Would your CEO or CFO want to know if up to 117% of profits were at risk? In other words, a profitable company would erase all profits? If yes, you may want to make sure you are paying attention to Copenhagen's meetings on climate change. By Thera Kalmijn & R. Paul Herman

The potential regulation and cap and trade systems are important issues, particularly in carbon-intensive industries where TruCost estimates carbon cost earnings (EBITDA) impacts of 2% to 117% for utilities, and 1% to 10% for less carbon-intensive industries1. However, those who are focusing only on strategies that will just meet regulatory requirements are missing the boat. Forward-thinking companies are seizing the opportunity created by the environmental crisis to shake costs not only out of their operations, but also out of supply chains.

According to a 2008 McKinsey Quarterly article, "… between 40 and 60 percent of a company's carbon footprint resides upstream in its supply chain-from raw materials, transport, and packaging to the energy consumed in manufacturing processes. For retailers, the figure can be 80 percent2." In order to manage profit risk and exploit this opportunity, accurate and relevant information regarding carbon impacts throughout the value chain must be available at the point of decision-making.

A starting point is measuring and reporting GHG emissions. Accounting and reporting is no simple task and requires a deep understanding of processes and carbon impacts in your own operations and in your supply chain. According to the Carbon Disclosure Project (CDP) and HIP analysis, about half of the S&P firms track GHG emissions and 82% of the Global 500 reported data to the CDP in 2008. While understanding and reporting carbon impacts in terms of the Greenhouse Gas Protocols' Scope 1 (operations), Scope 2 (electricity usage), and Scope 3 (supply chain, product use, etc.) emissions standards is a good start, it is what you do with the information that is critical in driving profits in a low-carbon economy.

Levi Strauss & Co. leverages carbon impact data to effect change upstream and downstream. In a recent life-cycle analysis for a pair of Levi's® 501® jeans, Levi found 58% of climate impacts occurred in product use (washing and drying), and 35% came from their supply chain and manufacturing. Levi is taking a two-pronged approach to reduce product climate impacts; one focusing on the consumer with labels that recommend fewer washes and using cold water, and the other focusing on their supply chain and logistics. While they are still in the early stages of supply chain carbon reduction efforts, a 2007 test-run switching to intermodal transport (mixed rail and truck) produced a 47% reduction in climate impacts, showing that even their early efforts have payoffs3.

The most visible recent green supply chain move was Walmart's introduction of a Supplier Sustainability Questionnaire. In their latest report to the CDP, Wal-Mart stated "…we believe Wal-Mart's supply chain is likely to have an annual carbon footprint that is at least 100 times greater than our total Scope 1 and Scope 2 emissions4." While Wal-Mart's sustainability efforts started at home in their own stores and operations, it was clear that affecting the supply chain would be key to squeezing carbon and cost out of their products.

There are six key steps to effective carbon emission management practices: measure, disclose and report, verify, manage, set targets, and reduce. Each of these steps is important in managing risk and identifying opportunities. Developing a deep and accurate understanding of Scope 3 supply chain impacts is crucial to focusing efforts on the right opportunities particularly for supply-chain intensive industries. According to Chris Erickson, CEO of Climate Earth, "Carbon accounting is the new lens for management. Finding hidden fossil fuel wherever it lies in your supply chain is a key to innovation and effective strategy in the emerging low carbon economy. It's smart business, and the right thing to do."

Climate Earth provides carbon accounting for Webcor Builders, the largest general contractor on the west coast. Webcor aims to not only understand its own supply chain footprint, but to create the first database of greenhouse gas emissions for new construction projects. Every building material, from glass and drywall to steel and concrete, has greenhouse gas emissions associated with its creation. The resulting database will enable designers and builders to make smarter, lower carbon decisions about materials and designs from the earliest conceptual phase of a project. Carbon accounting gives Webcor executives a new strategic view of their entire supply chain, from the extraction of raw materials, to manufacturing of building products, to the construction process and the use-phase of buildings.

Working proactively to reduce impacts in the supply chain is a critical way to prepare for and stay ahead of whatever might come out of Copenhagen. If up to 117% of your profits can be eroded by not managing carbon efficiently, then wouldn't you want to address those risks and ensure those profits are maintained - and possibly grow by helping customers do the same? Reductions in emissions help the bottom line as well as the ecosystem, reduce risk and liabilities, and create opportunities for new products or services. Leading companies in a low-carbon economy will lead not only their own organizations, but also their supply chains to greater environmental and financial sustainability.

To learn more, go to HIP Investor, SureGround and Climate Earth - and attend the free webinar "Carbon Efficient Supply Chains" on November 18, 2009. Register here: http://bit.ly/3huVq1.

Thanks to Frankie Ridolfi at Climate Earth for his contributions to this article.