Claire Perry O’Neill, former UK Minister of State for Energy and Clean Growth and sustainability advisor at Terrascope, explains why companies of all sizes should begin their carbon accounting journey, and how.
- Carbon accounting defines the processes of measuring and managing emissions data across Scopes 1, 2 and 3.
- Despite upcoming regulations on environmental disclosures, many companies still see it as a box-ticking exercise and do not use the data collected in their strategies.
- Having carbon data in order will be crucial for businesses to comply with regulatory requirements, access financing from lenders, attract investors and pay penalties such as carbon taxes.
Carbon accounting defines the processes of measuring and managing emissions data across all scopes. Scope 1 and 2 emissions are produced by the direct activities of an organisation and the source of the electricity it consumes, respectively, and as such are relatively easy to calculate.
Scope 3 emissions are generated by all indirect sources in the value chain and can account for up to 90% of a company’s carbon emissions. This means they can be more challenging to measure and require a collaborative approach between the emitter, its partners and stakeholders.
Not quite like financial accounting
Despite upcoming regulations on environmental disclosures, carbon accounting is not yet a widespread practice in the corporate space. “It should be like cash accounting, companies should be as familiar with it as they are when they’re talking about profits, losses and cash balances and balance sheets. And they’re not,” says Perry O’Neill.
This creates two main challenges: firstly, companies have a hard time measuring these emissions, especially if Scope 3; secondly, once the data is collected, it is not used properly.
“We’re not very good at using the data. So, even when we collect it, and we have a reasonable sense of accuracy, we often don’t know what to do with it,” Perry O’Neill adds. “Sometimes it’s reported, and there are around the world different requirements to report data, but often it kind of sits in a silo, rather than being integrated into decision-making, as you would want with an equivalence of traditional accounting data.”
What are the barriers to using the data?
According to Perry O’Neill, a major reason why many companies do not use this data effectively is that they see its collection as a way to satisfy stakeholders, such as investors, customers and employees, but do not see further benefits for the business itself. It is considered as a box-ticking exercise, instead of a useful tool to develop action plans, especially if there is uncertainty around the accuracy of the data.
Management should use this information to make day-to-day decisions about the company, Perry O’Neill says. She believes that it is the same concept for any sustainability strategy: instead of viewing it as an imposition, it should be deemed an opportunity to best position a business for the future.
“You can often tell how a company thinks about this. If you look where their chief sustainability officer reports in the organisational framework, often, not always, but often if you have a CSO who comes in via a legal and compliance background and is reporting into that structure, you can see that is a sense of defensiveness, it’s covering bases, as opposed to a CSO who is reporting directly to the chief executive officer, who’s really part of those big decisions,” she notes.
The challenges of carbon accounting
The new requirements of corporate reporting are highlighting the divide between large and smaller companies. Many big corporations are better placed to weather the changes, as they have more resources and can even dedicate entire teams to the task at hand.
Conversely, small and medium-sized enterprises (SMEs), which might already be struggling amid the economic crises, may see carbon accounting as yet another strain on their cash flow.
SMEs data, however, is crucial to calculate Scope 3 emissions of larger companies, as they will be part of their value chain. This shared need has led to collaboration in some sectors, such as UK grocery chains piloting a standardised approach to the calculation and communication of their supply chain emissions. Initiatives such as SME Climate Hub have also sprung up to provide the resources to get started, even for startups.
“If I’m selling to you, my Scope 1 and 2 data is your Scope 3,” says Perry O’Neill. “If we have a global carbon price, it wouldn’t matter because you would just buy from the cheapest provider of your carbon. But we don’t have that and that’s why this emissions data is so important and you need this kind of shared ecosystem to really do it properly.”
“People have got very used to disclosing cash flow information, lots and lots of information about corporate performance, but somehow this sustainability data is seen as ‘other’ and it shouldn’t be,” she adds. “I think we’ve made the sustainability thing much too complicated. It feels like you need a PhD… And that’s wrong. We have to make this accessible and available and just disclose away.”
Taking the first steps
So, how do you begin your carbon accounting journey? For Perry O’Neill, companies need to start by creating datasets to generate Scope 1 and 2 emissions numbers, which can be done through metrics common to certain industries or locations – energy usage, transport and so on.
The next step is understanding Scope 3 emissions, which can be more complicated. “This is where I think the real value of Terrascope’s product is because we have thousands and thousands of data points and we can go off and work with suppliers in order to create much more accurate data. Put all that together, and then you get a baseline… There are lots of people that can do that for you, they could produce a report for you and many consultants do that.”
There are a plethora of software options designed for companies of all sizes, from established names such as ERM and Visa (NYSE:V) to startups including Coolset, Emitwise and ClimateSeed. Major accounting firms such as KPMG and Deloitte are clinching partnerships with software providers such as CoolPlanet and Persefoni to set up carbon accounting offerings for their clients. The huge market demand is projected to push the global carbon accounting software market to a value of $64 billion by 2030, up fourfold from $15 billion in 2023.
Collecting the data, however, is only the beginning of it. Once the baseline is set, the data needs to be analysed to establish a decarbonisation strategy, identify a business pathway and integrate it in the management information systems. Ultimately, having carbon data in order will be crucial for companies to comply with regulatory requirements, access financing from lenders, attract investors and pay penalties such as carbon taxes.
Just radically disclose
Organisations need to remember that carbon accounting is a work in progress, with data getting more accurate over time. By starting their journey early, companies have less regulatory pressure and more time to learn from their mistakes.
“One of the things we often say to companies is just radically disclose, be radically transparent, even if you’re not being asked to do this, even if there isn’t a checkbox for it,” Perry O’Neill concludes.
“It’s pretty clear that sustainability is the new organising principle for businesses, it’s this opportunity frontier. And what you want is to make sure that what you’re saying about your strategy is also backed up in your data set, you’re actually demonstrating you are on a sustainable path.”