As CEOs grapple with increasing customer demands for sustainable goods and services, mounting pressure from activist shareholders, and the uncertain costs linked to climate change, carbon management is at last getting the executive airtime it deserves, and is moving from a CSR issue to a boardroom priority, albeit slowly.

The biggest challenge boards face now, says Alan Buckle,a member of the board of directors of KPMG, is deciding how quickly to act. Jump too soon and you could miscalculate where the market is moving. Jump too late and you could lose first-mover advantage. In either case, you risk making expensivemistakes and damaging your reputation.

“A few years ago, we thought carbon management was an issue that would happen slowly, whereas boards now realise this is happening quite fast and they need to be involved,” he says. Research conducted earlier this year by KPMG and YouGov found carbon management now ranks in the top 10 list of priorities for chief executives among the FTSE 350.

Though the carbon market is moving fast, it is still in the embryonic stage and conflicting messages abound. Carbon regulations presently exist for some industries under the EU Emissions Trading Scheme, but not for others. Meanwhile, consumers are calling for greener goods and services, but many are still reluctant to pay a premium for them. Another concern is the uncertain cost of climate change. The UK Government puts the social cost of global warming (including the consequences of Britain looking more like Spain) at £70 per tonne of CO2. That amount stands to increase by as much as £4 per tonne for each year of inaction, depending on who you ask.

The tipping point

Despite all the confusion, RichardWarner, head of the resources team for Accenture, believes the next 12-18months will mark the tipping point for boards to embark on a carbon management strategy. However, he cautions: “Before you say anything about your strategy, be it to shareholders, employees, or customers, youmust understand your products and know your ability to abate carbon.” There also needs to be clear and consistent leadership from the top down, he adds.

Since assigning a boardmember to oversee the firm’s carbon strategy a year and a half ago, Michael Kelly, head of KPMG’s CSR team, says the topic has moved from an annual footnote on the boardroom agenda, to a focus at every board meeting.

This, in turn, helps KPMG to change employees’ behaviour, which is a critical part of its carbon management strategy. “Staff take this much more seriously when it comes from the board,” he says. Senior leadership must also be closely involved in the actual carbon measurement process, as this affects both internal and external operations and relationships.

The first step in measuring a carbon footprint is to understand where to draw the boundary of what youmeasure, says Michael Rea, COO of the Carbon Trust. Carbon measurement can be fairly simple in terms of calculating electricity usage and howmany carbon miles stem from business travel, for example. Where it gets murky is when you take into account the carbon footprint of stakeholders and suppliers.

If, for example, you are a 30% stakeholder in a business, youmust decide whether you are responsible for 30% of emissions, or whether the emissions liability falls to those who have operational control of that business. Once internal emissions are calculated, boards must determine how much muscle to flex with suppliers.

Wal-Mart, the world’s largest retailer, is wielding its scale to pressure suppliers to make environmentally sustainable products. Companies with less clout will probably need to tread more lightly, but leaving supply chain emissions out of the carbon equation is increasingly viewed as tantamount to fudging figures on the annual report, and businesses that try it will be caught out.

After companies have worked through themeasurements, the next stage is to understand the broader business risks linked to the physical and social impacts of climate change, such as whether your business would be affected by rising temperatures and what would happen if your products or assets became socially unacceptable or taboo – as has happened, for example, in the tobacco industry.

Next, businesses must identify ways to reduce their emissions. For most companies, carbon management starts with energy efficiency and conservation, though bizarrely businesses struggle with the latter and forget that installing energy-efficient lightbulbs is worthless if the lights are switched on all night.

Other companies are quick to jump into offsetting schemes so they can wave their carbon neutrality banner at the next shareholder meeting. But this can be a divisive and expensive path.

Filling a much-needed gap

In The God Delusion, Richard Dawkins jests that his book “fills a much-needed gap”, saying that people would benefit from more intellectual space to ponder scientific views on human existence and rival religious theories.

Sceptics of carbon offsetting might argue that, like religion, these schemes provide a sort of moral duvet. But if such schemes did not exist, or were restricted to those that could prove their positive environmental impact, then the ‘gap’ would be filled withmore innovative solutions to climate change.

Critics say the main problem with offsetting is that it does little to encourage people to stop polluting. HSBC, which in 2005 declared itself the first carbon neutral bank, has ‘removed’ the bulk of its emissions through offsetting, rather than operational changes, but in doing so has seen emissions increase year on year.

“Offsetting has a role to play, but you need to first look at your direct footprint, then up and down the supply chain, and then make sure the offsets you do buy are robust,” says the Carbon Trust’s Rea. Keep in mind, too, he says, that offsetting is a cost centre, while carbon reduction strategies save business money. Offset providers, of course, say they do encourage companies to reduce first and offset second. But sceptics maintain that offset money, such as that paid out by HSBC, could be far better spent on technological innovation and other solutions.

The fact is, no-one really knows whether paying £20 to offset the emissions of a flight from London to Bangalore will make a difference to global warming, and there is a growing number who believe it won’t.

It is not surprising, then, that some companies, such as KPMG, are steering clear of offsetting altogether and focusing instead on reducing obvious internal costs. “You need to work out the quick wins first, before agonising about the long term,” the firm’s Alan Buckle advises. For instance, he says, as a service business, KPMG cannot avoid business travel and so is making substantial investments in videoconferencing technology. “When technology gives you a choice to change your behaviour, you then need to determine how to capitalise on it. You could spend a lot of money now, or wait and see one of your competitors develop very quickly.”

Growth in a CO2 constrained world Boards know they need to change their evil ways and that moving to a low carbon business model will cost them money. What they don’t know is how to expand their business in a carbon-constrained world, says Buckle.

Of course, the answer to this is subjective. While Tesco can make money now by increasing and hiring staff, removing costs from its supply chain and responding to ethical shoppers’ demands, the circumstances may not be as clear for other industries, he observes. “That question of timing, technology development and the competitive environment are the real issue boards need to understand.”

Accenture climate change expert Jonathan Burton agrees that boards must be on the constant lookout for commercial opportunities and disruptive technologies, which could change the competitive landscape and pave the way for new entrants. For instance, he says: “With the exception of the Toyota Prius, we’ve not seen the aspirational green product, but if someone could tap into a consumer aspiration to be green, they stand to lead a particular market.”

Equally, he says companies must consider the “cradle to grave” carbon footprint of the products they sell and manufacture. How able customers are to recycle and re-use these products and how energy-intensive it is to dispose of them will become increasingly important, particularly if proposals to cap household emissions and rubbish come to fruition. Boards must also be cognizant that employees are consumers too, so what they expect is very important, particularly in the war for talent. Burton believes some of the biggest competitive shifts are likely to emerge from the energy industry, where there are opportunities for less obvious players. For instance, he says you could see Tesco partner with an existing power company to develop a white-label energy product. Taking this a step further, you can envisage a partnership between a supermarket, a utility and an appliance manufacturer, such as Bosch, to offer a full-service green home solution, helping people to reduce their carbon footprint by making sure homes have the necessary insulation, energy-efficient lighting and green electricity.

Sky is another example. Today, not many people would think of Sky as a competitor to British Gas, but it makes perfect sense for consumers to view their home energy use via Sky’s set-top boxes instead of relying on information from their utility company. “Give it a couple of years and the whole competitive landscape will have shifted,” says Burton.

There is now a whole range of carbon management options for boards to consider. But doing nothing is fast sliding off the list. For some companies, the temptation is still to stand on the sidelines, but taking no action will inevitably have consequences. Acting too soon and without a clear focus also poses high risks, so there is a delicate balance to be struck.

“There will be big winners and losers out of this phase – that is clear,” Burton warns. So much for the three wise monkeys’ strategy.