How do you hold a corporation to account? If it’s financial information you’re interested in, then it’s relatively straightforward – in theory at least. Around the world, companies big and small must submit an annual report and accounts. Stakeholders can peruse profit and loss accounts and balance sheets to see if a business has done what it said it would.
But what about data on carbon emissions? The last few months have seen a slew of promises from companies committing to reduce their carbon footprint. How will stakeholders hold these companies to account? And, as a business leader, how can you measure your impact and take climate-positive decisions?
The difficulty with carbon reporting
The rules for financial reporting are well-established and consistent. Although national variations remain, an international accounting language, the International Financial Reporting Standards (IFRS), has been adopted by more than 120 countries. On a more fundamental level, the internal processes associated with financial reporting are well understood, with many software solutions catering for companies of all shapes and sizes.
The same is not the case for reporting on carbon emissions. Legislation is patchy and inconsistent, and it’s far from clear which operations, activities and transactions should be included in climate-related disclosures.
As an example of the lack of legislative clarity, the UK’s planned rules for mandatory climate reporting require that organisations report on their direct emissions (scope 1) and the indirect emissions resulting from their purchase of electricity or energy (scope 2). But reporting on emissions in the supply chain (scope 3) is only required ‘if appropriate’. Duncan Oswald, Head of Climate Science at carbon accounting software company Spherics, points out that, “For non-financial groups (i.e. all of industry), there is no supplemental guidance as to whether scope 3 reporting is ‘appropriate’. Scope 3 emissions often account for the lion’s share, but there is currently no requirement to include them”.
Another issue is the lack of infrastructure and expertise to measure emissions within companies. This is particularly challenging for smaller businesses.
What is driving change?
The big news coming out of COP26 was the announcement that IFRS will develop international sustainability standards. This raises the prospect of a global carbon reporting language, like we have for financials. However, this is only the very first step in the process.
Instead, change is being driven by the demands of stakeholders. In Oswald’s words, “What is actually driving developments in carbon accounting is the people who work across industry and the public sector”. He argues that employees won’t stand for employers who ‘obfuscate and delay’ when it comes to carbon emissions.
Investors too are demanding change. For them, “the risk of putting your money into a business which doesn’t treat this situation like an adult would, is just too high”.
What solutions are there?
In Oswald’s view, the ideal solution would be an escalating carbon tax. This would remove the need for complicated carbon accounting systems altogether, as it would ‘let the market do the sums’. However, he concedes that this is not likely in the short term. A ‘carbon ledger’ that applies the principles of blockchain to carbon credits as they pass down the value chain is another potential solution. But this would require the co-operation of fossil fuel suppliers, a prospect towards which Oswald expresses scepticism.
For the time being, the next best solution is to back-calculate emissions. This approach can only provide estimates and creates complexities such as ‘double-counting’ – a situation where emissions by suppliers at the top of the chain are counted multiple times by companies further down. Nonetheless, this is the approach that companies are currently taking.
This is why we are seeing a spike in carbon-counting software innovations at Springwise.
Carbon accounting innovations
Spherics’ platform starts with a spend-based approach to carbon accounting, automatically deriving information from financial accounts. It then allows users to add activity data, if it is available, to improve the data quality. This solution is particularly attractive for small and medium businesses, costing as little as £9 per month.
Swedish company Normative also draws emissions data from financial accounts. Its platform provides several extra products such as an emissions hotspot analysis highlighting which purchases have the highest carbon footprint.
UK company Foodsteps is more specialised, focusing on the food industry. Its tech makes it simple and affordable to calculate the footprint of food and drink products from farm to fork.
Finally, German company Climatiq takes a different approach. Rather than an off-the-shelf solution, it provides organisations with data infrastructure, including APIs connected to an open database of emissions factors. This allows companies to build their own carbon-counting applications.
The societal need for carbon accounting solutions will only grow as the climate crisis becomes ever more pressing. And the commercial opportunity is huge. The market for carbon accounting software is expected to grow by $6.38 billion during 2021-2025. It’s therefore no surprise that we are seeing many platforms vie to become the ‘Xero of carbon’.
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Written by: Matthew Hempstead
Editor’s note: James Bidwell, Chair of Springwise, is an investor in Spherics but his views are not represented in this article.
24th November 2021