Is your chief financial officer still reeling from the dawning realisation of the scale of your company's carbon liabilities and the huge challenge involved in keeping proper and timely account of them?
No wonder. Chances are the way your company currently collects greenhouse gas data won't cut it when trading starts.
CE Daily talks to Ernst & Young's Lorraine Stephenson about the complex task of integrating greenhouse gas data with traditional financial data.
Three factors
Plenty of companies have procedures in place for estimating their greenhouse gas emissions – but the essential task of integrating it with their financial systems is a challenge that most have yet to fully come to grips with, according to Ernst & Young partner Lorraine Stephenson.
One of the biggest challenges is that, up till now, the people responsible for greenhouse gas data have largely been "either operational people, engineers in the field, or they've been the environmental group within an organisation … they haven't been financial people", Stephenson says.
"The second issue related to that is that the way the data has been collected has usually been in a fairly ad hoc system … usually something like a fairly simple spreadsheet."
Then there is the timeliness of the data, with most organisations currently only gathering data on emissions each year.
These three factors mean greenhouse gas data is "not something that's been core data in the day-to-day operations of the company, and particularly not in the financial sense", Stephenson says. (listen to audio clip one)
But the demands of emissions trading – and the potential for carbon liabilities to swamp revenue lines – means companies will need to revamp their management of greenhouse gas data, so that it can be accessed by a CFO "on the same sort of basis as you would any other ledger information … the normal profit-and-loss type information", she says.
'Dialogue has to shift'
Stephenson says despite a "growing awareness" among companies that they need to make changes, there is still a long way to go.
"A lot of the data and knowledge has resided with a limited number of people in each organisation. CFOs generally haven't been particularly attuned to the issue," she says.
"One of the challenges going forward is that the dialogue has to shift now and it has got to be a priority of the CFO. And in the companies I have spoken to I think they are now getting it, but they haven't quite understood the magnitude of the issue," she says.
"When you multiply out the tonnes [of emissions] by dollars and you look at the expressions of CFOs … you realise they haven't actually thought this through. And that is a difficult starting point when there are only two years to go to be actually ready."
"I think for some of the large liable parties it may be well that they did have a view for some time that they may get a free allocation … and so maybe it just hadn't quite penetrated previously what that level of impact is."
"But I am sure they are all highly attuned now, because it is obvious the majority of liable parties will have to buy their permits and buy them in their entirety," she says.
IT systems
Stephenson says one of the difficulties for many companies is that they use highly customised accounting systems, making the task of modifying these to include carbon data a complex undertaking.
"One of the challenges will be to bring in a new software package or an upgrade of an existing one and then to be able to tailor it to their very customised package."
"There is probably not going to be an off-the-shelf solution because each company has something that has evolved over time to suit their own corporate requirements and greenhouse gas data now has to fit into that."
This will be a tough task, yet it is one that companies should aim to have bedded down by the time trading starts in 2010 so that they properly understand their carbon assets and liabilities, Stephenson says.
"If you have to trade right at the beginning of the scheme … you would want to know on a timely basis what your exposure is," she says.
"The other consideration in accounting terms as well is, for example, if an auction happened before the scheme starts – and that's a possibility – you also need to be able to put these commodities somewhere in your accounting system."
Steps to better data management
Stephenson says companies looking to overhaul their greenhouse gas data systems should start with "an initial review of the status quo".
"Look at the overall reporting system you have in place today … and check it on a process basis to look at who is gathering the data, what the guidelines are for collection of that data, and the flow of the data from the person collecting it, particularly if it's at multiple sites."
"Then the next thing would be to ask 'can we collect this data on a more timely basis?'"
"The thing to do would be to gradually … move from yearly to six-monthly to quarterly and then hopefully, within two years, down to monthly data. Because I think each move to a more frequent reporting regime will find its own challenges."
Companies also need to find out whether they can rely on the provider of their current accounting system to supply an add-on package that will account for carbon data or whether they will need to look elsewhere for any necessary software modifications.
"And then what you need to do is work out what would be the mechanism for getting that raw data from a site into the financials," Stephenson says.
This could be either an approach based on first integrating greenhouse gas data from various business units and/or sites and then translating it into the financials or a company might instead opt to integrate the greenhouse data with financial data at the business unit or site level. (listen to audio clip two)
Data accuracy
Stephenson says companies also need to assess the accuracy of their emissions data.
"Where it may have been quite acceptable to report the data – particularly in a voluntary sense for sustainability reports – and put some parameters around it in terms of the accuracy or the level of confidence in terms of the data one of the real challenges with an emissions trading scheme is that buyers and sellers want to be assured that one tonne [of carbon] is one tonne."
The ambitious nature of Australia's proposed trading scheme, which unlike Europe's scheme will encompass methane and other greenhouse gases as well as CO2, will add to the complexity of ensuring data accuracy, Stephenson says.
So, for example, companies in the oil and gas and coal mining sectors that emit large quantities of methane can't just look to Europe for ways to improve data quality.
"We have no precedent within Europe to look at the accuracy of that data," Stephenson says.
The "widely varying" quality of this data means improvements are essential and companies are working on solutions, she says. But these will be expensive and implementing them will often involve downtime in their operations.
That means companies need to be sure that their proposed solutions will be acceptable to the regulator and to the financial markets and will work properly, she says.
"One of the challenges is for companies as they are working through this accuracy issue is that they don't have the guidance from the regulator yet about what level of accuracy will be deemed satisfactory.
"I think what they will probably do is reach agreement with the regulator that they move towards a much tighter level of compliance over time, but that is yet to be discussed," Stephenson says.
"Those discussions are really only just starting to happen with the Australian government as they are starting to map out their emissions trading scheme."
