Carbon accounting and business sustainability
By Vijay LNarasimhan
Climate change and business imperatives
With the threat of climate change coming to the fore, decarbonisation becomes critical in the global effort to reduce the devastating effects of greenhouse emissions. As the push for a low-carbon economy ramps up around the world, businesses need to demonstrate clear leadership on climate action and find ways to ensure a greener future.
Although greenhouse gas (GHG) emissions occur naturally, many business activities increase emission levels, releasing large amounts of destructive gases into the atmosphere, thus causing global warming and a climate crisis.
To make a meaningful change towards a more sustainable future driven by a credible plan to get to net zero, businesses need to identify what activities release GHG emissions and calculate how much they contribute. This is where carbon accounting steps in.
As the process used to measure the amount of carbon dioxide that countries, businesses, or even individuals emit into the atmosphere, carbon accounting provides a framework for understanding their climate impact so they can set targets to limit these emissions.
The Paris Agreement is at the core of carbon accounting. In December 2015, at the COP21 (Conference of the Parties – COP) held in Paris, 196 countries came together to adopt a legally binding treaty on climate change for the first time in history. Effective from November 2016, the Paris Agreement intends to cap global warming below two degrees Celsius to achieve a climate-neutral world by mid-century.
Since then, COPs have been held annually, with the most recent being COP26, held in Glasgow, UK, in November 2021. The latest summit demonstrated that, although the world is making progress in meeting this goal, we still have a long way to go.
The scope of the matter – tracking levels of emissions
As a watershed moment in the international climate change process, the Paris Agreement works on a five-year cycle of progressively ambitious climate action goals to achieve a gradual economic and social transformation across the world.
To identify where they stand regarding GHG emissions and assess the impact of their efforts to reduce the climate crisis, companies need metrics that inform them whether they are on the right track. That's where carbon accounting can help.
Carbon accounting helps estimate how much carbon dioxide equivalents entities — from businesses to countries to individuals — emit so that they can keep their climate impact in check.
When implementing carbon accounting, companies need to distinguish different scopes of GHG emissions. As a standardised framework for measuring and monitoring emissions, the international accounting tool called Greenhouse Gas Protocol classifies all GHG emissions into three groups or scopes. Scope 1 and 2 emissions relate to activities within the reasonable control of an individual organisation, while Scope 3 are generated externally across the company's whole value chain.
Scope 1: Direct owned emissions
Scope 1 includes direct emissions released into the atmosphere because of the use of company-owned and controlled resources such as buildings, equipment and vehicles. It also captures accidental or fugitive emissions such as leaks and other irregular releases of greenhouse gases from commercial facilities.
Since these emissions are easily traceable and measurable, reporting Scope 1 emissions usually does not present a challenge for businesses. But for many companies, Scope 1 emissions represent a minuscule fraction of the total emissions — often as small as less than one per cent.
Therefore, failing to account for emissions beyond Scope 1 may mask the actual scale of the problem. What initially might appear as a minor pollution offender could end up being the biggest culprit once emissions beyond Scope 1 are considered.
Scope 2 - Indirect owned emissions
Scope 2 emissions are indirect GHG emissions associated with electricity, steam, heat, or cooling purchased from a utility provider. Although they physically occur at the facility where they are generated, Scope 2 emissions are accounted for in a buyer's GHG inventory because they are related to the buyer's energy consumption.
Electricity is the biggest — and sometimes the only — source of Scope 2 emissions for most organisations. Improving efficiency of operations helps reduce scope 2 emissions
At a high-level, Scope 2 emission is simply calculated by multiplying consumption due to activity from source with source emission factors.
Scope 3 – Indirect, not owned emissions
Scope 3 emissions are the biggest GNG culprit as they often represent the largest share of a company's total carbon footprint.
They include all other indirect emissions resulting from activities of a company, occurring from sources that they do not own or control like emissions from upstream and downstream activities. Reflecting the complex nature of the global climate crisis, these emissions involve a virtually never-ending list of emissions across the whole value chain that companies are indirectly responsible for — from investments they make to suppliers and distributors they collaborate with, to consumers that buy and use their products and services.
In many industries, these emissions are the single most significant contributor to total emissions. Worse still, they are also the hardest to calculate and track. Therefore, many companies fail to track Scope 3 emissions, which results in under-reporting.
In the past, the focus was more on direct emissions, which are easier to track and calculate. But without accounting for Scope 3 emissions, it is essentially impossible to develop an effective strategy to tackle climate change.
As more businesses start to aim for net zero emissions, they seek to measure their entire climate footprint, so the importance of Scope 3 has expanded. Still, several challenges remain when companies try to screen the whole value chain through an ESG (environmental, social, governance) lens.
First, Scope 3 emissions are difficult to control as they go beyond a company's direct management or ownership.
Second, they are hard to evaluate because companies must consider many factors when calculating their Scope 3 emissions. Collecting quality data on the type and volume of emissions remains a challenge.
Finally, these emissions are often accounted for by several different companies in a value chain, so we need to address the question of who should be responsible for reducing them. In addition, different businesses also use different methodology and underlying assumptions, which further complicates the comparison of the Scope 3 emissions between companies.
The greater good - carbon accounting makes business sense
Carbon accounting is key in tackling the threat of climate change as it provides a framework to understand where emissions originate and where they are absorbed.
But carbon accounting also demonstrates that climate accountability doesn't need to come at the cost of profitability or productivity. Instead, it makes business sense as it delivers multiple benefits for companies that commit to a greener future. Here is the list of some of these benefits.
Carbon accounting and reporting require companies with a holistic screening tool to assess their resource consumption.
With carbon accounting and reporting, businesses get invaluable transparency into their energy consumption so they can more easily identify activities that use a lot of energy. As a result, they can take steps to reduce the amount of valuable resources they use, which can translate into lower costs.
It also provides tools and metrics for companies to demonstrate to their stakeholders their contribution to combatting climate change and quantify their efforts to achieve net zero targets.
Improving financing opportunities: Qualifying for funding and attracting investment
As the green trend grows around the world, finance is going green, too. An increasing number of financial institutions will only offer funding to companies with eco-credentials. As more and more of them want to support businesses that are committed to sustainability, a new Global GHG Accounting and Reporting Standard for the Financial Industry was released in 2020 as a response to the financial industry's demand for a standardised framework to calculate and report financed GHG emissions.
Likewise, investors are increasingly looking to support companies committed to the shared greener future, offering investments to those that can demonstrate a determination to be a part of the climate crisis solution.
Client and customer retention
Just as companies can make cost savings by embracing carbon accounting, they can also help their clients benefit from the advantages of going green. By advising clients on how to reduce their climate footprint, companies can boost client satisfaction and retention as they help them save money and keep their energy consumption in check.
Consumers also increasingly want to support initiatives that represent the greater good. More and more, they seek to align themselves with brands and companies that share their social, ethical, and other values. Especially the younger generations base their buying decisions on how a brand's values are aligned with their own. COVID-19 cemented this trend as a recent study finds that 60% of consumers made more environmentally friendly purchases since the pandemic, with nine out of ten intending to keep more sustainable habits in the future.
Talent attraction and retention
It's not only consumers that care about a greener future. Businesses are increasingly viewed through the lens of ESG values — by consumers and talent alike. Carbon accounting can help companies establish stronger brand preferences both in the market they serve and in the job market.
Today employees want their work to be attached to a higher purpose. The IBM Institute for Business Value survey shows that 71% of employees and those searching for employment think that environmentally sustainable companies are more attractive employers. More than two-thirds of the respondents are more likely to apply for and accept jobs from environmentally and socially responsible employers. Interestingly, almost half of them would be willing to accept a lower salary to work for such companies.
If your business commits to carbon accounting, it sends a strong signal that it takes the climate emergency seriously, which can help it attract and retain talent.
As the generation committed to reversing the devastating effects of climate change comes of age and joins the workforce, companies will need more green commitment to improve employee engagement. With the war for talent equally relentless as the war for customers, the business case for carbon accounting becomes even stronger.
Preparing for the future
As one of the most urgent subjects of this generation and the generations to come, climate change requires committed, coordinated action to reduce the effect of global warming. Regulators, consumers, and investors expect businesses to act responsibly to make a real impact against the climate change threat.
With governments around the world committed to making a meaningful change to combat the climate crisis, companies will need to prepare for the oncoming regulatory changes around sustainability reporting. Triple bottom line accounting, one that allows businesses to measure their performance beyond financial success by including social and environmental performance, has been growing in popularity in recent decades.
Still, carbon accounting does not mean a one-size-fits-all approach. It also does not necessarily require a strict map that must be followed to reach the end goal. Instead, it can be adjusted and customised to the specific needs and circumstances of the company implementing it. By custom-designing programs to reduce greenhouse emissions, every company has the power to take action in its own way and demonstrate leadership within the global sustainable development agenda.
HLB International specialise in developing and implementing a strategic sustainability roadmap for businesses to help them gain a competitive advantage through advisory services across compliance, business optimisation, business growth, and managed business risk. Is your business ready for the future climate challenges and is it prepared to improve its carbon accounting?