The Future of Emissions Accounting: What to Expect Following the Launch of ISSB
The Greenhouse Gas Protocol is a standard used by many organisations to measure and report their greenhouse gas baselines, although updates to carbon accounting could be on the horizon. Here’s what you need to know about carbon accounting methods and what your business can do to prepare for any changes to these standards in the future.
Most organisations that report their Greenhouse Gas (GHG) emissions currently use the methods outlined in the GHG Protocol to account for these emissions. This approach focuses on accounting for the Scope 1, 2 and 3 emissions of organisations, i.e. both their direct and indirect emissions. Although thorough, some argue it can also leave a large margin for error and data manipulation.
Other climate change accounting systems have recently been suggested to solve the problems of the scope accounting method, such as that put forward recently in the Harvard Business Review. The authors suggest an E-liability system, where financial accounting techniques are used with ledger technologies to tackle some of the downsides of the current GHG protocol approach.
With the announcement last week of the new International Sustainability Standards Board (ISSB), it is a good time to look at the pros and cons of sustainability accounting systems and outline what we expect a set of ISSB standards to consider.
Using the GHG Protocol Scope Method
The GHG protocol splits an organisation’s GHG emissions into Scope 1, 2, and 3 emissions.
- Scope 1 emissions are the direct emissions that arise from company-owned and/or controlled resources. For example, this could be emissions that result from a company’s own factory equipment.
- Scope 2 emissions are indirect emissions that arise from the generation of purchased energy. For example scope 2 emissions would be created by the electricity bought from a utility provider.
- Scope 3 emissions are indirect emissions that are created by both the upstream and downstream activities in an organisation’s value chain (not including the scope 2 emissions).
Although there are many benefits of this approach, particularly in helping businesses holistically understand the emissions impact of their actions, two main challenges have arisen:
- A lack of standardisation, and therefore comparability
- Reporting which can lack intuition without deep business context
A lack of standardisation:
This system has been in place since 2001, and provides consistent guidance for organisations to report, understand and discuss their GHG emissions. The long (in sustainability terms) history of this structure means that many organisations are already using this accounting standard.
However, the degree to which reporting through this system is truly standardised is under question; many companies choose not to report their scope 3 emissions (or some categories of) and the difficulty of obtaining data from the numerous stages of an organisation’s supply chain means that rough estimates are often used. Therefore, scope 3 emissions values can vary wildly because data manipulation or distortion may happen at multiple stages.
Historically therefore, this means that comparisons between organisations’ scope 3 values are difficult, and in many cases pointless. Many technology solutions, including Altruistiq, are helping to tackle this problem through accelerating data collection and standardising emissions measurement. However, the existence of the challenge in itself raises the question of whether standards should be adjusted.
Reporting which can lack intuition:
The scope system has benefits in its coverage of all emissions sources throughout a value chain, but the breakdown of emissions by direct and indirect, rather than more “business-friendly” activities or financial systems can be challenging because it makes it difficult for companies to intuitively integrate their existing data with the framework of the GHG protocol. For example, one trip by a logistics company can lead to emissions reported across all of Scopes 1, 2 and 3!
Moreover, the structure of Scope 3 emissions categories can be confusing for investors, regulators and others who are not deep in sustainability topics and reporting. If this structure was made more intuitive, this could help finance to flow more effectively to businesses who take sustainability seriously, and make accounts easier to audit.
Therefore, some would argue there is an opportunity to improve intuition and standardisation in emissions accounting at this critical period.
Note: All of Altruistiq’s GHG baselines align to the data requirements of the GHG Protocol, whilst using more user-friendly and intuitive data collection techniques.
What makes a good emissions accounting system?
There are a few key principles that the ISSB should consider when creating their reporting standards. For reporting emissions, a good standard should balance:
- A holistic view of all emissions sources
- Accessibility of data sources
- Ease of understanding by all stakeholders of the standard and its requirements
- Standardisation of key metrics to feed into wider accounting
- Time and cost required to report to the standard
- Opportunity for integration with other ESG reporting data
A successful update to standards would iterate upon the successes of the GHG Protocol, which has accomplished a lot since 2001, to accelerate standardisation and quality improvements in emissions reporting. In particular, we see a few key areas for iteration:
- Standardising the required Scope 3 categories for disclosures, alongside explanations that must be made where categories are not reported on
- Building increased guidance/assumptions for hard-to-directly-measure categories, such as downstream use of sold products
- Defining 3–5 standard emissions metrics that can be embedded into annual reports (such as emissions intensity, emissions adjusted earnings per share, or others)
Crucially, moving onto any updated system should aim to create minimal administrative barriers that could delay businesses in taking action on their climate impact.
What can my business do to prepare for any changes?
To prepare for any changes in reporting standards, your business should align with the most recent updates such as the CSRD and the incoming UK TCFD-aligned standards. This will mean that your business is collecting the most up-to-date sustainability data and preparing for the move towards wider sustainability reporting, rather than just GHG-focused reporting.
Moreover, your business should build capabilities to tackle the challenge of emissions reporting and understand in detail what data sources, types, and quality are required to achieve high precision emissions calculations. High-quality measurement will be the first step towards identifying opportunities to decarbonise your business.
If you want to discuss how to tackle the problem of effective emissions measurement that can be translated across frameworks and reporting standards, feel free to contact us at Altruistiq for more information.
For feedback on this article or questions related to how your organisation should approach sustainable reporting, drop us a line at firstname.lastname@example.org.
Altruistiq is a sustainability SaaS and helps some of the world’s largest companies to sustainably sell more, spend less, and save time.