UK Spending On Climate Change – Latest Research

[Derek_Parkinson]

Money talks, as the saying goes, and how much is spent by companies on managing their emissions, and where, tells us a lot about how UK industry is responding to climate change. Research by Verdantix has given us unprecedented views of how different sectors compare in terms of spending, what type of low carbon initiative attracts the most corporate spending, and some clues as to why this is so.

Overall, UK industry is set to spend more than $5.3 billion on climate change and sustainability initiatives in 2010 according to the research, based on analysis of 457 large companies. Verdantix surveyed 200 corporate budget-holders and analysed some 1,200 initiatives, covering investment in employees, equipment, consulting, project implementation and support services.

While in 2009 business spending on initiatives directly linked to climate change and sustainability shrunk by 3%, in 2010 Verdantix predicts the market will grow by 8%. And after making reasonable assumptions for factors such as GDP growth, energy prices, carbon prices, and regulatory decisions, Verdantix forecasts growth of 13% in 2011 and by 18% in both 2012 and 2013. From 2009 to 2013 the compound annual growth rate will be 14%, it says.

The research enables us to identify spending “hot spots” - sectors and types of initiative where spending is either high or expected to increase rapidly over the next few years.

Big spenders, growth areas

One of the more striking findings is the heavy spending in the retail sector, amounting to some $944 million in 2010. This far outweighs the $639 million by oil and gas industries and the $473 million by industrial goods and services. Less surprisingly, the utilities sector is among the big spenders with $412 million, followed by technology with $379 million, and construction and building materials with $363 million. Verdantix expects these big spenders to maintain their lead – and their relative positions – through to 2013.

“We were a little surprised at just how big the retail sector is – that it's so much larger than oil and gas,” Verdantix Director David Metcalfe told Low Carbon Board Report. “The spending by the utilities and oil and gas sectors was pretty much as expected. The research also shows how important engineering and technology industries are becoming – probably because they see opportunities in this area.”

Breaking the spending down into types of initiative reveals that improving the energy efficiency of buildings is the most important area of work in 2010, accounting for $701 million, far outweighing the $427 million to be spent on marketing of sustainable products and services, the $419 million earmarked for industrial emissions reduction, and development of sustainable products and services, which accounts for $319 million.

It also indicates which types of initiative are expected to take off between 2009 and 2013. The fastest growing types are expected to be development of smart grid infrastructure, with a compound annual growth rate of 31%, followed by carbon data collection and management with 28%, cleantech research and development with 26%, electric vehicles and infrastructure with 24%, and sustainable product development with 23%. However, it should be born in mind that some of these start from a very low base.

And what will all this money be spent on, exactly? The research suggests that in 2010, employees take the lion's share of expenditure with $1.85bn, or some 36% of the total. Investment in equipment, including software; consulting services; and implementation projects – such as improving energy efficiency in buildings and data centres and installing on-site renewables – are the next largest spending categories, accounting for roughly 20% each of the total spend.

Hot spots, management deficits

Two areas of work stand out as the “hot spots” mentioned earlier. The first of these is classified by Verdantix as Financial Carbon Accounting. “This is something that will typically be looked after by the finance function. It includes spending on forecasting the costs of carbon, collecting energy consumption data, getting better quality data, and pushing this data into business processes – by implementing carbon budgets, for example,” says Metcalfe. In 2010, Verdantix expects the total spending on Financial Carbon Accounting to amount to around $89m, but this is set to rise steadily over the following years, with a compound annual growth rate of 20% to 2013.

Energy and Carbon Data Collection and Management is the second hot spot. A typical example would be a programme to implement smart meters and the associated data management software. “For example, I've just been talking to a retailer which has 2,900 buildings. It is in the process of installing smart meters in 1,000 buildings, and this is because of the Carbon Reduction Commitment and the Early Action Metric,” he says. Verdantix expects the total spending on Energy and Carbon Data Collection and Management to amount to around $265m in 2010, but this will rocket by 40% next year, a rate that falls off only slightly in following years. Overall, Verdantix expects the compound annual growth rate to be 30%.

The research also sheds new light on the role of company directors in responding to climate change. Verdantix found that few companies have appointed what it calls a Chief Sustainability Officer – a senior figure “with a remit to centralise spending and governance across all climate change and sustainability initiatives.” A lack of cohesion between a company's executive team and its senior managers is the main risk of this state of affairs, says Verdantix.

Specifically, a “management deficit” may be the result, with the executive team lacking the expertise, information, or a compelling business to respond more decisively to the low carbon agenda, which will typically be perceived as a CSR issue, says Verdantix. In such a scenario the knowledge and expertise needed by the executive team will typically be locked in the business units headed by the energy manager, or the chief information officer, or the director responsible for CSR or environmental health and safety.

“These people just don't get time with the CEO, but they will have the domain expertise. I suspect that independent consultants are filling that gap at the moment. This isn't the case in all sectors – for example in the utilities sector you just can't have that gap,” says Metcalfe.

Overall, there are also pointers to what is driving the low carbon strategies of companies in particular sectors. Compliance with regulation is a given, but other factors are beginning to emerge. “Competition between companies is something we are seeing in the oil and gas and construction materials sectors. In retail too, where it is an important branding issue. In IT and telecoms there are signs that companies have spotted opportunities and are positioning themselves to compete for them,” says Metcalfe.


Key questions:

- Have we reviewed our energy metering and management systems?
- How can we push the cost of carbon into our business units?
- Should we create a Chief Sustainability Officer role?