ESG » Carbon accounting strategies: the key to long-term corporate survival?

Carbon accounting strategies: the key to long-term corporate survival?

As organisations look to reduce their carbon footprint, precise and reliable data is crucial as CFOs navigate the latest challenge dubbed ‘the accuracy gap’

If you had asked Kristian Ronn, ten years ago what the biggest hurdle was for CFOs chasing net zero he would have probably cited the commitment gap.

Fast forward to today, Ronn, CEO at carbon accounting firm Normative, tells The CFO the biggest challenge for CFOs wanting to help their organisations reduce their carbon footprint, is no longer not knowing where to start but the ‘accuracy gap’.

The accuracy gap is the difference between the carbon emissions a company calculates and those for which it is accountable. For many businesses, especially large enterprises with complex value chains, the accuracy gap can be sizable.

In a 2021 survey, executives from global corporations in nine major industries estimated an error rate of up to 40% in their emissions calculations. CFOs with an inaccurate view of their emissions are unlikely to be able to make data-driven decisions towards sustainability.

For many CFOs, investing in new technology will be crucial to meeting their net-zero goals and achieving compliance with new carbon reporting legislation.

“One must ask themselves if they want to be like Kodak, using old technology for film, or do they want to be investing in digital cameras,” Ronn says. “I think it’s a similar situation where, due to legislation and due to public pressure, all companies will need to decarbonise. And whoever does it the quickest is going to survive.”

A web of new regulatory requirements

Carbon accounting legislation has become increasingly important due to the growing concern over climate change and the need for businesses to become more sustainable. In the US, there is currently no federal carbon accounting legislation in place, however, some states have implemented their own regulations.

For example, California’s AB 32 requires companies to report their greenhouse gas emissions and develop plans to reduce them. In Europe, the EU Emissions Trading System (EU ETS) is a key piece of carbon accounting legislation that places a cap on the total amount of greenhouse gas emissions that can be emitted by certain industries.

As CFOs are responsible for the financial operations of a company, they play a critical role in ensuring that their organization complies with any carbon accounting legislation that may apply. But the cacophony of new rules which have come into place, Ronn says, has increased the regulatory burden on finance teams.

CFOs must be aware of the reporting requirements and ensure that their company’s carbon emissions are accurately measured and reported – this will not only ensure compliance, but also open up businesses to new avenues for growth. By tracking and managing carbon emissions, CFOs can also identify opportunities for cost savings through improved energy efficiency and reduced waste.

Reliable data is crucial

Corporates wanting to act on climate change must have the right data. Currently, businesses calculate their greenhouse gas emissions using two methodologies: spend-based and activity-based. In practice, businesses will often combine these two methodologies to achieve their calculations, using what’s called the “hybrid method.”

However, new research from S&P Global Ratings has found that current greenhouse gas emissions (GHG) accounting practices can obscure how effectively corporates are contributing to national and international net-zero goals.

“Right now, there is this an accuracy gap,” Ronn says. “We see repeatedly where companies only calculate a small subset of their emissions, and if they don’t include everything right now, they’re typically only including 40% of emissions. Unless they include everything, they cannot act on it.”

Ronn says Normative still sees this gap in action because companies do not have the right data to take appropriate action. The Greenhouse Gas Protocol’s Corporate Standard – the most widely-used framework for calculating corporate climate impacts – recommends businesses follow the hybrid methodology. This involves performing an initial spend-based carbon footprint calculation to gain an emissions overview, then supplementing this calculation with activity data, beginning with the highest-emitting suppliers.

Calculations are only the start

Though carbon accounting lays the groundwork, corporate accounting alone cannot reduce emissions, says Ronn, explaining that accounting strategies can guide emission reducing actions, investment in technologies that enable emission reduction is still necessary.

Figuring where to invest in your value chain is crucial as more corporates need to make investments in technologies such as renewable energy, renewable transportation, and other renewable materials, Ronn says.

The S&P report also acknowledges that measuring purchased energy emissions can be challenging for companies, as they may not have access to accurate data from their energy suppliers.

This variance makes it difficult to compare performance across companies and determine whether a company’s actions meet broader net-zero goals set at the country level or globally through the Paris Agreement.

However, there are methods to estimate these emissions, such as using market-based or location-based emission factors.

Standardisation key to informed investment decisions

Credit Suisse’s group head of Sustainable Investing and Finance Frameworks James Purcell recently wrote that a lack of standardisation made fully incorporating sustainability data into business and investment decisions challenging for CFOs.

Purcell states that the first challenge is a lack of commonly accepted standards for reporting. “According to The Reporting Exchange, an online tool developed to help corporates navigate the landscape, the number of voluntary and mandatory reporting requirements and frameworks exceeds 2,000.

“Even with a tiny sample of the nine voluntary reporting frameworks that The Reporting Exchange identified, there are more than 1,400 potential indicators that companies could use to disclose their sustainability performance and aid their CFOs in business and investment decisions (Arabesque, n.d.).

According to Ronn, the lack of standardisation in terms of when, how, and what to report continues to significantly hold CFOs back in their net-zero endeavours while also making it challenging to attract investment.

“Currently, the lack of standardisation in carbon accounting makes it difficult for investors to compare the carbon emissions of one company with another.

As a result, investors struggle to determine if a company’s full carbon footprint has been accurately calculated,” Ronn explains.

Ronn suggests one option to help alleviate this challenge is for CFOs to work with a carbon accounting provider. Not only does this reduce the burden of compliance, but also says to the market that a business is taking the matter seriously.

As the pressure to reduce carbon emissions increases and regulatory requirements become more stringent, the accuracy of data for carbon accounting is critical to ensure sustainable and effective decision-making.

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