While everybody is talking about ‘carbon footprints’, ‘net-zero’ and ‘zero emissions targets’, it is difficult to pin down what these terms mean, and how to go about measuring them in precise or agreed ways. There is no single agreed carbon accounting process and there are many methodologies. Numbers behind any carbon accounting system or net-zero targets are always just an approximation or a metaphor. This can be difficult for finance professionals as we see numbers as precise solutions, very much in a black-and-white context.
There is a fine line between making a positive emissions difference and activities leading to unintended consequences of increased emissions in a supply chain. Authors Thomson and Bates cite the use of carbon intensity ratio as a metric as an example, ‘recent research has shown that inappropriate carbon accounting methods like this result in investments that are actually adding to the climate crisis.’34
Accounting for GHG emissions and setting net-zero targets are wrapped in many shades of grey, but they will become clearer as the science evolves.
Climate transition planning steps
The following high-level steps are designed to get you thinking about the relationships and activities an organisation will need to build and integrate into carbon accounting and their transition to a lower carbon or net-zero entity.
Step 1 — Start with a vision for your organisation to lead the way It is important upfront that all buy into the direction of travel. An organisation’s compelling vision needs to engage internally with employees, but also externally with investors, customers and consumers, supply chain partners, and local community stakeholder groups.
Governance and executive management will need to communicate a coherent case for change and own the agenda. They must allow all stakeholders to suspend their judgements and enable them to get curious. This means upskilling employees and bringing in resources where knowledge gaps exist to build a culture to support an organisation’s transition. Transition is a shared challenge that requires people at its core. It is worth seeking out examples of other organisations in your industry or supply chain that are already on their low carbon transition. A collaboration approach leads to greater knowledge sharing and will help in building a compelling vision.
Finally, as already highlighted the language an organisation uses to describe its carbon accounting journey needs to be consistent. The right language is important as it builds trust through transparency.
Step 2 — Understand your organisation’s current carbon footprint and set a baseline. A key step in an organisation’s transition journey is to understand its historic and current carbon footprints. The goal here is to measure how much carbon dioxide equivalents an organisation emits in a given baseline year. Defining the baseline then provides your organisation with the emissions gap to bridge in its transition journey to net zero.
This sounds simple, however the activity required to understand your organisation’s carbon footprint is complex and needs input from across the whole business and supply chains. The scale of the task is neatly summed up by Thomson and Bates (above).
… businesses need to recognize how every decision they make throughout their value chain drives carbon emissions up or down — what you buy, who you buy from, how you ship it, what you invest in, how you heat your buildings, how energy efficient you are, how much you waste, how you design, make, sell and ship your product, how your employees get to work, how you store your product, how you move things round, how you finance your operations, how and where you sell your product and what people do with your product. Carbon emissions are the consequences of these decisions, and carbon reduction is much easier done at a granular level.35
It makes sense for the gathering of trend data to build a baseline to be led by the finance function. However, without the support and buy-in from cross-functional teams it could end in misleading metrics and conclusions that negatively impact an organisation’s transition journey.
To inform your organisation’s transition planning the carbon dioxide equivalent baseline should be broken down by emissions generating activities, and scopes.
Think about the GHG emissions your organisation emits from:
Making things
Plugging in
Growing things
Getting around
Keeping warm and cool36
Think about scopes
Scope 1 — direct GHG emissions
Scope 2 — indirect GHG emissions from generated power consumption
Scope 3 — indirect GHG emissions in the supply chain
The key here is to experiment with the data you have and use it to facilitate debate and change within your organisation. It will always be a journey of discovery, continual learning and upskilling. But the process should make you understand your business better.
There are also risks and opportunities in transitioning to a lower carbon business model. These need to be explored up front as part of an organisation’s ERM processes.
In setting a baseline year, the U.N.-backed Science Based Targets Initiative (SBTi) propose organisations consider the following,
Scope 1, 2 and 3 emissions data should be accurate and verifiable.
Base year emissions should be representative of a company’s typical GHG profile.
The base year should be chosen such that targets have sufficient forward-looking ambition.
The base year must be no earlier than 2015.37
Once the baseline metrics are collected and agreed, they can be used to calculate targets and build an organisation’s climate transition plan.
Step 3 — Establish a net-zero target. The Carbon Trust’s working definition of ‘net zero’ is, ‘Achieving a state in which the activities within the value-chain of a company result in no net impact on the climate from greenhouse gas emissions.’ 38 This is when all greenhouse gases being emitted into the atmosphere are equivalent to the greenhouse gases being removed from the atmosphere on a global scale.
This will need to be expressed as a verifiable and quantifiable set of Key Performance Indicators (KPIs). Transparency and accountability are key here as an organisation will need to be able to justify how they arrived at a target with their multiple stakeholders. Also important is the credibility of the targets set. In 2021, SBTi published a white paper launching a standard for corporate net-zero targets.39 It lays out the foundations for setting credible net-zero targets that are based on science.
Throughout, decision-makers will need to be able to justify how they measure ‘net zero’, because powerful stakeholders will start to hold them to account for the consequences of their actions on GHG emissions, including the timeframe of these measurements, and to what extent they are paying off their historic GHG debts.
Step 4 — Set metrics, milestones, and timelines in a plan An organisation’s climate transition plan must outline its ambitions and activity milestones that over time lead to the entity becoming a net-zero one. The transition plan must at least set out,
High-level targets to reduced greenhouse gas emissions and mitigate climate risk.
Interim targets and milestones.
Details of the steps and organisational actions to achieve the high-level targets.40
Evolving best practices in transition planning advocates setting relevant time horizons in disclosing progress. This includes setting both ‘near-term’ and ‘long-term’ targets for boundaries for scope 1, 2 and 3 emissions.41 For many organisations already on their carbon accounting journeys 2030 and 2050 have become useful key target dates.
Other elements a transition plan should look to include,
Relevant governance board oversight.
Scenario analysis to inform an organisation’s future strategic direction and financial planning.
An assessment of the climate-related risks and opportunities impacting an organisation’s plan.
The CDP, in 2021, published six principles that must be embodied within a climate transition plan. Use these to guide the construction of your plan (see table 3).
The TCFD recommendations demonstrate that an organisation’s transition plans cannot be considered in isolation. Both transition plans and adaptation plans, which address the risks and opportunities associated with the physical risks of climate change, must be fully integrated into an organisation’s strategy and business model to make a difference (see figure 2).
Any offsets or sequestration needs to be clearly articulated as part of a climate transition plan.
Carbon offsets and carbon sequestration In simple terms, this is where a polluting organisation pays somebody else to compensate for the emission of carbon dioxide into the atmosphere. However, it is a complicated, grey, and disputed area. What is not disputed is that carbon emissions will continue even if net-zero targets are achieved, and there will need to be some offsetting measures to compensate. Dieter Helm in his book, Net Zero, defines offsetting into two activities, natural sequestration, and industrial sequestration.44
Natural sequestration: the storing of carbon dioxide through trees, vegetation, soils, peat, marshes, and oceans
Industrial sequestration: the use of technology for carbon capture and storage (CCS)
Offsetting represents a mitigating activity. Advice from the SBTI in this area suggest, Companies prioritize near-term science-based targets, followed by securing and enhancing carbon sinks (terrestrial, coastal, and marine, etc.) to avoid the emissions that arise from their degradation. Examples include purchasing high-quality, jurisdictional REDD+ carbon credits that support countries in raising the ambition on, and in the long-term, achieving their nationally determined contributions.45
Finally, at Cop26 in 2021, the U.K. Government announced its intension to make the publication of transition plans mandatory.46 Its ambition is to encourage consistency for published plans, and it has set up a high-level transition plan task force to help. The task force has been given a mission to develop a gold standard for transition plans. It is due to report its findings by the end of 2022.
Step 5 — Reporting and disclosing progress against a climate mitigation plan Consensus on the frequency of reporting progress against an organisation’s climate mitigation plan is annually. The focus of the reporting should be on the climate-related targets and include any new targets as well as progress against existing targets. TCFD guidance recommends that, ‘a comparison of completed actions to planned actions in the prior reporting period’ be included within an annual report to stakeholders.47
Progress updates are usually published as part of an organisation’s annual reports or sustainability reports, with copies available on their website.
An annual update must include the disclosure of climate-related material issues. The Integrated Reporting (IR) framework defines materiality as, ‘A matter is material if it could substantively affect the organization’s ability to create value in the short, medium or long term.’48 Organisations should not only disclose how climate-related issues affect them, but also how their climate transition affects the environment and society. This process helps an organisation articulate its view of ‘outside-in climate risks’ and ‘inside-out climate risks’.49
Step 6 — Feedback loops back into business management processes There must be time to reflect on an organisation’s progress, update steps or even construct a new climate transition plan. It is about being adaptable to changing circumstances and the evolving science underpinning climate change.
Thomson and Bates recognise that, ‘the current standard for carbon reporting covers just a small part of the spectrum of carbon accounting.’ 50 Widening the organisational scope from a purely carbon reporting focus to a carbon accountability emphasis will promote integrated thinking and meaningful feedback into governance, strategy, and risk management internal processes. It also breaks down barriers allowing greater knowledge sharing and collaboration, leading to carbon accounting innovation and ultimately long-term business resilience. More importantly, it makes an organisation contemplate their contribution to the future sustainability of the planet.
The reality of carbon accounting is that although we set a final target, it will be a continuous evolutionary process.
Systems thinking and carbon accounting Climate change does not stand in isolation. The IPCC’s 2022 report on impacts, adaptation and vulnerability highlights that climate change causes risks and impacts to both human society inequality and to ecosystem biodiversity.51 The three are defined by the IPCC as ‘coupled systems’ and represent grand challenges that require the engagement of a diverse range of organisations and stakeholders across the world. Therefore, organisations, finance functions and finance professionals need to think about carbon accounting in a wider systemic light.
A ‘systems thinking’ approach will help organisations when implementing carbon accounting processes. It is an approach to problem-solving that views issues as part of a wider, dynamic system. In terms of climate change, it is the process of understanding how things influence climate change individually and, also, one another as part of a whole that includes biodiversity and inequality. It is also important to see patterns of change and the feedback loops between the three factors.
The systems thinking approach helps in the breaking down of information silos within an organisation, and embedding interdisciplinary conversations externally with supply chains, scientists, policymakers and local communities.
Climate policy priorities
Polman and Winston in Net Positive set out what they see as the most productive climate policies organisations should fight for. These include
Reducing the economy's carbon and material intensity
Set a rapidly rising price on carbon, coupled with massive shifts in subsidies from fossil fuels to clean-tech and low-carbon production methods.
Research into and funding for increased material capture (recycling, reuse, repair) to encourage a circular economy.
Scaling up
Unleash public capital that pulls more private investment into cleantech.
Reimagining food and land use
Reverse perverse agricultural policies and provide incentives for farmers to move to regenerative agriculture.
Reduce food waste.
Finding nature-based solutions
Price natural capital and conserve lands (e.g., wetlands) to prevent emissions.
Zero carbon mobility
Phase out internal combustion engines by specific dates (e.g., Norway by 2025) and offer large incentives for electric vehicles of all sizes.
Resilient, zero-carbon built environment
Set high performance standards for building, heating, and cooling systems.
Offer incentives for public transportation and mixed-use buildings.
Provide funding for adaptation and city resilience planning.
Protecting people
Ensure reskilling and training for workers displaced by the green transition.
Advocate for climate justice and the rights of vulnerable people.
Transparency
Require climate risk assessments in keeping with the Task Force on Climate-Related Financial Disclosures.
Measure product-level carbon footprints and print data on packaging and labels.52
If you only take away one lesson from this brief on accounting for carbon it should be the mindset shift required to make a difference. Thomson and Bates summarise the change perfectly,
Like all modern sciences, accounting idealistically assumes that if you quantify and mathematically model all of life on Earth accurately enough, it’s possible to formulate universal laws that provide certainty and produce outcomes that are both predictable and comparable. But the latest sustainability science is starting to reject those ideas. It acknowledges the inherent uncertainty, complexity, and non-linear dynamics of the Earth’s living systems, such as its ecology, atmospheric chemistry, and meteorology. No matter how comprehensive and advanced the quantifying and modelling by scientists, these systems are impossible to predict.53
