Carbon accounting and business sustainability

Climate change and business imperatives

With the threat of climate change coming to the fore, decarbonisation becomes critical in the global effort to reduce the devastating effects of greenhouse emissions. As the push for a low-carbon economy ramps up around the world, businesses need to demonstrate clear leadership on climate action and find ways to ensure a greener future.

Although greenhouse gas (GHG) emissions occur naturally, many business activities increase emission levels, releasing large amounts of destructive gases into the atmosphere, thus causing global warming and a climate crisis.

To make a meaningful change towards a more sustainable future driven by a credible plan to get to net zero, businesses need to identify what activities release GHG emissions and calculate how much they contribute. This is where carbon accounting steps in.

As the process used to measure the amount of carbon dioxide that countries, businesses, or even individuals emit into the atmosphere, carbon accounting provides a framework for understanding their climate impact so they can set targets to limit these emissions.

The Paris Agreement is at the core of carbon accounting. In December 2015, at the COP21 (Conference of the Parties – COP) held in Paris, 196 countries came together to adopt a legally binding treaty on climate change for the first time in history. Effective from November 2016, the Paris Agreement intends to cap global warming below two degrees Celsius to achieve a climate-neutral world by mid-century. 

Since then, COPs have been held annually, with the most recent being COP26, held in Glasgow, UK, in November 2021. The latest summit demonstrated that, although the world is making progress in meeting this goal, we still have a long way to go.

The scope of the matter – tracking levels of emissions

As a watershed moment in the international climate change process, the Paris Agreement works on a five-year cycle of progressively ambitious climate action goals to achieve a gradual economic and social transformation across the world. 

To identify where they stand regarding GHG emissions and assess the impact of their efforts to reduce the climate crisis, companies need metrics that inform them whether they are on the right track. That's where carbon accounting can help.

Carbon accounting helps estimate how much carbon dioxide equivalents entities — from businesses to countries to individuals — emit so that they can keep their climate impact in check.

When implementing carbon accounting, companies need to distinguish different scopes of GHG emissions. As a standardised framework for measuring and monitoring emissions, the international accounting tool called Greenhouse Gas Protocol classifies all GHG emissions into three groups or scopes. Scope 1 and 2 emissions relate to activities within the reasonable control of an individual organisation, while Scope 3 are generated externally across the company's whole value chain. 

Scope 1: Direct owned emissions 

Scope 1 includes direct emissions released into the atmosphere because of the use of company-owned and controlled resources such as buildings, equipment and vehicles. It also captures accidental or fugitive emissions such as leaks and other irregular releases of greenhouse gases from commercial facilities. 

Since these emissions are easily traceable and measurable, reporting Scope 1 emissions usually does not present a challenge for businesses. But for many companies, Scope 1 emissions represent a minuscule fraction of the total emissions — often as small as less than one per cent. 

Therefore, failing to account for emissions beyond Scope 1 may mask the actual scale of the problem. What initially might appear as a minor pollution offender could end up being the biggest culprit once emissions beyond Scope 1 are considered. 

Scope 2 - Indirect owned emissions  

Scope 2 emissions are indirect GHG emissions associated with electricity, steam, heat, or cooling purchased from a utility provider. Although they physically occur at the facility where they are generated, Scope 2 emissions are accounted for in a buyer's GHG inventory because they are related to the buyer's energy consumption. 

Electricity is the biggest — and sometimes the only — source of Scope 2 emissions for most organisations. Improving efficiency of operations helps reduce scope 2 emissions

At a high-level, Scope 2 emission is simply calculated by multiplying consumption due to activity from source with source emission factors.

Scope 3 – Indirect, not owned emissions 

Scope 3 emissions are the biggest GNG culprit as they often represent the largest share of a company's total carbon footprint. 

They include all other indirect emissions resulting from activities of a company, occurring from sources that they do not own or control like emissions from upstream and downstream activities. Reflecting the complex nature of the global climate crisis, these emissions involve a virtually never-ending list of emissions across the whole value chain that companies are indirectly responsible for —  from investments they make to suppliers and distributors they collaborate with, to consumers that buy and use their products and services. 

In many industries, these emissions are the single most significant contributor to total emissions. Worse still, they are also the hardest to calculate and track. Therefore, many companies fail to track Scope 3 emissions, which results in under-reporting. 

In the past, the focus was more on direct emissions, which are easier to track and calculate. But without accounting for Scope 3 emissions, it is essentially impossible to develop an effective strategy to tackle climate change. 

As more businesses start to aim for net zero emissions, they seek to measure their entire climate footprint, so the importance of Scope 3 has expanded. Still, several challenges remain when companies try to screen the whole value chain through an ESG (environmental, social, governance) lens. 

First, Scope 3 emissions are difficult to control as they go beyond a company's direct management or ownership. 

Second, they are hard to evaluate because companies must consider many factors when calculating their Scope 3 emissions. Collecting quality data on the type and volume of emissions remains a challenge. 

Finally, these emissions are often accounted for by several different companies in a value chain, so we need to address the question of who should be responsible for reducing them. In addition, different businesses also use different methodology and underlying assumptions, which further complicates the comparison of the Scope 3 emissions between companies.