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With more than a third of the world’s largest businesses pledging to eliminate net carbon emissions by 2030, carbon accounting has become a priority.
According to an Accenture study, nearly all companies (93%) will fail to achieve their net zero goals if they don’t double the pace of greenhouse gas emissions reduction. Carbon accounting provides companies with a way to quantify the pollutants they send into the atmosphere and demonstrate their commitment to the environment and decarbonization.
There’s little time to waste. A recent UN study found our planet will cross a potentially catastrophic milestone for global warming within the decade if more isn’t done to shift away from fossil fuels contributing to carbon emissions.
But scientists say industrialized nations can head off and even reverse this trend by accelerating efforts to achieve net zero carbon emissions by the 2050s, with carbon accounting keeping programs on track.
What is carbon accounting?
Carbon accounting is a method organizations use to track the amount of greenhouse gas emissions they emit. Also known as carbon or greenhouse gas inventory, carbon accounting helps businesses and industries understand their impact on the planet so that they can take steps to reduce it.
Greenhouse gases (GHG) are natural and manmade gasses – such as carbon dioxide, methane, and nitrous oxide – that can trap heat in the atmosphere and blanket the planet, leading to global warming.
The Greenhouse Gas Protocol is the most widely used method for measuring GHG emissions. Managed by the World Resources Institute and the World Business Council for Sustainable Development, the GHG Protocol develops international standards for use in both the public and private sectors.
The ISO 14064 standard from the International Standards Organization complements the GHG Protocol by providing specific guidelines for organizations to follow in their carbon accounting efforts.
The GHG Protocol corporate standard has three categories or scopes to assess emissions:
- Scope 1: Direct emissions from owned or controlled sources, such as those produced from corporate boilers, furnaces, or cars.
- Scope 2: Indirect emissions from the generation of purchased energy, such as energy produced to power electric vehicles.
- Scope 3: All indirect emissions not included in scope 2 that occur in the value or supply chain of reporting companies.
Most large companies report on Scope 1 and 2 levels, but struggle to gather the information needed from their supply chain partners to address Scope 3 carbon accounting. This is a problem since Scope 3 emissions account for an estimated 75% of corporate greenhouse emissions, according to the World Resources Institute.
The average company’s supply chain GHG emissions are also 5.5 times higher than direct emissions from their owned assets and operations, according to a Rocky Mountain Institute report.
Carbon accounting supports Environmental, Social, and Governance (ESG) frameworks, which have gained traction as investors and consumers increasingly evaluate businesses based on their environmental and social values and practices.
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Business benefits of carbon accounting
By prioritizing decarbonization and using carbon accounting, businesses can gain a number of benefits. Having a strategic carbon plan, anchored by accounting, helps companies improve the environment and their community while boosting the bottom line.
Here’s a breakdown, starting with the benefits for the planet:
- Reduced greenhouse gas emissions
- Improved air and water quality
- Preservation of natural resources
- Mitigate climate change
As the effects of global warming intensify, government regulatory pressures are likely to increase. The European Union, for instance, has set reduction targets and measures, such as the recently adopted Corporate Sustainability Reporting Directive (CSRD), which requires all large companies operating in the EU to report carbon emissions.
In the US, thousands of large direct-emitting facilities – those responsible for 50% of pollutants – are required by the Greenhouse Gas Reporting Program (GHGRP) to disclose their annual emissions. Carbon accounting following ISO 14064 guidelines helps demonstrate compliance with regulatory requirements.
Social benefits of carbon accounting include:
- Encouragement of innovation and new business opportunities
- Compliance with regulations and standards
- Positive impact on local communities
- Increased employee engagement as workers are motivated by commitment to the planet
Investors, customers, and employees alike care more about the environment than at any point in history. Numerous studies, for example, show most U.S. consumers prefer to buy from companies they perceive as being sustainable, and are even willing to pay more for their products. Similarly, 75% of employees want more eco-friendly office spaces, according to an Essity study.
When a company can credibly show that it is achieving carbon emission reductions or net zero status, that can lead to all sorts of brand image enhancements.
- Improved financial performance and cost savings
- Enhanced corporate sustainability and reputation
- Attract young talent who want to work for sustainable companies
- Supply chain resilience and efficiencies
- Competitive advantage
There can be a clear return-on-investment (ROI) when companies reduce carbon emissions. Energy-efficient heating and cooling systems use less power, for example, and therefore cost less to operate. Ditto for hybrid vehicles which use less gasoline than their combustion engine counterparts and tend to require less maintenance.
Shipping expenses also drop when delivery routes are optimized with carbon reduction in mind. The examples of potential costs savings are endless, and carbon accounting can help reflect that, while flagging needs for improvement, to business leaders and board members.
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The challenges of carbon transparency
As important as carbon accounting can be for an organization, but it isn’t as rigorously practiced as you might think. The GHP Protocol estimates more than 90% of Fortune 500 companies do some form of it. But say that doesn’t mean they’re doing it well, which makes sense because it’s complex.
There are multiple moving parts in carbon reduction programs, and they can be difficult to track.
“It’s a poorly kept secret that most GHG footprint declarations we all read in corporate social responsibility (CSR), environmental or sustainability reports are a complex mashup of calculations based on procurement information, estimates reported by corporate divisions and supply chain partners, and averages that have been worked up for various industry sectors.,” wrote Heather Clancy, VP and editorial director of Green Biz Group.
For example, Scope 3 emissions often involve thousands or even tens of thousands of supply chain partners, and not all of them will be ready, willing, and able to share their carbon data. Short of contractually mandating they do so, which can be perceived as heavy handed, there isn’t much companies can do.
Carbon offsets represent another accounting wild card. Offsets are any activities that compensate for the emission of GHGs by providing an emission reduction somewhere else.
In a nutshell, offsets end up being credits an organization can sell (meaning they exceeded their goals and were able to sell a credit for the difference) or purchase (if they didn’t meet commitments).
Industry leaders and sustainability advocates are calling for changes to carbon accounting standards, and the GHG Protocol is now gathering input for an update. The goal is to improve carbon transparency and data quality so that companies can better reach their sustainability goals.
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Steps for implementing carbon accounting in your org now
Despite the challenges, organizations must find a way to measure and manage their greenhouse gas emissions. What can they do today to meet their environmental goals and regulatory requirements?
- Adopt a hybrid carbon accounting approach that combines supplier-specific activity data with spend-based, secondary data from other sources.
- Focus on Scope 1 and Scope 2 reporting granularity and accuracy
- Implement a credible Scope 3 strategy to identify the source of emissions, collect product carbon footprints (PCFs) from suppliers, collaborate to reduce emissions, expand PCF data exchange, and improve carbon data quality, granularity, and accessibility on a continuous basis
- Deploy carbon accounting software to help wrestle all the data together for you. Advanced carbon accounting software solutions feature embedded analytics and transactional capabilities to help measure emissions data and map it to standard frameworks such as ISO 14064 for corporate transparency.
Shifting away from manual approaches such as spreadsheets to more automated systems that apply analytics helps streamline processes for better visibility into carbon output.
In order to speed their net zero efforts, businesses will need “carbon intelligence” capabilities that embed carbon and broader ESG insight into their core businesses and across their value chains, according to Accenture.
“Most importantly, reaching net zero will require urgent and profound transformations, as it is about embedding sustainability into everything organizations do, redefining their purpose, culture and business models,” Jean-Marc Ollagnier, CEO of Accenture for Europe, said in a prepared statement.
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Future of carbon accounting
Improving carbon transparency requires change on a number of fronts. Existing carbon accounting rules must be continuously updated to boost accuracy. And greater collaboration must occur across value chains, industries, and both the private and public sectors.
The ideal system will provide a harmonized approach for calculating carbon footprints and enable data sharing in an open, digitalized, flexible manner across solutions and platforms. At each step of the value chain, companies will have access to standardized emissions data.
With more accurate accounting of both product emissions and overall corporate emissions, organizations can set goals to track and demonstrate progress more effectively.