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Key Successes and Shortcomings
UPS made notable progress across many environmental programs and initiatives in 2012. Key successes are listed below. Note that this list does not include recognition from outside organizations and publications for our sustainability programs and reporting transparency. We present selected examples of such recognition in "Recognition for Responsibility".
UPS delivered the following key successes within the 2012 scope and boundary of this Report:
• Achieved positive results on 9 of our 11 Key Performance Indicators related to the environment (see "Key Performance Indicators").
• Achieved absolute reductions in both Scope 1 and Scope 2 carbon emissions compared to 2011, using the widely accepted global reporting standards of the Greenhouse Gas Protocol (see "Priorities and Goals").
• Increased the number of Scope 3 emission categories we report on according to the Greenhouse Gas Protocol Corporate Value Chain Accounting and Reporting Standard (see "Supply Chain Transparency").
• Continued to achieve rapid improvements in fuel and emissions efficiency in the freight operations of our Supply Chain & Freight segment, by applying technologies and techniques honed in our U.S. Domestic Package segment (see "Ground Fleet Efficiencies").
• Approved substantial additional investments in vehicles and stations for low-emission liquefied natural gas (LNG); creating a critical mass of LNG technology in the United States helps make it more affordable and available for other commercial transportation companies (see "Environment").
• Offset carbon emissions associated with our extensive operations and hospitality as Official Logistics and Express Delivery Supporter of the London 2012 Olympic and Paralympic Games (see "Marketplace").
• Reported to the water program of CDP—an analog to the CDP carbon program—and contributing to CDP’s 2012 Global Water Report (see "The Global Challenge of Water").
• Achieved more than 90 percent diversion of waste from landfill or incineration at both UPS facilities selected to evaluate methods and practices for our Zero Waste Initiative (see "Effluents and Waste").
The number of reportable spill incidents in the United States (an environmental KPI) increased compared to the prior year, for the second year in a row. This shortcoming is partially mitigated by the fact that actual volume from reportable spills declined 14 percent compared to 2011. This KPI is shown graphically in "Key Performance indicators" and discussed narratively in "Compliance". All other environmental KPIs showed improvement year-over-year.
Work in Progress
As always, UPS has numerous environmental programs and initiatives in progress that cross from one year into the next. Notable work in progress in 2013 includes the following:
• Preparing to add yet another category of Scope 3 carbon emissions to our reporting (see "Supply Chain Transparency and Scope 3 Reporting").
• Adding winglets to our fleet of Boeing 767 long-haul aircraft to increase their fuel-efficiency (see "Success in Air Fleet Efficiency").
• Building previously announced maintenance and fueling stations for LNG vehicles in the state of Tennessee (see "Environment").
• Purchasing approximately 700 LNG vehicles and building four refueling stations by the end of 2014 (see "Environment").
• Preparing to design and build additional solar energy systems that we own and manage internally, modeled on the financially successful 250-kW system in Lakewood, New Jersey that we completed in 2011.
• Continuing to refine and deepen our measurement data for water use in our facilities around the world, and making water use a standard metric for local operations managers.
• Implementing water conservation programs in high-use facilities in the United States.
• Implementing the previously announced UPS Global Forestry Initiative, with a 2011-2013 goal of planting more than a million trees on five continents (see "Millions of Trees").
Risks and Opportunities
Enterprise Risk Management Program
UPS integrates climate change risks and opportunities into its multidisciplinary, company-wide risk management process. We utilize a mature ERM (Enterprise Risk Management) program in combination with close linkages to Corporate Strategy, Risk Management (insurance programs and/or hedging programs), and the Business Continuity Group. Each plays an important role in the overall management of risks in relationship to meeting business objectives. Our ERM program provides detection and governance processes, while Corporate Strategy reviews many of the opportunities as well as long-term mitigation initiatives. Traditional risk management helps to limit exposure where necessary, ensuring fiscal requirements are met for recovery. Business Continuity provides resiliency for the organization through well-developed response plans coupled with practice drills of the most likely business disruption scenarios.
The key to the success of our ERM program is a rigorous process that includes identifying risks and opportunities related to regulation, customer behavior, brand reputation, and weather. This process utilizes internal surveys of key senior management as well as information and perspectives obtained through outside consulting relationships, benchmarks against other organizations’ risk profiles, and active participation in roundtable risk committee sessions. Below we discuss the major risk categories related to the environment that we assess in the ERM program. For more complete information regarding the program and risk factors affecting UPS, you can:
• Visit the UPS investor relations website (investors.ups.com) to view our filings with the United States Securities and Exchange Commission (SEC).
• View the UPS submission to CDP (cdproject.net)
Climate Change-Related Regulatory Risk
Through the ERM process described above, we review multiple potential climate change regulatory risks— including, but not limited to, carbon taxes, cap and trade schemes, fuel/energy taxes and regulations, environmental concerns, and customers’ demand to reduce their carbon footprints. Based on this risk process, the risk analysis timeframe, the financial impact within the timeframe, and the global perspective of providing services in more than 220 countries and territories regarding regulatory developments, no regulatory risks relating to climate change have been identified as having the potential to generate substantive change in our business operations, revenue, or expenditures.
The largest potential risk category is aviation cap and trade. Within the category, the most significant potential risk is related to the EU Emissions Trading Scheme (EU ETS). Even so, the estimated cost of the impact of EU ETS is, in the short-term, small compared to risks that arise as substantive through our internal Enterprise Risk Management process.
Without modifying the aforementioned risk analysis, it should be noted that UPS as a company is deeply engaged in carbon-related risk mitigation initiatives. We describe these initiatives in detail in “Greenhouse Gas Reduction Strategy,” beginning on page 86. This strategy focuses on intermodal shifting, network efficiencies, air and ground fleet efficiencies, integration of technological and human factors, and more.
As a global company with operations in more than 220 countries and territories, UPS is continually evaluating current and potential future regulations around the world for applicability. Because of UPS’s global footprint, the company is able to absorb the impact of carbon taxes, cap and trade schemes, and fuel/energy taxes, and regulatory changes that may occur in one country/region and offset the effect across its global network. Over time, expenditures relating to regulatory changes in one country/region will be fully incorporated by the specific country/region.
EU Emissions Trading Scheme (EU ETS)
At present, UPS’s planning horizon for the regulatory impact of EU ETS is short-term (1 to 5 years ahead) due to a number of factors that add considerable uncertainty to any long-term perspective. We met our 2012 compliance obligations with respect to EU ETS. UPS has further determined that EU ETS, in its current form, does not present a short-term substantive regulatory risk. Airlines could potentially be included in EU ETS in 2013, after a one-year extension was instituted in 2012.
Recent events demonstrate the possible proliferation of other national EU ETS-like schemes. Notwithstanding legal challenges, it is anticipated that uncertainties posed by these potentially overlapping schemes add complexities and confusion to global aviation regulations and may slow the certainty of the EU ETS regulatory timeline. In the event that other national schemes do succeed under the premise of claiming exemption from EU ETS as an equivalent program, the financial implications could vary. The expected occurrence of such a scenario is outside UPS’s planning timeframe of 1 to 5 years. The financial impact of EU ETS will be distributed across the entire aviation industry, of which UPS is a typical member. This therefore mitigates the risk of competitive disadvantage to any one company.
Climate Change-Related Physical Risk
Through the ERM process described previously, UPS reviews potential climate risks including, but not limited to, changes in precipitation, snow, ice, and tropical cyclones. When looking at physical risks, we evaluate both day-to-day weather-related changes and catastrophic events. Based on this risk process, the risk analysis timeframe, the financial impact within the timeframe, the global perspective of providing services in more than 220 countries and territories regarding physical risks, and the highly flexible and adaptable nature of the UPS integrated network, no physical risks relating to climate change have been identified as having the potential to generate substantive change in UPS’s business operations, revenue, or expenditures over the foreseeable future.
Being a global company with facilities located all over the world, UPS is accustomed to addressing a wide variance of climate conditions and weather interruptions; therefore, UPS does not expect a slow change in climate conditions to affect its service in the near term.
Risks related to natural disasters (such as hurricanes, tornadoes, floods, etc.) represent the largest potential risk category to UPS. However, the estimated cost impact of these types of risks in the short-term is small compared to risks that arise as substantive through the ERM process. We maintain and test operational contingency plans to address episodic disruptions in locations where severe climate conditions are more likely to impact our network. For example, risks are evaluated with assurance of alternative plans in the event of a severe storm. These contingency plans are reviewed quarterly at the corporate level and presented annually to our Board of Directors.
The sheer size of the integrated UPS network (nearly 3000+ facilities) allows for rapid operational changes in how we utilize the network and provides us with the flexibility necessary to recover promptly from catastrophic events. For example, we can route packages and choose modes of transport as required to lessen the loss of volume we can carry and associated delays in delivery. Our planning horizon for this type of short-term risk is current, meaning that we have no way of forecasting when or where these events will occur in the future.
A number of natural disasters and related phenomenon in recent years demonstrate how our flexible response to this physical and financial risk plays out at UPS. The United States has experienced a number of severe weather events in each of the past seven years, including Hurricane Katrina in 2005 and Superstorm Sandy in 2012. In each case, we were able to promptly restore our operations even when the affected region’s industrial base was destroyed or damaged. We put in place contingency plans to bypass affected areas of the region as necessary, minimizing any impact to our network operations as a whole.
Because of the robustness and reliability of our network, UPS is regularly in position to provide disaster recovery and humanitarian aid services as an in-kind provider of logistics and transportation services or as a philanthropic partner (and sometimes both).