how to make your software selection, check out the full article.  If you just want to make sense of this particular topic, keep reading.  Whether you like this article or not, we want to hear from YOU so that we can continue to provide the best insight for YOU, our readers… 

Our series on Sustainability Software continues with “Data Management Concepts for Sustainability”.  In this article (Part 1 of 4), we’ll begin introducing and defining key Data Management terms.  Our end goal with this series is to enable YOU, as the Business Leader, to feel more comfortable in a technical discussion related to the various areas of Data Management, especially as related to the care and feeding of Sustainability Software packages. Being able to “talk the talk” is the best defense in the technology wilderness.  Just remember, at the basis of any technical term is a common sense business notion, and staying grounded to this notion will help keep your conversations from drifting astray. 

Data Management

The definition provided in the Data Management Association (DAMA) Data Management Body of Knowledge (DAMA-DMBOK) is: "Data Management is the development, execution and supervision of plans, policies, programs and practices that control, protect, deliver and enhance the value of data and information assets."  This term is the most general description of the collection of activities involved with data and broadly includes all the areas that we’ll introduce in this article.  If you’re really interested in more detail, check out the DAMA site at http://www.dama.org.

Data Processing

This is another very broad term representing the collection of plans, processes, people and technology tasked with the collection of transactional data (e.g. item sales in a company's retail outlets) and the subsequent calculation of summary data that has meaning to your business such as periodic sales reports.  This includes the routine computational work performed by your company's people and computers that generate output like your monthly customer invoices or accounting reports, for example.

Your Sustainability Software, in the ongoing state, would be supplied with data such as rigorous measurements of weights and volumes of raw materials and products (Collected Data) and the software installation will calculate the various indicators and reports for their respective uses (Calculated Data).  When discussing Data Processing, it is always a good grounding exercise to distinguish the Collected Data vs. Calculated Data being considered.  The two have different types of rules around them, which brings us to the next category of Data Management.

Data Governance

Data Governance is the management aspect of Data Management and has to do with identification and life cycle management of Business Rules connected with Data Management.  These rules might be driven by law, profit motivation, social norms or a myriad of other factors, but the establishment of definitions of terms and their existence in your company's soft assets is the foundation of Data Governance.  Examples of such rules include the following:

  • Meta-data Management is the collection of rules and definitions of the data elements used in your company.  It could be stored in a rigorous set of spreadsheets, or in an exotic, purpose-built system like Rochade from ASG Software.  Meta-data should have a dedicated team devoted to its maintenance and secure distribution to interested parties.  This team should include representation from both the technical side and the business side of your firm. 
  • Business and technical ownership of data quality standards for things like customer mailing addresses and formulae used in reporting. 
  • The clear specification of things like sales transactions and revenue classifications in the company's data streams. 
  • The identification and lifecycle management of your company's master lists such as store locations, product names and their reporting rollups, and a consolidated customer contact list across all lines of business.  This activity is referred to as "Master Data Management" and has taken on a life of its own by numerous software companies and consultancies but it is based on the common sense notion to "Keep your lists straight." 

Data Governance is like going to church, in that it is often postponed until there is enough confusion in the Business to make people desperate enough to try it.  It is definitely an endeavor that can start small, but requires the organization’s highest level of support.  Unlike some of the other topics presented here. Data Governance must be practiced within the confines of your corporate headquarters by your employees, perhaps augmented by technical consultants from time to time.

(TO BE CONTINUED…)

Now that you’ve read this article, tell us what you think!  And be sure to check out the full white paper.

Data Management Concepts for Sustainability, Pt. 1

The SSC Team August 11, 2015 Tags: , , , , , , , , , , Strategic Sustainability Consulting No comments
This article was written as an expansion of our white paper “Choosing Sustainability Management Software for your Business” published in July 2011.  If you’re looking for information on how to make your software selection, check out the full article.  If you just want to make sense of this particular topic, keep reading.  Whether you like this article or not, we want to hear from YOU so that we can continue to provide the best insight for YOU, our readers…  Our series on Sustainability Software continues with “Data Management Concepts for Sustainability”.  In this article (Part 1 of 4), we’ll begin introducing and defining key Data Management terms.  Our end goal with this series is to enable YOU, as the Business Leader, to feel more comfortable in a technical discussion related to the various areas of Data Management, especially as related to the care and feeding of Sustainability Software packages. Being able to “talk the talk” is the best defense in the technology wilderness.  Just remember, at the basis of any technical term is a common sense business notion, and staying grounded to this notion will help keep your conversations from drifting astray.

Data Management

The definition provided in the Data Management Association (DAMA) Data Management Body of Knowledge (DAMA-DMBOK) is: "Data Management is the development, execution and supervision of plans, policies, programs and practices that control, protect, deliver and enhance the value of data and information assets."  This term is the most general description of the collection of activities involved with data and broadly includes all the areas that we’ll introduce in this article.  If you’re really interested in more detail, check out the DAMA site at http://www.dama.org.

Data Processing

This is another very broad term representing the collection of plans, processes, people and technology tasked with the collection of transactional data (e.g. item sales in a company's retail outlets) and the subsequent calculation of summary data that has meaning to your business such as periodic sales reports.  This includes the routine computational work performed by your company's people and computers that generate output like your monthly customer invoices or accounting reports, for example. Your Sustainability Software, in the ongoing state, would be supplied with data such as rigorous measurements of weights and volumes of raw materials and products (Collected Data) and the software installation will calculate the various indicators and reports for their respective uses (Calculated Data).  When discussing Data Processing, it is always a good grounding exercise to distinguish the Collected Data vs. Calculated Data being considered.  The two have different types of rules around them, which brings us to the next category of Data Management.

Data Governance

Data Governance is the management aspect of Data Management and has to do with identification and life cycle management of Business Rules connected with Data Management.  These rules might be driven by law, profit motivation, social norms or a myriad of other factors, but the establishment of definitions of terms and their existence in your company's soft assets is the foundation of Data Governance.  Examples of such rules include the following:
  • Meta-data Management is the collection of rules and definitions of the data elements used in your company.  It could be stored in a rigorous set of spreadsheets, or in an exotic, purpose-built system like Rochade from ASG Software.  Meta-data should have a dedicated team devoted to its maintenance and secure distribution to interested parties.  This team should include representation from both the technical side and the business side of your firm.
  • Business and technical ownership of data quality standards for things like customer mailing addresses and formulae used in reporting.
  • The clear specification of things like sales transactions and revenue classifications in the company's data streams.
  • The identification and lifecycle management of your company's master lists such as store locations, product names and their reporting rollups, and a consolidated customer contact list across all lines of business.  This activity is referred to as "Master Data Management" and has taken on a life of its own by numerous software companies and consultancies but it is based on the common sense notion to "Keep your lists straight."
Data Governance is like going to church, in that it is often postponed until there is enough confusion in the Business to make people desperate enough to try it.  It is definitely an endeavor that can start small, but requires the organization’s highest level of support.  Unlike some of the other topics presented here. Data Governance must be practiced within the confines of your corporate headquarters by your employees, perhaps augmented by technical consultants from time to time. (TO BE CONTINUED…) Now that you’ve read this article, tell us what you think!  And be sure to check out the full white paper.

How to Set Smart Carbon Goals

The SSC Team August 6, 2015 Tags: , , , Strategic Sustainability Consulting No comments

Enjoy this blog from the SSC archives:

Every company needs smart carbon goals -- and this is especially true if you are a Walmart supplier (or sell to a retailer with a similar sustainability scorecard). But what makes a good carbon goal? You don't want to be too ambitious and fall short, but you also don't want to set such easily attainable goals that you look lazy. What is the right middle ground?

Before we jump in, we want to mention that there is much disagreement in the sustainability industry about what an appropriate carbon goal is -- and what companies should be aiming for. So please take our opinion with a grain of salt. What works for you might be different that for another organization.

Ok, let's get into it.

Should you set a goal of carbon neutral? 

Maybe. It's an admirable goal, and we love BHAGs. However, there are two main problems that we see with carbon-neutral goals. First, it's easy to slide from a meaningful effort to reduce carbon-generating activities into a focus on buying your way out of the problem with RECs and carbon offsets. Second, the challenge of zero carbon is so big that it can be overwhelming. Avoid these two problems by 1) keeping the emphasis on carbon reduction, and only purchase carbon offsets to mitigate truly unavoidable impacts, and 2) creating a year-by-year plan with shorter goals that get you to carbon neutral.

Should you set a goal aligned with IPCC guidelines?

Yes. The IPCC report is the go-to place for understanding global carbon thresholds. In it, scientists tell us we must reduce the amount of CO2 in the atmosphere from its current level of 392 parts per million ("ppm") to below 350 ppm. That equates to a global reduction in carbon emissions by 80% by 2050 (against 1995 baselines). (Read more about the science here). In order to honestly say that you are "doing your part" to stop climate change, your company should be aiming to reduce its carbon footprint at this same rate. (If you're interested in learning more, please contact us -- we have access to tools that can help you figure out what IPCC guidelines mean for your company on a year-by-year basis!)

Should you set a modest 5% - 10% goal?

Maybe. It's better to have a modest goal, rather than no goal. But our general feeling is that these types of goals are mostly suited to extremely short timeframes -- like 1-3 years. And that's great, particularly if you are just starting out and need some quick wins to build momentum. But don't overlook the bigger picture. It's critical to understand where you need to be in the long run (20-50 years from now). Focusing on that horizon will help you consider the carbon implications of capital investments, supply chain development, mergers and acquisitions, and new product development.

Should you set goals beyond tons of CO2-e?

Yes. There are lots of ways to set carbon goals. And while an absolute reduction in tons of CO2-e is a vital element of a carbon management plan, it is not complete. Consider the following to round out your approach:

  • Adjusted carbon goals (like carbon-per-production-unit, or carbon-per-$-revenue) will help you determine how your carbon efficiency is changing as you grow (or shrink) your organization.
  • Employee engagement goals (like % of employees trained on carbon reduction initiatives) will help you measure how far into your organization you have embedded your mission.
  • Supply chain goals (like % of suppliers reporting their Scope 1 and 2 emissions) will help you track how much of your Scope 3 emissions are covered, and how much you are leveraging your value chain towards sustainability.

Are simple mistakes holding back your sustainability? Find out how to correct those mistakes here!

How to Set Smart Carbon Goals

The SSC Team August 6, 2015 Tags: , , , Strategic Sustainability Consulting No comments
Enjoy this blog from the SSC archives: Every company needs smart carbon goals -- and this is especially true if you are a Walmart supplier (or sell to a retailer with a similar sustainability scorecard). But what makes a good carbon goal? You don't want to be too ambitious and fall short, but you also don't want to set such easily attainable goals that you look lazy. What is the right middle ground? Before we jump in, we want to mention that there is much disagreement in the sustainability industry about what an appropriate carbon goal is -- and what companies should be aiming for. So please take our opinion with a grain of salt. What works for you might be different that for another organization. Ok, let's get into it.

Should you set a goal of carbon neutral?

Maybe. It's an admirable goal, and we love BHAGs. However, there are two main problems that we see with carbon-neutral goals. First, it's easy to slide from a meaningful effort to reduce carbon-generating activities into a focus on buying your way out of the problem with RECs and carbon offsets. Second, the challenge of zero carbon is so big that it can be overwhelming. Avoid these two problems by 1) keeping the emphasis on carbon reduction, and only purchase carbon offsets to mitigate truly unavoidable impacts, and 2) creating a year-by-year plan with shorter goals that get you to carbon neutral.

Should you set a goal aligned with IPCC guidelines?

Yes. The IPCC report is the go-to place for understanding global carbon thresholds. In it, scientists tell us we must reduce the amount of CO2 in the atmosphere from its current level of 392 parts per million ("ppm") to below 350 ppm. That equates to a global reduction in carbon emissions by 80% by 2050 (against 1995 baselines). (Read more about the science here). In order to honestly say that you are "doing your part" to stop climate change, your company should be aiming to reduce its carbon footprint at this same rate. (If you're interested in learning more, please contact us -- we have access to tools that can help you figure out what IPCC guidelines mean for your company on a year-by-year basis!)

Should you set a modest 5% - 10% goal?

Maybe. It's better to have a modest goal, rather than no goal. But our general feeling is that these types of goals are mostly suited to extremely short timeframes -- like 1-3 years. And that's great, particularly if you are just starting out and need some quick wins to build momentum. But don't overlook the bigger picture. It's critical to understand where you need to be in the long run (20-50 years from now). Focusing on that horizon will help you consider the carbon implications of capital investments, supply chain development, mergers and acquisitions, and new product development.

Should you set goals beyond tons of CO2-e?

Yes. There are lots of ways to set carbon goals. And while an absolute reduction in tons of CO2-e is a vital element of a carbon management plan, it is not complete. Consider the following to round out your approach:
  • Adjusted carbon goals (like carbon-per-production-unit, or carbon-per-$-revenue) will help you determine how your carbon efficiency is changing as you grow (or shrink) your organization.
  • Employee engagement goals (like % of employees trained on carbon reduction initiatives) will help you measure how far into your organization you have embedded your mission.
  • Supply chain goals (like % of suppliers reporting their Scope 1 and 2 emissions) will help you track how much of your Scope 3 emissions are covered, and how much you are leveraging your value chain towards sustainability.
Are simple mistakes holding back your sustainability? Find out how to correct those mistakes here!

Carbon Risk Assessment in the Financial Sector

The SSC Team August 4, 2015 Tags: , , Strategic Sustainability Consulting No comments

By: Mirele B. Goldsmith

How can financial institutions and individuals factor climate change into their decisions about investments?  This question was considered at a meeting hosted by Moody’s Investors Service on Paving the Road to Paris COP21: Discussing Carbon Risk Assessment Strategies on July 27, 2015.  (The list of speakers may be found here.)

Those of us focused on sustainability are well aware that over time climate change will impact every aspect of the economy.  The finance sector is facing this fact now that governments are beginning to introduce regulation requiring disclosure of the risks that climate change poses to investors. At the meeting there was a lot of talk about France, where legislation has just been proposed to require disclosure of climate risk.  China is also considering legislation.  The European Union already requires pension funds to consider climate risk.  The SEC requires that companies disclose material risks from climate change, although the speakers described this requirement as “toothless.” 

What risks could climate change pose to financial returns?   The most obvious risk is that companies will be impacted physically (operator risks) and investors will bear the costs. The risk that seems to be most on the minds of experts is changes in policy.  As one speaker put it, “it is becoming more expensive to pollute.”  Changes in technology which may make businesses obsolete or lead to falling prices are another risk.  And there are reputational risks.

Much of the meeting focused on just how the financial risks of climate change can be quantified.  The two big sources of uncertainty are first, that we don’t know how much and what kinds of actions will be taken to mitigate climate change.  And second, we don’t know how much the climate will change.  Risk projections are usually informed by past experience, but there is no historical data that can be used to build and test models of climate risk.

The speakers presented several tools that are designed to help investors at various levels incorporate climate into their risk assessments.  Speakers from the World Resources Institute and UNEP Finance Initiative gave an overview of their Carbon Asset Risk Discussion Framework.  The framework, which provides questions to ask but no answers, provides a structured approach to assess exposure to climate risk, valuate, and manage it.  Mercer has released a report on Investing in a Time of Climate Change that is meant to help investors assess their portfolios using four climate-risk factors to assess exposure under four possible climate scenarios.  Mercer’s approach is more user-friendly because it provides answers based on assumptions about how investments in certain sectors and regions will be impacted under specific scenarios.  However, given how much is unknown, this approach obviously requires making a lot of assumptions.  2 Degrees Investing Initiative has worked with UNEP Inquiry and CDC Climat Research to produce a review of various approaches to carbon risk assessment: Financial Risk and the Transition to a Low Carbon Economy.  The Bloomberg Carbon Risk Valuation Tool (available to Bloomberg subscribers) was also mentioned in passing.

This meeting was focused on technical questions about how to assess climate risk in order to protect financial institutions and individual investors. However the speakers also alluded to the critical need to mobilize the influence of financial markets to accelerate action to mitigate climate change.   On this point, speaker after speaker emphasized the issue of the difference in time horizons for investment decisions and the major risks to investments from climate change.  Most investment decisions are made for 2-10 years, while these experts expect to see major impacts on investments from climate change only in 25-30 years.  In order to leverage the power of markets to address climate change something will have to change.

Mirele B. Goldsmith is an environmental psychologist, program evaluator, and activist.  She is an expert in how to change human behavior – the key to solving environmental problems and building a sustainable future.  Mirele’s clients include community-based organizations, associations, and businesses, that are engaging employees, tenants, board members, and constituents, in saving energy, reducing waste, educating about sustainability, and advocating for change.  Mirele is a certified SSC Green Auditor and the principal of Green Strides Consulting.

Carbon Risk Assessment in the Financial Sector

The SSC Team August 4, 2015 Tags: , , , , , , , , Strategic Sustainability Consulting No comments
By: Mirele B. Goldsmith How can financial institutions and individuals factor climate change into their decisions about investments?  This question was considered at a meeting hosted by Moody’s Investors Service on Paving the Road to Paris COP21: Discussing Carbon Risk Assessment Strategies on July 27, 2015.  (The list of speakers may be found here.) Those of us focused on sustainability are well aware that over time climate change will impact every aspect of the economy.  The finance sector is facing this fact now that governments are beginning to introduce regulation requiring disclosure of the risks that climate change poses to investors. At the meeting there was a lot of talk about France, where legislation has just been proposed to require disclosure of climate risk.  China is also considering legislation.  The European Union already requires pension funds to consider climate risk.  The SEC requires that companies disclose material risks from climate change, although the speakers described this requirement as “toothless.” What risks could climate change pose to financial returns?   The most obvious risk is that companies will be impacted physically (operator risks) and investors will bear the costs. The risk that seems to be most on the minds of experts is changes in policy.  As one speaker put it, “it is becoming more expensive to pollute.”  Changes in technology which may make businesses obsolete or lead to falling prices are another risk.  And there are reputational risks. Much of the meeting focused on just how the financial risks of climate change can be quantified.  The two big sources of uncertainty are first, that we don’t know how much and what kinds of actions will be taken to mitigate climate change.  And second, we don’t know how much the climate will change.  Risk projections are usually informed by past experience, but there is no historical data that can be used to build and test models of climate risk. The speakers presented several tools that are designed to help investors at various levels incorporate climate into their risk assessments.  Speakers from the World Resources Institute and UNEP Finance Initiative gave an overview of their Carbon Asset Risk Discussion Framework.  The framework, which provides questions to ask but no answers, provides a structured approach to assess exposure to climate risk, valuate, and manage it.  Mercer has released a report on Investing in a Time of Climate Change that is meant to help investors assess their portfolios using four climate-risk factors to assess exposure under four possible climate scenarios.  Mercer’s approach is more user-friendly because it provides answers based on assumptions about how investments in certain sectors and regions will be impacted under specific scenarios.  However, given how much is unknown, this approach obviously requires making a lot of assumptions.  2 Degrees Investing Initiative has worked with UNEP Inquiry and CDC Climat Research to produce a review of various approaches to carbon risk assessment: Financial Risk and the Transition to a Low Carbon Economy.  The Bloomberg Carbon Risk Valuation Tool (available to Bloomberg subscribers) was also mentioned in passing. This meeting was focused on technical questions about how to assess climate risk in order to protect financial institutions and individual investors. However the speakers also alluded to the critical need to mobilize the influence of financial markets to accelerate action to mitigate climate change.   On this point, speaker after speaker emphasized the issue of the difference in time horizons for investment decisions and the major risks to investments from climate change.  Most investment decisions are made for 2-10 years, while these experts expect to see major impacts on investments from climate change only in 25-30 years.  In order to leverage the power of markets to address climate change something will have to change. Mirele B. Goldsmith is an environmental psychologist, program evaluator, and activist.  She is an expert in how to change human behavior – the key to solving environmental problems and building a sustainable future.  Mirele’s clients include community-based organizations, associations, and businesses, that are engaging employees, tenants, board members, and constituents, in saving energy, reducing waste, educating about sustainability, and advocating for change.  Mirele is a certified SSC Green Auditor and the principal of Green Strides Consulting.