05 agazine magazine 05 mt - ey tax insights · 05 magazine 05 tax insight for business leaders a...

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Tax insight for business leaders

A sustainable mindset

The role of tax in a changing climate

Spain’s approach to a green energy policy

Changing behavior with incentives and taxes

Sustainability reporting comes of age

ImprintPublisher:Ernst & Young EMEIA TaxMaagplatz 1, 8005 Zurich, Switzerland

Marketing Director: Alfred RaucheisenProgram Manager: Alexander LorimerContent Advisor: Monica KremerOnline Manager: Mikael Enoksson

Publishing House:Infel AG Militärstrasse 36, 8004 Zurich, Switzerland

Publishing Director: Elmar zur BonsenEditor-in-Chief: Rob MitchellEditors: Fergal Byrne, James WatsonArt Director: Guido Von DeschwandenProject Manager: Michèle MeissnerPicture Editor: Diana Ulrich

Printer: Rüesch Druck AG9424 Rheineck, Switzerland

All rights reserved. Contents of this publication may not be reproduced whole or in part without written consent of the copyright owner.

A part of this issue will be distributed as an insert in the Financial Times across Europe, Middle East, India and Africa in September 2011.

Ernst & Young Issue 05 T Magazine 3

By Stephan Kuhn Editorial

Dear Reader

Sustainability has moved from being a “nice to have” to a “must have” for today’s business leaders. There is now a recognition that sustainability is not just good for reputation; it is also good for business. And increasingly, this means more than risk management or cost reduction through improved energy efficiency. Market-leading companies now see that a clear sustainability strategy allows them to develop better products, make their workforce more productive and grow more quickly than their competitors.

The reasons for this high-level attention are well understood. Growing concern about climate change, resource scarcity and the impact of business on society are encouraging companies to think more carefully about the impact of their short-term decisions on their long-term viability. Customers, investors and other stakeholders are all scrutinizing business more carefully and placing increasingly stringent demands and expectations on corporate behavior. The days when corporate social responsibility could be left to the public affairs department are fast becoming history – companies now need substance as well as form in their sustainability pledges.

As well as coming under the scrutiny of boardrooms, sustainability is also forming a key part of fiscal policy. Around the world, regulators are ramping up the use of a range of indirect taxes, including exploring new carbon taxes, to raise revenues and steer companies toward more responsible energy usage. At the same time, there is a growing availability of tax credits and incentives to stimulate investment and innovation into sustainable industries and business models.

Although individual jurisdictions differ in their approach, it seems clear that taxes will form an important part of international efforts toward more sustainable business practices. In this fast changing environment, it is becoming increasingly important to have the right people and processes in place to understand the impact of these taxes and incentives on their business. Clear lines of communication between the tax function and the business will become increasingly important. Only then can the company be confident that it is taking full account of all green taxes and incentives in its investment planning.

In this issue of T Magazine, we explore the sustainability agenda in the context of a rapidly evolving fiscal and regulatory environment. We look at how leading companies are responding to calls for greater corporate responsibility from stakeholders, and discuss the importance of cost management and tax planning as a component of a sustainability strategy.

I hope you find the publication valuable and stimulating.

Stephan Kuhn

Tax as a catalyst for a more sustainable future

Stephan Kuhn is Area Tax Leader for the Europe, Middle East, India and Africa (EMEIA) region at Ernst & Young.

Stephan Kuhn

4 T Magazine Issue 05 Ernst & Young

Contents Credits: RIA Novosti, Matthew Rainwaters, Keystone / Science Photo Library / Manfred Kage; Cover: Keystone / EPA / EFE / Julio Munoz

Discover more content, news and features on the T Magazine website at www.ey.com/tmagazine

44

“There are no silver bullets but what is certain is that it is impossible to maintain balanced growth without the proper use of natural resources.”

Teresa Ribera Rodríguez, the Spanish Secretary for Climate Change, on the importance of balancing the demands of economic growth with environrmental protection. Prior to her current role, Ribera Rodríguez was Head of the Unit for Compliance and Development at the Spanish Climate Change Bureau.

Features8 __ A new reality for global businessThe days when sustainability was largely a PR-led affair are fast disappearing.

14 __ Emitting a new view of the worldA visual representation of global carbon dioxide emissions offers a world map from a completely new perspective.

16 __ The missing variablesUncertainty over feed-in tariffs and carbon prices are slowing the growth of renewable energy.

18 __ Spanish steps towards green energyTeresa Ribera Rodríguez, the Spanish Secretary for Climate Change, on the importance of an energy policy incorporating a strong commitment to smart energy use.

21 __ New responsibilities in the textile industryFashion firms like Pepe Jeans are changing their methods of production to better address the environmental concerns of customers.

24 __ It’s time to talkThe connection between transfer pricing and sustainability is not obvious at first sight, but is becoming increasingly important.

Management26 __ High yields from sustainable suppliesSourcing strategies that minimize environmental and social impacts are becoming more widespread.

30 __ Keeping sustainability in the familyThe German logistics firm Dachser is seeking to give the environment a bigger role alongside economic and social considerations.

33 __ New opportunities, new rolesCleantech is often seen as the next frontier for cost reductions and revenue growth. Key is ensuring tax directors and CFOs fully understand these potential opportunities and impacts.

Focus36 __ A shift in the sources of powerInvestment in alternative energy sources and clean technology is gathering momentum.

42 __ The drive for transparencyIn the face of mounting pressure to be transparent, a growing number of companies are choosing to report on sustainability.

44 __ Russia sets its sights on sustainable tax policyMikhail Mishustin, Head of Russia’s Federal Tax Service, talks to T Magazine about the country’s efforts to set a more sustainable long-term policy.

Outlook48 __ The short term thinking trapAccording to Georg Kell of the UN Global Compact, the single most important barrier to more widespread corporate action on sustainability is the short-termism of markets and business.

Cover

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Do the world’s leading businesses purchase innovation from outside or develop it from within? Through extensive research with 1,400 senior executives around the world Ernst & Young has developed key insights into how the world’s leading businesses are returning to profitable growth. To learn more about Competing for Growth, contact your local Ernst & Young office or visit ey.com/competing-for-growth

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News

GreeceJune 2011The Greek parliament approved a new austerity bill that was expected to avert the immediate risk of default. Prime Minister Papandreou won support for €28b of tax increases and spending cuts. In doing so, the Government paved the way for a further round of funding from the International Monetary Fund and European Union.

United KingdomJune 2011The Treasury announced a consultation on changes to the “controlled foreign companies” regime to try and stem the recent trend of companies leaving the UK over tax competitiveness concerns. The reforms are expected to cost the Treasury £840m a year.

BelgiumJune 2011The European Union proposed an expansion of its revenue-raising powers in a new budget. Measures being considered include the introduction of EU-wide taxes and a tax on financial transactions – the “Tobin tax”.

FranceJune 2011The Paris-based OECD announced that the Multilateral Convention on Mutual Administrative Assistance in Tax Matters is now open to all countries. The Convention seeks to help governments enforce their tax laws by creating an international framework for cooperation among countries in countering international tax avoidance and evasion. The opening of the Convention in

centers (IPC) in an effort to promote Thailand to become one of the leading international distribution hubs in Asia. The incentives are offered to trading activities that are carried on either entirely offshore or from onshore to offshore.

NetherlandsJune 2011Following a formal request from the European Commission, the Netherlands has amended its corporate tax rules to allow two sister companies to form a fiscal unity where they are held by an EU parent. These are important developments for (multinational) groups with profits and losses in the Netherlands that cannot currently be used under existing provisions of Dutch fiscal unity rules.

this manner is reflective of the growing recognition that tax administrators are increasingly viewing global companies through a “global lens” in order to be more effective in their enforcement efforts.

ItalyJune 2011A crackdown on tax evasion implemented as part of the Italian Government’s drive toward austerity measures led to the arrest of 45 individuals suspected of providing tax evasion services for hundreds of corporates and clients. Police said that a suspected €600m in tax had been evaded.

ThailandMay 2011The Thai Government enacted the tax incentive provisions for international procurement

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Global tax newsA roundup of recent developments from major governments and tax administrations

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Canada and Russia have already said they will not proceed. With each round of United Nations (UN) climate talks, the prospect of reaching a new, worldwide agreement remains distant. In fact, it looks increasingly likely that there will be no legally binding replacement for Kyoto by the time it expires. In the absence of a successor treaty, another approach is starting to gather steam. Leading emerging markets, including Brazil, China and India, are increasingly realizing that clean energy is one of the big economic opportunities of our times. Meanwhile, the European Union remains committed to pursue its efforts to control emissions through the carbon market, with or without Kyoto in place.

Launched at the start of 2005, the EU Emissions Trading Scheme (ETS) is the world’s first international company-level ‘cap-and- trade’ system of allowances for emitting carbon dioxide and other greenhouse gases. The EU ETS now operates in 30 countries: the 27 EU member states plus Iceland, Liechtenstein and Norway. In terms of industry sectors, the trading scheme currently covers some 11,000 heavy energy consuming installations in power generation and manufacturing.

In future, we may see a more unilateral system, with countries setting their own emissions and clean energy targets, while also working together on a range of trading and development schemes. What is clear is that much will rest on the next UN Climate Conference later this year, which is effectively the last chance to reach any agreement to extend Kyoto.


1993 1994 1995 1996 1998 1999 2000 2001

June 1992154 nations signed the UN Framework Convention on Climate Change, forming the foundation for the Kyoto Protocol.

December 1997 The Kyoto Protocol is created, setting binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions.

November 2000 UN climate talks in The Hague collapse after disputes over carbon sinks, non-compliance and finance for developing countries prove to be insurmountable.

March 2001 US President George W. Bush withdraws American support for Kyoto.

February 2005 The Kyoto Protocol comes into force.

October 2006 The UK’s Stern Review concludes that global warming would damage world gross domestic product (GDP) far more, if left unchecked, than it would cost to curb it.

Fighting global warming

1992 1997

News Credit: Keystone / AP / Anja Niedringhaus

The Climate Change Performance Index 2011

Germany

Share of global primary energy supply

United Kingdom

India

Russia

China

United States

Source: Germanwatch/IEA

2.73%

1.17%

5.06%

5.6%

18.62%

17.37%

Public market new investment in clean energy by country, 2010

Source: Bloomberg New Energy Finance

China, $5.9bItaly, $3.6bUS, $2.9bNorway, $0.8bCanada, $0.7bGermany, $0.7bRest of World, $2.9b

34%

20%17%

5%

4%4%

16%

Climate change treaties

__ The Kyoto Protocol on Climate Change marked the first important step toward a truly global effort to curb greenhouse gas emissions. It had its problems – notably the refusal of the US administration under George W. Bush to ratify the treaty. But it has also had its successes. Between 2005, when the treaty came into force, and 2009, the international market in carbon credits created by the protocol has allocated US$25b to clean energy projects in developing countries.

With the Kyoto Protocol set to expire in 2012, time is now running out to negotiate a successor. The US is again very unlikely to enter a new agreement and, without the US involved, Japan,


Credit: Keystone / Xinhua / Lan Hongguang, Keystone / Martial Trezzini

World consumption of energy has increased 5.6% in 2010, according to BP’s Statistical Review of World Energy, June 2011. This is the largest increase since 1973. In 2010, the country consuming most of the world’s energy was no longer the US, but China. China’s energy consumption rate grew 11.2% from the previous year, pushing the country’s total to 20% of global energy consumption. China also had the highest growth rate of renewable energy among large countries at 74.5%. www.bp.com/statisticalreview

5.6%

The World Economic Forum and Bloomberg New Energy Finance estimate that it would require annual investment in clean energy to grow to US$500b by 2020 in order for global warming to be limited to 2°C, without impacting economic growth.

2°C

Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change,

tells the annual conference of the International Emissions Trading Association that the current limit

of a 2°C temperature rise is inadequate.

“Two degrees is not enough – we should be thinking of 1.5°C. If we are not headed

to 1.5 we are in big, big trouble.”

2002 2003 2004 2005 2006 2007 2009 2010

April 2007A landmark judge-ment by the US Supreme Court rules that the Environ-mental Protection Agency can regulate emissions contri-buting to climate change under the Clean Air Act.

March 2007 The Fourth Assessment Report of the Intergovernmental Panel on Climate Change concludes that the warming of the climate system is unequivocal and very likely to be caused by human activity.

November 2008 The UK’s Climate Change Act is passed, with the target of reducing greenhouse gases by 80% from the 1990 baseline by 2050.

December 2009 The UN Climate Change Conference in Copenhagen achieves little and descends into conflict and recrimination.

November 2010 Parties to the Kyoto Protocol agree to create a “Green Climate Fund” to be worth US$100b a year by 2020.

November 2011 The 17th Conference of the Parties must decide the fate of the Kyoto Protocol in Durban, South Africa.

Beijing __ ChinaThe National People’s Congress approved the 12th Five-Year Plan (2011–2015) for national economic and social development. This

commits China to a greener (and slower) economic growth strategy that includes major investment in renewable energy and efficiency strategies. The plan aims to cut carbon emissions by 17% per unit of GDP by 2015 (from 2010 levels).

Washington __ USAThe US National Research Council released a Congress-requested report entitled “America’s Climate Choices”. The report warns that the country urgently needs a strong national policy to curb emissions, and that the risks of ‘business as usual’ are fast increasing. A significant number of Republicans, led by Rep. Joe L. Barton (R-TX), dismissed the report.

The global climate change agenda__ In November and December of this year, climate negotiators will meet in Durban, South Africa, to try and agree a binding global goal to reduce carbon emissions. Last year’s Cancun summit achieved modest progress – a 2°C target; a large Green Climate Fund; and a mechanism for incentivizing developing countries to stop deforestation – but failed to reach a consensus on specific cuts. The tone is already quite different from two years prior, when the Copenhagen summit fell apart over disagreements about costs, but budgetary pressures in many developed economies will weigh on talks.

2008 2011

Feature The future of sustainability Credit: Matthew Rainwaters


The days when sustainability could be left to the public affairs department are fast disappearing. Today, sustainability is a key strategic imperative and a potential source of competitive advantage.

A new reality for global business

SummarySustainability is evolving from a public relations challenge to a strategic and operational imperative. Increasingly, companies are finding that such initiatives make good business as well as ethical sense – offering a potential source of competitive advantage.

economy will double in size. Energy consumption is projected to increase by 50%, and there will be increasing strain on other essential natural resources, such as water. Concern is growing about the potential for climate change to cause extreme weather events, disrupt biological systems and displace communities. Meeting the needs of a growing economy against a backdrop of finite and scarce resources will require companies to implement a more sustainable strategy and business model.

Stakeholders are also demanding a more sustainable approach. Governments are imposing increasingly stringent regulations and taxes on business. Customers and employees are exerting pressure on companies to demonstrate greater environmental and social responsibility.

• By Bill Millar

Sustainability has become one of the defining trends of modern commerce. In

little more than a decade, it has moved from the fringes of business, where it was often seen as a responsibility of the public affairs department, to play a central role in corporate

strategy. Companies in every sector are considering their own sustainability strategies, and holding discussions at the highest level over how to communicate these to the outside world. According to a 2010 survey from the United Nations Global Compact, 93% of business leaders now consider sustainability important to their future success.

The drivers behind this increased interest in sustainability are many and varied. At the most fundamental level, sustainability is an economic issue. Over the next 25 years, the global

The pressure to adapt business practice to meet these new expectations is enormous

250 More than 250 climate change regulations and taxes were enacted globally between July 2008 and February 2009.

David Lear, Executive Director of Sustainability at Dell

Feature The future of sustainability


Climent. “In that equation, sustainability and profitability go hand in hand.”

The rising cost of energy and raw materials have made the link between sustainability and profitability even stronger. Consider energy usage in buildings. Every company knows that efficient buildings lead to lower heating and cooling costs. But until recently, the incentives to

take advantage of improved efficiency were not sufficiently great. Two factors have changed that view. First, energy costs have increased and are likely to rise further. At the same time, the energy-saving characteristics of modern building design and materials have greatly improved. “The result is that the payoffs for structural energy conservation have increased exponentially,” says Matt Kitson, Director of Sustainability at Hilson Moran, an engineering consultancy.

Similar factors apply in the world of information technology. One of the primary components of cost within an enterprise computing environment, says Lear, is energy. Racks upon racks of hardware within a typical server farm not only consume energy but also generate heat, requiring still more energy in the form of cooling. This is to say nothing of the energy consumption stemming from arrays of monitors, PCs, laptops, chargers and myriad related elements in the typical corporate computing environment.

These significant costs have been one factor encouraging the company to make a strong commitment to using clean energy. In 2010, renewable sources provided 25% of the company’s global energy needs. The company’s headquarters in Round Rock, Texas, houses a 516-panel solar array that generates 130,000 kilowatt hours annually. This displaces 145,000 pounds of greenhouse gases and helps to bring down the company’s energy bills.

Sustainability as business opportunityA growing number of companies also view sustainability as a major opportunity. In a recent survey conducted by Ernst & Young, published in the report Action Amid Uncertainty, 85% of respondents rank new revenue opportunities arising from climate change as very important or important. Examples of new revenue opportunities include developing a line of more efficient products, building a portfolio of carbon assets, or investing in clean technology and innovative IT solutions.

Some companies have adapted their entire business model around sustainability. General Electric, for example, has developed its Ecomagination suite of products, which focus

And investors are seeking assurances that companies are planning for the long term in addition to meeting short-term performance targets. The pressure to adapt business practice to meet these new expectations is enormous yet many companies are still not fully addressing the issue. “Responding to the demands of sustainability is complex and requires concerted action across a number of areas,” says Brigitte Frey of Ernst & Young in Austria. “It involves reassessing the fundamentals of business strategy as well as a focus on operational issues. Companies need to take a balanced approach, which includes attention to sustainability reporting and assurance.”

In making the transition to a sustainable global economy, a fundamental requirement will be increased transparency. A key problem is that there is still no way for stakeholders to gain a holistic view of the overall economic value that a company either creates or destroys. “There are companies that are creating more value than is visible from their financial accounts because they are improving the environment or improving social conditions,” says Juan Costa Climent, Global Leader for Climate Change and Sustainability Services at Ernst & Young. “But since we don’t have parameters to measure that value creation, we are missing that information. This means that the market is not working properly because investors and other stakeholders aren’t able to make informed choices.”

Cost benefits In addition to being an economic issue, sustainability also makes good business sense. As David Lear, Executive Director of Sustainability at Dell, explains, sustainability has evolved from a sense of doing the right thing “just because” to a state of doing the right things because “doing so reduces risks and costs.” He cites the example of Dell’s recent decision to become the first computer manufacturer to offer bamboo packaging to its customers. Not only does bamboo grow more quickly than traditional organic packaging materials, but it can also be grown adjacent to Dell’s manufacturing facilities, thereby reducing transport costs and greenhouse gas emissions. “By offering our customers bamboo packaging, we also help them avoid disposal taxes levied in certain jurisdictions on traditional packaging waste,” explains Lear.

The Spanish shoe company Camper offers another example. Its Wabi shoe range is produced from just three components. By cutting down on the materials used, the company made the shoes easier to recycle and cheaper to produce. It also meant that they could streamline the supplier base and gain greater visibility into the costs of production. “If you reduce the number of materials and components in your products, you are reducing your costs, as well as your environmental and social risk,” says

Some companies have adopted their entire business model around sustainability

15%Percentage by which the stock prices of companies committed to sustainability outperformed their respective industry averages, according to a study by A. T. Kearney.

0

50

100

150

200

250

06 07 08 09 10

113

151

180 186

243

Global clean energy investment


in US$ billions


influential drivers of sustainability is Government,” says Ksenia Leschinskaya, Director for Climate Change and Sustainability services for Ernst & Young in Moscow. “Around the world, legislatures are becoming strong advocates for social and environmental, sustainability-driven regulations with which companies must comply.”

In addition to regulation, governments are also using taxes and incentives to steer corporate behavior. Taxes, which include carbon taxes and pricing, and indirect taxes, are becoming more widely used. To date such taxes have been largely restricted to Europe. But, for the first time, it seems likely that major developing economies such as China, India, Brazil and Indonesia will begin to use their tax systems to penalize the emission of greenhouse gases by businesses.

Recent years have also seen an increase in the use of tax incentives introduced to encourage investment in the assets and new business practices and processes required by more efficient and low-carbon-based models. These include tax incentives made available in the 2009 US stimulus package, as well as those stimulus packages that contained measures designed to encourage cleantech investments within the European Union (EU), Australia and Canada. In tandem, this combination of taxes

on green technology and sustainability initiatives. In 2010, these accounted for US$18b in sales revenues.

Government is a key stakeholder in the drive towards sustainability. Around the world, governments are introducing increasingly stringent environmental and social regulation to influence corporate behavior. “One of the most

Credit: Dell / Creative Commons

Bringing together stakeholders to discuss sustainable ideas results in innovation and buy-in at Dell

ReduceSwitch

InnovateOffset

Resource-efficient

buildings,plants,

infrastructure

Carbonmanagement

Switching tolow carbon

energy sourceBehavioral switch

Sustainablesourcing of raw

materials

Managingstakeholderexpectations

Reduction ofresource intensity

of supply chainResource-efficient

products

Key corporate actions

Source: Ernst & Young survey, Climate change and sustainability

35%In late 2010, Bloomberg New Energy Finance (BNEF) estimated that the 12 most important green stimulus programs of governments around the world, announced in the wake of the financial crisis, totaled US$190.3b, and that around 40% of this would have reached projects on the ground by the end of 2010. According to a recent BNEF forecast, a further 35% of the total, or US$66b, might be spent during 2011.

Feature The future of sustainability Credit: Dell / Creative Commons


a flagship event bringing together leading EMEIA-based companies, only 14% of participants indicated their companies had incorporated tax planning into a comprehensive sustainability strategy.

The rise of reportingRecent years have seen a dramatic increase in the number of companies going public about their sustainability performance through external reporting. In addition, businesses are also being closely watched by an ever-increasing array of socially responsible business indices such as the FTSE4Good Index series, the Dow Jones Sustainability Group Index, the Calvert Social Index and the NPI Social Index.

Initially done primarily by companies in sectors such as consumer goods and mining, sustainability reporting has since broadened into other sectors. Research from Ernst & Young suggests that more than two-thirds of the Fortune Global 500 companies publish some form of sustainability or corporate responsibility report. Although most reporting is voluntary, companies face growing pressure to release information on their sustainability practices. Investors, non-governmental organizations (NGOs), community associations, customers, suppliers and employees want more information about companies’ long-term impact on society.

and incentives deployed by government are designed to encourage both corporations and consumers to move toward more efficient and sustainable business models. The behaviors that Governments are seeking to encourage can be grouped into four main categories: Reduce: improve energy efficiency in buildings, vehicles, machinery and other infrastructure; reduce the carbon intensity of the supply chain; design and manufacture low carbon products; re-engineer manufacturing processes to reduce the consumption of natural resources, including water; implement solutions to recycle natural resources during the production cycle. Switch: move to low carbon, low emission energy sources, including alternative and renewable energy.Innovate: research and develop innovative solutions to implement internal ‘Reduce, Switch, Innovate and Offset’ initiatives; design and manufacture advanced energy and reduced emissions products and services.Offset: leverage Clean Development Mechanisms and voluntary markets to generate offset credits by reducing net global emissions.

Despite the focus of regulators on taxes and incentives to influence corporate behavior, recent evidence suggests such an approach has not filtered through to many corporates. At Ernst & Young’s recent European Tax Symposium,

22%GRI’s statistics reflect a global upwards trend in sustainability reporting, and suggest an increase in the use and awareness of GRI Guidelines. The 2010 figures indicate an increase of 22% in the number of reports worldwide registered on the GRI Reports List, rising from 1,491 in 2009 to 1,818 in 2010.

Dell is steadily packaging its products in new ways, including the introduction of bamboo as a key material


standard-setters, suppliers can quickly and easily demonstrate that they take sustainability seriously. “Companies are becoming more compliance-driven not only to meet internally established requirements but also as a result of initiatives from standard-setting bodies,” says Frey. Thinking in terms of a value cycle Some companies are taking this approach a step further and thinking in terms of a value cycle, rather than the supply chain. This means that they consider the materials used in production as a “closed loop”, whereby they move from manufacturing, through consumption, then back to the manufacturer via recycling. One example comes from manufacturers of lead-acid batteries, who recycle the lead from old batteries to secure supply. “Thinking in terms of a value cycle means paying more attention to the materials and components you use, and looking ahead to how the waste that you generate can be recycled,” says Climent. “That process might encourage you to rethink the production process to make it more sustainable.”

But as large companies apply pressure on suppliers to meet their own sustainable standards, there is a danger that those suppliers receive multiple requests from different suppliers that may be inconsistent and even conflict. To address this problem within the IT industry, Dell is now also working with its peers – and even some competitors – to make it easier for suppliers to develop sustainable business practices of their own.

Technology companies often use commodity products such as wiring harnesses and hard drives. Ensuring that buyers co-operate on producing a consistent set of sustainability standards for these suppliers helps to reduce confusion and leads to better outcomes. “Imagine being a supplier, and you’re being bombarded with different standards from everyone you do business with,” says Lear. “By working with our peers in the industry and developing a more coherent set of industry standards in sustainability, we make matters easier for everyone.”

ConclusionSustainability is evolving from a public relations challenge to a strategic and operational imperative. The impetus for change is coming from multiple directions: customers; investors; regulators and governments. Companies that do not take significant steps toward enhancing their sustainability practice will increasingly find themselves at odds with these key stakeholders. Yet sustainability should not be regarded as something that must be done only to satisfy others. There is also a major market opportunity starting to emerge. Increasingly, companies are finding that sustainability initiatives make good business as well as ethical sense.

Most organizations develop key performance indicators (KPIs) on which to report. Some set targets for limiting their total direct and indirect greenhouse gas emissions by weight; others measure the percentage of recycled materials used in their business, or the size and biodiversity value of the water bodies affected by their operations.

Choosing the issues and indicators to focus on, and determining the reporting boundaries, are fundamental to the preparation and quality of any report. To make those choices, an organization must first establish a methodology for identifying the material issues associated with its activities. “Materiality is a key issue,” says Climent. “You have to take into account your stakeholders’ expectations and the issues that they consider important. Those issues will vary from company to company.”

Stakeholder engagement is one means of identifying issues that are material. Some companies form an external committee to maintain a constant dialog with stakeholders. They can then take what they learn from this engagement to formulate strategies and operations that are consistent with sustainable development. Reporting guidelines The Global Reporting Initiative (GRI) is a United Nations-backed, non-profit, multistakeholder-focused group that put forward its initial sustainability reporting guidelines back in 1999. From fewer than 20 business and government enterprise filings in 2000, the number of GRI-based sustainability reports reached 1,818 in 2010.

GRI suggests some guidelines for ensuring that reports are of acceptable quality. They should be timely, for example, and clearly understandable to non-experts. They should be balanced, reflecting both positive and negative aspects of the organization’s sustainability performance. And they should be accurate, meaning that certain types of oversight or assurance are necessary.

Sustainability does not end at the company walls. With most companies operating within complex supply chains of partners, suppliers and customers, high performance in sustainability terms means that other links in the supply chain must also comply with high standards. In 2010, for example, Walmart became the first global retailer to set a target for its suppliers’ greenhouse gas emissions as well as its own. It set a goal of eliminating 20m tonnes of carbon dioxide emissions from its supply chain by the end of 2015. This pressure on suppliers is encouraging the dissemination of sustainability best practice around the world.

Many corporate procurement functions are now looking for evidence that suppliers meet certain requirements in their business practice. By obtaining formal certification from

Regional distribution of 2010 GRI reports

Source: Global Reporting Initiative (GRI), 2010

Europe Asia Latin America Northern America Oceania Africa

45%

20%

14%

14%

4% 3%

Latin America: 68% increase in reporting in BrazilEurope: 56% increase in reporting in SwitzerlandNorth America:– 53% increase in reporting in

Canada– 22% increase in reporting in

the USAAsia: 9% increase in reporting in ChinaOceania: 9% decrease in reporting in AustraliaAfrica: Almost all reports are from South Africa

Source: Global Reporting Initiative (GRI), 2010

Key changes from 2009:

75Bahrain

31.1

9 Iran527

3.7%

37 Iraq104

47 Israel70.5

8242 Kuwait

84.989

63Oman49.0

50 Qatar66.5

11 Saudi Arabia470

53Syria56.9

1.2%

26 UnitedArab Emirates

19379

Yemen22.9

3.2%

3.2%

6.2%

36 Algeria114

78Angola

24.0128

107

116

115

3.5%

27 Egypt192

125

112

126

10497

57 Libya55.0

71Morocco

36.5

45 Nigeria77.7

117

91

114

80Tunisia

22.9

100

6.7%

12 South Africa450

1 China7,711

%

Emissions ranking and countryMillion tonnes of CO2 emitted in 2009Change in emissions, 2008 to 2009Regional emissions in 2009

Key

Africa1,222m tonnes of CO2 in 2009

Down 3.1% on 2008

World30,398m tonnes of CO2 in 2009Down 0.3% on 2008

Middle East1,714m tonnes of CO2 in 2009Up 3.3% on 2008

Eurasia2,358m tonnes of CO2 in 2009Down 9.2% on 2008

99

72Azer-baijan36.2

52Belarus

60.6

85

9.8%

28Kazakhstan

185

87

4 Russia1,572

54Turkmen-

istan56.8

28.2%

22 Ukraine255

9.4%

35Uzbekistan

115

7.4%

Biggest % drop in emissions

49 Austria

69.2

11.2%

34Belgium

137

66Bulgaria

44.5

81

3.8%

40Czech Rep

95.3

62Denmark

49.6

59Finland

52.2

18 France397

5.3%

67Ireland

40.3

17 Italy408

101

109

0.2%

25 Netherlands249

68Norway

39.6

3.7%

21 Poland286

55 Portugal

56.558 Serbia

52.3

86

19 Spain330

60Sweden

50.6

65Switz.45.8

7.3%

24 Turkey253

UK had been ranked8th for emissions

in 2008

10 UK520

84

6 Germany7667.0%

7.8 %

7.4%

9.3%

8.4%

Europe4,310m tonnes of CO2 in 2009Down 6.9% on 2008

73Slovakia

35.8

43Romania

80.5

38Greece

100

61Hungary

50.0

US emissions are down for the second year in succession – after almost uninterrupted yearon year increases since these records began

in 1980. The decline has matched the country’seconomic woes which have seen it only just

emerge from recession.Since 2000 the country’s CO2 emissions

have fallen by 7.5%.

7.0%

5,425million tonnes

2 US

7 Canada541

13 Mexico444

9.6%

1.9%

North America6,411m tonnes of CO2 in 2009Down 6.9% on 2008

3.2%

29Argentina

167

90

14 Brazil420

51 Chile65.7

48Colombia

70.1

113

77Ecuador

28.7

98 105

88

70Peru38.2

110

1.4%

30Venezuela

162

76Cuba30.4

8395

96

74PuertoRico33.3

64Trinidad& Tobago

47.8

94

0.3%

Central & South America1,220m tonnes of CO2 in 2009Down 0.7% on 2008

15 Australia418

56Bangladesh

55.1

41Hong Kong

86.0

India overtook Russia in 2009

3 India1,602

16 Indonesia413

5 Japan1,098

44North Korea79.5

8 South Korea528

0.2%

32 Malaysia148

135

69 NewZealand

39.1

0.4%

33 Pakistan140

0.1%

31 Singapore161

92

20 Taiwan291

23 Thailand253

4.9%

39Vietnam

98.846

Philippines72.4

93

Only three years earlier, in 2006, China was in second place, and until recently had been very close

to US emissions. But from 2008 to 2009, rapid growth has matched the country’s 9–10%

growth in GDP.Since 2000 the country’s CO2 emissions have

risen by 170.6%.

13.3%

7,711million tonnes

1 China

8.7%

1.2%

9.7%

2.4%

1.8%

3.7%

0.1%

Asia & Oceania13,26m tonnes of CO2 in 2009Up 7.5% on 2008

Feature Climate change


Latest data published by the US Energy Information Administration provides a unique picture of growth – and decline. The world’s economic fortunes are aptly refl ected in the changing image of carbon dioxide emissions. Much of the developed world has fallen in line with the recession, while emerging markets have continued to rise.

The world by carbon dioxide emissions

Source: EIA / Graphic: Mark McCormick, Paul Scruton.


75Bahrain

31.1

9 Iran527

3.7%

37 Iraq104

47 Israel70.5

8242 Kuwait

84.989

63Oman49.0

50 Qatar66.5

11 Saudi Arabia470

53Syria56.9

1.2%

26 UnitedArab Emirates

19379

Yemen22.9

3.2%

3.2%

6.2%

36 Algeria114

78Angola

24.0128

107

116

115

3.5%

27 Egypt192

125

112

126

10497

57 Libya55.0

71Morocco

36.5

45 Nigeria77.7

117

91

114

80Tunisia

22.9

100

6.7%

12 South Africa450

1 China7,711

%

Emissions ranking and countryMillion tonnes of CO2 emitted in 2009Change in emissions, 2008 to 2009Regional emissions in 2009

Key

Africa1,222m tonnes of CO2 in 2009

Down 3.1% on 2008

World30,398m tonnes of CO2 in 2009Down 0.3% on 2008

Middle East1,714m tonnes of CO2 in 2009Up 3.3% on 2008

Eurasia2,358m tonnes of CO2 in 2009Down 9.2% on 2008

99

72Azer-baijan36.2

52Belarus

60.6

85

9.8%

28Kazakhstan

185

87

4 Russia1,572

54Turkmen-

istan56.8

28.2%

22 Ukraine255

9.4%

35Uzbekistan

115

7.4%

Biggest % drop in emissions

49 Austria

69.2

11.2%

34Belgium

137

66Bulgaria

44.5

81

3.8%

40Czech Rep

95.3

62Denmark

49.6

59Finland

52.2

18 France397

5.3%

67Ireland

40.3

17 Italy408

101

109

0.2%

25 Netherlands249

68Norway

39.6

3.7%

21 Poland286

55 Portugal

56.558 Serbia

52.3

86

19 Spain330

60Sweden

50.6

65Switz.45.8

7.3%

24 Turkey253

UK had been ranked8th for emissions

in 2008

10 UK520

84

6 Germany7667.0%

7.8 %

7.4%

9.3%

8.4%

Europe4,310m tonnes of CO2 in 2009Down 6.9% on 2008

73Slovakia

35.8

43Romania

80.5

38Greece

100

61Hungary

50.0

US emissions are down for the second year in succession – after almost uninterrupted yearon year increases since these records began

in 1980. The decline has matched the country’seconomic woes which have seen it only just

emerge from recession.Since 2000 the country’s CO2 emissions

have fallen by 7.5%.

7.0%

5,425million tonnes

2 US

7 Canada541

13 Mexico444

9.6%

1.9%

North America6,411m tonnes of CO2 in 2009Down 6.9% on 2008

3.2%

29Argentina

167

90

14 Brazil420

51 Chile65.7

48Colombia

70.1

113

77Ecuador

28.7

98 105

88

70Peru38.2

110

1.4%

30Venezuela

162

76Cuba30.4

8395

96

74PuertoRico33.3

64Trinidad& Tobago

47.8

94

0.3%

Central & South America1,220m tonnes of CO2 in 2009Down 0.7% on 2008

15 Australia418

56Bangladesh

55.1

41Hong Kong

86.0

India overtook Russia in 2009

3 India1,602

16 Indonesia413

5 Japan1,098

44North Korea79.5

8 South Korea528

0.2%

32 Malaysia148

135

69 NewZealand

39.1

0.4%

33 Pakistan140

0.1%

31 Singapore161

92

20 Taiwan291

23 Thailand253

4.9%

39Vietnam

98.846

Philippines72.4

93

Only three years earlier, in 2006, China was in second place, and until recently had been very close

to US emissions. But from 2008 to 2009, rapid growth has matched the country’s 9–10%

growth in GDP.Since 2000 the country’s CO2 emissions have

risen by 170.6%.

13.3%

7,711million tonnes

1 China

8.7%

1.2%

9.7%

2.4%

1.8%

3.7%

0.1%

Asia & Oceania13,26m tonnes of CO2 in 2009Up 7.5% on 2008

Feature Carbon pricing


and long-term investment environment. The withdrawal of subsidies is already having an impact on investment. Between the fourth quarter of 2010 and the first quarter of 2011, the value of European photovoltaic financing fell by 29% to US$2b, according to Bloomberg New Energy Finance. At the same time, the pace of wind farm construction slowed by about 10% during 2010, according to the European Wind Energy Association.

Some energy observers argue that scaling back tariffs now before the renewable base has grown further could discourage the private investments that are needed to grow the clean and renewable energy industry to a scale that will make it viable without subsidies. “Some European governments are undermining their own strategy of creating a stable investment environment, which helps drive down the cost of support, while delivering secure, low carbon energy,” says Thomas Fletcher, Senior Executive for Ernst & Young’s Energy and Environmental Infrastructure Advisory.

Moreover, at exactly the same time when Europe is winding down its tariffs, China is taking the opposite approach. In 2009, the People’s Republic introduced generous new feed-in tariffs for wind power. All told, the PRC spent US$48b on renewables in 2010, according to the United Nations Environment Program. This makes the country the world’s single-largest renewable energy investor – and also places increasing price pressure on European wind manufacturers.

Carbon tradingLack of certainty around the price of carbon is also discouraging power plant investment for both renewable and fossil fuel plants. Carbon credits in Europe are trading well, but some industry insiders claim that this is not doing enough to motivate carbon reduction. The World Bank warns that enough credits are available now to satisfy demand through to 2020, which

• Bennett Voyles

In the past two decades, stable feed-in tariffs encouraged renewable energy development all over Europe. More recently, though, pressure

on public sector balance sheets and the falling cost of renewable technology has led to cuts in these subsidies – and the prospect of less certain returns is leading to skittishness among renewable energy investors.

The cost of polluting is equally unclear. Although US$142b in carbon credits are now traded every year, some market participants say that structural problems with the market and regulatory uncertainties over the severity of pollution restrictions are preventing investors from using the carbon price to value potential energy projects. “It’s very difficult for us to get any confidence in the long-term price curve as you can do with traditional gas, oil or coal power generation,” says Allan Baker, Global Head of Power, Energy Project Finance at Société Générale Corporate & Investment Banking.

Supporting renewablesIntroduced in Germany in 1990 as a way to grow the renewable energy industry, feed-in tariffs have since been copied all over Europe. Lately, however, government budgetary stress and the success of the industry at bringing down component costs has led legislators in many of these countries that use such tariffs to renegotiate these long-term structures.

In some countries, particularly Germany and Italy, legislators have readjusted the tariffs in a controlled manner, providing relative certainty to investors. In others, including the UK and Spain, legislators cut incentives more abruptly, creating more uncertainty. The renewables industry has hit back, citing the positive employment and economic benefits that support measures provide. But this can only be achieved when policymakers provide a transparent, consistent

Continued uncertainty over feed-in tariffs and the price of carbon may be slowing investment into renewable energy projects, as investors await greater clarity.

The missing variables

US$142 000 000 000The total value of carbon credits traded in 2010, according to the World Bank. This represents a fall of 1.4%, which has attributed to uncertainty over market rules once the Kyoto Protocol expires in 2012.

29%The drop in financing for European photovoltaic projects in the first quarter of 2011, compared with the final quarter of 2010, according to Bloomberg New Energy Finance.

Credit: LUZphoto / Abbie Trayler-Smith

Ernst & Young Issue 05 T Magazine 17Ernst & Young Issue 05 T Magazine 17

eliminates any incentive to develop more carbon reduction projects. “The underlying fact is that the price of CO2 under the emissions trading scheme isn’t really underpinning investment in CO2 reduction technology and low carbon generation,” says Baker. Some countries recognize this and are taking action. In the United Kingdom, for example, there are plans to introduce a carbon floor price that will act as a levy to underpin the price of carbon permits. The government believes that the current carbon price is too low to subsidize clean energy development.

For all these reasons, the rate of growth of the renewable energy market in Europe seems to be decelerating sharply even as worldwide renewable energy investment continues to rise. In the United Kingdom especially, where investors are waiting for detail of the ongoing electricity market review, investment has slowed for all forms of generation. According to Baker, coal and gas plants are tough to finance right now in the UK because banks are reluctant to take market and carbon price risk and sponsors find it tough to secure long term power purchase

agreements to mitigate these risks. This uncertainty over the price of carbon might be expected to help the renewables industry but, in fact, the opposite is the case, because the “real” cost of carbon is not reflected in the market although at least the UK carbon floor sets base.

Broader uncertainties may also be dampening renewable investments. The 1997 Kyoto Accord expires in 2012, and no comprehensive agreement is expected to take its place in time for this imminent deadline. One recent World Bank survey found that nearly 95% of carbon traders and other market participants were pessimistic that governments would be able to agree to a comprehensive climate change and energy strategy by 2015.

In the absence of certainty, companies involved in renewable energy projects are generally looking for comfort from governments prior to making investment decisions. In cases where external funding is being sought, the issues are particularly significant. “In general, project developers are being forced to await the decisions of the respective governments prior to drawing down funding,” says Fletcher.

The potential for a political decision makes it impossible for investors to use some kind of financial hedge. The remedy: keep your eyes open. “The message for companies looking to develop in Europe is to know the market, be close to the legislation and take equity risk in development accordingly,” says Fletcher.

One alternative is a carbon tax of fossil fuels, which could be more directly effective than a trading scheme to spur CO2 reduction efforts. Attempts to implement such a pan-European carbon tax have failed thus far, but a rising need to raise revenues to cope with public debt levels may prompt new efforts here. Ireland was the most recent country to add such a tax, as part of its 2010 budget. Sweden, Norway and Denmark all run such schemes already, while Switzerland added a tax in 2008.

What next? For companies with carbon-reduction goals, such uncertainties should not represent a major obstacle. “A well thought through carbon reduction strategy should incorporate a myriad of measures that achieve greenhouse emission reduction goals at the lowest cost to the consumer. Sourcing green power is an element of this strategy, but only one component,” says Fletcher. Measures such as the installation of more insulation and the introduction of smart meters can be just as important as green power sourcing, and a lot cheaper.

The key, then, is to focus on cost-effective measures. “By the time a company has introduced all of the cheaper measures, the regulatory, tax and energy policy landscape is likely to look, if not more favorable for low carbon energy, at least more certain,” says Fletcher.

Allan BakerAs the Global Head of Power at Société Générale, Allan Baker has been involved in financing in the power sector for more than two decades. He is responsible for defining the bank’s strategy for project finance in the sector.

Carbon prices aren’t stimulating sufficient investment in CO2 reduction, says Allan Baker


Feature Climate change policy Credit: EFE / Jeffrey Arguedas

SummarySpain has taken a proactive approach to a sustainable energy policy. Here, the Spanish Secretary for Climate Change discusses her perspective with Ernst & Young’s Global Leader for Climate Change and Sustainability Service.

A conversation between Teresa Ribera Rodríguez, the Spanish Secretary for Climate Change, and Juan Costa Climent, Ernst & Young’s Global Leader for Climate Change and Sustainability Services and a former member of the Spanish government.

Leading the way in green energy policy

Fukushima brought into sharp focus the great weakness of nuclear power: zero risk is impossible. If any kind of accident occurs, the consequences can be very serious, requiring huge financial guarantees that go well beyond the capabilities of the individual company operating the plant. This should cause us to reflect once again on what the most robust options are, taking account of all the costs, benefits and risks. This doesn’t mean that we should close all existing facilities. If they are safe and reliable, they can help to facilitate the transition to a clean, stable model. But we need a timeline characterized by rapid reductions and gradual replacement.

Another challenge is how to combine environmental protection with economic growth. In my opinion, growth in its broad sense means more than just an increase in GDP, because that does not take account of the environmental impact. We are all aware of countries that are achieving growth rates of around 10% but also number among the worst polluters. The challenge is for countries to juggle growth and sustainability.There are no silver bullets but what is certain is that it is impossible to maintain balanced growth without proper use of natural resources. The current model has delivered unsustainable economic growth, combined with major social injustices and a scandalous waste of resources. It is true that, over the course of the 20th century, we gradually broke the link between growth and the consumption of raw materials, but not quickly or steadfastly enough. In order to pave the way for the radical transformation we need, we must integrate the price of using natural resources into the cost structure. If we fail to do

Juan Costa Climent: Spain has already shown a strong commitment to renewable energy. Spanish technology in this sector has crossed national boundaries, with many Spanish firms now leading projects in a variety of countries.Teresa Ribera Rodríguez: Access to energy is a basic prerequisite for development and wellbeing. In order to avoid economic, social and environmental tensions, renewable energy sources offer the best solution. Despite earlier predictions, they are viable and competitive, and can contribute a substantial proportion of our electricity supply. A modern energy policy therefore needs to demonstrate a commitment to smart energy use. Such a major change of focus means going through a transition phase, which is not always easy. We have learned how

important it is to ensure political support based on an understanding of the advantages and difficulties of the task. A modern energy policy also requires a good transport infrastructure and effective systems management so that we can take advantage of the various technologies and their geographical distribution.

In my opinion, renewables alone will not be enough to satisfy the planet’s future energy needs. This is why I advocate nuclear energy as one of the best alternatives, but the crisis caused by the earthquake

in Japan has rekindled the nuclear debate. World energy policies are being reshaped by this situation. Germany has already decided to bring forward the “nuclear switch-off” to 2022, and that’s just one example.

40.5%According to figures from Red Eléctrica (REE), a utility company, renewable energy sources met 40.5% of national electricity demand in Spain during the first three months of 2011.

Credit: Xxxxxx / NameVorname Xxxxxxxxxxxxxxxxxxx Feature


Teresa Ribera Rodríguez__ Teresa Ribera Rodríguez is the Spanish Secretary for Climate Change. Between 2004 and 2008, she was Director of the Spanish Climate Change Bureau. She was also Associate Professor of Law, in the Department of Public Law and Philosophy of Law, at the Universidad Autónoma of Madrid.


Feature Climate change policy

so, the outcome will be damaging, both from a social and economic perspective.

Fiscal support can promote the transformation toward a sustainable economy. In the future, we may need to consider the possibility that corporation tax or personal income tax may be dependent on how much pollution companies or individuals produce. What is clear is that we will have to incentivize economic activity that creates value, and tax environmentally damaging consumption to a greater extent. The tax system is a key element in the restructuring of any modern economy’s resources. As the OECD and other international institutions recommend, it is vital to reduce the pressure on working incomes and gradually increase taxes on the consumption of natural resources. Having said that, it is true that a very useful and complementary measure may involve promoting the widespread roll-out of clean technologies using tax incentives that make clearer distinctions between doing things well, or doing them badly.

The carbon markets have also proven to be a good system for promoting transformation and regulating the cost of pollution. Although major uncertainties surround them, they are predicted to be worth approximately two trillion dollars in 10 years. This shows that the market has potential. We firmly believe that carbon markets are an extremely useful tool for incorporating cost indicators. And the more widespread and uniform they are globally, the more effective they will be and the more they will act as a catalyst for innovation.

Transparency is becoming a priority. Some countries are already demanding information on the environmental footprint of products and the European Union is looking at initiatives in this area. At a global level, the International Integrated Reporting Committee, an organization that brings together companies, governments and public bodies, is highlighting the need for comprehensive company reports that include environmental and social data as well as financial information. Should these reports be mandatory?I certainly believe that transparency is key. It helps to increase our ability to analyze opportunities and inefficiencies, and encourages companies, citizens and governments to be more responsible. It can also help us to detect new opportunities for investment and development. Environmental footprint calculation systems are highly valuable. I’m convinced that they will eventually be a mandatory component of companies’ accounting processes and a cornerstone of market valuation methods. We are still in a learning phase, and have developed different models, each with their own advantages

and drawbacks, in our quest for simplicity and accuracy. Until we understand which measurement systems are simplest and most reliable, it is good to allow companies and analysts to continue to test and compare these models.

It is clear that business activity is already changing substantially and companies are committing to change. We see this with electric cars, which are forecast to account for 10% of global car sales by 2020. It seems to me that the world will be a very different place in 25 years. The 21st century world will be very different from the past 50 years. There are trends that clearly demonstrate where we are heading, such as a global rebalancing of economic and political power between the different regions. We need to ensure that this rebalancing is allowed to take place in a way that strengthens the democratic and humanistic values that are central to the cultural tradition that has cost us so much to build. Otherwise, we will end up with tensions and conflicts that exacerbate inequalities. Europe has a tremendous responsibility in this respect. It can help to build bridges while maintaining a steadfast belief in a more participatory, democratic model. In the environmental arena, Europe should capitalize on its potential. It is, after all, a society that is well placed to make technological progress and effective use of its resources.

It is now just a few months until the United Nations Conference in Durban and there is real doubt about whether international agreement can be reached. A consensus between China, the United States and the European Union, who are the world’s largest emitters, might be more worthwhile. It also worth asking whether the G20 might be a more effective forum for reaching international agreements.There is a very busy agenda for Durban. Implementation and application of the full Cancun agreement is a precondition for progress but also a huge task that will take time. We also need to address unresolved issues from last year, such as the extension of the Kyoto Protocol, which now forms part of the international community’s legal and environmental heritage. We have to identify the new models that can bring about additional reductions in greenhouse gas emissions to achieve our goal of a temperature increase of no more than 2ºC. We need to push the contribution that aviation and international sea transport can make to this. We have to consolidate regional cooperation on infrastructure and industry, and deepen our involvement with carbon markets. And finally, we need to reinforce the gradual incorporation of climate change adaptation mechanisms into financial systems, and into public and private infrastructure and industry, and deepen our involvement with carbon markets.

Juan Costa Climent Ernst & Young’s Global Leader for Climate Change and Sustainability Services

Ernst & Young� Issue 05 T�Magazine��21

Jeans are a global phenomenon. But the textile industry that makes them is facing a range of new pressures to change its methods of production to better address the environmental concerns of customers.

New responsibilities in the textile industry

Increasingly, they recognize that a failure to build a sustainable business could lead to considerable damage to their reputation.

A number of companies in the textile sector have already adopted a more sustainable approach. Often, this takes the form of measuring the environmental footprint of the production process and then seeking to minimize its impact. The Swedish retailer H&M has turned 1,600 tonnes of recycled materials into new garments and claims to have saved 50m liters of water in the production of its jeans.

The European group Pepe Jeans is making similar moves. Originally formed in 1973, Pepe Jeans has since grown to become a global brand. In 1998, the management team acquired the

•� By�Cristina�Zoilo�Cabrera

There are few consumer products that are as prevalent and truly global as jeans. Every year, around 6b pairs are sold around

the world. By 2015, it is expected that sales from jeans will exceed US$65b. But, despite this positive outlook, things are changing for jeans manufacturers. Cotton prices are at an all-time high, forcing some retailers to pass the price increases onto customers. There is increasing demand, too, for manufacturers to demonstrate that they take sustainability seriously. As a result, a growing number of companies have started to introduce policies to protect the environment as part of their business practice.

SummaryChanging�consumer�attitudes�about�sustainability,�as�well��as�rising�environmental�pressures�within�the�textile�industry,�are�causing�firms�to�rethink�how�they�bring�their�products�to�market.�They�also�need�to�inspire�their�customers�to�change�too.��

Credit: Pepe Jeans

Pepe�Jeans�is�one�of�the�firms�in�the�textile�industry�trying�to�find�new,�less�impactful�ways�to�make�jeans

Production Feature

Feature��Production��

22��T�Magazine��Issue 05� Ernst & Young

Spanish subsidiary via a management buyout, and progressively acquired the remaining subsidiaries in Europe. The company is currently investing in India and China; it has licensees and distributors in Latin America and South Africa, and has set its sights on the United States. The group now turns over around €400m annually.

When forming its sustainability strategy, the first priority for Pepe Jeans was the health and labor conditions of workers in its factories. This was considered an absolute prerequisite. In environmental terms, the first step was to examine the production processes in depth. Like many clothing manufacturers, Pepe Jeans has a wide and complex supplier network with suppliers and factories spread across many different countries. It was therefore considered essential to establish a proper audit process to analyze the production processes and ensure that they operate appropriately.

The company introduced a code of conduct to which every supplier must adhere. “We make all the suppliers we work with sign it,” says Ana Rello, the company’s Sourcing Director. “We undertake constant audits and any supplier that does not comply loses us as a client. We have seen a very positive change in the countries

where we have suppliers, although we are aware that we still have some way to go.” Although the manufacture of jeans may not seem on the surface to be of particular importance from a sustainability perspective, the size of the sector means that the methods used can make a big difference. “Jeans manufacturers need to think about the techniques they use, the

water and energy consumption required and the chemical substances with which the materials are treated,” says Tomás Pastor of Ernst & Young’s Climate Change and Sustainability Services in Spain. “They also need to understand the impact of all of this across the entire supply chain.”

A clear understanding of the business practices of suppliers is essential. The fact that a supplier is thousands of miles away and a separate company counts for nothing – from a reputational perspective, it is the brand that suffers when suppliers cut corners on social or environmental performance. In 2010, several large brands in the jeans sector discovered this to their cost when it emerged that sandblasting, a process used to give jeans a worn-in look, was injuring workers and even causing death. Without proper protection, workers were being exposed to silica dust that entered the lungs, causing silicosis. A number of manufacturers, including Pepe Jeans, had already stopped using the process. Others are now following suit.

Achieving the worn-in look that customers crave – even without sandblasting – has environmental consequences that must be considered. With hundreds of liters of water used to achieve the desired look, the environmental impact can be significant, particularly when applied to millions of garments. The search for new techniques that reduce the environmental impact of this process is becoming a key issue. “At Pepe Jeans, we are working with our suppliers on new techniques that, although they are still being tested, achieve great savings in water consumption,” says Carlos Ortega, Chief Executive of Pepe Jeans.

The environmental impact of a garment does not end with the production process. France’s Agency for the Environment and Energy Management (ADEME) has calculated that 50%

The�search�for�new,�less�impactful�production�techniques�is�becoming�a�key�issue�for�the�industry

50%Proportion�of�the�overall�environmental�impact�of�jeans�that�is�attributed�to�how�consumers�use�and�wash�them,�according�to�France’s��Agency�for�the�Environment�and�Energy�Management.

New techniques: The�sector’s�main�objective�is�to�reduce�the�water,�chemicals�and�energy�used�in�making�its�products.�The�application�of�new�processes,�such�as�using�lasers�or�air�to�give�jeans�a�more�worn-in�look,�can�help�to�reduce�the�carbon�footprint.�According�to�US�organization�Cotton�Incorporated,�the�textile�industry�can�reduce�its�ecological�footprint�by�at�least�50%�if�it�employs�technologies�currently�used�in�the�most�modern�manufacturing�plants.�

New products:�Conscious�of�new�consumer�attitudes,�textile�companies�are�introducing�environmentally�sustainable�product�lines.�Pepe�Jeans,�for�example,�is�carrying�out�research�on�new�techniques�and�more�sustainable�fabrics.�In�addition�to�organic�cotton,�it�is�also�exploring�materials�such��as�unusable�fishing�nets,�and�used�cotton�or�leather�garments�that�can�serve��as�the�basis�for�new�products.

Control:�One�of�the�main�

challenges�in�this�sector�is�external�control�of�the�production�chain.�Suppliers�are�distributed�across�numerous�countries�and�often�work�with�their�own�suppliers.�Understanding�these�linkages�and�carrying�out�proper�audits�across�the�entire�supply�chain�is�essential.�

Understand the ecological impact:�The�old�adage�that�“what�gets�measured,�gets�managed”�is�particularly�true�in�the�textile�sector.�Firms�must�measure�their�

environmental�footprint�in�order�to�put�a�price�on�it.�Only�then�can�they�understand�where�to�prioritize�efforts�to�minimize�that�impact.�

Transparency and reporting: Consumers,�investors�and�other�stakeholders�are�demanding�more�information�about�the�products�they�consume�and�the�processes�that�go�into�making�them.�An�honest,�transparent�approach�to�sustainability�reporting��is�an�important�tool�to�build�a�trusting�relationship.

A sustainability road map for the textiles industry

Credit: Pepe Jeans


of the environmental impact from clothing stems from the production process, but the remaining 50% is attributed to how consumers use and wash them. It is therefore important to provide customers with more information so that they can be made aware of their impact. “There is a tendency to monitor water consumption in the production process, but we must not forget that the end client also has a responsibility to conserve water as well,” says Pastor.

Consumers also have a role to play in creating demand for products that are more sustainable. Just as the food sector has responded to demand for organic products, thereby increasing availability and reducing price, so consumers must educate themselves about textiles and processes that are more sustainable. This in turn will spur jeans manufacturers to innovate and will bring down the prices of these more sustainable products because there is greater demand for them.

“If the consumer starts to demand more sustainable products and their use becomes widespread, the excess cost is diluted and the end product does not necessarily have to be affected by it,” says Ortega. “If the market demands it, the manufacturers will have no other choice but to produce such fabrics.”

Reducing the environmental footprint of the textile sector depends on the interaction between companies, consumers, regulators and governments. All have a role to play in embedding a more sustainable approach to

business. “For sustainability to become a worldwide reality, we need a change of mentality and support from everyone, including governments,” says Ortega. “The current environmental problems arise from a series of factors and risks that we have all taken, not only the textile sector. Support and leadership from government is therefore key.”

Although private enterprise has taken the initiative in kick-starting the transition to a more sustainable economy, this is not enough. Business also needs a stable framework and incentives that encourage continued investment in sustainability. In the recent Ernst & Young report Action amid uncertainty: the business response to climate change, 94% of companies said that national policies are essential when defining their strategies on the environment.

“Economic policies that support these types of initiatives must be introduced,” says Ortega. “This could include tax incentives, such as the application of a lower corporate tax rate or reduced VAT for products that are more sustainable. The sector would welcome these initiatives and they would also be an incentive for research. This is not about subsidizing firms but encouraging more ecological practices.” For Pepe Jeans, the path ahead is clear. “You have to define accurately the steps to follow, know what your ecological and social footprint is, and try to minimize your impact and even offset it,” says Ortega. “At Pepe Jeans, we want to be at the top, as the non-conformist company that we are.”

Health�and�safetyThe�global�textile�and�apparel�industry�has�long�battled�consumer�concerns�about�workplace�practices.�For�firms�like�Pepe�Jeans,�“addressing�these��concerns�is�now�considered�a�fundamental�issue.�Suppliers�are�regularly�audited�to�ensure�that��they�comply�with�strict�guidelines.”

Consumers�will�drive�improved�sustainability,�as�they�become�more�educated�about�textile�practices

Feature Transfer pricing and climate change


“Although many businesses are grappling with how they respond to the climate change and sustainability agendas in a holistic sense, it is amazing how little connection there is between tax and those responsible for implementing climate change in the business,” says Josephine Bush, EMEIA Tax Leader for Ernst & Young’s Climate Change and Sustainability Services.

This lack of communication is a mistake. When it comes to transfer pricing specifically, there are several areas where companies seeking to reduce their carbon footprint should be sure to include tax in the conversation. These include:

1. Emissions reduction/carbon tradingWhen considering how to cut its own emissions, a multinational company will rarely begin by doing so evenly across all countries. It makes sense for companies to prioritize countries where the greatest impact can be achieved for a given cost. This may well mean focusing on developing countries, especially if the project could qualify for the Clean Development Mechanism (CDM) or equivalent funding. Under the CDM, qualifying projects to cut carbon emissions in emerging markets can earn credits that can be traded and sold. “CDM Offset Projects are a great way to accelerate a project payback period and improve return on investments,” says John Brady, Leader of Climate Change and Sustainability Services for

• Paul Kielstra

The connection between transfer pricing and sustainability is not obvious

at first sight. But as companies embark on sustainability initiatives, including carbon credits and the generation of intellectual property (IP) related to low-carbon technology, this is becoming an increasingly important area.

Transfer pricing provides a means to document a company’s environmental initiatives to ensure

compliance with local country tax rules in which the activities take place. It also presents value-added tax planning opportunities. “It is prudent to ensure a company’s transfer pricing policies take into account all the intercompany activities generated by its environmental sustainability initiatives,” says Paul Naumoff, Americas Director of Climate Change and Sustainability Services at Ernst & Young.

Despite the importance of transfer pricing as part of overall sustainability efforts, this remains an area that many businesses have not yet properly addressed. All too often, the tax function is not consulted as part of corporate efforts to reduce their carbon footprints and improve their environmental performance.

Sustainability creates new challenges and opportunities in transfer pricing. But despite the importance of this connection, surprisingly few companies explore the implications in detail.

It’s time to talk

SummaryFew firms are grappling with the implications of sustainability on transfer pricing as yet, especially efforts to cut emissions or create new IP. But bringing the finance function into the frame can raise new opportunities for cost and tax efficiencies.


Ernst & Young’s Americas East Central Sub-Area. “Once a project is qualified, it generates carbon credits that can be used to meet a company’s specific emissions cap. Alternatively, it can be sold to third parties or on an established exchange for cash.”

Where the emission reduction takes place physically, however, may not be the jurisdiction in which it would be most profitable to apply the benefit. In such cases, one inevitable question is how to price the transferred asset. Carbon exchanges can help, by giving an idea of the carbon price, but they are far from a complete solution. First, exchanges are not present in every jurisdiction. There are currently only two – in the European Union and New Zealand. Second, although these exchanges are linked in that both allow United Nations carbon credits (CERs and ERUs) in place of local units, they do not converge on a single, world price for carbon but tend to have different prices.

Moreover, companies might, for reputational or efficiency reasons, seek to reduce their own emissions rather than simply buy equivalent credits on the open market, even when doing so costs more. If this is done in one country to reduce the carbon footprint of a related company in another jurisdiction, it will be necessary to decide which company was responsible for the emissions reduction.

2. Supply chain redesignTransfer pricing is a key consideration for companies seeking to make their supply chain more sustainable. Consider the relocation of a manufacturing facility, which might allow a firm to take advantage of green incentives. “There are huge transfer pricing implications to all these decisions,” says Bush. “Factors to consider will include the funding of the actual relocation, people issues, shared offices and know-how.”

Even a shift from an unconsolidated supply chain to a regional hub structure in order to save energy costs will require a review of transfer prices. This is because the new model will change the points at which national operations “own” elements of the supply chain at different times as they are passed from one link to another.

Deciding on the optimum transfer prices to minimize overall tax is just one piece of the puzzle. Companies must also take into account differences in approaches to transfer pricing regulation across jurisdictions. Although guidelines from the Organisation for Economic Co-operation and Development (OECD) provide some level of international uniformity, they are not universally applied.

3. IntangiblesEfforts to address climate change, like much sustainability activity, intersect with a company’s intangible assets in a number of ways. For example, strategic initiatives around sustainability frequently result in new IP in the

form of products, processes, brands or brand enhancement. This raises important transfer pricing issues around which entity should fund, own and manage new brands in a tax-efficient manner that is consistent with a company’s business and legal strategy for maintaining IP.

There are also tax planning opportunities associated with new product or process technologies. But, says Naumoff, it is important to distinguish between new IP and enhanced IP. “Executives may want to consider a traditional transfer pricing functional analysis to distinguish between new IPs and enhanced IPs,” he says. “It may be appropriate to license this new IP to affiliates which directly benefit from it.”

With this in mind, executives should consider the following from a transfer pricing perspective when generating IP related to sustainability: first, whether the technology transfer raises any issues with regulations where intangible property is transferred outside the US; second, the appropriate royalty for the technology; third, the source of any royalty income; fourth, withholding tax and any related treaty overrides; and finally, whether any intercompany IP licensing is documented with a transfer pricing study for the relevant countries where the activity takes place.

The reputational considerations that often drive sustainability activity may also have implications from a transfer pricing perspective. For example, activities conducted in one country can easily have a marked effect on brand and goodwill in another. Where this is intentional, there is clearly some kind of transfer, but to what extent is a South American company “selling” anything when a European affiliate with a shared brand advertises in its own market about the former’s new wind farm in the Andes?

For such reasons, intangibles are, in the OECD’s words, “one of the most challenging topics in the transfer pricing area, both from a theoretical perspective and because of the number and size of the disputes that arise in relation to their recognition and valuation.” The OECD is currently engaging in a consultation on the issue with the aim of producing guidelines for companies on transfer pricing for intangibles. Companies are well advised to monitor the process: such guidelines typically inform national policy-making and therefore are likely to affect the tax treatment of all intangible asset transfers, including those related to climate change. Bringing tax into the frame These are just some of the bigger tax issues from transfer pricing. Other significant ones include cross-border funding questions for green initiatives and a new distribution of risk arising from changing environmental regulation. Rather than pursuing partially blinkered carbon strategies, it is time for companies to talk with the tax function about how to proceed in the most cost-effective manner.

12%of companies in 2010 operating in China underwent transfer pricing reviews there, which is a threefold increase compared with 2007.

Management Sustainable sourcing Credit: Marks&Spencer


Committed to fair trade and sustainability:

Marks & Spencer manager Katie Stafford in discussion

with a cotton supplier

Credit: Marks&Spencer


Sourcing strategies that minimize the environmental and social impact on communities and ecoystems are becoming increasingly widespread.

High yields fromsustainable supplies

Consumers are increasingly demanding that companies ensure that crops such as cotton come from sustainable sources


• By Gerri Chanel

In late 2010, the consumer goods giant Unilever pledged that 100% of its agricultural raw materials – all US$16.5b worth – would be

sourced sustainably by 2020, as part of its Sustainable Living initiative. Unilever is not alone in making a pledge to improve sustainability in the supply chain. In recent years, the role of supply chain management in the greening of business has expanded enormously as more and more companies have become serious about engaging, collaborating and tracking supplier and vendor sustainability efforts.

The potential for companies to make a difference by improving the sustainability of their supply chains is considerable. Companies such as Unilever are major buyers of agricultural raw materials. For example, the company purchases 12% of the world’s black tea; 6% of its tomatoes; and 5% of its onion and garlic. Unilever is therefore in a position to make a big difference in embedding more sustainable agricultural practices throughout its supply chain worldwide.

Better yields, lower costsAccording to Jan Kees Vis, Unilever’s Global Director of Sustainable Sourcing Development, one of the biggest challenges has been overturning the common assumption that sustainability efforts increase costs. “As a rule, implementing sustainability practices at the farm level does not require investments and also leads to better yields and lower costs,” he says. “Much of sustainable agriculture is all about simply applying the best technology available and ensuring that the best agricultural practices are applied consistently.”

Adopting a more sustainable approach to sourcing often requires a multi-pronged approach. In 2007, Marks & Spencer, the UK’s largest clothing retailer, launched a sustainability initiative, called Plan A. With 180 specific commitments targeted for 2015, the ultimate goal is for the company to become the world’s most sustainable retailer.

One of these commitments is to obtain palm oil from sustainable sources. In the past, environmental groups have been very critical of the use of palm oil in food products, which they claim leads to deforestation of tropical rainforests as farmers clear land to try to keep up with demand.

Marks & Spencer has sought to tackle these charges by ensuring that its palm oil comes from sustainable sources. “We are moving toward fully traceable, segregated palm oil and are working with the derivative processes to drive those to a fully sustainable route,” says Richard Gillies, Director Plan A, CSR & Sustainability Business at

Marks & Spencer. “We are also buying GreenPalm certificates for our palm oil usage across the entire business. These effectively reward farmers who are farming sustainably, even if we can’t track that palm oil through our own supply base.”

Marks & Spencer is also trying to remove palm oil altogether from some food products. “We have reformulated a number of food products and taken palm oil out,” says Mr Gillies. “We are also replacing it with other, more sustainable raw materials. So, where we might have been using palm oil to fry, we’re replacing it with something like rapeseed oil that’s grown in the UK, France or the Netherlands.”

Sustainable sourcing often requires companies to look beyond their own boundaries and collaborate closely with suppliers and growers. Consider the example of Walkers, a PepsiCo-owned brand of British potato crisp. In 2006 and 2007, Walkers worked with Carbon Trust, an independent not-for-profit company set up by the UK government, to analyze the carbon footprint of a Walkers crisp throughout its life cycle. Their research indicated that a large proportion of the crisp’s environmental impact came from agriculture and the supply chain. For example, growing potatoes and sunflowers – the raw ingredients in a bag of Walkers crisps – accounted for 34% of the carbon footprint of each bag.

Carbon Trust discovered that the farmers supplying Walkers’ potatoes were storing the potatoes in humid rooms to keep the skins soft, which meant that Walkers then had to use additional energy to dry out and fry the potatoes. By switching to paying farmers by dry weight, Walkers reduced its frying time and farmers reduced their costs of humidification. Through this and other measures, Walkers reduced the energy needed to make its crisps by one-third and cut water use per kilo by 45%.

Saving 300,000 miles per yearTransportation and logistics operations can be a ripe target for improvements in supply chain sustainability. For example, as part of Walkers’ efforts to reduce carbon emissions by cutting their road miles, the company switched to using 100% British potatoes in July 2007. Less miles travelled and less borders crossed can mean reductions in customs duties and other indirect taxes. Walkers has also designed a special trailer that is capable of simultaneously carrying bulk raw materials and finished product, enabling the fleet to make deliveries to retailers en route saving almost 300,000 miles per year.

Many corporations are also incorporating hybrid and alternative energy vehicles into their fleets in order to reduce environmental impact. While this is important, sustainability also requires companies to look more broadly. “In a transport context, sustainability also means reducing other environmental risks, such as when a company operates with pipelines,” says

SummaryIn recent years, leading companies have taken a proactive role in ensuring that their raw materials are sourced sustainably. Sustainable sourcing can benefit companies by helping them to minimize costs and identify opportunities.

83%According to a 2010 survey conducted by Institutional Shareholder Services, 83% of investors believe that environmental and social factors can have a significant impact on shareholder value over the long term.

Management Sustainable sourcing

Credit: Mike Abrahams, Unilever


Roger Amhof, Ernst & Young’s Head of Sustainability Advisory Services for Germany, Switzerland and Austria. “It also encompasses the social impact. So sustainable routes of transport also provide for the health, safety and security of employees of both the company and its suppliers.”

Improvements in waste management are another area of focus for supply chain sustainability. “There is a considerable amount of efficiency that comes with better stewardship of the resources that you use,” explains Gillies. “If you reduce the waste that you create by one-third, then you don’t have to buy it in the first place. We are diverting all our waste now from landfill and that’s providing, in some instances, a revenue stream as well. Our customers have reduced their carrier bag usage by 80% – those are carrier bags we’re no longer buying. We’re recycling 150m hangers every year; hangers that are no longer being bought, manufactured and duty paid on their import.”

International standardsThe first challenge in measuring supply chain sustainability is simply defining it. Central to most emerging standards – and many company initiatives – is a concept that embraces not just the carbon footprint and other climate-related issues, but also areas such as sustainability governance, workforce, customers, suppliers and human rights.

There are a number of voluntary international standards that are either already in practice or in development. These include the ISO 26000 guidance on Corporate Social Responsibility from the International Organization for Standardization (ISO) and the Global Reporting Initiative’s Sustainability Reporting Framework, a partnership with the OECD. Standards for measuring the carbon footprint are expected in the next year or so from both the ISO (asISO 14067) and from the Greenhouse Gas Protocol Initiative (GHG Protocol), a partnership of the World Resources Institute and the World Business Council for Sustainable Development.

Because there are so many standards in circulation, deciding which to adopt is not an easy task. Even with all these standards, many product categories have few or no certifications. Moreover, many standards are limited in scope. Some, for example, only focus on energy consumption rather than on all the environmental impacts. As a result, some companies look to external certifications, while others develop their own internal standards.

“There are thousands of standards and certification schemes out there that are local or regional,” says Vis. “Even if we include them all, there would still be large volumes of raw materials that companies like Unilever use that are simply not covered by any of these standards. That is why we developed the

Unilever Sustainable Agriculture Code, the benchmark for everything we do in sustainable sourcing.”

The Sustainable Agriculture Code is a set of rules and practices to which Unilever expects its suppliers to adhere. It lays out the minimum standards that suppliers must meet, as well as a framework for how suppliers can improve their performance over time. The Code also enables Unilever to benchmark other standards that its suppliers may be using. This helps to cut down on costs and bureaucracy and reduces the risk that suppliers will be forced to adhere to multiple standards.

Managing risksThe benefits of building a more sustainable supply chain are often framed in terms of managing costs and uncovering opportunities. But the process can also help companies to manage risk more effectively. These risks are not just operational or compliance-related. There are also a number of financial risks to consider. For example, carbon-intensive sectors may face an increase in their cost of capital as financial institutions begin to factor carbon into their lending procedures.

Reputational risk is another concern. It is not just the company’s own activities that can trigger reputational problems. Any supplier can tarnish a company’s reputation and diminish brand value. This is becoming increasingly problematic in an era when supply chains can be extremely large and complex. Moreover, suppliers do not pose the only reputational risk: companies that lag their peers may find themselves at a competitive disadvantage in terms of both cost and customer perception.

Last but certainly not least, companies face a range of strategic risks. For example, sustainability is contributing to changes in how entire companies are valued. A 2010 survey conducted by Institutional Shareholder Services, a proxy advisory firm, found that 83% of investors believe that environmental and social factors can have a significant impact on shareholder value over the long term.

The business case for sustainability There is already a strong business case for supply chain sustainability. By increasing the efficiency of supply chain operations and paying closer attention to the sourcing of raw materials, companies can reduce costs and streamline their operations. And with commodity and oil prices soaring, this business case is now stronger than ever. But the drive to cut costs is not the only factor. Increasingly, companies face pressure from a range of internal and external stakeholders to make their supply chains more sustainable. Over time, this will only grow in importance, and will be both an opportunity for forward-thinking firms and a threat for those that do not act.

Richard Gillies, Director Plan A, CSR & Sustainability Business at British retailer Marks & Spencer

Jan Kees Vis, Unilever’s Global Director of Sustainable Sourcing Development

Bernhard Simon__ The grandson of Dachser’s original founder has been the firm’s CEO since January 2005. Starting out as a shipping clerk in the 1980s, he has steadily worked his way up through the company, imparting his own interest in sustainability into the wider organization.

T Magazine: Most family businesses, like Dachser, take a long-term view of their business and corporate strategy. Does this approach also extend to your thinking on sustainability and the environment?Bernhard Simon: Environmental sustainability is an important part of Dachser’s culture and is deeply rooted in our value system. We are very aware of the need to take sustainability into account if we want the company to remain viable in the future. In our eyes, environmental protection is one component of a triad formed by ecology, the economy and social responsibility. This is the only approach under which long-term perspectives can be developed independently from balance sheet requirements, allowing us as a family business to take responsibility for future generations.

In recent years, we have seen more and more companies extend their supply chains into Asia and other emerging markets. To what extent can sustainability be the key to success in logistics?

We know that resources are not infinitely available, so the question of sustainability plays a part in all decisions related to company policy. Avoiding unnecessary resource use and discovering new cost-saving potential lies at the heart of the design of company-wide supply

chains. Grouping various types of transport and continuously optimizing operations in our worldwide network, for example by avoiding empty runs, helps us to meet our own and our clients’ sustainability goals, and provides a decisive competitive edge in the market.

What steps did Dachser take to make sustainability an integral part of the company?As a strategic program, sustainability has always played a role in our financial and network management. Recent milestones include the

Bernhard Simon, CEO of international logistics firm Dachser, tells T Magazine how the company combines environmental awareness with a focus on economic and social goals. Interview by Marcus Schick

Keeping sustainability in the family

144,000Tons of carbon dioxide saved each year at Dachser’s headquarters in Germany, by capturing waste heat from the firm’s data center and tapping into geothermal energy.


The question of sustainability plays a part in all decisions related to company policy

Credit: Daniel Ammann Logistics Management

Management Logistics Credit: Dachser


establishment of the Dachser Foundation Chair for Sustainability in Logistics at the European Business School. Furthermore, the new Dachser headquarters in Kempten, Germany, was designed so that the waste heat from the computer center is used to heat the office building. In addition, geothermal energy contributes to the building’s heating system. This means that we save 144,000 tons of CO2 per year. We are also actively involved in various long-term global projects focusing on sustainable mobility and on standards for energy consumption and greenhouse gas emissions related to transport services.

We see more and more companies paying attention to the environmental impact of their supply chain. How does Dachser support its clients’ own sustainability strategies?Clients really want in-depth details on how their logistics service provider deals with the topic of sustainability. This requires reliable reporting based on specific metrics and quantifiable company goals. Looking at CO2 emissions in the supply chain alone is not enough, as there is currently no standard for calculating emissions. In order to create practical metrics for our clients, we are collaborating on the development of a German and European standard. When reporting to our clients, we are much more interested in taking an in-depth look at the processes, which often reveal potential for optimization, rather than just providing some quickly calculated figures.

Is there anything that people, companies and governments can do to increase the success of sustainability goals?In basic terms, the concept needs to be learnt, understood and then become part of daily life. For us as a company, this means rooting sustainability as a management concept in the whole workforce and being a living example of it.

Do you believe that the logistics sector can be an enabler of improved climate protection?The logistics industry has been putting sustainability into practice long before the term appeared on the public agenda. One example concerns the question of how transport along alpine passes can be designed in as environmentally friendly and socially responsible ways as possible. Resource protection and fuel savings through optimal transport efficiency have always been an important part of the logistics business model. The only difference is that today we call this sustainability.

The oil price is an important driver for sustainability in the transport business. How important is it for competitiveness in the logistics market?The oil price is a very important factor, but we cannot influence it. We can however influence

the optimization of our operations. Empty runs, unused capacity and poorly planned logistics are damaging to the environment. We therefore need to think in an integrated manner, reaching out to consumers and involving them in our sustainability concepts.

How does sustainability affect product and service innovation at Dachser?One thing we ask ourselves is whether there are models that allow completely different, cheaper and more environmentally friendly ways of transporting goods. In the European logistics

business sector, we have developed a service that we call entargo. Depending on their requirements, the customer can choose to focus on fixed hours of operation (targospeed), fixed delivery dates (targofix) or time-independent deliveries at a cheaper price (targoflex).

Which investments in sustainability have shown themselves to be a cost benefit for Dachser and which do not (as yet) make economic sense?We look at all investments in network competency, capacity and resource savings and test them against any sustainable benefits they might produce. We do this not only for Dachser but also for our clients. One example is energy and resource efficiency for our offices, transfer stations and warehouses. The upshot is that we don’t refurbish any old buildings, but instead invest in state-of-the-art building standards that offer the best environmental cost-benefit.

The government plays an important role in sustainability by setting the framework for taxes and incentives. What do you as a company expect from the state in terms of support for sustainability?The state should in a sense provide the “traffic regulations” for this new way of doing business. Operating transport and logistics in an environmentally friendly manner without unfair competition requires balanced regulation. Globalization means that it doesn’t make much sense for a country to do things in isolation, because experience has shown that logistic flows very quickly choose the path of least resistance.

The transport and logistics sector is not yet required to participate in the European emissions trading scheme. Does it make sense for this sector to be included in the scheme?Emissions trading is a market-oriented instrument that can only work once worldwide standards have been defined and are accepted by all parties. At the moment we are still very far from this being a reality.

About DachserA high-capacity network and 46.2m annual shipments make Dachser one of Europe’s leading logistics providers. The German company, with its headquarters in Kempten, was founded by Thomas Dachser in 1930. The family concern has 19,250 employees in 310 locations worldwide. In 2010, Dachser achieved a turnover of €3.8b.

The state should provide the “traffic lights” for this new way of doing business

Credit: Guido Bergmann / Presse- und Informationsamt der Bundesregierung Cleantech incentives Management


impact of their use. There are various factors driving growing interest in this trend. These include external drivers, such as stakeholder expectations, current and anticipated regulation and consumer pressure. But there are internal drivers too. Increasingly, businesses are looking to cleantech as a way of reducing energy and other costs and to drive revenue growth.

It is not only businesses that are becoming more interested in cleantech. Around the world, governments are playing an increasingly prominent role in encouraging the development, commercialization and deployment of clean technologies. They are doing so through a combination of “carrots” – which consist of incentives – and “sticks” – usually consisting of taxes. As both trends gather momentum,

•� By�Gerri�Chanel

Cleantech investment by both governments and the private sector is reaching record levels. In 2010, global investment

reached US$243b, which is 30% greater than 2009 and a fivefold increase compared with 2004. This trend is only expected to grow. According to the 2011 edition of Cleantech matters, Ernst & Young’s second annual global survey of cleantech adoption, three-quarters of large international corporates plan to increase or significantly increase their cleantech budgets between 2012 and 2014. The term cleantech refers to the technologies, products or services that optimize the use of natural resources or reduce the negative environmental

Increasingly, businesses are looking to cleantech as a way of reducing costs and driving revenue growth. A key to success is ensuring that tax directors and CFOs fully understand the tax impact of sustainability initiatives at all levels of the organization.

New opportunities, new roles

Germany’s�offshore�wind�industry�is�taking�off:�Chancellor�Angela�Merkel�has�declared�support�for�wind�power�plants�a�top�priority

Management��Cleantech incentives �


expenditures (such as allowing 100% write-off of costs in year one)

–� �Tax�holidays: Defined periods with reduced or no tax on profits generated by certain activities or goods

–� �Reduced�indirect�taxes: Temporary or permanent VAT or sales tax reductions or, in some cases, exemptions from certain goods or services taxes

–� �Reduced�property�taxes: Reduction of or exemption from taxes on certain property

–� �Reduced�transfer�taxes: Reduction of or exemption from taxes on the transfer of certain assets

–� �Reduced�capital�gains�taxes�on�disposal: Tax relief on disposal of certain assets, which may be either at a reduced rate or through extra ways of rolling gains into other capital expenditures

–� �Reduced�hydrocarbon�taxes�or�taxes�on�fuel:�Reduced taxes on cleaner fuels.

“Misconceptions about the availability and eligibility for some of these taxes are commonplace. For example, many companies incorrectly assume that R&D tax benefits are restricted to ‘white lab coat work’ or companies that specialize in developing new cleantech technologies,“ says Frank Buffone, Head of Ernst & Young’s R&D Tax Services in the United Kingdom. “Companies don’t necessarily know that qualifying activities can include a wide range of climate change initiatives and that the R&D tax scheme can help fund these,” says Roxane Naro Markarian, R&D Tax Senior Manager for Cleantech & Sustainability at Ernst & Young.

Consider the case of a UK retailer that incurred significant costs in implementing sustainability initiatives across areas such as sourcing raw materials, production, transport and waste. A number of projects were identified

there is little doubt that they are changing the day-to-day responsibilities and corporate profile of the tax function. This article looks at the main types of incentives – and disincentives – and explores how the role of the tax director needs to change both to take advantage of new opportunities and minimize environmental taxes.

Incentives�for�cleantechErnst & Young recently conducted a 38-country survey to assess the increasingly important role of tax measures and other incentives in changing behavior across the climate change agenda. The survey, Climate change and sustainability: the role of tax as catalyst for change, found that incentives and grants are the most common government expenditures in this area; accelerated and enhanced depreciation provisions are the second most common. The report also notes that some countries provide incentives for which companies can qualify even if they do not pay taxes.

The mechanisms of individual country tax incentives for cleantech are as varied as the countries offering them, although they generally include the following broad categories:

–� �R&D�tax�credits�and�“super�deductions”:�

Enhanced tax relief for R&D expenditures (such as a deduction for more than 100% of R&D expenditures)

–� �Accelerated�or�enhanced�depreciation:�Enhanced tax relief for certain capital

Source:�“Climate�change�and�sustainability:�The�role�of�tax�as�catalyst�for�change,�Ernst�&�Young,�2011.”

Key�tax�measures�identified�by�type�

Country

Accelerated/enhanced

depreciation

Customs duties/ imports

Incentives/grants

Other or not classified

Personal tax measures

R&D tax scheme

Reduced hydrocarbon taxes/taxes

on fuels

Reduced property

taxesReduced

VAT Subsidy Tax holidays

BrazilChinaFinlandFranceGermanyIndiaIrelandItalyThe�NetherlandsRussian�FederationSpainUnited�KingdomUnited�States

US$738bIn�China,�clean�energy�companies�and�projects�received�investment��of�US$51.1b�in�2010.�Over�the�next�decade,�the�country�is�expected�to�spend��US$738b�on�clean�energy�programs.


as eligible for R&D tax initiatives across the business, including a project to streamline packaging for footwear that in turn reduced waste sent to landfills. Together, these incentives led to £1m of tax savings for the company. In another example, a US big-box retailer obtained a US$15m federal tax deduction as a result of identifying and quantifying the tax benefits for energy-efficient lighting installed in all of its new stores. Some countries have spent significant amounts of money to underwrite cleantech initiatives through non-tax programs, such as direct grants and subsidies. For example, many European nations offer incentives for renewable energy in the form of feed-in tariffs or green-certificate programs.

Another notable funding initiative is the European Commission’s Seventh Framework Program for Research and Technological Development (FP7). Yet another prominent example is China, where clean energy projects received investment of US$51.1b in 2010. Over the next decade, the country is expected to spend US$738b on clean energy programs.

Green�taxesWhile many governments seek to change behavior through incentives for innovation, others attempt to discourage other, more damaging activities using taxes. These disincentives generally take the form of carbon taxes (and carbon pricing) or other taxes such as landfill taxes, fuel taxes, customs duties, land taxes and certain regional and state taxes.

Understanding the impact of these taxes on the business can be challenging. “These taxes are easy to lose sight of because they are ‘embedded’ in products or other expenditures and are not easily identified as costs,” says Josephine Bush, Ernst & Young’s EMEIA Tax Leader of Climate Change and Sustainability Services (CCaSS). “As we move toward a low-carbon, green economy, these ‘above-the-line’ taxes are becoming more prevalent and a bigger part of the tax take.” This lack of transparency into the true extent of costs being incurred can hamper a company’s overall sustainability efforts by making it difficult to build an effective business case. “Companies need to understand the true costs of the sustainability strategies and that includes visibility into taxes being incurred,” says Bush. “We are finding that more and more companies are seeking to identify these taxes for a number of reasons, particularly as a means of evaluating their energy costs and strategies.”

New�roles�for�the�tax�functionThe tax value that can be derived from cleantech initiatives and managing green tax burdens can be significant. As a result, sustainability is now becoming a core competency for the tax function, in addition to its traditional roles. Navigating these new responsibilities requires an

effective operational framework that encompasses four capabilities: management, action, communication and policy.

–�Management:�The tax director’s role is expanding to include coverage of an ever-increasing number of carbon and other environmental taxes, whether direct or indirect. A leading practice for tax departments will be to increase their focus on these taxes incurred by the operational divisions of their businesses. To do this, they must put in place the people and processes necessary to understand the incidence of these taxes, monitor compliance and ensure that all available exemptions are claimed.

–�Action: The sustainability-aware tax department will need actively to identify, monitor and manage the evolution of incentives in every jurisdiction in which the company does or is considering doing business. This is a herculean task when one considers that this remains a rapidly developing and fast-changing area. Tax directors will also need to provide regular briefings to the business on the relevance and effectiveness of these incentives in minimizing the after-tax cost of the evolving business drive toward operational efficiency and low-carbon activity.

–�Communication: Tax departments will need strong communication skills and the ability to engage with other parts of the business that may be driving operational efficiency and the company’s sustainability strategy. “Tax must have a seat at the table,” says Buffone. “This is a challenge in many companies, where the tax and sustainability areas often work in isolation from one another. The tax director will need to be involved with the company’s sustainability objectives and its current and planned activities in order to fund them effectively through tax mechanisms.”

–�Policy: A leading tax team should be able to influence the company’s future state as its sustainability policies ebb and flow. The only way to affect the tax policy process in a way that supports business goals – especially in a fast-moving area such as climate change – is to be involved and provide meaningful input early and often.

Navigating�the�new�tax�landscapeCareful management of today’s cleantech tax opportunities and burdens can make a meaningful difference in helping an organization to fund its climate change initiatives. The key to success is ensuring that tax directors, chief financial officers and sustainability executives fully understand the tax impact of sustainability initiatives at all levels of the organization. And, with tax trends in sustainability certain to change and become more important in the years ahead, building these capabilities now and providing effective monitoring over the long term will be a key source of competitive advantage.

Total New Investment in Clean Energy by Region

in US$ billions


ASOC*

*Asia and Oceania

AMER

EMEA

2007200820092010

0

94.475.5

70.261.9

47.7

41.251

3974

59.448.6

65.8

20 40 60 80 100

Focus Cleantech R&D


Alternative energies and clean technology have seen a boom in spending over the past decade. Although much more is needed in the future, the sector is gathering momentum.

A shift in the sources of power

• By Dan Armstrong

The past year has marked a watershed in R&D spending on alternative energy. Surging oil prices, aggressive government policies

and plummeting manufacturing costs came together to create exponential growth – albeit from a low base – in power generated from non-traditional sources. New challenges also emerged: fiscal austerity forced some governments to scale back incentives, while power demand in emerging markets, particularly China, led to a modern-day coal rush. Yet the acceleration of solar and wind power, the take-off in electric vehicles and high levels of investment suggest that the era of fossil fuels is coming to a close – not tomorrow or next year, but within the lifetimes of much of the world’s population.

More than 60 countries – including every nation in Europe as well as provincial governments from Ontario to Rajasthan – have established incentives to drive investment in alternative energy. According to HSBC, governments around the world, led by China and the US, have allocated over US$430b in spending for green investment themes. Sweden has announced that it intends to be 100% carbon-neutral by 2050, power all cars with renewables by 2030 and heat the country using no fossil fuels by 2020 – and so far it is ahead of schedule. Meanwhile, the EU has set a goal of 20% reliance on renewables nine years from now and is considering a goal of 45% by 2030. California is aiming higher: 33%reliance on renewables by 2020.

These targets would be mere proclamations if it were not for two other factors: falling production costs and the risk of dwindling oil

supplies. According to the US Department of Energy, solar-generated electric power dropped from US$22 per kilowatt hour in 1980 to under US$3 today, a steady decline of 7% per year – and it continues to fall further. Another eight to ten years will yield an electric power source as cheap as coal; by 2031, it will be half the price of coal. The world’s largest solar power company by market cap, Arizona-based First Solar, expects that cheaper solar wafers will enable it to match the peak price of gas-generated electricity within three years. The drop in costs is one big reason that global solar capacity grew by 73% in 2010.

The carrot for continued efforts are rapidly developing technology and the falling costs of photovoltaic production. Some of these advances are highlighted visually in this artice. The stick is the fact that the low-hanging fruit of the energy world – cheap, portable and plentiful oil supplies – is disappearing. According to BP’s Statistical Review of World Energy 2011, average daily crude oil consumption in 2011 surpassed production by over 5m barrels per day. The result? Lower inventories; greater use of biofuels; The substitution of coal where possible; and of course higher oil prices. Despite lower levels of economic growth, crude oil prices have risen to be close to their pre-crash peak of 2008, leading some to speculate that the current level of oil production is not adequate to support even today’s slower rate of economic growth.

One worrying result of this imbalance is the surge in coal consumption, particularly among non-OECD countries, most specifically China. In the long run, though, higher oil prices are precisely what the world needs to ramp up the production of renewable energy sources.

Discover more content, news and features on the T Magazine website at www.ey.com/tmagazine

40%Corporations embrace cleantech for revenue growth: the biggest share of cleantech spending – 40% on average – is dedicated to developing new cleantech-enabled products and services, according to Ernst & Young’s study Cleantech matters.

Credit: Keystone / Science Photo Library / Manfred Kage


Algae biofuelsAlthough controversial, biofuels have seen much development in the past decade. One promising option is the oil created from algae, creating a third-generation biofuel. Due to their high-density yields, significant volumes can be created in a small land area.


Concentrated solarUtility-scale solar projects are building up steam. Literally. Most use reflected heat to heat water and power a generator, but a new Californian system goes further: heating salt to over 500 degrees celsius, which can keep producing energy when night falls.

Focus Cleantech R&D Credit: Keystone / Laif / Paul Langrock

Credit: IPP / Wolfgang Filser


Fusion powerResearchers at the Max-Planck-Institut für Plasmaphysik are investigating the basis for a fusion power plant. As in the sun, such a plant will generate energy from the fusion of atomic nuclei – a sustainable contribution to future world energy supply.


Masdar CityIn a bid to transform its economy and create a new R&D hub, the United Arab Emirates is creating a carbon-neutral city from scratch, due for completion in 2020–2025. It will be wholly powered by renewables, with zero-carbon and zero-waste.

Focus Cleantech R&D Credit: masdarcity.com

Credit: Aquamarine Power


Oyster wave powerCurrently a tiny source of renewable energy, wave power is nonethe-less developing steadily. A new approach dubbed Oyster provides an on-shore base, which is easier to manage, and systems that can function in shallower water.

Focus Sustainability reporting


financial report and sustainability report. If companies do not produce an integrated report, they must explain why they have chosen not to do so.

Investors are becoming more vocal in their demands for sustainability reporting. According to Eurosif, a think tank, the volume of socially responsible investments reached €5 trillion in Europe by the end of 2009, after increasing by 87% in two years despite the global financial crisis. Mainstream investors are increasingly looking for reliable information that can be independently verified and used as a comparison with other companies in similar circumstances. A recently published survey found that one out of every seven written questions from shareholders of companies on the CAC40, France’s main stock index, during general assemblies in 2010 related to sustainability issues. The previous year, the ratio was 1 out of 100.

In response to this demand from investors, rating agencies are becoming more interested in sustainability issues. A number of specialist companies, such as Vigeo, Eiris and SAM, have emerged to provide sustainability ratings. These organizations provide independent assessments of environmental, social and governance performance that investors can then factor into their asset allocation and investment decisions.

A final, but important, driver is peer pressure. As more companies formalize their approach to sustainability reporting and receive praise from external stakeholders for their efforts, other companies recognize that they need to catch up.

• By Rodrigo Amaral

Sustainability reporting is coming of age.As more and more companies seek to embed a sustainable approach to their

business, there is a growing need for a mechanism to tell stakeholders about their performance. And, as demands for sustainability reporting become more vocal, these documents are evolving from an expression of a firm’s good intentions to a more structured, detailed report that can inform investment decisions.

In addition to providing information about their performance on core sustainability measures, such as carbon emissions, companies are also under pressure to increase the transparency of their tax reporting. This can be an important part of using reporting to build better relationships with external stakeholders.

Independent assessmentsThe pressure for transparency has come from several fronts. National governments have put forward legislation that outlines the non-financial data that companies must report. In France, for example, a new law has expanded the reach of sustainability reporting requirements to many non-listed firms, and it will become mandatory for around 2,600 companies. In South Africa, companies listed on the JSE Securities Exchange must comply with the King Report on Corporate Governance for South Africa (King III), which recommends that companies should produce an integrated report rather than a separate annual

In the face of mounting pressure to be transparent, a growing number of companies are choosing to report on sustainability. Data-rich reports can help firms improve stakeholder trust and increase operational efficiency.

Under pressure

2,600In France, a new law has expanded the reach of sustainability reporting requirements. It will become mandatory for around 2,600 companies.

Credit: Victor Tonelli / OECD


based on them,” says Kamp-Roelands. “They cannot fulfil the concerns of all kinds of stakeholders.” Such choices entail a risk that the company will be accused of trying to withhold sensitive information from the public. Often companies will only report on areas that are closely aligned with their business, or on metrics where they fare particularly well. But this can be a dangerous strategy to adopt. A failure to tackle controversial or delicate issues can reinforce a perception that a company’s sustainability report is more about marketing than a genuine desire for transparency.

Despite these challenges, progress is being made to ensure that sustainability reporting is more consistent and widespread. Since 1997, the Global Reporting Initiative (GRI) has promoted a set of sustainability reporting standards based on a series of core metrics designed to be applicable to all businesses. Currently, more than 1,800 companies adhere to the GRI’s reporting framework. Global standards for integrated reporting An important recent development is the launch of the International Integrated Reporting Committee, a coalition of businesses, regulators, accountancy firms, securities exchanges and non-governmental organizations. The aim of the IIRC is to create a globally accepted integrated reporting framework that brings together financial, environmental, social and governance information in a concise, consistent and comparable format. “Global standards for integrated reporting, such as those being developed by the IIRC, will greatly help stakeholders to understand the true value creation of a company and enable them to make direct comparisons of performance,” says Climent.

The IIRC plans to release a discussion paper for public consultation in mid-2011, which will outline a vision for integrated reporting and principles for preparing an integrated report. It will then present a framework for integrated reporting to the G20 later in the year. Although it will be challenging to secure universal support for the framework at an international level, the high profile of the initiative will provide a significant boost to help it succeed. “What is powerful about the IIRC is that it is a multi-stakeholder initiative that is supported by both regulators and accountancy standards boards,” says Climent.

As initiatives like these spread, companies will also become more aware of the benefits that the reporting exercise brings. “Many companies begin to report to comply with regulations, but as they learn more about the impact of their activities, they implement changes that increase the efficiency of their operations,” says Kamp-Roelands. “Looking for ways to consume less energy, for example, is good for the environment, but also good for the finances of the firm.”

“Government regulation and stock exchange requirements have played a part, but peer pressure has been a key driver of sustainable reporting,” says Nancy Kamp-Roelands, Director of Ernst & Young’s CSR Knowledge Center.

This pressure from external stakeholders is feeding through into a more robust approach to tackling sustainability reporting in the corporate world. But despite this growing pressure, there are significant barriers preventing the transition to more effective sustainability reporting.

The first is a lack of comparability. With sustainability reporting still mostly voluntary, and with different jurisdictions promoting different guidelines, it remains very difficult for investors to compare like-for-like performance across companies. “If we want to make proper choices in the global economy, there has to be transparency and comparability, otherwise markets will not be working properly,” says Juan Costa Climent, Global Leader for Climate Change and Sustainability Services at Ernst & Young.

A second problem is that some companies still think that sustainability reporting exists to talk about good deeds. “Companies are keen to report the great things they do in specific areas, but these are usually marginal to their business strategies,” says Anne-Catherine Husson-Traoré, the Director-General of Novethic, a French-based think tank. “Communication on sustainable issues is certainly more developed today, but it does not necessarily address the concerns of ethical investors.”

Furthermore, while sustainability reporting is becoming more commonplace, it is far from universal. A survey of large European companies conducted by Instituto de Empresas, a Spanish business school, found that only one-third provide stakeholders with dedicated sustainability documents, while 48% merely mention the subject in their annual financial reports. Companies are also selective about the subjects that they choose to disclose in their reporting. The environment and workplace conditions are among the most commonly reported issues. Ethics and local economic development receive less attention, while human rights are rarely mentioned in their publications.

Facing dilemmasThe challenge of compiling and presenting information about sustainability is an important barrier to more effective reporting. The sheer amount of information to be gathered is a first hurdle that companies need to overcome. Sustainability encompasses a wide range of subjects, including the environment, labor conditions, community relations and global human rights campaigns. Such is the breadth of information required that few companies can genuinely claim to be fully transparent in every one of those areas. “Companies will face reporting dilemmas and have to make decisions

Broad trend toward disclosureResearch by Ernst & Young shows that more than 3,000 companies worldwide, including over two-thirds of the Fortune Global 500, issue sustainability reports. Originally, such reporting was done mostly by consumer-based businesses and resource-intensive industries such as energy, utilities and mining. Over the time, it has evolved to include other industries such as financial services, logistics, healthcare products, chemicals and aviation. Reporting is probably most advanced in Europe, where companies first started producing reports nearly 20 years ago. Japanese companies predominate in sustainability reporting in Asia, but Chinese companies are starting to do it as well.

Anne-Catherine Husson-Traoré, the Director-General of Novethic, thinks that sustainability reporting does not yet address the concerns of ethical investors


Like many fast-growing markets, the Russian Federation is making efforts to ensure that its tax systems keep pace with economic development and remain sustainable in the long term. Here, Mikhail Mishustin, head of the Federal Tax Service, explains how this is being achieved.

Russia sets its sights on a sustainable tax policy

SummaryUnder Mikhail Mishustin, the Russian Federal Tax Service is taking important steps to ensure a sustainable tax policy. This includes broadening the tax base, and providing an environment that gives both local taxpayers and foreign investors greater certainty and predictability.

no-nonsense approach to tackling corruption. “The task can be mainly accomplished not by increasing the tax burden for individual taxpayers, but by improving registration systems and so expanding the tax base,” says Mikhail Mishustin, head of the Russian Federal Tax Service.

He cites the example of the Taxpayer’s Personal Section service – a new development

that gives individuals and organizations access to their own personal data. The service provides registration and re-registration, offsets and refunds, reconciliation between client accounts, receipt of documents on demand and a range of other useful functions. “The new service enables taxpayers to establish relations with the Federal Tax Service at a distance,” says Mr Mishustin.

As an economy that is highly dependent on oil and gas revenues, a long-term, sustainable tax policy is essential to ensure that taxes remain stable despite fluctuations in commodity prices. While the current high oil price has helped to reduce the federal budget deficit, a downturn in commodity markets could cause the deficit to widen.

An increased focus on property taxes is one way of smoothing out some of the impact from commodity price cycles. “Property taxes will play an increasing role because they ensure stable budget revenues, grounded in a transparent tax base, and don’t depend directly on oil and gas prices,” says Mr Mishustin. In the past, the

• By Rob Mitchell

Tax policy and administration in the Russian Federation continues to evolve and develop. Although historically, interaction

with the tax authorities was a challenging aspect of doing business in Russia, recent years have seen significant improvements. And while this work is not complete, ongoing developments are helping to give local taxpayers and foreign investors greater certainty and increased

transparency in their dealings with the Federal Tax Service.

The Russian Federation is not alone in its efforts to develop a sustainable long-term tax policy. Many fast-growing markets, including the other BRIC countries, are taking steps to ensure that their tax systems keep pace with rapid growth and economic development. As per capita incomes increase, as foreign investment deepens and as local companies grow in size and reach, governments and tax administrations in these markets recognize the

need to secure growth potential for revenues and prevent tax leakage.

One important way in which this is being achieved is through improved administration. In recent years, Russia’s Federal Tax Service has taken a number of steps to improve the efficiency of tax collection, including greater use of automation and electronic services, and a

Learning from other countries has been a key approach to building best practice in tax administration

Focus Tax policy


Although there is still some way to go, the Russian Federation is making important changes to its business and tax environment

Credit: Ria Novosty


effective collection of property taxes has been compromised by “poor quality” data held in inconsistent formats. But in 2010, an amendment to Russian law required that registration agencies provide the tax authorities with information in electronic form. According to Mr Mishustin, this has greatly helped to simplify the data collection process and increased the accuracy of tax information. “If these agencies have inaccurate information, it not only affects national budget revenues, but also creates an unfavorable public image of the agencies themselves,” he says.

Learning from other countries has been a key approach to building best practice in tax administration. By benchmarking its services against those of leading OECD countries, Mr Mishustin says that the Federal Tax Service can identify key areas for improvement. This includes assessing electronic services offered by other administrations to see if similar services can be offered in Russia. “We are always keeping track of other markets and sometimes borrowing technical approaches in our work with taxpayers,” says Mr Mishustin.

One example where benchmarking has led to a service improvement is on-site audits. In 2003, Russia conducted on-site audits of around 11% of taxpayers, compared with an average of less than 3% in OECD countries. This was deemed unacceptable and so the Federal Tax Service

introduced a system to identify high-risk taxpayers rather than rely on the use of a random sample. “We saw that our practice did not meet international standards, and that was one of the reasons why we substantially changed our approach,” says Mr Mishustin. “By implementing a risk management system, we succeeded in considerably reducing the administrative burden on business and reduced on-site audits to less than 1% annually.”

Transfer pricing is a key area of development, with new rules expected to be introduced this year. Mr Mishustin explains that Russia’s guidelines will rely on a combination of the OECD guidelines and its own proprietary

approach. “Transfer pricing is a new direction in our work,” says Mr Mishustin. “The experience of other countries shows practice is needed, and that may take years. However, we believe that control over transfer pricing will ultimately prevent profit from being taken out of the country.”

In recent months, many multinationals have expressed increasing concern about unfair

Good relations with taxpayers are the key to strengthening administration

3.6%The Russian Federation has a planned budget deficit for 2011 of 3.6%. But this is based on oil prices of US$75/barrel, which is well below the average for the year. The actual deficit is therefore likely to be significantly smaller than the 2011 estimate.

Visitors to a Federal Tax Service office in Moscow

Focus Tax policy Credit: Ria Novosti / Andrey Rudakov

Credit: Ria Novosti / Alexey Kudenko


treatment at the hands of emerging market tax administrations. Transactions involving offshore entities have come under particular scrutiny in China and India. Mr Mishustin is keen to emphasize that, while it will continue to take tax evasion by multinationals seriously, it will also treat them fairly.

“The use of tax avoidance schemes is a pressing problem for us,” he explains. “But I do not support repressive measures, and I always stand for an open dialog with taxpayers. If all taxpayers are to be put under equal conditions of doing business, we should strictly limit the possibilities for dishonest taxpayers to receive unsubstantiated tax benefits, including those received by using various offshore schemes.”

In providing a service that is fair, transparent and effective for taxpayers, the Federal Tax Service hopes to improve the overall reputation of the Russian Federation as a destination for foreign investment. Mr Mishustin accepts that there is some way to go in achieving this goal. For example, the latest Doing Business guide from the World Bank ranks the Russian Federation 105 out of 183 countries in terms of the ease of paying taxes.

Despite this relatively low ranking, Mr Mishustin urges investors to develop their own assessment of the business environment. “On the whole, I’m very wary about rankings, because

they are highly subjective,” he explains. “It is always very important to know who makes the calculation, what is covered by the calculation, and on the basis of what concepts a valuation is made.”

He worries that the challenges of doing business in Russia are often exaggerated. “Russia does not usually score highly in these rankings,” he says. “That is due, firstly, to the large number of myths about our country that are intentionally or unintentionally supported by public opinion in the West, and, secondly, to simple lack of information about us.”

Rather than adopt a coercive approach to tax collection, Mr Mishustin believes that good relations with taxpayers are the key to strengthening administration and increasing overall revenues. “Efficient partner relations between the tax bodies and taxpayers are more effective than fines in stimulating citizens to perform their duty to their country,” he explains. “Taxpayers should be shown that the Federal Tax Service of Russia is not a stale structure with people standing in enormous lines and with rude and ill-willed officials. We are a modern dynamic structure providing public services on the highest level, and we save taxpayers time and respect them. Only in this way, by showing our professionalism, client-focus and good service, can we in turn be respected.”

Mikhail MishustinMr Mishustin has been head of the Federal Tax Service in Russia since April 2010. He was formerly President of the UFG Asset Management group of companies. Prior to that, he headed the Federal Agency for the Management of Special Economic Zones.

Mikhail Mishustin, head of the Federal Tax Service, answers journalists’ questions at a press conference

Outlook Sustainability & leadership Credit: Keystone / Martial Trezzini


Georg Kell


The short term thinking trap

than essential. Today, the big accounting firms all recognize that this is an important issue. There is now a lot of work going on to define the material aspects of these non-financial issues and how to account for them.

More and more companies are now providing forward-looking information that can be used for valuations. But that, on its own, is not enough. Investors do not yet have sufficient data. We need thousands, if not tens of thousands, of corporations to share this relevant information. Only then can they systemically integrate these issues.

Corporate leadership will be essential to drive this change. Senior executives need to make the case to shareholders that the company is

putting in place the right framework to deliver long-term value. Many, if not most, sustainability decisions will require investments in the short term for the sake of long-term savings. In our forums with CEOs, we see this issue arising again and again. CEOs need to articulate that these investments are necessary to preserve future returns. Governments also have a critical role to play in promoting the sustainability agenda. Without incentives and regulatory stimuli from governments in place, we will not be able to create a coherent global market system. But short-term thinking dominates here too. We need to bear in mind that governments are by their nature local and driven by election cycles that span only three to five years. While there may be some politicians who would like to be more long-term in their thinking, there is a strong temptation to go along with more immediate issues.

To make things worse, we are facing something of a governance void in the international arena. This is an odd point of history at which the institutions created after World War II are still up and running, but they are no longer fit for purpose. The emerging markets have become much more powerful and play a central role in the global economy, yet they are poorly represented in these multilateral institutions. What is needed is strong leadership at an international level, so that a new international framework can emerge around which countries can align themselves.

Great strides have been made in the sustainability movement in recent years, but there is much that still needs to be done.

Only around 15% or 20% of the Fortune 500 have really embraced sustainability. And if we look more broadly at companies outside this elite list, the percentage that have active sustainability strategies drops off fairly quickly. We need to see more companies embrace the concept of sustainability.

In my view, the single most important barrier to more widespread corporate action on sustainability is the overwhelming short-termism of business and stock markets. CEOs today are under relentless pressure to deliver short-term quarterly results. As a consequence, many of the most important long-term trends, such as climate change and natural resources scarcity, are simply not factored into strategic decision-making.

Markets aren’t perfect but they remain the best way to ensure allocation of scarce resources. We need to build on the market system so that it becomes more effective at responding to these long-term trends.

A key step will be to integrate non-financial issues (including environmental, social and governance metrics) into valuations. For a variety of reasons, including lack of knowledge and concern about the impact on external stakeholder relationships, companies have been slow to do this. But the impetus for companies to take non-financial criteria seriously continues to grow. Corporations need to demonstrate that this is a race to the top, in which the best performers win, and where the best solutions can travel quickly and diffuse rapidly. The alternative is a race to the bottom, where companies with poor compliance standards and environmental records have a cost advantage.

Markets need to demonstrate that they are part of the solution. If they choose to ignore the issue, then not only do we miss

a massive opportunity for change, but we also place the future of global market integration in jeopardy.

Progress is being made to integrate sustainability issues into financial reporting. Moreover, the professional accounting community is finally taking these issues seriously. Until fairly recently, sustainability reporting was seen primarily as a stakeholder exercise that was “nice to have” rather

By Georg Kell, Executive Director of the United Nations Global Compact

BiographyGeorg Kell is the Executive Director of the United Nations Global Compact, the world’s largest voluntary corporate responsibility initiative with more than 6,000 participants in over 130 countries. He has served as head of the UN Global Compact since 2000. A native of Germany, Georg Kell holds advanced degrees in economics and engineering from the Technical University of Berlin.

Ernst & Young Eurozone Forecast Summer edition – June 2011

Eurozone

Tax Policy and Controversy Briefing

Issue 8 | August 2011

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member rms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com

About Ernst & Young’s Global Compliance & Reporting servicesFast-changing compliance and reporting requirements are more demanding on nance and tax functions today than ever before. So how do we help you improve quality, manage risk, create ef ciency and drive value? Our market leading approach combines standard and ef cient processes, highly effective tools and an extensive network of local tax and accounting professionals. In more than 140 countries, you bene t from an integrated, consistent, exible, quality service to address direct and indirect tax compliance, statutory accounting and nancial reporting, and tax accounting. This unlocks the potential of your nance and tax function, while improving ef ciencies across your nancial supply chain. It’s how Ernst & Young makes a difference.

© 2011 EYGM Limited.All Rights Reserved.1103-1242009EYG no. DK0066

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any speci c matter, reference should be made to the appropriate advisor.

The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member rms. Moreover, they should be viewed in the context of the time they were expressed.

Seizing the opportunityin Global Complianceand ReportingSurvey and trends


Publications��

PreviewIn�issue�6�of�T�Magazine,�which�will�also�be�published�as�an�insert�in�the�Financial�Times,�we�will�focus�on�global�compliance�and�reporting�(GCR).�Topics�covered�will�include:

•��Finance�transformation�and�compliance

•��Integrating�tax�and�fi�nance

•��The�role�of�technology

•��The�business�case�for�investment�in�GCR

•��The�human�capital�side�to�GCR

Eurozone�ForecastSummer�2011Ernst�&�Young’s�latest�annual�forecast�for�the�Eurozone�provides�easily�accessible�information�on�the�rapid�developments�across�the�region.�With�individual�reports�for�17�countries,�this�pragmatic�and�business-friendly�publication�gives�executives�an�accurate,�up-to-date�assessment�of�the�region�against�a�backdrop�of�ongoing�sovereign�debt�crisis.��

Tax�Policy�and�Controversy�Briefi�ngAs�governments�try�to�balance�increasing�competitiveness�with�boosting�revenues,�and�tax�authorities�adapt�their�enforcement�strategies�and�policies,�staying�up-to-date�with�the�tax�landscape�is�a�challenge.�This�quarterly�publication�covers�the�key�issues.

Seizing�the�opportunity�in�global�compliance�and�reportingGCR�comprises�the�key�elements�of�a�company's�fi�nance�and�tax�processes�that�prepare�statutory�fi�nancial�and�tax�fi�lings�as�required�in�countries�around�the�world.�In�this�publication,�we�examine�best�practice�in�managing�and�co-ordinating�these�vital�activities.

VAT�and�GST:�Managing�the�multinational�burdenThe�focus�on�indirect�taxes�is�increasing�around�the�world.�In�this�paper,�we�consider�the�multinational�VAT�compliance�burden�borne�by�multinational�enterprises�and�suggest�ways�in�which�the�VAT�compliance�system�could�be�improved�for�the�benefi�t�of�taxpayers�and�administrations.

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About�Ernst�&�Young�Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com

About�Ernst�&�Young’s�Tax�services�Your business will only achieve its true potential if you build it on strong foundations and grow it in a sustainable way. At Ernst & Young, we believe that managing your tax obligations responsibly and proactively can make a critical difference. Our global teams of talented people bring you technical knowledge, business experience and consistent methodologies, all built on our unwavering commitment to quality service — wherever you are and whatever tax services you need.

Effective compliance and open, transparent reporting are the foundations of a successful tax function. Tax strategies that align with the needs of your business and recognize the potential of change are crucial to sustainable growth. So we create highly networked teams who can advise on planning, compliance and reporting and

maintain effective tax authority relationships — wherever you operate. You can access our technical networks across the globe to work with you to reduce inefficiencies, mitigate risk and improve opportunity. Our 25,000 tax people, in over 135 countries, are committed to giving you the quality, consistency and customization you need to support your tax function. It’s how Ernst & Young makes a difference.

© 2011 EYGM Limited. All Rights Reserved.EYG No. DL0449

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

The opinions of third parties set out in this publication are note necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

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