Unilever: Using Carbon Pricing to Achieve Corporate Goals
Worldwide, the private sector is increasingly acknowledging the business case for investing in climate business opportunities and climate risk management. However, the question of which management approaches are most appropriate for each company is still being explored.
In a recent webinar on designing and implementing internal carbon pricing hosted by the Carbon Pricing Leadership Coalition (CPLC), the World Economic Forum (WEF) and Yale University, Unilever - one of the largest consumer goods company in the world - discussed some approaches that businesses can take, and have already taken, to implement such measures.
The webinar was moderated by Alzbeta Klein, Director of the International Finance Corporation’s (IFC) Climate Business Department and featured Roger Seabrook (VP Finance), Sabina Nealon (Finance Director) and Thomas Lingard (Director, Climate and Environment) from Unilever. They discussed Unilever’s strategy of embedding climate risk management in its operations - the strategy is driven by their priorities and vision for a low-carbon economic future and the belief that different approaches derive different benefits for corporations. To achieve Unilever’s Sustainable Living Plan, which seeks to make its operations carbon positive by 2030 – this means the company will be generating more clean energy than it can consume, and will be selling the surplus on the market so as to help others reduce their carbon footprint – Unilever has identified carbon pricing as an effective transition strategy until sufficient external market prices are in place.
Unilever expects carbon pricing to deliver against five key objectives:
1. making emissions meaningful to financial decision makers,
2. helping those decision makers factor in the long-term cost of carbon,
3. preparing decisions for future carbon taxes,
4. holding decision makers accountable for sustainability outcomes, and
5. achieving emissions reduction targets.
Carbon pricing, the cornerstone of a suite of tools developed by Unilever to achieve these objectives, is part of two complementary approaches to account for carbon risk and opportunity. The first is a shadow price applied to the cash flow analysis of all capital expenditure decisions over 1 million Euros. Assessing emissions in monetary terms helps decision makers visualize the economic impact of the cost of carbon associated with each project. The second approach calculates the cost of carbon for each of the company’s global business units, and subtracts this amount from their budgets. This is then placed in a clean-tech fund that is used for clean energy investments by the company, such as in solar thermal installations. Unilever’s approach reflects a shift in the mindset of how companies think of climate impact – while carbon presents a risk that needs to be managed by calculating its financial implications for each decision, it also presents an opportunity for businesses to profit in a climate-friendly manner.
Consultant Long Lam from Ecofys concluded the webinar presenting a guide on Best Practices on Integrating an Internal Price on Carbon. Their analysis suggests that companies primarily have three motivations for deploying internal carbon pricing mechanisms: to demonstrate climate leadership, to manage financial risk as outlined by the FSB Task Force on Climate-related Financial Disclosures, and to capitalize on the transition to a low-carbon economy. Ecofys has outlined a four-dimensional framework to develop company policies on carbon pricing in line with company priorities. Such strategies must consider height (level of carbon price), depth (level of influence on business decisions), width (coverage of emissions), and time (evolution of price). Before such policies can be implemented, however, companies first need a clear idea of what objectives they wish to achieve through carbon pricing, and even whether carbon pricing is the correct tool of choice to achieve them. Further, corporate leadership must contend with the significant challenge of having the rest of their organization accept internal carbon pricing as a useful tool, one that presents not only a cost but also an opportunity to them. Engaging with the business from the very beginning, as well as bringing senior finance executives to articulate the business case for carbon pricing will help in this process.
Ms. Klein concluded the webinar by highlighting an important takeaway: the key to carbon pricing is to keep it simple. She urged companies to recognize and avoid the pitfalls of letting the need to get every detail right and instead start with implementing simple and impactful carbon pricing mechanisms. If every company managed their Scope 1 and 2 emissions, the added complexity of managing Scope 3 emissions would be greatly reduced. As deftly articulated during the discussion, every company’s Scope 3 emissions are some company’s Scope 1 emissions. Put simply, every company’s indirect emissions are the direct emissions of another company, best positioned to reduce their own.
The webinar is available here: https://www.carbonpricingleadership.org/resources-for-the-private-sector/
About the Author
Ayesha Malik works in the Climate Business Department of the International Finance Corporation. She earned a Master of Science in Foreign Service from Georgetown University, where she focused on the global business and finance of climate change and energy, and a Bachelors in Political Economy from the University of California at Berkeley. Previously, she has worked with the Planning Commission of India, the Brookings Institution, and the Center for Climate and Energy Solutions.