This article has been updated with the latest figures and references. It was originally published October 12, 2023.
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. Globally, nearly 60% of listed companies disclosed their Scope 1 and 2 emissions in 2023 – and around 42% their Scope 3 emissions.
With the global proliferation of both mandatory and voluntary emissions reporting programs, this reporting gap is likely to shrink further, as more firms measure and disclose their emissions. Taking lessons from GARP’s own GHG accounting project, this article shares practical advice and guidance for getting started with your own firm’s GHG accounting.
The Practical Challenges of GHG Accounting
In an earlier 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: determine 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 are often 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
Depending on the size of your firm, GHG accounting may require 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, operational and/or accounting functions.
At the start of the project, it is wise to ensure 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 the 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 for example what will happen after the GHG inventory (i.e., the calculating phase) has been completed. How will the results be verified? Will this require an external consultant, and if so, has this been cleared with your financial controller? Asking these questions early on will help to align internal stakeholders and pave the way for a smooth project.
Tip #3: Adapt to the Best Available Data
GHG accounting can involve significant amounts of both internal and external data. For example, calculating the emissions from powering your offices requires knowing both your office’s 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).
Now imagine that 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 is available at the time.
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? Where’s the source for this data?”
Carefully documenting any changes made to the data — as well as cataloguing 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 of the process 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 is more essential than ever that firms are able to reliably measure their GHG emissions. Since 2014, the number of emissions cap-and-trade systems operating worldwide has nearly tripled (from 13 to 36), with 14 more currently under development. According to the World Bank, around 24% 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 to effectively manage risks and pursue opportunities.
Furthermore, the International Sustainability Standards Board’s inaugural standards — released in June 2023 and set to become the global baseline for financial firms — will accelerate the uptake of mandatory GHG 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 Assistant Vice President 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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