Business

How carbon accounting is transforming business


How do you hold a corporation to account? If it’s financial
information you’re interested in, then it’s relatively straightforward – in
theory at least. Around the world, companies big and small must submit an
annual report and accounts. Stakeholders can peruse profit and loss accounts
and balance sheets to see if a business has done what it said it would.

But what about data on carbon emissions? The last few months
have seen a slew of promises from companies committing to reduce their carbon
footprint. How will stakeholders hold these companies to account? And, as a
business leader, how can you measure your impact and take climate-positive
decisions?

The difficulty with carbon reporting

The rules for financial reporting are well-established and
consistent. Although national variations remain, an international accounting
language, the International Financial Reporting Standards (IFRS), has been
adopted by more than 120 countries. On a more fundamental level, the internal
processes associated with financial reporting are well understood, with many
software solutions catering for companies of all shapes and sizes.

The same is not the case for reporting on carbon emissions.
Legislation is patchy and inconsistent, and it’s far from clear which
operations, activities and transactions should be included in climate-related
disclosures.

As an example of the lack of legislative clarity, the UK’s planned
rules for mandatory climate reporting require that organisations report on their
direct emissions (scope 1) and the indirect emissions resulting from their
purchase of electricity or energy (scope 2). But reporting on emissions in the
supply chain (scope 3) is only required ‘if appropriate’. Duncan Oswald,
Head of Climate Science at carbon accounting software company Spherics, points out that, “For non-financial
groups (i.e. all of industry), there is no supplemental guidance as to whether scope
3 reporting is ‘appropriate’. Scope 3 emissions often account for the
lion’s share, but there is currently no requirement to include them”.

Another issue is the lack of infrastructure and
expertise to measure emissions within companies. Traditionally, solutions have
been consultancy-based, time-consuming and expensive. And quicker alternatives
often ignore supply chain emissions altogether. This is particularly
challenging for smaller businesses.

What is driving change?

The big news coming out of COP26 was the announcement that
IFRS will develop international sustainability standards. This raises the
prospect of a global carbon reporting language, like we have for financials. However,
this is only the very first step in the process.

Instead, change is being driven by the demands of
stakeholders. In Oswald’s words, “What is actually driving developments
in carbon accounting is the people who work across industry and the public
sector”. He argues that employees won’t stand for employers who ‘obfuscate and
delay’ when it comes to carbon emissions.

Investors too are demanding change. For
them, “the risk of putting your money into a business which doesn’t treat
this situation like an adult would, is just too high”.

What solutions are there?

In Oswald’s view, the ideal solution would be an
escalating carbon tax. This would remove the need for complicated carbon
accounting systems altogether, as it would ‘let the market do the sums’.
However, he concedes that this is not likely in the short term. A ‘carbon
ledger’ that applies the principles of blockchain to carbon credits as they
pass down the value chain is another potential solution. But this would require
the co-operation of fossil fuel suppliers, a prospect towards which Oswald
expresses scepticism.

For the time being, the next best solution is to
back-calculate emissions. This approach can only provide estimates and creates
complexities such as ‘double-counting’ – a situation where emissions by
suppliers at the top of the chain are counted multiple times by companies
further down. Nonetheless, this is the approach that companies are currently
taking.

Given the complexities, automation is key –
especially for businesses who can’t afford thousands of pounds in consultant’s
fees. This is why we are seeing a spike in carbon-counting software innovations
at Springwise.

Carbon accounting innovations

Spherics’
platform starts with a spend-based approach to carbon accounting,
automatically deriving information from financial accounts. It then allows
users to add activity data, if it is available, to improve the data quality.
This solution is particularly attractive for small and medium businesses,
costing as little as £9 per month.

Swedish company Normative
also draws emissions data from financial accounts. Its platform provides
several extra products such as an emissions hotspot analysis highlighting
which purchases have the highest carbon footprint.

UK company Foodsteps
is more specialised, focusing on the food industry. Its tech makes it
simple and affordable to calculate the footprint of food and drink products
from farm to fork.

Finally,
German company Climatiq
takes a different approach. Rather than an off-the-shelf solution, it provides
organisations with data infrastructure, including APIs connected to an open
database of emissions factors. This allows companies to build their own
carbon-counting applications.

The societal need for carbon accounting solutions will only grow as the
climate crisis becomes ever more pressing. And the commercial opportunity is
huge. The market for carbon accounting software is expected
to grow by $6.38 billion during 2021-2025
. It’s therefore no surprise that
we are seeing many platforms vie to become the ‘Xero of carbon’.

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Written by: Matthew Hempstead

Editor’s note: James Bidwell, Chair of Springwise,
is an investor in Spherics but his views are not represented in this article.



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