By Lawrence E. Goldenhersh
Jan. 28, 2010
Going green is at the top of everyone’s mind, but for some companies it is a federally mandated obligation.
As “going green” becomes a social and professional standard, companies are reducing carbon footprints in order to become more socially responsible and save money in energy costs. Environmental advocacy aside, the Obama administration’s passage of the Mandatory Greenhouse Gases (GHG) Reporting Rule in September 2009 has led thousands of companies to seek carbon management solutions for financial reporting and legal compliance. Penalties for non-compliance range from civil and administrative to criminal charges and hefty fines. With GHG reporting taking effect Jan. 1, 2010, companies are becoming transparent not just to go green, but to avoid breaking the law.
The new compliance mandates deliver unprecedented opportunities for the environmental consulting industry. Specifically, the reporting rule mandates that liable companies must have a “best available monitoring method” in place by April 1, 2010 for accurate reporting of GHG emissions. No longer will companies be able to rely on internal spreadsheets or other basic accounting methodology. Rather, many companies are seeking software solutions from external vendors who specialize in compliance accounting.
The necessity for a specialized accounting solution is that GHG data reports will be scrupulously audited. Any missteps could potentially lead to discrepancies in company financial statements, enforcement action by the Securities and Exchange Commission, and private class action lawsuits from investors who are misinformed about the cost and risk posed by GHG. Given this increased risk, investors, regulators and juries will view the reporting criteria on the same level as other financial metrics on which the market relies to value a company.
Furthermore, in the case that the U.S. government or the EPA implements a cap and trade system to manage the reduction of GHG, inaccurate reporting will be detrimental for a company’s financial data if it emits GHG in excess of its allocation. For companies that must purchase carbon allowances to support their normal business practices, this new carbon-related cost could prove devastating if not properly analyzed, measured, accounted for and financed.
For publicly traded companies, the risk extends beyond finance-as the price for GHG emission allowances rises, the cost of emissions are likely to become “material” to operations, requiring that they be disclosed in federal securities filings. These filings will subject CFOs and their companies to scrutiny from shareholders and regulators, including the new “C-Suite” of the carbon constrained world-the SEC (Securities and Exchange Commission); FTC (Federal Trade Commission) and the CFTC (Commodities Future Trading Commission)-not to mention the U.S. Justice Department.
As GHG emissions management and reduction becomes a core strategic objective for senior management, they need to turn to environmental engineers for guidance on implementation of a GHG management system. Because GHG is specialized, care should be taken to select a software provider that provides both air emissions and GHG domain experience and software development and operating experience.
Years of compliance software development has revealed several key elements for comprehensive monitoring methods:
First, effective management of GHG requires a centralized software system with the ability to calculate a variety of business processes based on an understanding of the particular industrial process. Next, it is imperative that the GHG software is grounded in the particular chemistry and requirements of GHG to avoid conversion and differentiation mistakes between the various GHG gasses. Additionally, the software system must have the flexibility to continually adjust as protocols for GHG data collection, calculation and reporting change and evolve. Finally, Internet-based architecture, also known as “cloud computing,” is ideal due to the ability to calculate the highly distributed, complex nature of the GHG data and the ease and speed of deployment. The Internet is also ideal for managing carbon in the supply chain, where most of manufacturing companies’ emissions occur.
The GHG crisis has posed the unique opportunity for various industries as well as cross sections of a company to interact. The necessity for a sound monitoring system engages the environmental engineer into the executive suite as a critical resource to the integrity of a company’s financial planning. The financial aspect also engages the CFO, who will rely upon the calculated emissions data to preserve and drive competitiveness and shareholder value. Furthermore, the IT and operations departments are streamlined in the day-to-day maintenance of the monitoring system, and the EHS department will be responsible for reporting the emissions. While GHG management and reducing carbon footprint may be more complex than anticipated, existing software provides the necessary tools to improve environmental quality while enhancing competitiveness and complying with the law.
Lawrence Goldenhersh is president and CEO of Enviance, Inc. in Carlsbad, CA, where he is responsible for the strategic and operational management of the company. Goldenhersh holds a law degree from the University of Virginia. He can be reached at [email protected].