Unlocking decarbonisation: Introduction to carbon accounting

In business, numbers tell stories. For decades, financial accounting has been the primary storyteller, telling tales of profit and loss. But as our planet faces environmental challenges, a new narrator has emerged: carbon accounting. 

What is carbon accounting?

Carbon accounting is the process by which your business quantifies, measures and reports data for the greenhouse gases (GHGs) your organisation produces. It's not just about counting carbon dioxide; it's about understanding your company's entire climate impact. 

The Greenhouse Gas Protocol (GHG Protocol) categorises emissions into scopes to give a clearer picture. Let's break it down: 

Scope 1 (Direct Emissions): These are the emissions that come directly from your company's activities and the assets it owns. Think of the smoke rising from on-site generators or the fumes from your corporate vehicles. These are Scope 1 emissions - directly under your control. 

Scope 2 (Indirect Emissions): Think of these as the "borrowed" emissions. When your office lights up or your factory machines whir to life, you're using electricity. The emissions from generating that electricity? That's Scope 2. It's like ordering takeout - you didn't cook it, but you're responsible for the energy used to make it. 

Scope 3 (Indirect Emissions): This is where things get interesting - and challenging. When you book a business flight, you don’t own the plane, fuel, or choose the route it takes to your destination. However, by purchasing a seat, you are responsible for a share of the overall emissions. This is a classic example of Scope 3 emissions, which include not only employee commuting and business travel but also how the products a company produces are used and the emissions from waste management. It's vast, complex, and often the biggest piece of the emissions puzzle. 

Why does this matter? Because you can't manage what you don't measure. Carbon accounting gives businesses the data they need to set meaningful sustainability goals, make informed decisions, and track progress. It's becoming as crucial as financial accounting in telling the full story of a company's performance and impact. 

As regulations tighten and consumers demand more transparency, carbon accounting is evolving from a nice-to-have to a must-have. Companies that master this new language of sustainability aren't just reducing their environmental impact - they're positioning themselves as leaders in the low carbon economy of the future. 

Scope 1 emissions are some of the easiest to measure and control, as they come directly from company operations (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles).

Scope 2 emissions are indirect GHG emissions from purchased energy sources, such as electricity, steam, heating, and cooling.

Scope 3 emissions: the toughest challenge for companies, requiring data from diverse suppliers and covering both upstream and downstream activities.

Understanding carbon accounting methods.  

Before diving into the carbon accounting methods, it's important to understand the five foundational pillars defined by the GHG Protocol. These principles act as the bedrock for ensuring accurate, relevant, and transparent emissions reporting, empowering stakeholders to make informed decisions. 

• Relevance: Focus on activities that significantly impact emissions and use data sources aligned with company goals.  
• Completeness: Include all relevant activities, even if data is limited. Justify any exclusions transparently.  
• Consistency: Apply consistent methods (accounting, boundaries, calculations) over time for reliable comparisons.  
• Transparency: Clearly explain methods, assumptions, and limitations to ensure data credibility and allow for replication.  
• Accuracy: Ensure data precisely reflects emissions with minimal uncertainties. High accuracy builds trust in decision-making. 

Following these five pillars makes carbon accounting more trustworthy and helpful. When businesses fight climate change, using these rules gives them a strong base for taking real action. 

What are the methods of carbon accounting?  

Calculating a business's carbon footprint involves quantifying GHG emissions from various activities. Carbon accounting typically employs three main approaches to quantify emissions: Spend-based, Activity-based, or a Hybrid methodology. 

Different types of business data, such as fuel consumption, expenditure, and distance travelled, can be used to calculate emissions for the same business activity. Each type of data has complementary calculation methods. Here are some examples to illustrate these methods:  

• Spend-based method: This method estimates indirect emissions based on the cost of goods or services. While convenient, it has limitations like lack of accuracy due to its dependence on estimates and average emission factors. Spend-based methods offer a valuable starting point for estimating a company's carbon footprint, but they might not be the most effective tool for detailed decarbonisation plans. 

Example: A hotel with energy-efficient practices might have lower emissions even at a similar price point compared to a less sustainable hotel. Spend-based calculations wouldn't capture this difference, potentially misrepresenting the actual environmental impact. 

• Activity-based method: This method quantifies emissions by measuring specific business activities, such as procurement, transportation, and product usage. It tracks emissions by multiplying the amount of each activity (e.g., number of products shipped) by emission factors specific to that activity (e.g., grams of CO2 per kilometer). 

Example: A global beverage company might use the activity-based method to track emissions from its production facilities, distribution network, and packaging processes. They would collect data on electricity usage in bottling plants, fuel consumption in delivery trucks, and materials used in packaging. By analysing this granular data, the company can identify that their highest emissions come from the energy-intensive bottling process. This insight allows them to prioritise investments in energy-efficient equipment and renewable energy sources for their production facilities, leading to significant reductions in their overall carbon footprint.  

• Hybrid method: The hybrid method is a strategic blend, recommended by the Greenhouse Gas Protocol. It leverages readily available spending data to estimate emissions alongside the more specific activity data you can gather. This "all-in-one" approach offers a balance between accuracy and practicality, making it the most widely used carbon accounting standard. 

Example: A multinational corporation uses a hybrid approach, combining spend-based data for general office supplies and activity-based data for manufacturing processes. This method balances convenience and accuracy, providing a comprehensive view of the company's carbon footprint.  

Distance-based and fuel-based methods.  

While we've covered these three methods, distance-based and fuel-based approaches are also worth mentioning because of their relevance to specific situations. Each of these methods offers unique advantages and is suitable for different scenarios, depending on the available data and the specific business activities being measured. 

The fuel-based method, for instance, is effective when an organisation has precise data on fuel consumption. Consider a company that tracks the gasoline used by its fleet of vehicles. This method allows for accurate emissions calculations by correlating fuel usage with carbon output.  

It's valuable for businesses looking to implement and measure the impact of fuel efficiency initiatives or alternative fuel adoption. This level of precision is crucial for developing and executing effective decarbonisation strategies. The superiority of the fuel-based method becomes evident when considering the nuances it can capture.  

If a company switches to more sustainable aviation fuels, the fuel-based method would reflect the resulting emissions reduction. In contrast, distance-based or spend-based methods might miss this improvement entirely.  

The distance-based method wouldn't account for the change in fuel type, while the spend-based method could show an increase in emissions if the sustainable fuel is more expensive, as it would multiply a higher spend by the same emission factor. 

However, it's important to note that the choice of method often depends on data availability and the specific goals of the carbon accounting exercise.

Each method plays a crucial role in the broader landscape of emissions measurement and management, contributing to a comprehensive understanding of an organisation's carbon footprint and informing targeted reduction strategies. 

Saying that, we highlighted some methods that are commonly used when comes to find out about your gases emissions and they are important depending on the goal and target.  

Carbon accounting: The GPS for your decarbonisation journey.

Imagine setting out on a cross-country road trip without a map or GPS. That's what attempting decarbonisation without proper carbon accounting is like. Having a precise roadmap is key to navigating your path with clarity and purpose.

Proper carbon accounting for decarbonisation offers detailed insights into the sources, patterns, and intensities of your greenhouse gas outputs. This level of detail is crucial because it allows you to identify not just the obvious emission hotspots, but also the subtle, overlooked areas where significant reductions can be achieved. 

Additionally, it gives you the ability to track your progress—understanding what strategies are working and which ones need adjustment. This ongoing assessment ensures that your decarbonisation efforts are effective and aligned with your sustainability goals. 

Let's consider the following fictional example: 

EcoNovatrix, a mid-sized electronics manufacturer, used spend-based methods to estimate their carbon footprint. Spend-based methods have their place and are a great way to start, but it can be like navigating with a compass instead of a GPS. They knew they were emitting carbon but couldn't pinpoint where or how to reduce it effectively. 

Realising this approach wouldn't cut it for their ambitious goal of 50% emissions reduction by 2030, EcoNovatrix switched gears. They implemented a granular data collection system, working directly with suppliers to gather product-specific emission data. They also installed smart meters to track energy consumption in real-time across their facilities. 

The results were eye-opening: 

• Component sourcing: By analysing emissions data for each component, EcoNovatrix identified that the microchips from Supplier A had a carbon footprint 30% higher than similar chips from Supplier B. This insight led to a supplier switch, cutting emissions without compromising quality. 
• Manufacturing process: Real-time energy monitoring revealed that their soldering process was an unexpected energy hog. By optimising this process, they reduced related emissions by 25%. 
• Product design: Detailed lifecycle analysis showed that the standby mode in their products was a significant source of customer-use emissions. This led to a redesign, creating an "eco-mode" that reduced standby power consumption by 70%. 
• Transportation: Granular logistics data highlighted that air freight for rush orders was causing emission spikes. By improving inventory management and using sea freight more often, they cut transportation emissions by 40%. 

This level of detail transformed decarbonisation strategy from guesswork to precision engineering. It wasn't just about reducing a number; it was about making informed decisions that improved efficiency, cut costs, and drove innovation. 

The lesson? In the world of decarbonisation, the opportunity is in the details. High-quality, granular carbon accounting doesn't just measure your footprint; it illuminates the path to reducing it. It turns abstract goals into concrete actions, helping you navigate the complex terrain of sustainability with confidence and precision. 

So, as you embark on your decarbonisation journey, remember: your carbon accounting system isn't just a scorekeeper. It's your GPS, your strategy planner, and your innovation catalyst all rolled into one. 

Decarbonisation success: data & investor-grade reporting best practices. 

Building trust with investors through your decarbonisation efforts starts with reliable, credible, and transparent GHG emissions data. Fortunately, achieving investor-grade reporting is within reach. Today's most successful organisations recognise that accurate and reliable emissions data is not the responsibility of a single department, but rather the result of a collaborative, company-wide effort. 

Early action and consistent data collection

Start collecting emissions data as early as possible – the sooner, the better. Implement a controlled, repeatable, and traceable data collection process. This allows for consistent monitoring, assessment of progress, and course correction as needed to meet your decarbonisation goals. 

Best practices for investor-grade reporting

Achieving high-quality investor-grade reporting requires more than just robust governance frameworks. To ensure the accuracy, auditability, transparency, and effective monitoring of your decarbonisation efforts and targets, consider implementing the following best practices: 

• Data integrity and management: Implement robust data collection systems that capture emissions data at the source. For instance, a commercial building might install digital smart meters on sub-loads to measure energy consumption in real-time, ensuring accuracy and reducing manual input errors. 
  
  
• Cross-functional collaboration: Create a dedicated sustainability team and this diverse group can provide holistic insights. For example, the finance team can help integrate carbon accounting into financial reporting processes, while IT can develop dashboards for real-time emissions tracking. 
  
  
• Third-party verification: Engage independent auditors to verify your emissions data. Some companies might have their entire value chain emissions independently assured, enhancing credibility with investors and customers. 
  
  
• Transparent reporting methodologies: Clearly communicate your calculation methodologies and assumptions. A good way to do it is to publish detailed explanations of how the company calculates their carbon footprint, including scope 3 emissions, in their annual sustainability report. 
  
  
• Continuous improvement process: Establish a feedback loop for ongoing refinement of your measurement and reporting processes. Regularly updates its carbon accounting methodology and openly shares these improvements in its annual stakeholder reports.  
  
  
• Stakeholder engagement: Actively involve key stakeholders in your reporting process. Engage supply chain partners in emissions reporting, providing training and resources to ensure consistent and accurate data collection. 
  
  
• Technology integration: Leverage advanced software solutions for emissions tracking and reporting. Many companies have a central carbon accounting system that automates information flows from key internals systems and suppliers, allowing for granular analysis and reporting.
  
  
• Scenario analysis: Incorporate climate scenario analysis into your reporting. Your company can use various climate scenarios to assess the resilience of its business strategy, providing stakeholders with a forward-looking perspective on emissions and climate risks. 
  
  
• Executive accountability: Link executive compensation to sustainability metrics, including GHG emissions reduction targets.  
  
  
• Regulatory alignment: Stay ahead of regulatory requirements by aligning with emerging standards. Ensure accurate and credible data by using established ESG (Environmental, Social, and Governance) frameworks like The Task Force on Climate-related Financial Disclosures (TCFD), GHG Protocol, and Taskforce for Nature-related Disclosures (TNFD). 

By implementing these strategies, organisations build a robust framework for GHG emissions reporting that not only meets current standards but also adapts to future requirements. This approach transforms emissions reporting from a compliance exercise into a strategic tool for driving sustainable business practices and building stakeholder trust. 

Evaluation of guidelines and policies.  

Let's return to EcoNovatrix and explore how this fictionalised business developed a comprehensive framework for their decarbonisation journey: 

In this example, EcoNovatrix recognised that effective decarbonisation requires more than just good intentions. They developed a detailed "Climate Action Playbook" that serves as the cornerstone of their emissions reduction strategy. Here's how they structured their approach: 

• Transparent data collection: Provides a clear and documented method for collecting and recording ESG data. 
• Data-driven quality: Leverages data, technology, and robust processes to ensure high-quality ESG metrics. 
• Rigorous verification: Implements internal reviews and control validations to confirm the effectiveness of data collection and reporting. 
• Continuous improvement: Strives to refine emissions calculations through consistent data quality improvement. 

EcoNovatrix demonstrates leadership in emissions transparency with their comprehensive GHG Policies and Procedures document. This document covers all emission scopes (1, 2, and 3) and provides clear guidance on data collection, including essential stages, considerations, and data source details. 

By adopting this comprehensive framework, EcoNovatrix not only speeds up its decarbonisation initiatives but also establishes a pioneering industry benchmark, turning climate action into a driving force for innovation and a competitive edge.

Summary.

Carbon accounting is the compass guiding businesses towards a sustainable future. From understanding direct emissions to untangling the complexities of Scope 3, businesses equipped with robust carbon accounting practices can identify hotspots, optimise operations, and innovate their way to a lower carbon footprint.

This data-driven approach is not merely a compliance exercise but a strategic imperative. By integrating carbon accounting into core business functions and adopting best practices, organisations can build trust with investors, enhance their reputation, and position themselves as leaders in the transition to a low-carbon economy.

Starting the journey towards decarbonisation may present obstacles, but with carbon accounting as a trusted companion, businesses navigate towards a future that is both sustainable and prosperous.