November 23, 2011

By Dena Aubin

After Office Depot was picketed over its environmental practices in 2003, the big-box retailer made big changes. It cut off a paper supplier accused of illegal logging. It started tracking its carbon emissions.

And, like more and more corporations, it began releasing independent audits of its environmental progress.

Eight years later, the company has more recycled products, a smaller carbon footprint and has won praise from conservation groups. Annual environmental audits reinforce all this.

"We want to showcase our performance accurately and positively without sugar-coating metrics," said Yalmaz Siddiqui, the company's head of environmental strategy.

Green audits - which for medium-sized companies can easily cost more than $100,000 - are helping a growing number of corporations assert their environmental responsibility in the face of scrutiny from the government, as well as consumers.

Regulators are making more demands. For example, companies that label their products as eco-friendly likely will face tougher oversight from the U.S. Federal Trade Commission under guidelines proposed a year ago.

Environmentalists make demands also. Overly positive green claims regularly trigger protest campaigns by such groups as Greenpeace. Green audits can also help companies find energy savings, fend off publicity nightmares and attract investors concerned about climate change.

For accounting firms, green audits are a business opportunity and the industry's Big Four - PwC, KPMG, Ernst & Young and Deloitte - are aggressively pursuing it.

GREEN CREDENTIALS AT RISK

Companies for years have released environmental reports separate from their financial statements. It started with oil companies trying to repair their image after the 1989 Valdez oil spill. Most big companies' websites link to sustainability or corporate responsibility reports, voluntary accounts of environmental and social impacts. At times it can be difficult to tell how much of a difference companies are making overall.

"Plenty of companies are taking actions to reduce their environmental footprints," said Sandy Nessing, head of sustainability at power group American Electric Power.

These activities run the gamut from retail titan Wal-Mart , which is cutting back on packaging, to drinks maker Coca-Cola Co , which is trimming water use, she said.

But watchdog groups and the public can still cast a skeptical eye on reports about companies' green achievements if they are not audited.

Kimberly-Clark endured a nearly five-year campaign by Greenpeace, which alleged the paper products company was getting pulp from sensitive forest habitats and misleading the public about it in its sustainability report.

Kimberly-Clark has since started having its reports reviewed by a sustainability consultant and an outside advisory board. It also worked with Greenpeace and in 2009 announced a tighter policy on buying fiber.

"We don't believe we misled anyone," said Kimberly-Clark spokeswoman Kay Jackson.

The company already had a strong forestry policy and the Greenpeace agreement just "raised the bar," she said.

Preserving brand names is the No. 1 reason companies complete environmental audits, according to a new survey released by KPMG.

POWERFUL INVESTORS BACK AUDITS

Green auditing has been slower to take off in the United States than in the European Union, where companies need accurate counts of carbon discharges to comply with an emissions trading scheme.

Nessing at AEP said her company finds it hard to justify the cost of an external audit and is using its own internal auditors to review its reports.

Even so, some of America's biggest corporations, from United Parcel Service Inc to Goldman Sachs , have had audits done over the past two years.

Though the United States has not legislated carbon trading, investors are pressing companies to disclose their emissions.

The Carbon Disclosure Project, a London-based nonprofit group, says it has 551 institutional investors with $71 trillion in assets backing its efforts to gather emissions data from major companies. It ranks companies on carbon disclosure quality and gives credit for third-party verification.

Another key proponent of audits is the $218 billion California Public Employees Retirement System, the largest U.S. public pension fund, which announced in May that it will put more focus on sustainability in all its investment decisions.

Much of the work of auditing emissions has been going to global certification experts like Bureau Veritas, or the Big Four. Deloitte, Ernst & Young, KPMG and PwC are pushing into this market with new hires or acquisitions of carbon consulting firms.

DRAWBACKS

Audits are not all the same, nor are they a cure-all.

Some auditors only verify numerical data, such as carbon emissions, and do not check the accuracy of the glowing narratives about companies' environmental achievements and goals that often dominate reports.

Moreover, there are no firm rules for environmental reports comparable to the U.S. generally accepted accounting principles (GAAP) and SEC requirements for financial statements.

Most companies follow guidelines of the Amsterdam-based Global Reporting Initiative (GRI), a coalition of governments, businesses and public interest groups that fosters environmental and social reporting. But some environmental activists say those standards have shortcomings.

For example, companies that are not doing a good job of reducing certain persistent toxic chemicals can just omit mention of them, said Sanford Lewis, a counsel for the Investor Environmental Health Network, a group that encourages companies to reduce use of toxic chemicals.

GRI's principles say companies should include all material information, but Lewis's group has been pressing for more specific guidelines and not to leave it up to companies to decide what is material.

"There are reports that are leaving out essential information that's needed to make them not 'greenwashing' and not fundamentally misleading," Lewis said.

GRI is reviewing its guidelines and considering a switch from broad principles to more detailed rules, including a standard set of disclosures companies would have to report on as a minimum, GRI spokeswoman Marjolein Baghuis said.

Companies with persistent toxic chemicals should be reporting them under current guidelines, she said.

http://www.reuters.com/article/2011/11/23/usa-auditing-green-idUSN1E7AM0BH20111123