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5 Carbon Accounting Challenges and How Address Them
The complexity and challenges of carbon accounting practices exceed most current in-house capabilities, leading to the need for outsourcing help and additional costs in order to keep an organization in line with changing regulatory, market, and investor expectations of environmental due diligence. The main challenges include errors in calculations and in collecting data, the definition of emissions boundaries, a lack of credible standardization, and more. Overall, addressing these challenges requires a combination of standardized methods, robust data management systems, transparent reporting, and a proactive approach to managing risks and opportunities related to greenhouse gas emissions.
1. Lack of a credible standardization
While overarching trusted protocols do exist for carbon accounting such as the GHG Protocol, there is still a lack of one definitive calculation model, emissions data collection procedure, and a consistent method of determining scope boundaries. Most areas of the accounting process are subject to strong recommendations and guidance rather than required methodologies, and companies are given significant discretion when it comes to where and how they source their data, and the use of estimation rather than primary data. Not only does this lead to greenwashing down the line, subjecting companies to possible legal trouble as regulations begin to crack down on the reporting of these metrics, but the rampant body of carbon inventories built mainly on estimates leads to results that are incomparable. This is a sizable issue for investors who value this data but cannot trust the data across companies and industries to be comparable, nor can climate change be adequately addressed when emissions accounting is wrong.
The GHG protocol method is widely embedded in many global climate agreements, yet many argue that the protocol falls short when it comes to its scope 3 standards, allowing a company to estimate the scope 1 emissions of all direct and indirect suppliers and customers with industry average data. This method is subject to possible double-counting flaws and greenwashing as more carbon-clean companies help boost the industry average emissions of more polluting firms.
2. Defining boundaries for greenhouse gas accounting
One challenge in greenhouse gas accounting is determining which emissions should be included and which should be excluded. This can be difficult because emissions can occur at different points in the supply chain, and it may be unclear which party is responsible for them. There are significant differences between the definition of organizational boundaries required by US GAAP (Generally Accepted Accounting Principles) relative to those required by the GHG Protocol (e.g., financial control, operational control, or equity share). To address this challenge, organizations need to thoroughly understand and comb through the available standardized methods and tools, such as the GHG Protocol, to determine their scope and boundary of emissions. Companies may also consider outsourcing talent in order to cover their boundaries accurately.
3. Collecting accurate & quality source data
Gathering emissions data manually is not only cumbersome for corporations but error-prone and lacks standardization. Many companies fail to collect activity data in real-time consistently over time, do not undergo emissions baseline calculations at the outset of GHG accounting adoption, and fail to check data progress against checkpoints on a quarterly, yearly, or monthly basis. In order to combat manual entry errors, look for sophisticated energy and sustainability data management solutions that continuously collect environmental data over time straight from the source (meter level), have goal tracking capabilities, internal audit and data checking functionality, and can compute GHG accounting based on current standards and verified calculation methods.
Most companies are fairly accurate about the emissions they directly produce (Scope 1 of carbon accounting), but accuracy is significantly reduced when collecting data from supply chain emissions or sold goods (all indirect emissions: Scope 2 & 3). Companies have little control over their access to and quality control of indirect emissions data, which is managed and distributed at the discretion of other corporations within supply chains. Scope 3 data can be notoriously difficult to acquire from suppliers and downstream business chains, who may not currently collect the necessary GHG data or who avoid requests for any data they deem unsavory to disclose. Because gathering indirect emissions data from other companies is so difficult, many frameworks and standards allow the use of industry average data to represent the direct emissions of a company’s specific suppliers, rather than primary source data. Currently, many companies skip line item accounting of scope 3 emissions, which may be an informed decision, if scope 3 is the deterrent for undergoing all levels of carbon accounting in the first place. Corporates new to GHG accounting should begin with reliable scope 1 and 2 data and integrate scope 3 later on if accurate supply chain valuation data is not accessible to your business or when better accounting standards are introduced. Do not rely on opportunistic and unreliable scope 3 reporting based on inaccurate industry average data. New legislation on climate-related disclosures from the SEC even provides fail-safe loopholes for scope 3 accounting, essentially acknowledging that these disclosures may be unreliable at this moment in time.
4. Errors in calculations and reporting
In carbon accounting, there is a high amount of measurement uncertainty and error. Many firms are using models that are not representative of true emissions inventory and human error is often introduced through the use of spreadsheets to conduct the accounting calculations. This is costly both in terms of mistakes and time. Corporations should seriously consider the use of third-party software and data tools to collect and dynamically calculate complicated carbon accounting metrics. Calculations completed on data management platforms also allow for more effective auditing and verification of data.
5. Ensuring transparency and audit credibility
There is no uniform guidance on auditing GHG emissions, which can leave corporations questioning what standards they need to meet in order to pass credibility standards and third-party verification or if assurance on emissions accounting is necessary in the first place. With consolidated sustainability reporting regulations and guidelines just around the corner in 2023 such as the SEC proposal, International Sustainability Standards Board (ISSB), and European Sustainability Reporting Standards, auditing sustainability data will become more mainstream as elements of emissions accounting become tied to the stringent standards of financial reporting. Organizations who have undergone or are planning to undergo GHG accounting should do so with the intent to acquire independent, third-party assurance alongside it for accuracy and reliability sake if not regulatory pressure.
Solutions to keep an eye on:
- Technology provides more consistency and comparability of reported data
- More guidance documents for some specific sectors and new methods that cover entire supply chains of materials
- Standardization of sustainability reporting frameworks such as CDP, SASB, TCFD, and GRI that all, at least in part, provide direction and guidance around carbon accounting and inform carbon accounting policy
- Better defined scope 3 boundaries that eliminate the greenwashing advantages of the use of secondary industry average data for scope 3 accounting
- Use of AI systems to replace manual spreadsheet data entry
- Look for systems that address issues in measurement uncertainty: Data should be regularly updated to allow comparisons across reporting periods for benchmarking progress and include viable baseline year emissions data for progress comparability.
WatchWire provides full-service carbon accounting, tracking Scope 1, 2, and 3 emissions, renewable energy credits (RECs), global warming potential, and more. To discover more about WatchWire and its capabilities, you can visit our website, blog, or resource library, request a demo, or follow us on LinkedIn, Instagram, or Twitter to keep up-to-date on the latest energy and sustainability insights, news, and resources.
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