Contents

Talk is Cheap, Investors Want Environmental Results 1 Feds Finalize Coal Emissions Regulations 2 Advancing Sustainability & Supply Chain Management with Life Cycle Approaches 2 ‘Sustainnovation’ Survey for Practitioners 2

Board Rooms Targeting Climate Change Risks – CDP Releases New Reports 3 Learning by Example: Opportunities for Emissions Market Linkages 3

EU Biofuel Policy U-Turn Harvests Mixed Reactions 4

SEPTEMBER, 2012

Climate Change Policy & Sustainability

Update

Talk is Cheap, Investors Want Environmental Results

As climate change and sustainability issues become material to companies, investors are taking heed. Financial premiums from investors are an increasingly common reward for companies that demonstrate real and tangible environmental results.

New research has revealed a relationship between financial performance and environmental performance; however, the link lies in the actual environmental outcomes of a company’s performance, rather than a company’s intended performance, as communicated by environmental targets and processes. A study examining the linkage between corporate environmental performance and corporate financial performance suggests that financial return is linked to outcome-based measurements, as opposed to process-based measurements. Simply put, companies that are able to curb their carbon emissions or reduce resource use are rewarded financially, while those that rely solely on carbon management processes and targets have significantly lower returns on equity.

Researchers at the Swiss University ETH Zurich examined 174 energy-intensive companies globally with large market capitalization, specifically looking at firms’ carbon performance through both outcome-based and process-based lenses. Outcome-based performance refers to the total amount of resources used or emissions generated, more specifically, the carbon intensity of a company’s operations. Alternatively, process-based measures consider a company’s internal efforts, such as environmental management systems, corporate commitments and targets.

The results suggest that when carbon management is utilized as a process-based measurement, focusing on environmental commitments and targets, a negative relationship is seen between environmental performance and financial performance. Conversely, when the carbon emissions are utilized as an outcome-based measurement of environmental performance, investors are more willing to pay for the company’s stock, increasing demand. In other words, the lower a company’s carbon emissions, the higher premium investors are willing to pay. The opposite was found for companies that engaged in process-oriented carbon activities such as setting emissions targets.

These results can be somewhat confounding to practitioners – targets and management systems are often necessary inputs for reduced environmental impacts. That said, the study does point to an apparent financial market reaction to environmental factors, which supports sustainability progress. Further analysis and study should be targeted at these results so that the relationships identified can be better understood and translated into corporate strategy priorities.

By Kaitlin Szacki, kszacki@delphi.ca

Advancing Sustainability & Supply Chain Management with Life Cycle Approaches

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of their “useful life,” a critical category whose definition was expanded between the draft and final regulations. A facility’s useful life was extended from 45 to 50 years, although the specific commissioning date can result in a useful life of fewer than 50 years depending on distinctions introduced in the final regulations.

An additional change is the introduction of a new compliance flexibility option: deferred application. The provisions give operators additional fleet management independence by allowing owners to shut down one unit early (i.e. prior to the end of its useful life) and “transfer” the remaining years of useful life to another unit that they own within the same province.

By Cheryl Johnson, cjohnson@delphi.ca

Following a soft release in early September, the federal government published the final emissions performance standards for coal-fired electricity generators on September 12, 2012.

In an effort to meet national reduction targets and tackle GHG emissions from the sector, Environment Canada is requiring certain coal-fired generators to decrease the emissions intensity to “the same standard as high-efficiency natural gas and renewable energy sources.” The final regulations mandate an intensity of 420 tonnes CO2/GWh, while the draft regulations required a more stringent 375 tonnes CO2/GWh.

The performance standard will apply to new units and those that have reached the end

‘Sustainnovation’ Survey

for Practitioners

Survey also to be posted to GLOBE-Net

This survey is being offered up to sustainability practitioners by the EXCEL Partnership, the Globe Foundation and the Delphi Group. EXCEL’s Fall Roundtable is focused on analyzing what the ingredients are for successful Sustainnovation. Part of this assessment will be informed by the views of practitioners who follow GlobeNet and Delphi’s Climate Change Policy and Sustainability Updates.

Please take a moment to fill in the survey by October 5, and we will play back the results through GlobeNet later that month.

‘Sustainnovation’ is the coming together of Sustainability and Innovation – resulting in change that provides a multitude of economic, environmental and social benefits.

By Ted Ferguson, tferguson@delphi.ca

Please take a moment to fill out our Sustainnovation survey before October 5th, with results to be released on GLOBE-net

This article is a guest editorial from Delphi Associate Nathan Taylor of Kalypso Designs, nathan@kalypsodesigns.com

Sustainability professionals are integrators within their organizations, breaking down knowledge and communication silos to measure and report on composite enterprise performance metrics. Best practices for enterprise sustainability management have been developed and proven for many of the core internal operations of organizations in recent years.

Given this progress, sustainability managers are now turning their attention to the broader value web supporting their organization. Efforts are being made to understand the impacts of the organization's activities both up and down the supply chain, since the indirect impacts of economic activities are often an order of magnitude greater than their direct impacts. This requires what is known as a Life Cycle Approach to products and services.

In a recent report to the Canadian government, the National Round Table on the Environment and the Economy (NRTEE) defines Life Cycle Approaches as "a group of concepts, programs, tools, and data that involve identifying, understanding, and reducing inputs (economic or environmental) and their associated impacts generated throughout the entire life cycle of a product, technology, or process." The NRTEE's recommendation is for Canada's government and private enterprises to develop capacity in Life Cycle Approaches to maintain competitiveness with Europe and the US.

The Carbon Disclosure Project has expanded into the value chain through their Supply Chain Program. Around 50 large international corporations have piloted and assisted in the development of a data collection methodology over the past four years, and they have built a process and tool kit that enables a harmonized means of communicating data that typically exists in a unique form in every organization. Over a third of the reporting companies have realized cost savings or new revenue streams as a result of their suppliers' carbon management activities.

These two developments are indicative of a widespread progression toward value chain sustainability management through life cycle approaches. Broader adoption will lead to new opportunities for collaborative cost savings, risk mitigation, and efficiency for all economic players, from manufacturers to retailers to government.

Feds Finalize Coal Emissions Regulations

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The Carbon Disclosure Project (CDP) launched their Global 500 and S&P 500 reports on September 12, 2012 with two events: the CDP rang the opening bell at the NYSE, marking the launch of the S&P 500 report; and at the CDP Global Climate Change Forum featuring CDP signatories such as Aviva Investors and Schroders as well as responding companies L’Oreal and Tata Steel, was held to launch the Global 500 report.

Both reports show that officers and board level executives are paying more attention to climate change. This is likely a result of more respondents now reporting that they are currently being impacted by physical climate change risks, regulatory risks and reputational risks. The Global 500 reported that board or senior executive oversight of climate change increased by 3% between 2011 and 2012. Similarly the S&P 500 reported that oversight of climate change at the board or senior executive level increased 6% from 2011.

The total number of CDP respondents did not increase significantly from 2011. The number of respondents to the Global 500 increased from 404 companies in 2011 to 405 in 2012. The S&P 500 also reported a small increase of 4 additional respondents (343) in 2012. While the number of CDP respondents in the Global 500 and S&P 500 has remained stable over the past few years, response rates from the 5000 companies asked to respond to the CDP Investor and Supply Chain questionnaires have increased on the whole. There is no apparent explanation from the CDP for these trends.

Despite the small increase in the number of respondents from 2011 to 2012, the number of CDP signatories - those organizations that support climate change disclosure from the world’s largest companies and include banks, pension funds, asset managers, and insurance companies - increased from 551, representing $71 trillion in assets, in 2011 to 655 this year, representing $78 trillion in assets.

Not to be forgotten, and emphasizing the role that cities play in climate change adaptation and mitigation, the CDP also released their CDP Cities 2012 Global Report in June. The report analyses responses received from 73 cities around the world presenting carbon emissions, climate change risk and the management of emissions.

The CDP Canada 200 Report is due to be released on October 16, 2012. Look for Delphi’s coverage on this report in our next Policy Update in November 2012.

By Peter Smalley, psmalley@delphi.ca

Learning by Example:

Opportunities for Emissions

Market Linkages

In the first major emissions market linkage, the European Union Emissions Trading System (EU ETS) and Australia’s burgeoning carbon system will link. In addition to administrative and price implications, the union raises questions domestically about how the experience of these international schemes can inform future partnerships with North American carbon markets.

While still in its infancy, the Western Climate Initiative (WCI) cap-and-trade program, stewarded by California and Quebec, has clearly stated its intention to eventually link with other international carbon markets. The Northeastern US Regional Greenhouse Gas Initiative (RGGI) has also maintained its openness to future linkages. International pressure is also a factor, with Australia’s climate change minister announcing the nation’s intention to pursue additional partnerships with California, South Korea and New Zealand.

Initial barriers to linkages for both systems are apparent: RGGI currently only regulates the power sector and CO2 emissions, not broader gases as CO2-equivalents. The WCI’s use of differing offset protocols even within partner jurisdictions raises questions about credit fungibility and price differentials within the program and with future potential collaborators. California regulators also have reservations against accepting United Nations carbon offsets, which are eligible in the EU ETS.

However, such challenges can be overcome. Values gained in market liquidity, price stability, avoidance of emissions leakages from regulated to unregulated sectors and jurisdictions, and providing additional access to lower cost abatement opportunities are strong arguments for market linking. Unlinked markets will benefit from the EU and Australian example and will hopefully leverage the learning into their own linkage opportunities. By Cheryl Johnson, cjohnson@delphi.ca

Board Rooms Targeting Climate Change Risks – CDP Releases New Reports

The European Union (EU) plans to limit the use of crop-based biofuels following concerns over food production competition and lower environmental benefits than previously thought. Draft EU legislation, leaked in early September, places limits on the use of biofuels made from certain crops and ends all public subsidies for crop-based biofuels after current legislation expires in 2020.

In 2009 the EU committed to sourcing 10% of road transport fuels from renewable sources by 2020. The newly proposed legislation has been viewed as an implicit admission by policymakers that the 2020 biofuel target has been unsound from the onset.

According to the draft, a 5% maximum would be placed on crop-based fuel consumption for EU transport in 2020. Currently, 4.5% of total EU transport fuel demand is met by crop-based fuels. The decision would effectively freeze the annual $21 billion industry by limiting room for growth.

Post-2020, only biofuels that lead to substantial greenhouse gas (GHG) reductions and are not produced from food or feed crops will be eligible for public subsidies. In order to fulfil the target to source 10% of road transport fuels from renewable sources (i.e. renewables in addition to, and including, crop-based biofuels), the draft suggests that the focus be shifted towards non-land-based biofuels, such as those made from household waste and algae.

Stakeholder Considerations

The decision follows highly publicized pleas from public and private entities regarding international biofuel policies. Oxfam and other poverty-fighting groups have called for European policymakers to reconsider their support for biofuel and the Director General of the UN Food and Agriculture Organization called for an “immediate, temporary suspension” of US biofuel mandates. The sentiment was echoed by the world’s largest food company, Nestle, calling on the EU and the US to alter their biofuel targets as drought and poor harvest in key grain growing regions have raised the price of food, escalating global food crisis fears.

Indirect Land Use Change

The leaked proposal is part of EU plans to address the indirect land use change (ILUC) impact of biofuels and follows studies that cast doubt on the emissions savings from crop-based fuels. This has been a point of contention between officials, biofuel producers and scientists, resulting in an almost two-year legislative delay. By displacing previous production to other land, biofuels feedstocks production can induce ILUC, having a significant impact on the GHG balance. These effects are not specific to biofuels, but are general to all incremental land use. ILUC effects cannot be monitored since displacement could move agricultural production to areas outside of the country; it could be distributed through global trading; and typically occurs with significant time lags. As a result, models are used to determine the ILUC effects of biofuels.

According to an EU study assessing possible cumulative effects of the biofuels target commissioned in early 2011, virtually all modelling exercises support the claim that GHGs from ILUC caused by increased biofuel demands are significant. The results cast doubt on the emissions savings from crop-based fuels.

Biofuel Industry Perspectives

In principle, the EU’s decision to limit the use of crop-based biofuels will ensure that biofuel targets do not conflict with food production or the environment, allowing for the channelling of more crops towards food and feed uses. However, biofuel producers are challenging the assertion that crops grown for fuel production are a threat to food supplies. Instead, industry officials suggest that food waste, growing appetites in emerging markets and commodities speculation are also part of the root cause but commonly ignored by the media. According to the Secretary-General of the European Renewable Ethanol Association (ePure), higher prices could be viewed as a positive, driving innovation in crop use, cutting agricultural waste and increasing productivity.

Without knowledge of the full impact of production, refining and delivery of biofuels, particularly within the context of land-use change, many remain wary of the environmental and social implications land and air transportation biofuel targets may have on the broader global system. The EU draft regulations will require approval from EU governments and lawmakers and thus the full impact of this policy decision remains to be seen.

By Kaitlin Szacki, kszacki@delphi.ca

The Delphi Group

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EU Biofuel Policy U-Turn Harvests Mixed Reactions