Why carbon accounting is so important in this day and age

As our climate worsens with global effects becoming more significant every day, companies around the world are becoming more aware than ever of their carbon footprint. In an age where environmental risks are high and planning for the future is critical, having an Environmental, Social and Governance (ESG) strategy offers a potential solution for businesses who have just started their journey towards net zero carbon – through carbon accounting.

What is carbon accounting?

Broadly speaking, carbon accounting is a term used to describe the general methodology of calculating an entity’s carbon footprint, in this case the total amount of carbon that a company emits. This is usually referred to as a subset of a greenhouse gas (GHG) inventory. This is divided in two categories: physical carbon accounting, where the absolute quantity of carbon from both direct and indirect emissions is reported, and financial carbon accounting, where the total quantity of carbon is reported based on a company’s market share or financial value.

How is carbon accounting done?

A select number of institutions offer standardised guides for carbon accounting, but the most widely recognised is the Greenhouse Gas Protocol (GHGP). Companies report on three main scopes of emissions, namely: Scope 1 - any direct emissions from owned sources such as vehicle use; Scope 2 - any indirect emissions from owned sources such as electricity consumption; and Scope 3 - all other indirect emissions from upstream business travelling to downstream leased assets.

Once all relevant scopes have been identified and data sources have been collated, companies will have to decide on an organisational boundary. Most will agree that physical carbon accounting, referred as the operational control approach in the GHGP, should be the standardised methodology as it captures the most representative dataset. The total emissions will then be calculated using carbon emission factors provided by recognised organisations, most notably from the UK Department for Environment, Food & Rural Affairs (DEFRA) as well as the Quantis calculation tool from the GHGP.

Why is carbon accounting important?

As management experts always say, “you can’t manage what you can’t measure.” If companies want to improve on their overall environmental impact, they need to understand that impact in detail.

Breakdown and benchmark

High-quality carbon accounting allows businesses to break down their carbon footprint in detail according to the GHGP emission scopes and thus identify their major carbon hotspots. This is usually highlighted in the highest-emitting parts of a company’s operations or supply chain, and a clear breakdown of their total emissions allows for a direct comparison against industry benchmarks, competitors in the market, and even internal performance. These insights help to empower the company to implement smart carbon initiatives and reduction strategies accordingly.

Tracking and targeting

Consistent carbon accounting lets companies monitor their progress over an annual or even quarterly basis. This allows key stakeholders to understand the relative performance of the company over time, and plays a key role in the due diligence process where ESG is concerned. It also allows for a predicted projection over an extended period, which encourages the process of setting an ambitious target in limiting an absolute quantity of carbon emissions. Most businesses will follow this path and look towards setting a Science-Based Target (SBT), an internationally recognised organisation that follows the GHGP criteria, acting as a formal third-party verification for companies and ensuring a strict mandate on the target setting process.

Disclosure and directives

Many investors and stakeholders now prefer and sometimes even require strict reporting of carbon emissions on a company-wide level. Carbon accounting may affect company valuations and general risk profiles, as many major asset managers and financial institutions agree that ESG factors play a vital role in capital allocation decisions. Unfortunately, this can also lead to the improper and misleading reporting of emissions, also known as greenwashing. Many governing bodies such as the United States Securities and Exchange Commission (SEC) are also regulating the corporate reporting and public disclosure of carbon emissions. Carbon accounting can help direct companies away from greenwashing while remaining compliant with emerging regulations.

As sustainability becomes the norm in the business world, ESG and carbon accounting will become leading elements in the solution to environmental issues as well as the journey to net zero carbon. With the innovation and advancement of technology, carbon accounting could be made even simpler and more efficient with digital engineering and AI implementation, as businesses around the world begin to put sustainability at the forefront of their agenda.