Companies and organizations are facing increasing pressure from regulators, investors, customers, and other stakeholders to measure their carbon footprint and limit emissions. In the U.S. several regulations and pending regulations would require public companies to report their emissions, including California’s SB 253, the SEC Climate Disclosure Rule, and proposed regulations in Washington and Illinois.
So, how can organizations answer this call?
Greenhouse gas (GHG) accounting prepares organizations to report emissions along with other non-financial and financial metrics to stakeholders. Here we provide an introduction to GHG accounting: what it is, what accounting standards and reporting frameworks exist for it, best practices, and challenges and solutions.
CONTEXT: GHG EMISSIONS AND ACCOUNTING
GHG emissions are categorized into three different scopes:
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- Scope 1: Sources that are owned and/or controlled by an organization such as emissions associated with fuel combustion in boilers, furnaces, and vehicles.
- Scope 2: Indirect emissions associated with purchased electricity, steam, heat, or cooling.
- Scope 3: All other emissions associated with the business value chain.
GHG accounting is a process used to measure, manage, track, and report an organization’s GHG emissions or carbon footprint, which includes the total amount of GHG emissions generated by a business’s direct and indirect actions per the scopes outlined above.
Organizations use GHG accounting to manage their carbon footprint and understand how their business activities contribute to climate change over time. This is a crucial step for organizations to understand their climate impact so they can set goals to limit emissions, meet targets such as net zero, and align with the Paris Agreement goal to limit global warming to 1.5 degrees C.
EXISTING GUIDANCE: GHG ACCOUNTING STANDARDS
Where can you start? Luckily, there are existing standards to guide GHG accounting efforts across industries.
GHG Protocol: The world’s most widely used GHG accounting standard for calculating GHG emissions is the Greenhouse Gas Protocol (GHG Protocol), which “establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains, and mitigations actions.”
PCAF: The Partnership for Carbon Accounting Financials (PCAF) framework is another widely used accounting standard, akin to the GHG Protocol but focused on guidance for financial institutions and investors to measure GHG emissions from investments and loans.
EXISTING TOOLS: DISCLOSURE AND REPORTING FRAMEWORKS
The way that organizations disclose and report GHG emissions varies across industries, guided in large part by three frameworks.
GRESB: Among commercial real estate (CRE) companies, GRESB is a commonly used reporting framework for benchmarking and improving on asset sustainability to protect shareholder value. GRESB has both a performance and management piece that covers environmental, social, and governance (ESG) topics adapted from several other reporting frameworks.
ISSB: Investors, lenders, and insurers, regardless of industry, are very interested in risk, and increasingly the notion of risk related to climate change. The International Sustainability Standards Board (ISSB) standards are intended to be the foundation for a comprehensive global baseline of sustainability disclosures focused on the needs of investors and financial markets. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium, and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. Both standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
CDP: The largest platform for carbon disclosure, Carbon Disclosure Project (CDP), measures risks and opportunities related to climate change, water security, and deforestation. CRE organizations can consider disclosure to CDP to understand how their emissions compare across peers and within the industry.
GETTING STARTED: ORGANIZATIONAL BOUNDARIES
To start establishing a GHG inventory, the reporting organization establishes an organizational boundary, which determines the control methodology that will be used across the inventory. There are three main categories for the approach: operational control, financial control, and equity share.
Operational Control: An organization would account for 100% of GHG emissions that it has operational control over. This means an organization’s Scope 1 and 2 direct and indirect emissions would include assets under the company’s control and Scope 3 emissions would include assets the company does not control even if it wholly or partially owns the asset.
Financial Control: An organization would account for emissions from operations where it has financial control or the ability to direct financial and operating policies. The reporting organization retains the majority of risks and rewards of ownership of the operation’s assets.
Equity Share: An organization accounts for emissions from its operations based on its share of its equity in the operation. This is typically the organization’s percentage of ownership.
BEST PRACTICES
Once an organization has identified its organizational boundary approach, it’s ready to evaluate emission sources applicable to its business and collect operational data. The GHG protocol provides guidance on how to develop a GHG inventory, as well as calculation methodologies to quantify GHG emissions associated with operational activity data.
Overall carbon accounting best practices include:
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- Maintain alignment with GHG Protocol and relevant reporting frameworks.
- Conduct an evaluation of Scope 3 categories and identify applicability.
- Establish data management processes and keep detailed records of all data sources, calculations, and methodologies.
- Validate and aggregate your dataset.
- Calculate emissions based on data quality and availability.
- Develop and maintain an Inventory Management Plan.
CHALLENGES AND SOLUTIONS: DATA MANAGEMENT AND SCOPE 3
If you encounter data management challenges in your GHG accounting efforts, don’t worry, you’re not alone. Collecting activity data on Scope 1, 2, and 3 categories can be a large undertaking that requires coordination across organizations and supply chains, which can result in complex data sources that need to be validated and aggregated for accuracy. These data challenges can include:
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- Double counting
- Incomplete data
- Data quality
- Access to data
- Data management of sources and processes
The nuance involved with CRE’s GHG accounting as it relates to leased spaces, transfer of new and existing buildings, and estimating supply chain emissions can be especially complicated and challenging – but it doesn’t have to be! Stok works with our CRE clients from the outset of a client’s GHG accounting journey to being on track to hitting their Zero targets, ranging in support including educational workshops on GHG accounting, GHG inventories and Inventory Management Plans, framework and disclosure reporting such as GRESB and CDP, and setting Science Based Targets, to name a few. We develop an iterative process with clients, working in lockstep to make these sometimes challenging and complicated topics easy to understand and implement in an organization’s climate journey.
Wherever your organization is on its climate journey, we recognize that this is vital and complex work, especially when it comes to understanding and reporting Scope 3 emissions. Stok can help your organization develop or improve your GHG inventory and support reporting to third-party frameworks, regulatory agencies, and public facing stakeholders. Reach out to discuss how we can collaborate on your decarbonization efforts.
