We become what we invest in
Written in collaboration between Cassie Jo and RedPepper Mergers
A lot has been written about Net Zero and Carbon Accounting over the last years. This article aims to provide you, the reader, with a simple overview and context of these concepts. (We understand that there are many nuances to this systemic-change topic but have simply tried to summarise the key touchpoints).
NET ZERO
Becoming net zero is 1 of the 10 challenges the world faces to secure a sustainable future. The significance of this goal was amplified as recently as COP28 where countries concluded by marking the obvious need to ‘transition away from fossil fuels’, the largest contributor to global warming and an essential factor in reducing carbon emissions to net zero.
Historically, the concept of net zero global CO2 emissions was adopted by the Paris Agreement after being flagged in the 5th Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC) and the United Nations Framework Convention on Climate Change (UNFCCC) Structured Expert Dialogue.
The Paris Agreement became a legally binding international treaty on climate change. It was adopted by 196 parties at the UN Climate Change Conference (COP21) in Paris, France, on 12 December 2015 and entered into force on 4 November 2016.
Nations and businesses worldwide are gradually aligning with the Paris Agreement, aiming to restrict global warming to below 2°C above pre-industrial levels and they continue to pursue efforts to limit warming to 1.5°C, by 2050. Supportively, China’s absolute carbon emissions are set to begin dropping in 2024. The importance of effective carbon accounting for monitoring and assessing global carbon emission reduction progress (and statements) has never been more evident.
CARBON ACCOUNTING
Carbon accounting involves measuring an organisation’s carbon impact resulting from its business activities which directly or indirectly produce greenhouse gas (GHG) emissions. Depending on the nature of the industry GHG emissions can be divided into waste and by-products. This applies to industries such as manufacturing, agriculture, mining and food processing. Emissions are primarily quantified in tonnes of CO2 equivalent (tCO2e) in order to standardise the impact of non-carbon dioxide related emissions such as methane (CH4) and nitrous oxide (N2O). Computations of smaller quantities are expressed in kilograms. For organisations, especially those navigating mandatory reporting and regulatory requirements, carbon accounting is crucial.
The initial phase involves establishing a baseline year to calculate that year’s emissions as a reference point, laying the foundation for setting measurable targets, pledges and goals to consistently reduce emissions to zero.
SCIENCE BASED TARGETS INITIATIVE
The Science Based Targets Initiative (SBTi) offers the most rigorous corporate net zero guide for companies. Their Science Based Targets are company adopted targets to lower GHG emissions in line with the recommended decarbonisation described in the AR5 of the IPCC. Once emissions are reduced, permanent removal of the carbon emitting process informs the last activity stage (versus offsets). The SBTi additionally provides sector by sector advice for achieving the reduction levels necessary for carbon mitigation with amounts of emissions reduction and timelines dependent on each sector’s current and projected emissions. It does however require struct evidence based and auditable carbon reduction claims.
Commercial Synopsis
In order to reach net zero, companies must understand their carbon footprint, design their climate roadmap and implement their climate action plan. We can’t act impactfully if we don’t know where we should spend our time and energy for the best (triple bottom line (ESG) measured) results. This article is the start of your journey.
GHG PROTOCOL, SCOPES & THE CDP
Central to the carbon accounting framework is the GHG Protocol, an international standard developed by a multistakeholder partnership led by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The GHG Protocol Corporate Accounting and Reporting Standard provides an essential guide to carbon accounting for companies, using methods of computation designed to measure three emissions categories classified as Scopes 1, 2 and 3. Over 90% of the world uses this measurement and reporting framework.
- Scope 1 refers to direct emissions generated by company-owner or controlled facilities and vehicles (within the company’s decision-making influence)
- Scope 2 comprises indirect emissions from electricity procurement, including steam, cooling, and heating, purchased for company use but not produced directly by the company itself.
- Scope 3 pertains to indirect emissions from upstream and downstream activities. These include:
- Upstream emissions (purchased goods and services, capital goods, fuel and energy related activities not included in Scope 1 or Scope 2, upstream transportation and distribution, waste generated in operations, business travel and employee commuting)
- Downstream emissions (downstream transportation and distribution, processing of sold products, use of sold products, end-of-life treatment of sold products, downstream leased assets, franchises and investments).
To calculate carbon emissions, a company multiplies its activity data (expressed using an input unit (e.g. litres, kilometres) by that item’s emission factor to produce the CO2 emissions per activity.
The CDP (formerly known as the Climate Disclosure Project) is an internationally recognised not-for-profit environmental impact database collecting information on GHG emissions through questionnaires and publishing CDP Climate Change Reports. It supports businesses (as well as cities, regions and governments) with their carbon disclosures. The results can be accessed by investors. Some authorities may mandate CDP reporting, but if not, a company can independently report its data as a self-selecting company (SSC).
UNLOCKING CORPORATE VALUE THROUGH CARBON ACCOUNTING
In addition to fulfilling current and anticipated legislative mandates, such as the EU’s Corporate Sustainability Reporting Directive (CSRD) which will oblige more companies to disclose data on their Scope 3 emissions, the strategic implementation of a robust decarbonization plan, anchored in meticulous carbon accounting, presents an important business opportunity. This approach not only identifies and mitigates emissions hotspots but also for example yields substantial reductions in energy, waste, material and water expenditure, thereby improving profit.
LEVERAGING CARBON ACCOUNTING FOR INVESTOR CONFIDENCE
Carbon accounting and reporting serve as pivotal indicators for investors assessing both immediate investment risk and the long-term return outlook. Investors increasingly scrutinize companies on their ability to manage carbon emission risk and overall environmental performance. The Task Force on Climate-Related (and more recently Nature-Related) Financial Disclosures, conceived as an investor-centric environmental reporting initiative, underscores the growing importance of transparent and comprehensive carbon accounting practices.
Beyond regulatory compliance, quality data collection and analysis play an essential role for meeting net zero targets. Prioritizing the use of primary data from relevant supply chains where available ahead of secondary data improves accuracy, credibility and transparency when calculating carbon footprints.
CARBON OFFSETTING & REMOVAL
If company emissions cannot be eliminated entirely through reduction efforts, then carbon offsetting and removal can be an option to achieve net zero.
Carbon offsets are managed through a range of Carbon Credits by various mandatory and non-mandatory carbon markets. Carbon offsetting should be a last resort reserved for unavoidable carbon emissions.
Carbon Capture and Storage (CCS) is a recent method of carbon removal. While investment opportunities exist in the sphere of CO2 removal technologies, these technologies have not yet been scaled and remain unproven and are not a first-step recommendation for decarbonisation plans.
CONCLUDING POINTS
The impacts of not reaching net zero would be increased global temperatures leading to unpredictable weather patterns, costs tied to resources and insurance and generally higher risks for businesses. In the extreme, it would ultimately lead to water scarcity, heightened resource competition, increased frequency of extreme weather events, climate-induced migration, social instability, and loss of life.
However, the opportunities for creatively lowering an organisation’s emissions include financial resilience and competitiveness, reputational and brand elevation and avoidance of environmental destruction. There is even an opportunity for helping nature regenerate and thrive – rather than just survive.
Given these commercial opportunities, many countries are increasingly monitoring greenwashing and imposing punitive measures on companies that are making hollow claims or not doing “the right thing”.
In the words of UN Secretary-General António Guterres, ‘Private sector commitments to net-zero cannot be a mere public relations exercise’.
We encourage all companies to engage immediately in sustainable initiatives and projects. Our collective future is being carved out by our daily decisions and happens as soon as tomorrow.
And if you don’t know where to start, no matter how large or small your company, contact www.simpli.today. We make Sustainability Simple. Today.
ACADEMIC
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Ascui, F., & Lovell, H. (2012) ‘Carbon accounting and the construction of competence’ in Journal of Cleaner Production, 36, 48-59.
Bolton, P., & Kacperczyk, M. (2021) ‘Do investors care about carbon risk?’ in Journal of financial economics, 142(2), 517-549.
Ekardt, F., Bärenwaldt, M., & Heyl, K. (2022) ‘The Paris target, human rights, and IPCC weaknesses: legal arguments in favour of smaller carbon budgets’ in Environments, 9(9), 112.
GHG Protocol (2013) ‘Technical Guidance for Calculating Scope 3 Emission (version 1.0)’ in Greenhouse Gas Protocol. Available at: https://ghgprotocol.org/sites/default/files/2023-03/Scope3_Calculation_Guidance_0%5B1%5D.pdf.
Hsueh, L. (2019) ‘Voluntary climate action and credible regulatory threat: Evidence from the carbon disclosure project’ in Journal of Regulatory Economics, 56(2-3), 188-225.
Munthe Nilsson, A., & Nilsson, K. (2023) ‘Adapting to the CSRD and Reporting of Scope 3 Emissions: Strategies for Newly Affected Companies: A Study of the Challenes and Potential Solutions for Companies Newly Affected by the CSRD’ in KTH Royal Institute of Technology, 1-138.
Nisanci, D. A. (2021) ‘FSB Task Force on Climate-related Financial Disclosures’ in World Scientific Encyclopedia of Climate Change: Case Studies of Climate Risk, Action, and Opportunity Volume 3 (pp. 3-8).
SBT (2023) ‘The Corporate Net-Zero Standard’ in Science Based Targets. Available at: https://sciencebasedtargets.org/net-zero.
UNFCCC (2015) ‘Report on the structured expert dialogue on the 2013-2015 review’ in Subsidiary Body for Scientific and Technological Advice & Subsidiary Body for Implementation, United Nations Framework for Climate Change. 4 May 2015. Available at: https://unfccc.int/sites/default/files/resource/docs/2015/sb/eng/inf01.pd
UN (2023) ‘Causes and Effects of Climate Change’ in United Nations. Available at: https://www.un.org/en/climatechange/science/causes-effects-climate-change
Wise, J. (2023) ‘COP28 decision to “transition away” from fossil fuels is hailed as milestone but loopholes are decried’ in The BMJ. 13 December 2023. 383, 2941. DOI:
10.1136/bmj.p2941.