In the race toward sustainability, carbon accounting has become an essential practice for organizations aiming to understand and manage their environmental impact. Often referred to as greenhouse gas (GHG) accounting, carbon auditing, or carbon inventory, this process involves calculating, measuring, and reporting GHG emissions. The goal is to provide a clear, auditable picture of an organization's carbon footprint, which is crucial for transparent environmental, social, and governance (ESG) reporting and for steering informed decision-making.

This article is written by Shashi Ravikumar ([email protected]), who is a part of RSM Netherlands Business Consulting Services with a specific focus on decarbonization and net-zero.

What is Carbon Accounting?

Carbon accounting quantifies the amount of greenhouse gases emitted directly and indirectly by an organization, individual, product, or event over a specific period, typically a year. This data reveals not only the total emissions but also the sources within operations that are responsible for them. By mapping out where emissions occur, organizations can effectively track, manage, and eventually reduce their environmental impact. 

As the global community focuses on achieving net zero emissions, this practice is vital for both large corporations and smaller entities. While reporting on climate impact has been common among bigger businesses, widespread adoption across all sectors is becoming more common.

What do Organizations Measure?

To effectively measure their environmental impact, organizations need to track three categories of emissions, as defined by the Greenhouse Gas Protocol (GHGP):
 

Source: GHG Protocol

Scope 1: Direct emissions from sources owned or controlled by the organization, such as emissions from company vehicles or on-site heating.

Scope 2: Indirect emissions from the energy an organization purchases and consumes, such as the emissions created to generate the electricity used in their offices.

Scope 3: Other indirect emissions generated across the value chain, including supplier activities and employee commutes. Scope 3 is often the most challenging to measure and mitigate due to the complexity and range of activities involved. 

While reporting Scope 1 and 2 emissions is often mandatory under various regulations, Scope 3 remains mostly voluntary. However, tackling Scope 3 is crucial for organizations seeking comprehensive climate impact management. For instance, companies like PepsiCo have acknowledged that Scope 3 emissions account for a significant portion of their total emissions—78% in PepsiCo’s case, as reported in 2020.

Why is Carbon Accounting Important?

Accurate carbon accounting is essential for organizations to assess their environmental footprint, but it’s also important for several other reasons:

1.    Compliance with regulations: The Corporate Sustainability Reporting Directive (CSRD) in the European Union is a key example of how regulatory frameworks are evolving to require detailed greenhouse gas (GHG) emissions reporting. The CSRD mandates that large companies, and eventually even smaller ones, disclose their environmental impact, including GHG emissions, in a standardized format. This initiative aims to enhance transparency and accountability across the EU market. 

While the CSRD sets a high bar for reporting, other countries also have stringent regulations in place, such as the Greenhouse Gas Reporting Program (GHGRP) in the U.S. and the U.K.’s Streamlined Energy and Carbon Reporting (SECR) scheme. These frameworks collectively push companies to improve their sustainability practices and disclose accurate emissions data.

2.    Voluntary disclosure frameworks: In addition to mandatory reporting frameworks, many organizations choose to report their greenhouse gas (GHG) emissions through voluntary disclosure standards such as the International Financial Reporting Standards (IFRS), Sustainability Accounting Standards Board (SASB), and Global Reporting Initiative (GRI).

These frameworks provide companies with guidelines to measure and disclose their carbon emissions, helping them communicate their climate impact more transparently to stakeholders. By integrating carbon accounting into these frameworks, companies can align their sustainability efforts with global best practices, enhance investor confidence, and demonstrate leadership in climate responsibility, even in regions where formal regulations may not require detailed disclosures.

3.    Sustainability goals: Many organizations, driven by internal goals or external pressure, have committed to achieving net zero emissions. Carbon accounting helps them track progress and implement strategies for emissions reduction.

4.    Informed decision-making: Data from carbon accounting enables organizations to make better choices regarding decarbonization, purchasing carbon credits, and identifying emission reduction opportunities.

5.    Stakeholder trust: Transparent carbon reporting builds credibility with investors, customers, and employees who increasingly expect businesses to take climate action seriously. 

Common Challenges in Carbon Accounting?

Despite the growing importance of carbon accounting, organizations face several challenges in implementing it effectively. These include:

1.    Data quality and accuracy: Collecting reliable data can be difficult, especially for Scope 3 emissions, which depend on external partners and complex supply chains.

2.    Regulatory complexity: Different geographical areas have varied standards and regulations, making it hard for multinational organizations to streamline reporting.

3.    Double-counting: Some emissions might be counted multiple times across different scopes, leading to inconsistent reports.

4.    Lack of standardization: With different methods and frameworks available, comparing data between companies or even different units within a company can be challenging.

How Technology is Streamlining the Process?

Fortunately, advanced tools and platforms like Climate Management and Accounting Platforms (CMAPs) are simplifying the carbon accounting process. CMAPs automate data collection, making it faster and more accurate. They also use recognized guidelines like the GHGP to help organizations assess their emissions in real-time, monitor reduction progress, and report findings to stakeholders. These platforms eliminate the reliance on manual spreadsheets and outdated data, offering organizations a more transparent, scalable way to track their carbon footprint.

Forward Thinking: Why Should Companies Invest in Carbon Accounting?

For any organization looking to align with modern sustainability practices, carbon accounting is no longer optional. It provides numerous benefits, from helping to meet regulatory requirements to identifying areas where cost-saving decarbonization measures can be implemented. Moreover, businesses that lead the way in reducing their carbon footprint will find themselves better positioned to handle future regulations, attract sustainability-conscious investors, and build stronger relationships with customers.

In summary, carbon accounting allows organizations to:

  • Reduce their environmental impact
  • Set and track emissions reduction targets
  • Improve operational efficiency and save costs
  • Build transparency and trust with stakeholders
  • Contribute to global climate research and policies

Investing in carbon accounting now prepares businesses for a sustainable future, as more stakeholders demand accountability and environmental action.

RSM is a thought leader in the field of Sustainability consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.