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What is carbon accounting?

What is carbon accounting?

The message is clear: companies of all sizes need to familiarise themselves with carbon accounting – but what is it and why should they?

  • A wave of upcoming environmental legislation for businesses globally is requiring them to calculate their greenhouse gas (GHG) footprints.
  • This process is called carbon accounting and allows companies to establish effective decarbonisation plans and provide meaningful data to stakeholders.
  • While these rules are yet to apply to smaller businesses, it is advisable to start reporting while it is still a voluntary exercise.

You can’t manage what you can’t measure: in a net zero world, carbon accounting will become as important as financial accounting. While we get there, business leaders have to figure out how to incorporate it into the day-to-day of their companies.

What is carbon accounting?

The first step in outlining an emissions reduction plan is calculating the footprint of an entity. Only once it has a full picture of its emissions, it can identify hotspots and take steps to decarbonise.

Just like financial accounting tracks a company’s transactions, carbon accounting focuses on its comings and goings in terms of greenhouse gas emissions.

These are categorised as Scope 1, 2 and 3 emissions. Scope 1 and 2 emissions are relatively easy to estimate, as they are generated by the direct activities of an organisation and the source of the electricity it consumes, respectively.

Scope 3 emissions, conversely, are generated by all indirect sources in the value chain and can represent up to 90% of a business’s total footprint. This makes them more challenging to measure and requires a collaborative approach between stakeholders to produce accurate data.

How does carbon accounting work?

After coming to terms with the Scopes, companies need to determine their boundaries, such as the measuring periods, the methodology – whether it’s based on spend or activity – and the scope of analysis across the business.

The data has to be collected as accurately as possible, then it is used to calculate the carbon emissions which are converted into metrics, which usually vary for different sectors. Investment portfolios, for example, focus on financed emissions, economics emissions intensity, and weighted average carbon intensity (WACI).

According to the GHG Protocol, which supplies the world’s most widely used GHG accounting standards, the process should be based on five core principles:

  • Relevance: ensure the GHG inventory appropriately reflects the emissions of the company and serves the decision-making needs of users, both internal and external to the company.
  • Completeness: account for and report on all GHG emission sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions.
  • Consistency: use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.
  • Transparency: address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.
  • Accuracy: ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.

Who needs it and who provides it?

All companies should measure their carbon emissions and let stakeholders see the data, in order to be transparent about their challenges and achievements. This allows these stakeholders to make informed decisions, whether it’s about buying a product or underwriting insurance.

Currently, only the largest businesses are required to collect carbon data. In the UK, for example, large corporations have to report on their UK energy use and related Scope 1 and 2 GHG emissions. In the EU, their peers will have to start reporting on the financial year 2024 under the Corporate Sustainability Reporting Directive, which will apply on all businesses operating in the bloc, even if they are based overseas.

As global legislation continues to be updated, these requirements will extend to companies of all sizes. As such, it is advisable to start reporting while it’s still a voluntary exercise to familiarise with the process.

There is a plethora of new technologies, software and apps that can help companies in their carbon accounting journey, as well as firms offering consultancy services. Some large players are also setting up dedicated in-house teams.

Indeed, the need for widespread carbon accounting has created huge opportunities in a fledgling market, where both startups and major players are carving their space. Instead of seeing it as an imposition or disruption, companies should view carbon accounting as an opportunity to fully engage in the sustainable transition and demonstrate to their stakeholders that they are well-placed for the future.

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