ACCOUNTING:

The Big Four will be among the big winners if U.S. adopts climate law

NEW YORK -- Having helped companies explore the labyrinth of greenhouse gas regulation in Europe, the Big Four auditing and accounting firms are now moving quickly to build climate and carbon shops in the United States. Their goal is to stake claim to a business that could one day rival tax compliance and financial disclosure in size and scope.

Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers are the undisputed giants of the auditing, tax advisory and business consulting world. They boast a client list that includes thousands of the biggest names in the corporate world.

The four are already well-known in Europe for their carbon footprint accounting, abatement strategy consulting and emissions disclosure services as industries on the other side of the Atlantic are forced to comply with the European Union's Emission Trading Scheme (ETS), but so far, their presence in America's nascent carbon market has barely been recognized.

But that's about to change. All four firms are in the midst of shifting experienced staff from places such as London and Copenhagen to New York and Washington. They are leaning on climate experts from as far away as South Africa and Australia in setting up their carbon desks here. Representatives from the firms are also more frequently seen at carbon market conferences as staff familiarize themselves with the basics of emissions trading in the United States.

"We're clearly leveraging our experience in Europe ... to build out and anticipate as best we can what impacts that will have on U.S. businesses," said Eric Hespenheide, global managing partner of internal audit services at Deloitte and one of the leaders of its sustainability practice. "If the U.S. decides to adopt some reduction targets as a country, the stimulus and the impact on our U.S. economy will be magnitudes greater than what we've seen in any other individual country around the world."

Deloitte and the others already have thousands of practitioners devoted entirely to the business of sustainability, many active in the United States for 10 years or more helping firms there adopt more environmentally friendly business practices and communicate these to the public. But thousands more of their tax, audit and financial reporting professionals are relied on to help them meet client needs in Europe in terms of carbon reporting and ETS compliance, on top of the regular services they provide.

An 'absolutely transformational' experience for clients

Officials from all four firms say they see a similar picture now emerging in the United States. At a minimum, they recognize carbon consultancies will be needed to help those industries most affected by a proposed federal cap-and-trade program -- especially oil and gas producers, electricity generators, chemical makers and heavy manufacturers -- to calculate their emissions, track and report them to U.S. EPA, and factor in allowance and offset purchases against bottom-line profit and losses.

Though it's hard to separate it from the broader practice of sustainable business advising, climate change already "is one of the fastest-growing segments of our business in the U.S.," said Katie Pavlovsky, co-leader of Deloitte's sustainability group.

Other emerging trends in the United States point to even greater opportunities for the Big Four, including repeated calls by groups like the Investor Network on Climate Risk and Ceres to have the Securities and Exchange Commission force companies to disclose climate change risks and business opportunities in their quarterly financial reports. Though they're not quite sure in what final shape or how quickly the new reality will emerge, the companies see climate eventually touching virtually every aspect of their business should Congress ultimately pass sweeping greenhouse gas regulation.

"I don't think it's understood universally by our clients or by the profession," said Jan Babiak, head of climate change and sustainability services at Ernst & Young. "What we all know is that at some point this is going to be absolutely transformational."

As seen in Europe and elsewhere, the business opportunities for consultancies active in the carbon space are diverse and increasingly abundant.

Through undertaking voluntary corporate sustainability and climate change initiatives around the world, most industries have already come to realize that cutting CO2 emissions from business operations is often just a proxy for saving money. That explains why the carbon- and cost-cutting have largely continued even as the worst recession in decades shakes the global economy.

Tracking energy expenses and suppliers?

The imperative to cut greenhouse gas emissions becomes even more central when governments require it. But by developing the right strategy, companies can ensure that the work to do so eventually pays for itself through lower energy expenses -- hence the Big Four's work in the European Union in measuring carbon footprints and locating the cheapest and easiest places for companies to reduce them.

The accounting giants also help companies operating in the ETS zone to determine how exposed they are to the higher electricity and fuel costs that inevitably come as governments place a price on carbon. Energy and commodity hedging services that factor in the carbon markets are another big business segment.

Supply chain management is another area, noted Eric Israel, head of KPMG's U.S. sustainability practice.

That means "how do you manage your supply chain, how do you make sure that your own code of conduct is being implemented by your suppliers, and how do you monitor that?" said Israel. KPMG and the others have recognized that often, the biggest portion of a company's carbon footprint comes from the supply chain and its upstream suppliers, and they're guessing that will factor into emerging U.S. carbon regulation, as well.

The firms also see opportunities in advising clients and the pros and cons of entering into mergers and acquisitions with climate change risk in mind. A report released last month by PricewaterhouseCoopers, for instance, considers several past mergers and other deals where climate proved a decisive factor, warning prospective clients that "because of the pending policy action and heightened stakeholder interest in climate change, companies in virtually every industry will need to think about its impact when executing a deal."

Closer to home, the companies have been active in helping broker the tax equity deals that have fueled wind and solar power plant construction, allowing financiers to offset tax liabilities on profits by investing in renewable energy and obtaining lucrative tax credits approved by Congress. Many subsequently launched their so-called "carbon advisory" services after EPA posted guidelines on emissions disclosure.

Waxman-Markey means bring help from Europe

But the cap-and-trade bill championed by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) has proved the real wake-up call. Representatives from all four firms now say they are scrambling to keep on top of developments in the United States and have begun relocating European staff to help build operations here. At the same time, they acknowledge a need to rely on folks already familiar with the ways of Washington, suggesting some emerging job opportunities here.

"We can bring in cap-and-trade emissions experts and say, 'OK, this is how it works here," said Babiak, who is now based in London. "We can bring that knowledge to bear, but it would be arrogant in the extreme to think that you can just parachute in teams from around the world."

Some of the methodologies used for carbon footprint calculations and emissions monitoring are common on both sides of the Atlantic, many point out. In Europe, for instance, many firms rely on guidelines spelled out in the Greenhouse Gas Protocol, a system developed for the U.S. voluntary carbon market by the World Resources Institute and the World Business Council for Sustainable Development. Others rely on the ISO 14000 series of carbon and environmental impact accounting standards developed by the International Organization for Standardization, which many U.S. firms are already familiar with.

Many major U.S. corporations are also well schooled in Europe's often confusing carbon regulations, as they run substantial operations there, likely smoothing their transition to cap and trade in the United States. And as the climate change issue continues to evolve, at least through state and regional programs should a federal bill never pass, the world's largest consultancies speculate that carbon will eventually move from the exotic to just another boring fact of business life in America and elsewhere.

"The way that we see it is that it should be implemented, integrated into what we normally do," said Helle Bank Jorgensen, U.S. head of sustainability and climate change at PricewaterhouseCoopers. "At some point, we had no Internet and no systems like we have today, and today it's just a part of everything we do."

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