Published: Monday, 5 Oct 2009 | 11:42 AM ET

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With carbon cap-and-trade legislation before Congress and increasing pressure from shareholders, US companies know they’ll have to deal with their greenhouse gas emissions, or carbon footprint, and many are jumping the gun to change their carbon liability into an asset.

“The best-managed companies are evaluating their carbon footprint,” says R. Paul Herman, founder and CEO of HIP Investor Inc., a Californian investment advisory firm that has created two sustainability indexes tracking the S&P 100 and S&P 500 constituent companies. “And they’re managing it lower to save energy and costs, reduce their future volatility of materials costs, mitigate potential environmental liabilities, and create new competitive advantages.”

Getting a handle on these emissions, however, takes work.

Emissions generated in the creation of a company’s principle product or service, whether it’s a megawatt of electricity or a truckload of goods moved 100 miles, can be relatively easy to calculate. But other emissions, like those generated when your employees fly to meetings or when consumers turn on your appliances, are harder to evaluate.

And for sectors with complex supply chains and wider geographic footprints—like home builders (see chart) and retailers—this evaluation requires more thought, and probably more spreadsheets.

“Direct emissions are usually coming out of a company's smokestacks. They are easy to measure,” says Chris Erickson, CEO of carbon accounting and consulting firm Climate Earth. “The problem is that for most companies 80% of their emissions are indirect, and that means they are hidden in their supply chain, because if a company manufactures a product, the design decisions, transportation decisions and material decisions all have direct impact on emissions of the suppliers that provide parts of the product.”

This Climate Earth graph for new home construction shows just how the end product carbon liabilities are calculated using its supply chain constituents.)

There are several tools available to measure a firm’s carbon footprint -- dozens of software packages and consulting firms have sprung up in recent years to help analyze emissions -- but the most widely used set of accounting guidelines is the Greenhouse Gas Protocol, GGP, criteria created by World Resources Institute and the World Business Council for Sustainable Development in partnership with governments and businesses around the world.

The GGP divides carbon emissions into three areas. Scope 1 emissions are directly created from the production of a product. Scope 2 includes indirect emissions from purchased electricity. Finally, Scope 3 covers the remaining indirect emissions caused by employee travel, waste management, use of products by consumers, and so on.

Many of the largest corporations have already begun this type of analysis. The Carbon Disclosure Project, a not-for-profit data collection agency funded by hundreds of institutional investors, in mid-September released its annual report looking at the carbon footprints of the 500 largest corporations.

• Slideshow: The Cleanest Companies

Members of the project’s “Global 500” voluntarily submit data based on the GGP protocols. This year’s report covered 409 responding corporations, accounting for ten billion tons of carbon dioxide equivalents.

But even with defined protocols and wide participation, cross-sector analysis is complicated by a corporation’s core business. One example is the financial services sector; how do you quantify the emissions of the companies, projects and technologies that they fund, and whose responsibility are they?

“If emissions are your sole criteria, you’d end up with a portfolio of advertising companies,” says Mario Lopez-Alcala, senior analyst in the climate change research group at analytics firm RiskMetrics Group, pointing to a subsector with a light footprint. Banks are similar, as their Scope 1 and 2 emissions are smaller than their geographic presence or market capitalization would suggest.

“Banks don’t emit a lot of CO2,” says Lopez-Alcala. “But how are they investing their money? Into projects and technologies that emit a lot?”

Some banks have backed off from funding new coal-fired plants because of the carbon risk, and investor pressure may push back on future funding of other emissions-intensive businesses and technologies, like oil refineries or mass-scale agriculture.

Shareholders are also pressuring management teams. A PricewaterhouseCoopers report from 2008 lists 43 climate-related shareholder resolutions filed with US companies during 2007, with 15 leading to new climate commitments by management from firms like ConocoPhillips

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[COP  Loading...      ()   ] , Wells Fargo

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[WFX  Loading...      ()   ] , and Hartford Insurance.  More shareholder challenges are expected in years to come.

But while there could be a short-term drag on company performance due to implementation costs, longer-term results could be worth it.

“Traditional Wall Street analysis has not yet fully integrated this thinking into valuation, but when an investor does incorporate environmental, or social, measures of results, a portfolio that weights the leaders higher than the laggards can outperform the market," says HIP’s Herman, whose index has outperformed its S&P analogs since 2004. “That’s because this (forward-thinking) is a leading indicator of success. Investment firms from (Al Gore-founded) Generation Investment Management, to Goldman Sachs’ 

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[GS  Loading...      ()   ] GS Sustain, to HIP Investor have shown this consistently.”

Climate Earth’s Erickson says that corporations need to treat carbon like any other input into their processes, and not as a separate regulatory requirement. “Manufacturers need to manage carbon emissions like quality,” he says. “If a (product’s) part is flawed and yields a poor quality end-product, no manufacturer today would tell customers that the poor quality product was not their fault.”

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