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Greg Turcotte

SAP Research Report

13 May 2007

Summary:Increasingly, corporations are being called on to adopt sustainable practices as part of their standard operations. One of the foremost goals of this movement is to reduce the emission of green-house-gasses. This report examines the role of information systems in reaching this goal. Forward thinking companies such as SAP have recognized this need, and are providing tools for tracking green-house-gas emissions.

Using Existing Information Systems for Green-House-Gas Emission Tracking

A textbook from one of my undergraduate management courses poses the question,

“Should business be responsible for social concerns lying beyond its own economic well-being?”

(Bateman 162). Increasingly, social interest groups, individual consumers, and even foreign

governments are answering this question with a resounding “Yes”. A call for corporate

accountability beyond immediate profits is being raised; a call that emphasizes the need for

ethical and sustainable business practices. One such social concern has received considerable

attention as of late: global warming due to green-house-gas (GHG) emissions. Many envision a

future where corporations are held responsible for their contribution to this global threat.

Unfortunately, as implied by the opening question, this vision conflicts with the

traditional profit-driven mentality of many corporations. Milton Friedman, credited with shaping

modern economic theory, was once asked what he thought of corporate philanthropy. He

responded, “’The social responsibility of business is to increase profits’”. He went on to argue

that anything in addition to this would be unethical (Bateman 162). Before vilifying this

statement, it needs to be added that this principle in itself does not exclude the idea of

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sustainability. When combined with a long-term view of the future, sustainability is a necessary

component of profitability. If resources are depleted, there are no profits.

However, reality has shown that a very short-term economic view is dominating the

current global economy. Today’s competitive trade-markets are driven by profits with little

concern for anything else. The expansion of these markets has fostered a business environment

in which corporations are forced to cut costs wherever possible simply to stay in business.

Unfortunately, the lowest common denominator often sets the bar. If a competitor is saving

money by spewing waste into the air, others may be inclined to do the same simply to compete.

The idea that a business would willingly take on the costly process of reducing green-house-gas

emissions seems counter intuitive at best. When looked at with a short-term view of the future, it

appears that the goals of profitability and sustainability are at odds with one another.

Currently, there are attempts being made to reconcile these two objectives. The hope is

to change the rules by which our global markets operate. Across the board, corporate

profitability needs to be linked with sustainable practices. The catalyst for change may come in

the form of government coercion, the influence of consumers through the purchases they make,

or through some other means. Likely, the resulting solution will incorporate aspects from all of

these sources. Milburn Thompson, a writer examining the social impact of globalization, has

taken an optimistic view. “The system itself can often be directed toward conserving the

environment… Multi-national corporations can be shown that environmental responsibility pays

in the end.” (Thompson 39). By directly linking profits with sustainability, the competitive

market system can be harnessed into self-regulation. While the final outcome is still unknown,

steps for reaching this point are already being taken.

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Signs that corporations are being influenced by these trends are already present. On their

own, some businesses have decided to include GHG emissions as part of their overall decision-

making process. Often, the organizations taking the lead in reducing emissions are being

rewarded for their effort. This has certainly been the case for one Colorado based brewery.

New Belgium [Brewery] has always looked for ways to be energy efficient and

socially responsible…

Greenhouse Gas Emissions Reduction • In 1998, New Belgium took an

employee vote and decided to commit to being the nation’s first wind-powered

brewery. The decision came after our engineers, looking to minimize CO2

emissions, discovered that city’s power plant, which supplied the brewery with

electricity, created the bulk of our emissions. Employee owners voted to dip into

their bonus pool to help finance the conversion. (New Belgium)

In this exceptional example, this company decided to take a risk by committing itself to a policy

of sustainability.

Rather than being a liability, incorporating sustainability as part of their ongoing

operations has greatly benefited New Belgium’s corporate image. It may even be possible to

claim that this effort has given them a competitive edge over other breweries. If nothing else, it

lets consumers feel good about using their product, and it makes for interesting conversation.

This informal advertising is yet another benefit. Although it can be difficult to assign such

benefits a direct monetary value, they should not be discounted. Examples such as New Belgium

show that it is possible to reconcile the goals of profitability with sustainability. Still, much

work remains for this ideal to be realized on a global scale.

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While the above example illustrated indirect benefits of sustainable practices, there is

potentially an additional source of revenue that businesses actively budgeting their emissions can

benefit from. Several proposed regulations include the buying and selling of emissions credits.

“To meet specific goals, emissions trading markets are being developed in which organizations

that meet targeted emissions levels earn credits that can be traded, stock-market style, to

organizations that didn’t meet them. Estimated by Point Carbon at $10 billion per year, this

emerging trading market is potentially very substantial” (SAP 1). In such a market, businesses

that excel at reducing their emissions will be in a position to gain financially. This could be a

powerful force for motivating emission reductions. In effect, global markets driven by profit can

be used to promote sustainable practices.

This report is written as a supplement to this vision of the future. Undoubtedly, the

required changes will result in a time of transition where corporations struggle to comply with

new standards. Admittedly, the process of incorporating sustainable practices will likely result

in increased costs. Minimizing these will be of utmost importance for reconciling the goals of

sustainability and profitability. After all, business is still about the bottom-line, and cutting

expenses is a key aspect of profitability. Efforts to ease corporations through this time are

already being made. The following research identifies some of the work being done to assist

corporations with green-house-gas emission compliance.

The International Organization for Standardization (ISO) has done extensive work in

developing a set of standards and protocols for the monitoring of GHG emissions. A brief

excerpt from ISO’s webpage states:

ISO launched the development of ISO 14064 in 2002 as a solution to the

problems posed by the fact that governments, business corporations and voluntary

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initiatives were using a number of approaches to account for organization- and

project-level GHG emissions and removals with no generally accepted validation

or verification protocols. (ISO)

With this standard, the ISO has created a single set of rules by which corporations are evaluated

for GHG compliance. Uniformity ensures that the playing field is indeed level. Enforcing these

standards as prerequisites for entering the global market could create a competitive environment

that encourages sustainability. No longer would one company be able to out-perform another by

ignoring GHG emissions.

In addition to creating a common set of rules, the ISO standard is a comprehensive

guideline for emissions reporting. It details how emissions tracking can be incorporated into the

business process. Concepts outlined in the ISO standard are strikingly similar to what one would

find in a financial accounting textbook. Unifying similarities can be found between the language

implemented in ISO 14064 and the corporate-familiar language of financial accounting.

ISO 14046 sets out to achieve four goals, each of which should sound very familiar to

anyone in the accounting field.

Promote consistency, transparency and credibility in GHG quantification,

monitoring, reporting and verification;

Enable organizations to identify and manage GHG-related liabilities, assets

and risks;

Facilitate the trade of GHG allowances or credits, and

Support the design, development and implementation of comparable and

consistent GHG schemes or programmes. (ISO)

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The reason these goals should look familiar: they closely resemble those promoted by the

Financial Accounting Standards Board.

Improve the usefulness of financial reporting by focusing on the primary

characteristics of relevance and reliability and on the qualities of

comparability and consistency;

Keep standards current to reflect changes in methods of doing business and

changes in the economic environment;

Consider promptly any significant areas of deficiency in financial reporting

that might be improved through the standard-setting process;

Promote the international convergence of accounting standards concurrent

with improving the quality of financial reporting; and

Improve the common understanding of the nature and purposes of information

contained in financial reports. (FASB)

Both standards emphasize relevance, reliability, and consistency as their primary goals. In both

cases, the intent is to create a way by which corporations can be evaluated and compared using a

common standard. The idea that all corporations will be held to the same rules is found

throughout both standards. As a generally accepted rule, it is illegal for a corporation to gain

competitive advantage by ignoring the FASB guidelines. Through the ISO standard, GHG

emission tracking is presented as though it is simply a subset of existing accounting practices.

Building on existing concepts makes the adoption of emission standards more manageable.

However, with the ISO standard in place, it must be recognized that GHG emission tracking will

cause significant change and expense for most organizations.

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SAP, a provider of information systems, is in the business of making change easier. They

have recognized that one possible path to ease businesses through this time of transition is to

modify pre-existing information systems. First, we should examine the traditional role SAP’s

solutions have played in the world of business. From there, a connection to their role in the issue

of green-house-gas emissions can be more easily explained.

SAP’s information systems are found in enterprise class businesses across the globe. Due

to an ever-increasing need to track information, corporations have turned to SAP’s information

systems for aid. SAP allows businesses to monitor operations at their most basic levels. SAP’s

systems have made it possible to generate financial and operations reports with a rate of

frequency and a level of accuracy that was previously impractical. To a large extent, measures

taken to implement these systems have justified themselves by cutting costs and increasing

profits.

The potential exists where these same systems could also be used to monitor green-

house-gas emissions. With an ISO standard in place that can be easily translated into accounting

principles, it seems reasonable to conclude that corporations could use existing information

systems to facilitate compliance. Instead of analyzing the monetary costs each processes will

incur, the emission cost of each product could be estimated. Using this information, companies

could apply accounting principles that allow them to budget the emissions they expect to produce

within a given time period. With an emissions budget in place, appropriate action could then be

taken to insure compliance. Such systems would also be key in the trading of emissions credits.

Without accurate information systems, there would be no way to realize this trade opportunity.

By expanding the role of existing information systems, corporations will be in a position to

comply with emission standards and capitalize on potential sources of revenue.

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In the recent past, SAP has implemented emission-tracking solutions in industries that are

already highly regulated. For example, utility plants are on the forefront of GHG emission

monitoring. An excerpt SAP’s website explains:

Regulations such as the Clean Air Act and the Kyoto Protocol require emissions-

producing entities in the United States, Europe, and elsewhere to reduce energy

consumption and greenhouse gas emission…

To succeed in this regulated environment, however, utilities – yours for example –

need a cost-effective way of monitoring and controlling emissions output,

tracking compliance, and generating reports. This is where SAP xApp Emissions

Management (SAPxEM) packaged composite application can help…

SAP xEM belongs to a new breed of composite applications. It is designed to

improve productivity by aligning compliance software with existing processes.

Capabilities such as maintaining compliance status, monitoring and controlling

plant emissions, tracking performance benchmarks, and communicating with key

stakeholders make this solution unique. It supports processes that enhance the

information flow across the organization, improve environmental portfolio

management, and enable you to move closer to achieving sustainability for your

global operations. (SAP 1, 2)

As seen here, SAP is positioning its product as a viable solution for emissions tracking.

In addition to promoting new stand-alone solutions, SAP has shown that existing

enterprise software can be modified to accommodate new environmental accounting methods.

“SAP xEM integrates seamlessly with existing enterprise portals. For effective emissions

management, you must be able to integrate data from various systems” (SAP 3). Adding further

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incentive, the estimate SAP gives for implementing this added functionality to their existing

systems is less than four months time (SAP 4). While realistically there are sure to be

complications, it is encouraging to see that developers like SAP are recognizing the importance

of providing competitive solutions that integrate environmental accounting into existing

programs. Retrofitting existing information systems could dramatically reduce the time for

implementation and the resulting overhead costs.

Personally, I find the merging of environmental accounting into traditional corporate

practices exciting. It is a highly practical way of tackling a problem with truly global

implications. Though it does not prevent such a thing, it does not require a drastic change in

corporate ideology. Compliance can be achieved by using competitive markets, something

readily accepted by modern corporations. To me, this seems like a realistic approach to a

potentially volatile transition. I hope to position myself professionally so that I’m involved in

this emerging field in some way.

In viable visions of a sustainable future, it must be recognized that corporations are

driven by profits. This basic principle is not likely to waiver. However, it is possible to foster a

long-range view of the future, thereby linking profits directly to sustainability. In the end, if we

fail to sustain our resources, what good are profits anyway? Competitive markets can be

modified to include this concept. Linking profits to compliance will effectively capture the

attention of shareholders and the companies they influence. The International Standards

Organization has made significant progress to this end. They have developed a standard by

which all businesses competing in the global market can be held accountable. Of equal

importance, SAP is providing the tools needed for corporations to operate in this new

environment. Information systems are helping corporations to comply with these standards in a

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way that is cost-effective and timely. Ideally, these efforts will lead to a future where both

sustainability and profitability can be accommodated.

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Works Cited

Bateman, Thomas S., Scott A. Snell. Management Leading & Collaborating in a Competitive

World. 7th ed. New York, NY: McGraw-Hill Irwin, 2007.

FASB. “The Mission of the Financial Accounting Standards Board.” FASB. 25 Apr. 2007.

<http://www.fasb.org/facts/index.shtml#mission>

ISO. “New ISO 14064 Standards Provide Tools for Assessing and Supporting Greenhouse Gas

Reduction and Emissions Trading.” International Organization for Standardization. 3

Mar. 2006. 25 Apr. 2007 <http://www.iso.org/iso/en/commcentre/pressreleases/2006/

Ref994.html>

New Belgium. “Sustainability.” New Belgium. 8 May 2007. <http://www.newbelgium.com/

sustainability.php>

SAP. “SAP for Utilities: SAP xApp Emissions Management.” SAP. Aug. 2004. 25 Apr. 2007

<http://www.sap.com/industries/utilities/pdf/BWP_xEM_SAP_Utilities.pdf>

Thompson, Milburn J. Justice & Peace. 2nd ed. Maryknoll, NY: Orbis Books, 2003.