When considering how the move to a low carbon economy will affect the value of assets and corporations, there are so many potential scenarios that the task could easily become too daunting for most business leaders to tackle. However, visionary business leaders are alert to the risks and opportunities. Indeed, coupled with today’s economic climate, it is not too far-fetched to suggest that the cleantech sector, including related ICT, is a white knight sector.
The demand for new ICT systems and increased data storage capacity continues to rise. With data centres set to overtake air transport in terms of energy consumption, how will businesses regulate the environmental impact of their ICT infrastructure? Can improvements in alternative energy and energy efficiency facilitate a reduction, slow down or reversal in the ever-increasing environmental impact of ICT infrastructure? How will businesses meet the new and forthcoming legal and policy demands of a low carbon economy without ICT to abate, adapt, mitigate, measure, monitor and account for reduction in carbon consumption? How can a logistics business that is dependent upon making deliveries by road transport survive dwindling oil reserves and increased road transport pricing without cleantech? In giving these examples, we explicitly link the prospective economic value of a business to its ability to face the risks and opportunities arising from the countdown of the carbon clock.
ICT businesses have a pivotal role to play in a low carbon economy. Not only can they reduce the environmental impact of their own products and services by delivering systems with improved energy and life-cycle efficiencies, but the enabling technologies they develop can and will have a dramatic effect on other sectors. In this article we explore some of the legal drivers for investment in clean technology.
Assessing impact on business valuations
At the transactional level (particularly in due diligence) there is currently a widespread lack of appreciation, never mind practical and financial understanding, of the economic implications of the move to a low carbon economy. If such failure is maintained, canny buyers will exploit unprepared sellers and investors will become more cautious.
Virtually all governments of major economies are imposing an array of direct and indirect legal and policy measures which impose, or incentivise, energy efficiency, or the use of alternative energy, and/or are setting targets for carbon reduction.
Due diligence on carbon risks and opportunities
Some businesses may believe there is no immediate need to assess how the trend towards a low-carbon economy will impact their businesses. However, this approach is dangerously short-sighted. Investors in businesses who intend to realise their investment within a few years should be making an assessment on acquisition of how the next buyer is likely to value the low carbon risks and opportunities of the business. The ability to demonstrate vision and adapt to a low carbon economy could become a feature of the transactional due diligence process. At first it may be a fairly irregular feature but it is not difficult to see it becoming a standard feature over quite a short period of time.
Business owners will have to develop strategies and invest in new ICT and other technologies to meet the low carbon world. In acquisitions, well advised buyers will begin to carry out much greater due diligence on the business’ ability to meet the future requirements (direct and indirect). A business that will not meet the future legal requirements in respect of energy use and efficiency is likely to be less attractive to investors and lenders and may find negative impacts on its sale price or saleability.
Lessons from the credit crunch
There are direct analogies with the credit crunch. Just like with the credit crunch: (1) we have been warned that there are problems in the system (in this case the system is the planet); and (2) we are warned that a correction will occur. As with the credit crunch, the correction in this instance is also likely to be very severe for assets and businesses that have not taken into account the impacts of the low carbon future. Right now, there is a convergence of environmental, economic and other policies, which are currently in the process of being backed up by law and which all tend to ask questions concerning how we should be valuing assets and businesses.
Leaving aside the various laws relating to the promotion of energy from renewable sources, the developing laws at UK and EU level that ought to be considered in relation to the ICT sector, both directly and indirectly, cover areas such as climate change instruments generally, energy efficiency of buildings, measures to reduce energy consumption within data centres and buildings, the promotion of micro-generation within real estate developments, numerous proposed road pricing/congestion/emissions schemes, numerous waste management laws and important water demand, consumption and efficiency laws and policies. All of these developments will require businesses to implement enabling ICT systems. On top of all this there are numerous developing industry sector policies, voluntary agreements and the CSR requirements of corporate customers.
Periodic reviews and cleantech legislative developments
From a legal and procedural point of view, some of the new legislation contains two important legislative developments which have generally been overlooked but which may prove to be pivotal.
For instance, in the EU’s Energy Performance of Buildings Directive and Water Framework Directive and in the UK’s Climate Change Act, the Commission and Government are legislatively obliged to carry out periodic reviews (eg every five years) of the workings of the legislation. Thus governments cannot merely sit back and wait to be lobbied. Instead they must proactively assess how the legislation is working against set targets or prescribed objectives.
The second aspect is that in carrying out such periodic reviews, governments must have regard to developments in related clean technology. The simple principle is that, as cleantech develops (and particularly as new cleantech becomes commercialised), the law is intended to match that development and keep pace with cleantech (ie stricter standards and targets will be introduced).
Clean procurement strategies
Policy makers and industry bodies are also taking a more active role in seeking to drive behavioural changes in ICT procurement. This has led to publications such as the sustainability reporting guidelines produced by GRI, Intellect’s ‘High Tech: Low carbon’ report and the recently published EU Code of Conduct on Data Centres.
Nevertheless, while businesses are becoming increasingly sensitive to the need to adopt environmentally aware procurement strategies, it appears that only a limited number are actually taking significant practical steps to drive environmentally aware supplier performance. However, many businesses expect their procurement behaviour in this regard to change.
Our recent survey of the ‘green’ procurement strategies adopted by suppliers and procurers of ICT goods and services revealed that relatively few organisations (31% of respondents) had participated in ICT procurements where fees, incentives, service levels or key performance indicators were tied to reducing environment impact. But around half of the respondents who stated their organisations had not been so involved expected that this would change in the next five years.
The survey also revealed that, although organisations are increasingly aware of the importance of focusing their procurement strategies and contracts, from an environment and sustainability perspective certain factors are clearly restricting progress in this area. Less than a quarter (only 22%) of respondents said their organisation specifically measures the energy consumption of their own ICT systems (including data centres).
Without appropriate energy consumption, waste, water, transport and packaging use data and transparency of life-cycle information, it is hard for businesses to drive sustainability and energy efficiency improvement through their procurement processes. Added to this is the fact that in many cases those responsible for facilities management and energy usage are not involved in the purchasing of ICT systems. In the light of the legislative developments highlighted above, and increasing consumer environment awareness, we can expect this to change – with energy efficiency demands playing an increasingly prominent role in ICT purchasing decisions. ‘Green’ performance requirements and service levels in ICT contracts are beginning to appear, and they will be here to stay.
Transformational change
The move to a low carbon economy is so daunting that it is understandable that many will choose to believe that it won’t happen or shouldn’t happen, or (again like the credit crunch) choose to address it when it happens, or perhaps throw up their hands saying its too large or uncertain to do anything meaningful. They will tend to leave it to others (in this arena this is called the ‘agency principle’) to sort out, especially governments and regulators (remind you of the credit crunch?). But governments and regulators are putting in place a myriad of direct and indirect policies, laws and economic and fiscal instruments which looked at on a one-by-one basis do not look too daunting, but looked at as a whole they form an entirely different picture.
The tasks ahead for directors and senior managers are not easy and the current economic crisis provides little time for many to think of the bigger picture. However, many business opportunities arise from the transformational change to a low carbon economy, particularly for the enabling, support and transitional technologies developed by the ICT sector, which have a significant role to play in all other sectors.
All in all we will see significant change, and sooner than is generally appreciated.
Paul Sheridan is an Environment Partner and Ian Stevens is an IT and Sourcing Partner at CMS Cameron Mckenna LLP. Both can be contacted at +44 20 7367 3000.
