How companies can improve their carbon accounting practices
A growing number of stakeholders are asking for greenhouse gas emissions reporting as part of doing business. Learn about the challenges this poses and how to improve efforts.
Gone are the days when company leaders could ignore environmental impacts and hope for the best.
As the need to address global warming becomes increasingly urgent and climate-related legislation grows, more companies are looking to measure and report on their greenhouse gas emissions.
"Carbon disclosures are now going mainstream," said Tim Mohin, a partner and director in climate and sustainability at global management consulting firm Boston Consulting Group (BCG). Companies have reporting on emissions on a voluntary basis, Mohin said. But now, legislation across the globe is growing to make measuring and reporting mandatory. "That's why there is so much attention being placed on this [task]," he said. "For example, in early 2023, the European Union's Corporate Sustainability Reporting Directive -- or the CSRD, as it is commonly known -- came into effect. It requires that large and listed companies report on social and environmental risks and impacts and on how companies' activities affect people and the planet.
Whether a company is tackling carbon accounting due to voluntary environmental, social and governance (ESG) efforts, mandatory requirements or future requirements, measuring and reporting emissions is new territory for many. That means business, sustainability and IT leaders have a lot to learn. This article can serve as a helpful overview of carbon accounting standards and challenges, as well as ways to improve efforts and where software fits in.
Carbon accounting standards for beginners
Any company stakeholder charged with learning about carbon accounting should learn about the most important standards, frameworks and organizations.
Learning about the Greenhouse Gas Protocol and its standards is a good place to start. The GHG Protocol, a global and multi-stakeholder organization, has created the mostly widely used carbon accounting standards. It was established in the late 1990s by the World Resources Institute and the World Business Council for Sustainable Development when they recognized the need for a consistent way to measure and report on greenhouse gas emissions. The GHG Protocol provides a comprehensive set of global standards for both private and public organizations to measure and manage emissions, and detailed and sector-specific guidance for emissions accounting. It also provides a variety of tools and training.
Another important standards-setting body to learn about is the International Financial Reporting Standards (IFRS) Foundation, a not-for-profit organization that has created accounting rules meant to be consistent, understandable and comparable for use by companies around the world. The IFRS Foundation standards are set by the International Accounting Standards Board (IASB) -- the first of the IFRS standards-setting boards -- and the International Sustainability Standards Board (ISSB), which was created in 2021 on the heels of COP26 to develop sustainability metrics to answer the needs of investors and financial markets.
In June, the GHG Protocol entered into an official partnership with the ISSB, a move that reflects a greater trend for standards organizations working together to create common standards and frameworks.
Carbon reporting is a data problem.
Tim MohinPartner and director, climate and sustainability practice, BCG
The GHG Protocol has defined three main areas of greenhouse gas emissions, called scopes. These include the following:
Scope 1 refers to direct emissions from sources that an organization owns or controls directly.
Scope 2 covers the indirect emissions produced from the power and utilities an organization buys, such as its electricity and heating resources.
Scope 3 encompasses emissions that come from up and down the organization's value chain; Scope 3 essentially covers emissions from all sources that don't fall under Scope 1 and Scope 2.
As greenhouse gas emissions reporting gains steam, efforts to further define the nuances of Scope 3 emissions are growing. Also, the World Resources Institute created the concept of Scope 4 emissions, which are commonly defined as avoided emissions, such as in the case of an energy-saving battery or low-temperature detergent.
Data management tops the list of challenges for many companies. Identifying, accessing and collecting all the data needed to fulfill reporting requirements is a complex and difficult task.
"Carbon reporting is a data problem," Mohin said.
Many organizations struggle to understand the full range of activities for which emissions must be measured and how to accurately measure them, Mohin said.
That difficulty is exacerbated by how indirect the emissions are.
Identifying and gathering data for Scope 1 emissions is challenging enough, although doable, said Michael Kraten, director of accounting program initiatives and faculty member at University of Houston's C.T. Bauer College of Business. However, it's significantly more difficult to identify and gather data to measure the indirect emissions counted under Scope 2 and Scope 3.
"For Scope 1, you can get actual measurements," Kraten said. "For Scope 2, there are estimates, and they're pretty good estimates, but Scope 3 is terrifying people [tasked with reporting]."
Measuring across the scopes is not the only challenge.
According to Rithika Thomas, sustainable technologies industry analyst at technology consultancy ABI Research, additional challenges related to carbon accounting include the following:
Lack of standardization in carbon emissions reporting regulations.
Inconsistencies in reporting frameworks, which still lack accurate comparability of core metrics across industries for disclosure based on methodology or calculation.
Accuracy of the reported data.
5 ways to improve carbon accounting
Though carbon accounting challenges are real, there are ways to begin to address them. Here are five.
1. Get top-level support
ESG initiatives to measure and report on corporate greenhouse gas emissions require cross-organizational collaboration and support, and that means top leadership's buy-in.
First, the board and the CEO must make carbon accounting a priority, Thomas said. That will help ensure all the teams -- from IT to the data department to other business functions whose cooperation is necessary for identifying and gathering required data sources -- will work together. That collaboration is required to successfully create an accurate emissions calculation.
"It has to be a top-down approach, [with the board or the CEO saying,] 'This is our sustainability and carbon accounting goals,'" Thomas said.
2. Create a carbon accounting inventory
Understanding the breadth of company processes is foundational to carbon accounting.
The executive team needs to work together to create a carbon accounting inventory, which is a comprehensive list of everyone in the value chain, including customers, Kraten said. The executive team next needs to determine where it can get exact carbon emissions figures, using sensors and other tools, and where it must estimate emissions.
Leaders can then start making decisions about issues such as which measurements need to be precise and which can be estimates, he said.
"But if you don't have an inventory … you might be in trouble," Kraten said.
3. Align sustainability goals to business goals
Corporate ESG initiatives and carbon accounting don't happen by accident. These efforts require a specially appointed group to focus on and figure out the complexities.
Enterprise chiefs should establish a task force to align sustainability goals to strategic objectives and financial goals, Thomas said.
Top leaders should also identify decision-makers for carbon accounting, Thomas said. Large companies likely have a chief sustainability officer who could assume responsibility, while small to mid-sized organizations might look to chief financial officers to take up the role as they align initiatives with the company's strategic objectives and financial goals.
4. Ensure software supports sustainability
Technology is critical in supporting sustainability.
CIOs should identify the systems and tools to collect the data required and ensure the systems communicate and integrate with each other, Thomas said. Top IT leaders are also responsible for implementing the carbon tools and other technologies required to gather and calculate data and ensure that needed data seamlessly flows across departments and disparate systems.
5. Assign data duties
A cross-organizational collection of leaders and others is required for data collection and analysis.
"[Make] the team on the ground -- for example, facility managers, HR, IT, supply chain managers -- responsible for data collection, ensuring data are accurate and updated," Thomas said.
Organizational leaders should also assemble a team, which might include the controller and head of business operations and assign that team responsibility for analyzing the ESG data to create the report and course of actions to align with sustainability targets, Thomas said.
Mohin noted that some organizations have created a new role -- ESG controller -- to lead such efforts.
Enterprise executives should also work together to establish governance and controls for the acquisition and quality of the data being gathered and the information produced, Mohin said.
Success requires transparency.
Enterprise leaders should support transparency on regulations and reporting methodology, Thomas said.
"ESG reporting is becoming as serious as financial reporting," Thomas said.
The role of carbon accounting software
As part of their sustainability reporting efforts, more companies are turning to software.
The carbon management software market will grow by a compound annual rate of 19.7%, reaching $5.5 billion by 2032, according to ABI Research.
Carbon accounting software is meant to streamline the multifaceted emissions collection and analysis process, Thomas said. And although many ESG software products contain carbon accounting functions, numerous vendors now offer purpose-built carbon accounting software. This type of software works by pulling data from numerous other enterprise systems.
"We see more companies in the future using [carbon accounting software] for reporting but also to analyze data in ways that allow them to take follow-up actions," she said. That's where companies will see value."
Mary K. Pratt is an award-winning freelance journalist with a focus on covering enterprise IT and cybersecurity management.
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