Decoding carbon accounting

It's crucial to understand the significant impact businesses have on the environment — and accounting for carbon emissions is a fundamental step in this process.

Reporting carbon emissions is increasingly becoming another compliance measure mandated by regulators. Carbon accounting is the process of arriving at these numbers and accountants can serve as invaluable advisors in the process of helping businesses ensure their emissions reporting is in order. 

This importance is amplified when dealing with small businesses supplying goods and services to larger entities. Many large companies are updating their business operations to meet new compliance requirements, including product life cycles and the carbon emissions from their supply chains. Suppliers unable to provide this information risk exclusion from those supply chains and future contracts.

What is carbon accounting?

Carbon accounting is the name given to the process of evaluating an organization's carbon footprint by calculating its carbon-based greenhouse gas emissions. Essentially, carbon accounting is a mathematical process familiar to many accountants: Emissions are calculated by multiplying business data (such as employee travel data or office electricity usage) by an "emissions factor," or the average emissions generated by that activity. Conducting the carbon accounting process for a company's entire operations yields its carbon footprint. 

Understanding a business's carbon footprint

A carbon footprint captures and summarizes the total amount of GHGs that are produced by a business's activities. Until recently, carbon footprints have typically been calculated and recorded on large, complex spreadsheets. However, streamlined software solutions are now managing the calculations from start to finish, helping simplify the process.

Emissions within a company's carbon footprint are categorized into three scopes. Scope 1 encompasses direct emissions from sources owned or controlled by the company, such as driving petrol vehicles, powering diesel generators, or operating fuel-powered forklifts. Scope 2 includes emissions from purchased electricity over which a business has control. Finally, Scope 3 consists of indirect emissions resulting from a business's operations, generated by the goods and services within its supply chain, including activities like business flights, third-party delivery services, cloud hosting services, and employee commuting.

What are GHGs and why should you measure them?

Understanding and tackling the climate crisis hinges on managing greenhouse gas emissions, which are atmospheric gasses responsible for global warming and climate change. Although most GHGs occur naturally, human activities have caused a troubling rise in both their emission levels and concentration in the atmosphere. This increased concentration, in turn, has led and will continue to lead to adverse effects on the climate, including increases in the frequency and intensity of extreme weather events such as floods, droughts, wildfires and heat waves. These events not only impact millions of people but also result in substantial economic losses amounting to trillions of dollars.

Navigating the right standards and methodologies 

Carbon accounting can be a complex process, but thankfully global standards have been developed to help ensure that the way that businesses measure and account for carbon emissions is consistent and comparable. The Greenhouse Gas Protocol stands as the most prevalent global framework, offering a corporate standard that provides guidance on the methodology and procedures for embarking on this endeavor.

Why is this important?

A global transition toward a low-carbon economy is underway, driven by legislation and consumer, business and investor preferences. At its core, carbon accounting is an important step to better understand and be transparent about your business's environmental impact. A company's carbon footprint is increasingly becoming a key indicator for external stakeholders that may be assessing your company as a potential customer, business partner or investor.

The time is now to proactively engage in this process, securing your position in low-carbon supply chains and the broader green economy for the future. 

How accountants can drive carbon accounting success 

Accountants serve as essential guides and advisors for small businesses navigating the complexities of carbon accounting and evolving legislation. Accountants aid organizations in grasping the significance of relevant data to their carbon footprint, help streamline data collection methods, and ensure accurate calculation of greenhouse gas emissions. In some cases, this includes enhancing clients' data infrastructure to provide more thorough insights into emissions across their operations. Given the complexities of carbon accounting processes, accountants can help simplify this process and set realistic and achievable reduction targets. 

Understanding emissions is critical for establishing sustainable supply chains and mitigating high energy costs. By identifying areas of the business that produce high carbon emissions, accountants can work with businesses to redesign processes or operations to minimize their environmental impact. Additionally, carbon accounting can help small businesses reduce their energy consumption and waste across operations, which can help lower operational expenses. Accountants can also assist small businesses in integrating carbon accounting information into financial statements, which enhances transparency and helps provide a clearer picture to investors and other external stakeholders.

Ultimately, by facilitating carbon accounting processes and promoting sustainable practices, accountants can enable small businesses to measure and reduce their environmental footprint and thrive in an increasingly environmentally conscious business landscape.