Whether it’s a new regulatory frameworks or pressure being applied by consumers or investors, businesses must be taking on the battle against their carbon emissions. This is no easy feat, and to fully understand an organization’s impact on the planet and climate, is it essential to use data-driven tools to calculate those emissions.
One of those vital tools is carbon accounting, and here we set out what it is and the important considerations for organizations.
What is Carbon Accounting?
Organizations and individuals are familiar with accounting, but what is carbon accounting? The simple answer is to substitute emissions data for financial data. In this case, carbon accounting refers to measuring the volume of carbon dioxide “equivalents” an organization emits across all aspects of its business – defined by the independent standard, the Greenhouse Gas Protocol, as Scopes 1, 2 & 3.
Carbon accounting is growing in importance as organizations cannot realistically set targets, like net-zero, to reduce their environmental impact without it. It is a tool that enables organizations to make informed decisions around mitigation strategies and assign accountability within the organization and across the supplier base.
It’s all about the journey to net-zero and helping to define a business’ starting point on that journey. The outputs of carbon accounting can inform mandatory reporting in Director’s reports, investment due diligence, staff engagement, and marketing communications. Increasingly we are seeing this data used to inform customer tender requests.
Challenges and considerations in carbon accounting
While it can be difficult to account for Scopes 1 & 2 – emissions typically within an organization’s control – it is even more complex when you look outside the organization at Scope 3, which typically makes up around 70%-90% of the total.
Here, we set out some of the challenges and how organizations can look to tackle them. Addressing these challenges will allow you to support action in your business, as this is where the actual value of carbon accounting lies.
Understanding the requirements
Following the GHG Protocol’s guidance means organizations have complete discretion over what and how they measure their emissions. There are many variations of calculation methods for assessment of each of the 15 Scope 3 categories, but no mandate to use any specific one, and this whole process is very much open to interpretation.
This wiggle room is necessary to enable organizations to measure emissions bespoke to their business, factoring in industry differences, scale, data availability, and the organization’s targets. To build a successful program, organizations need a high degree of carbon literacy coupled with a deep understanding of how to translate the guidance into their operations.
Carbon accounting considerations
For businesses to conduct carbon accounting successfully, they need access to real-time emissions data, which tracks from the farm to the business and onto the customer. Without this, the approach will be imperfect based on estimates and a one-time view of the situation, quickly becoming outdated.
Unfortunately, there is an obvious overlap in the calculations which do not take account of complex networked supply chains. For example, there are situations where clients and suppliers have reciprocal trading relationships – think of a marketing agency for an airline that also uses global air travel.
Another critical challenge is ensuring consistency across the supplier base. It might be that an organization has access to accurate data for one supplier but is that process being applied to all suppliers? It is crucial that data is provided in a universal and identical format. However, currently, most suppliers are not familiar with calculating their emissions and won’t be familiar with the GHG Protocol’s standard.
Without a global standard for emissions reporting, their customers are probably making requests for data in multiple different formats as well. Therefore, supplier engagement is vital to give suppliers a helping hand when it comes to reporting.
And that brings us to our next consideration – engagement. Few organizations have the time and resources to employ a systematic engagement program with their suppliers to manage risk or performance, let alone engage them to provide emissions data to support carbon accounting.
Engaging suppliers and getting their buy-in to support this process is a considerable challenge and requires cross-business internal alignment.
Knowing which suppliers to target, what to ask, and when to engage them is a crucial challenge that businesses must tackle head-on.
Lastly, the challenge is whether the approach can be scaled across all suppliers in all business areas? For an organization with 10k+ suppliers, this is a data collation nightmare. Without a data platform to support this, it would be unmanageable for most organizations without significant internal analytics capability, and the time it would take to collate would be significant.
This data paralysis is causing many organizations to postpone the inevitable, as it is easier to focus on simple and more immediate problems than carbon accounting and decarbonization. Businesses need to push past this and work to gather as much data as possible to move the needle while always striving to improve the accuracy and impact of that data.
Making a start with carbon accounting
While the backdrop is complex and littered with hurdles to jump, there are some actions that organizations can take to make a start. It is important to take that first step and have as much visibility as possible – it’s not about perfection straight away.
Don’t seek perfection in the data
Businesses are working towards a collective challenge, and it’s about working with what you have. Data can evolve, so it’s essential to accept that perfection cannot be achieved from the start; start simple and begin your data journey.
Organizations can begin by using proxy data, applying an economic value for the goods and services bought, and mapping these to industry-standard emissions factors to give an outline emissions value. Businesses can access AP spend data through collaboration between procurement and finance departments. This is a good starting point and provides a map of hotspots across the supply chain, identifying the key contributors to your Scope 3.
Then segment the supplier base and isolate a few suppliers where the most impact can be made on emissions. It is then essential to explore the goods and services provided and apply a more specific calculation method moving from average to product-specific data where available. The effort and engagement level with these suppliers will need to increase, so consider this when deciding which supplier to engage with and ensuring that the ask is clear.
Build carbon literacy
There is a lot of complexity around carbon accounting, which is unfamiliar to most people. However, given the importance of using it in achieving decarbonization, we need to build greater levels of carbon literacy. Organizations must train people across Procurement and the wider business to build carbon into future investment decisions and embed it within their sustainable sourcing policy.
Understanding carbon as a cost liability to be evaluated in the same way that labor, overheads, and profit margins are. This is a crucial next step in Procurement’s evolution and represents a fundamental shift in how it supports the organization. This will enable businesses to make informed decisions about the potential offset liability cost they will face if they don’t successfully remove carbon from their supply chains.
Source a data platform or data repository
Organizations with a suitable internal capability can achieve this themselves; however, there are vital considerations to be made around the scalability of that approach. For most, engaging a technology provider will provide greater functionality than simply storing and visualizing the data. It will also remove much of the burden in ensuring the data is correctly classified and has the appropriate emissions factors applied.
This will not solve all of the challenges, but it will certainly help as the methodology is already embedded in the platforms, and the data is held in one repository. Releasing valuable resources to concentrate where the real focus should be: on how you manage the supplier engagement process and internal alignment necessary to make change happen. Sourcing the right technology platform is not without its challenges, as there are many options on the market today. It is important to ensure that its functionality supports a broader decarbonization strategy.
How Proxima can help
Carbon accounting is vital and complex in equal measure, so working with the right partner is essential. Proxima delivers Decarbonization-as-a-Service for a range of clients globally. As decarbonization becomes an increasingly in-demand service, we work with organizations to align their suppliers with business purpose targets.
Proxima brings together an experienced data-driven team with a diverse skill set to offer a full end-to-end service to help accelerate businesses to meet their carbon zero supply chain goals faster. To speak to one of our specialist consultants, simply fill out the form below.