Transition Risk - Green Finance & Sustainable Business

Greenhouse Gas Accounting: 5 Tips for Getting Started

Greenhouse gas accounting can be a challenge, even if you understand the key principles. This article contains practical advice for getting started at your own firm.

Thursday, October 12, 2023

By Tom Strachan

Greenhouse gas (GHG) accounting is a crucial first step in mitigating GHG emissions, which is essential to the long-term health of our environment and economy. Yet a recent study showed that only 40% of major firms are disclosing their scope 1 and 2 emissions — and only 24% their scope 3 emissions.

With the global proliferation of both mandatory and voluntary emissions reporting programs, this gap is likely to shrink as more firms measure and disclose their emissions. Taking lessons from GARP’s own inaugural GHG accounting project, this article shares practical advice and guidance for getting your firm’s own GHG accounting off the ground.

The Practical Challenges of GHG Accounting

In a recent article, “What Is Greenhouse Gas Accounting and Why Is It So Important?”, we explained the basic principles of GHG accounting, how it works and when it is used:

  • GHG accounting is the process of calculating, recording, and reporting the emissions that occur throughout an organization’s value chain.
  • There are four main steps: select which activities’ emissions to measure; gather data relating to those activities; calculate the activities’ emissions; and verify and report those calculations.
  • Firms may use GHG accounting for a variety of reasons, such as meeting regulatory requirements, transition risk management, pursuing transition-related opportunities and participation in carbon markets.

Anyone new to GHG accounting or setting up a firm’s GHG accounting for the first time is likely to experience numerous challenges. The following tips offer practical advice on how to solve or avoid some of these common challenges.

Tip #1: Understand Your Reporting Standard

GHG-related reporting standards can be far from straightforward. The GHG Protocol Corporate Standard — the most widely used voluntary GHG accounting standard today — is over 100 pages long. The U.K.’s Streamlined Energy and Carbon Reporting, which is mandatory for certain large firms, has a guidance document that is over 150 pages long.

All GHG-related reporting standards will have fundamental similarities, whether they are mandatory or voluntary. However, no two are identical, and each will have a unique set of rules and requirements such as the methodology that should be used and the business activities that should be included.

Rushing into the project without referring to the appropriate documentation will very likely end up causing delays and revisions. Take the time to familiarize yourself with the reporting standard to avoid nasty surprises down the line. Guidance documents will also often contain advice and tools for practitioners that may help you throughout the process.

Tip #2: Engage Your Internal Stakeholders Early

GHG accounting requires input from many different internal stakeholders throughout its various stages. For example, the initial activity selection phase may require conversations with senior leadership to help set the scope of a voluntary reporting project. Similarly, the data collection phase may require significant collaboration with your firm’s administrative, operations and/or accounting functions.

For this reason, it is wise to ensure, at the start of the project, that your key internal stakeholders have an adequate understanding of the project and their possible role within it. This is partly to confirm that you will have access to everything you need to complete your project, but it will also reduce the likelihood of obstacles appearing later in the project, such as reputational sensitivities or a lack of resources.

Consider what will happen after the GHG inventory (i.e., the calculating phase) has been completed. How will you verify the results? Will an external consultant need to be hired and, if so, have you cleared this with your financial controller? Asking these questions early on will help you align internal stakeholders and pave the way for a smooth project.

Tip #3: Adapt to the Best Available Data

GHG accounting involves significant amounts of both internal data and external data. For example, calculating the emissions from powering your offices requires knowing both your electricity consumption (i.e., from energy bills) and the emissions associated with each unit of electricity produced by your grid (i.e., from publicly-listed grid-specific emissions factors).

Imagine your firm has offices in five different countries. Different electricity providers may have different billing cycles; they may use different units, round to a different number of significant figures, or may only have national emissions factors, rather than regional. Be prepared not only to re-format and convert data, but also to fill in any gaps or discontinuities with what’s available to you.

Although use of the best available data is generally expected, reporting standards will often contain specific guidance for situations where only sub-optimal data is available.

Tip #4: Document Everything

This applies to the project as a whole, but is especially true during the calculating phase. By the time the data formatting and gap-filling are completed, there will be too many details and nuances to remember. “Why did I average that data point? Is that figure an estimate? Which units did I convert from again? Where’s the source for this data?”

Carefully documenting any changes made to the data — as well as cataloguing your data sources — will save many headaches, especially during the verification phase. Moreover, a clear and transparent methodology is an essential element of the reporting phase and a key indicator of the reliability of the inventory overall.

Many reporting standards emphasize the need for firms to justify their inventory-related decisions, such as why certain activities have not been included or why sub-optimal data has been used. Taking note of these decisions as you go will make this step much easier.

Tip #5: Iterate

While it is important that firms are ambitious in their attempts to quantify and disclose their emissions, many will underestimate the time and resources required to accurately assess even a portion of their total emissions. Whether you cast a wide net at first, or start small and expand, there will almost certainly be room for improvement — for example, substituting averages and estimates for primary data or assessing additional business activities. Understand that GHG accounting is a repeat commitment and plan accordingly.

Parting thoughts

It seems more important than ever that firms are able to reliably measure their GHG emissions. For example, since 2014, the number of emissions cap-and-trade systems operating worldwide has more than doubled (from 13 to 28). According to the World Bank, around 23% of global emissions are now covered by carbon taxes and emissions trading systems, up from 7% in 2013.

This global policy trend is both a source of risk for large emitters and of opportunities for firms who are ahead of the curve in their transition to net-zero. In both cases, firms need to understand their GHG emissions in order to manage these risks and pursue these opportunities.

Furthermore, the International Sustainability Standards Board’s recently released inaugural standards — which are set to become the global baseline for financial firms — is likely to accelerate the uptake of mandatory reporting requirements, even in jurisdictions without carbon taxes or cap-and-trade mechanisms.

If you want to learn more about GHG accounting, carbon markets, and climate risk management at financial firms, consider signing up for our Sustainability and Climate Risk (SCR®) Certificate.

Tom Strachan is an analyst at the GARP Risk Institute. He holds a BA in Geography from the University of Exeter and an MSc in Environmental Technology from Imperial College London.

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