Carbon accounting helps organisations understand and manage their greenhouse gas (GHG) emissions, contributing to informed sustainability decisions and efforts to mitigate climate change – and upcoming legislations will soon make it a mandatory requirement.
- The practice of carbon accounting has emerged as a crucial step for enterprises looking to increase their transparency and comply with new regulations.
- It involves quantifying and analysing GHG emissions generated by business operations.
- While the current obligation to collect carbon data applies mainly to large corporations, reporting requirements will expand to include companies of all sizes as global legislation evolves.
Amid mounting environmental challenges and the imperative to tackle climate change, businesses worldwide are aware that their carbon footprint must be reduced. To ensure transparency, every company should measure and disclose its carbon emissions data to stakeholders. This open communication empowers stakeholders to make informed decisions when purchasing products or evaluating insurance coverage. Embracing this practice builds trust, accountability, and support for companies dedicated to sustainable initiatives.
Carbon accounting has emerged as a necessary practice for enterprises seeking to navigate this transformative journey. It refers to the process of quantifying and analysing GHG generated by business operations, and presents a comprehensive approach to measure, manage, and ultimately reduce the emissions footprint of any organisation.
These emissions are classified into three scopes: Scope 1, Scope 2, and Scope 3.
Why does carbon accounting matter?
Carbon accounting is of utmost importance for several reasons, particularly as we strive to achieve the Sustainable Development Goals (SDGs). Ching Hu, Terrascope’s climate regulations and reporting specialist, says: “Primarily, implementing carbon accounting measures in business operations is timely and crucial in achieving corporate sustainability and driving climate action at the speed and scale that is required to stay on the 1.5°C degree pathway.”
It is the first concrete step of any corporate decarbonisation effort, according to Hu. “When a corporation possesses the ability to quantify its GHG emissions precisely and comprehensively across its organisation, it unfolds a plethora of opportunities for growth. Some of which include the ability to pinpoint emission hotspots, set ambitious yet realistic reduction targets, identify opportunities for emissions reduction, gauge the efficacy of decarbonisation efforts, and sharpen strategic & financial decisions.”
Alexis Normand, Greenly’s co-founder and chief executive, adds: “Typically, understanding precisely where emissions come from helps you set targeted action plans in your top priority areas. This obviously varies according to business types.”
He notes: “Retailers need to think about the impact of products bought and sold, and identify which brands to work with to offer consumers more sustainable choices. You can only do that if you have performed a detailed carbon accounting of your inventories, with product level data.”
The benefits of carbon accounting
Most of a company’s emissions come from its value chain and its suppliers (Scope 2 and 3). “Carbon accounting can therefore help not only businesses themselves to identify their carbon inefficiencies, but also that of their value chains, so that all businesses can then take steps to reduce their carbon footprint,” says Normand.
“GHG emissions disclosure is fast becoming the single biggest source of ESG reporting across platforms and compliance requirements. Being transparent about your emissions helps you score better on platforms such as BCorp or Ecovadis.”
Carbon accounting has evolved from a “good to have” notion, Hu says, to a “make-or-break” compulsion for businesses. “Companies that fail to perform accurate and comprehensive carbon accounting – including the often overlooked Scope 3 emissions in their value chains – will find themselves being exposed to a multitude of risks that may jeopardise brand reputation, operational efficiency, and market competitiveness.”
Some of these risks include being inadequately prepared to address climate-related supply chain disruptions, ultimately compromising the company’s long-term resilience, as well as committing greenwashing intentionally or inadvertently. Companies also expose themselves to the risk of failing to comply with regulations. Currently, under the EU’s Corporate Sustainability Reporting Directive (CSRD), European countries may apply what Hu calls “effective, proportionate, and dissuasive” sanctions, including monetary penalties, against companies that fail to disclose climate information.
According to Hu, these companies risk missing out on opportunities to future-proof their business, including pivoting into sustainable offerings, uncovering cost-saving measures, and differentiating themselves as environmentally responsible entities. Without clear decarbonisation strategies, they may fall behind in meeting customer expectations and regulatory requirements, undermining their market position and failing to resonate with environmentally conscious individuals, investors, and stakeholders.
Normand echoes Hu’s sentiments, adding: “The easiest way for businesses to adapt to this new world is to integrate carbon accounting into their everyday operations. Making it second nature, in the same way that financial accounting is.”
Does my company need to measure its carbon emissions?
Currently, the obligation to collect carbon data applies mainly to large corporations but, as global legislation evolves, reporting requirements will expand to include companies of all sizes. Therefore, voluntary disclosures allow businesses to familiarise themselves with the process before it becomes mandatory.
In the interest of transparency regarding their challenges and accomplishments, all companies should measure their carbon emissions and make the data accessible to stakeholders. This enables them to make informed decisions, whether related to product purchases or insurance considerations.
This will be imposed by various reporting standards such as the CSRD in the EU, the UK’s Streamlined Energy and Carbon Reporting policy which highlights the importance of disclosing climate-related information; and in the US, the Securities and Exchange Commission’s upcoming standardised climate-related disclosures for public companies.
What are the challenges with carbon accounting?
In the pursuit of net zero emissions, organisations face several challenges that must be addressed to achieve their goals, Hu said. These hurdles fall into three main categories:
- Data obstacle: dealing with vast amounts of data from diverse sources, formats, and systems makes ensuring data quality and reliability a difficult task.
- Supplier collaboration: collaborating with a large pool of suppliers and value chains to source, disclose, and improve emissions data demands significant resources and time investment.
- Setting targets and driving action: establishing ambitious net zero targets and creating credible company-wide decarbonization plans can be challenging. Strong leadership is required to navigate high upfront costs, long-term commitment, and foster collaboration and accountability.
Normand adds: “Carbon accounting can seem to be a very complex, expensive and time consuming undertaking. It’s still dominated by large consultancies performing ad-hoc assignments for enterprises and this comes at a high financial cost.”
As the need for carbon accounting tools grows, however, the market is seeing more software available to enterprises of all sizes, sectors and spending power, making it increasingly possible to extract and analyse the data in-house. With the process becoming more accessible, businesses may find it to be a less daunting task than it seems.