When you think of your company’s benchmarks, what comes to mind? If you thought of revenue metrics that help evaluate your performance—both internally and against competitors—you’re probably part of the majority.
But have you also thought about how your company stacks up against the competition regarding climate change?
What is carbon benchmarking?
Carbon benchmarking is a way for companies to understand their greenhouse gas emissions relative to previous years and their peers. Simply put, it requires emissions measurement, then comparison. Though a relatively new process, carbon benchmarking has risen in popularity thanks to market pressures, the supply chain network effect, and investor disclosure demands. In short, these stakeholders rely on benchmarks to evaluate suppliers and investments.
What’s the point of carbon benchmarking?
Climate change has come to the forefront as one of the highest priority environmental, social, and governance (ESG) issues facing businesses today. A 2021 survey by Macquarie Asset Management showed that climate change is widely considered the priority ESG issue for investors. Now more than ever, it has become increasingly important for businesses to track and report GHG emissions reductions, especially with policymakers proposing new emissions disclosure rules.
Carbon benchmarking serves two primary purposes:
1. The systematic evaluation of a company’s emissions relative to its peers to understand market and environmental performance.
2. The evaluation of GHG emissions internally—a company can benchmark against its performance and measure progress over time. Internal carbon benchmarks require companies to set a baseline—annually or before significant programs or active management.
Ideally, these efforts result in a better understanding of a company’s environmental impact and the effectiveness of its sustainability measures. For example, many commercial building owners use the EPA’s ENERGY STAR program to improve energy savings and reduce GHG emissions. Buildings can establish a baseline and benchmark their energy and emissions data to understand performance in relation to buildings with similar characteristics like size, location, and type (e.g., residential, industrial, office building, retail).
Why is carbon benchmarking important?
Carbon benchmarking came on the scene after the U.S. mandated annual GHG emissions reports for thousands of manufacturing facilities in 2010. Signed on March 22, 2010, the EPA Mandatory Reporting of Greenhouse Gases Rule required “five types of suppliers of fossil fuels or industrial greenhouse gases, manufacturers of vehicles and engines (except light-duty sector), and facilities from 25 source categories that emit 25,000 metric tonnes or more per year of GHG (CO2e)” to monitor and report emissions for CO2, CH4, N2O, HFCs, PFCs, SF6 and other fluorinated gases. The rule was groundbreaking, as it covered roughly 85% of the nation’s GHG emissions and applied to around 10,000 facilities. It allowed for the standardized collection of accurate and comprehensive emissions data, which, you guessed it, laid the groundwork for carbon benchmarking.
With the 2010 rule, the U.S. could better understand and track where GHGs come from, a crucial step in developing policies and programs for the mitigation of GHG emissions. For the first time, it also allowed businesses to compare their emissions to their peers and identify cost-effective ways to reduce emissions.
Mandating disclosure also provides access to data and the ability to regulate further—or promote through market forces—emissions caps or performance standards. The oft-used Peter Drucker adage, “what gets measured gets managed,” is appropriate here.
Carbon disclosure effectively prompts companies—and stakeholders—to push to reduce GHG emissions. In fact, according to a 2019 study by the European Corporate Governance Institute, the 2010 rule resulted in a 7.9% emissions reduction following disclosure. As the SEC pushes for new carbon disclosure mandates, we can only hope to see similar results.
In addition to climate benefits, climate disclosure and larger ESG initiatives are premium value propositions—sustainable companies are often more profitable than their counterparts. For example, a 2014 Harvard Business School study, “The Impact of Corporate Sustainability on Organizational Processes and Performance,” found that “high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.” Many companies utilize benchmarking performance against their competitors so they can disclose this ranking to investors and other stakeholders.