Feb 22 2024

Common Pitfalls in Corporate GHG Accounting and How to Avoid Them



Common Pitfalls in Corporate GHG Accounting and How to Avoid Them

Measuring and managing greenhouse gas (GHG) emissions is a critical component of any corporate sustainability strategy. By providing a comprehensive and transparent account of a company's carbon footprint, GHG accounting enables informed decision-making, stakeholder engagement, and meaningful climate action.

However, GHG accounting is not a simple or straightforward exercise. It requires navigating a complex web of data sources, calculation methodologies, reporting frameworks, and stakeholder expectations, often with limited resources and expertise. As a result, many companies face significant challenges and pitfalls in establishing and maintaining a robust and reliable GHG inventory.

These pitfalls can range from technical issues like data gaps and errors to more strategic challenges like setting appropriate boundaries and engaging stakeholders. If left unaddressed, they can undermine the accuracy, consistency, and credibility of a company's GHG disclosures, exposing it to reputational, financial, and regulatory risks.

In this article, we'll explore some of the most common pitfalls in corporate GHG accounting, and provide practical guidance and best practices for avoiding them. By understanding and proactively managing these challenges, companies can ensure the integrity and effectiveness of their GHG accounting practices, and build trust and accountability with their stakeholders.

Pitfall 1: Incomplete or inconsistent boundary setting

One of the most fundamental challenges in GHG accounting is determining which emission sources and activities to include in the inventory, and how to consistently apply those boundaries over time. Many companies struggle with scoping and boundary-setting, either by excluding relevant emissions sources, applying inconsistent approaches across different business units or regions, or failing to properly document and communicate their methodology.

These inconsistencies can arise from a variety of factors, such as:

- Lack of clear guidance or criteria for determining organizational and operational boundaries

  • Inconsistent application of control or equity share approaches across different entities
  • Incomplete identification or categorization of emission sources within each scope
    Changes in organizational structure, ownership, or activities over time
    Insufficient documentation or transparency around boundary assumptions and decisions

To avoid this pitfall, companies should:

- Establish clear and consistent criteria and procedures for setting organizational and operational boundaries, aligned with recognized standards like the GHG Protocol

  • Engage relevant stakeholders, such as finance, legal, and business unit leaders, in the boundary-setting process to ensure alignment and buy-in
    Conduct a comprehensive inventory of emission sources and activities across all operations, and categorize them according to the GHG Protocol scopes and definitions
  • Regularly review and update boundaries as needed to reflect changes in the business, and document and communicate any adjustments transparently
    Disclose boundary assumptions, methodologies, and limitations in public reporting to enable comparability and verification

Pitfall 2: Poor data quality and management

Another common pitfall in GHG accounting is the lack of reliable, consistent, and verifiable data on emission-generating activities and sources. Many companies struggle to collect, manage, and assure the quality of their emissions data, due to challenges such as:

1. Incomplete or inaccurate activity data from various sources (e.g. energy invoices, fuel receipts, production records)
2. Inconsistent or outdated emission factors and methodologies across different regions, products, or activities
3. Manual data entry, transcription errors, or version control issues in spreadsheets or disparate systems
4. Lack of standardized data management processes, documentation, and quality controls
5. Insufficient training or accountability for data owners and contributors across the organization

To avoid this pitfall, companies should:

- Establish clear roles, responsibilities, and procedures for data collection, validation, and management, with appropriate training and oversight
Use standardized templates, tools, and systems for data entry, calculation, and reporting, with built-in error-checking and audit trails

  • Centralize and automate data flows where possible, using software solutions that integrate with existing business systems (e.g. ERP, energy management, procurement)
  • Regularly review and update emission factors, methodologies, and calculations to ensure alignment with the latest scientific and industry guidance
  • Implement robust data quality assurance measures, such as internal audits, peer reviews, and third-party verification, to identify and address errors or inconsistencies
  • Document all data sources, assumptions, and limitations transparently in inventory reports and disclosures

Pitfall 3: Inadequate or incorrect calculation methods

A third common pitfall in GHG accounting is the use of inadequate, inconsistent, or incorrect methodologies for calculating emissions from various sources and activities. Many companies face challenges in selecting, applying, and updating calculation methods, due to factors such as:

- Lack of awareness or understanding of relevant industry- or activity-specific calculation tools and guidelines

  • Inconsistent use of global warming potential (GWP) values or other emissions factors across scopes or regions
  • Errors or omissions in unit conversions, data aggregation, or other calculation steps
  • Insufficient documentation or justification of methodological choices and assumptions
  • Failure to properly account for biogenic carbon, carbon capture and storage, or other complex emission sources

To avoid this pitfall, companies should:

- Identify and apply the most appropriate and up-to-date calculation methodologies for each emission source and activity, based on recognized standards and sector guidance (e.g. GHG Protocol, IPCC, EPA, ISO)

  • Use consistent and clearly defined emissions factors, GWP values, and other parameters across all calculations, and document any deviations or assumptions
  • Implement standardized calculation tools and models, with built-in formulas, unit conversions, and error-checking, and ensure proper version control and archiving
  • Conduct sensitivity analyses and uncertainty assessments to understand the impact of key assumptions and methodological choices on the inventory results
  • Obtain third-party verification or assurance of the inventory calculations and methodologies, to identify and address any errors or improvement opportunities
  • Disclose calculation methods, assumptions, and limitations transparently in inventory reports, and align with relevant reporting and verification standards (e.g. ISO 14064, GHG Protocol Corporate Standard)

Pitfall 4: Incomplete or inaccurate Scope 3 accounting

For many companies, the majority of their GHG emissions occur outside their direct operations, in the upstream and downstream activities of their value chain (i.e. Scope 3 emissions). However, accounting for these indirect emissions can be particularly challenging, due to the complexity, data limitations, and lack of control involved. Common pitfalls in Scope 3 accounting include:

- Inconsistent or arbitrary selection of relevant Scope 3 categories and activities to include in the inventory

  • Overreliance on spend-based data or industry-average emission factors, rather than supplier-specific data
  • Incomplete or inaccurate data collection from suppliers, distributors, or other value chain partners
  • Lack of engagement or communication with key stakeholders on Scope 3 accounting expectations and requirements
  • Insufficient prioritization or resources for Scope 3 accounting, relative to Scope 1 and 2 emissions

To avoid this pitfall, companies should:

- Conduct a comprehensive Scope 3 screening and materiality assessment to identify the most relevant and impactful categories and activities to include in the inventory, based on criteria such as emissions magnitude, data availability, and stakeholder interest

  • Engage proactively with suppliers, customers, and other value chain partners to communicate expectations, build capacity, and collect primary emissions data wherever possible
  • Use a combination of primary activity data, supplier-specific emission factors, and secondary data to calculate Scope 3 emissions, and clearly document all data sources, assumptions, and limitations
  • Allocate sufficient time and resources for Scope 3 data collection, calculation, and quality assurance, recognizing that this is often the most time- and resource-intensive aspect of GHG accounting
  • Report Scope 3 emissions separately from Scope 1 and 2, and provide a clear description of the methodologies, boundaries, and limitations used in the Scope 3 inventory
  • Collaborate with industry peers, value chain partners, and other stakeholders to improve the consistency, accuracy, and completeness of Scope 3 accounting over time

Pitfall 5: Misalignment with business strategy and decision-making

A fifth common pitfall in GHG accounting is the failure to effectively integrate emissions data and insights into core business strategy, risk management, and decision-making processes. Many companies treat GHG accounting as a standalone sustainability reporting exercise, rather than a key input to strategic and operational decisions. This can lead to challenges such as:

- Lack of executive and board-level attention and accountability for GHG emissions performance and reduction targets

  • Siloed or disconnected sustainability and finance/operations teams, with limited cross-functional collaboration and data-sharing
  • Inadequate or misaligned incentives and KPIs for GHG reduction across different business units and levels
  • Insufficient analysis and communication of the business risks and opportunities associated with GHG emissions and climate change
  • Failure to embed GHG considerations into key business processes such as budgeting, capex planning, product development, and supply chain management

To avoid this pitfall, companies should:

- Establish clear governance and accountability structures for GHG management, with executive sponsorship, board oversight, and cross-functional steering committees or working groups

  • Set ambitious, science-based GHG reduction targets that are aligned with the Paris Agreement goals and integrated into business strategy and risk management frameworks
  • Regularly review and communicate GHG emissions performance and progress against targets to senior leadership and the board, and integrate this information into strategic planning and decision-making cycles
  • Conduct scenario analysis and risk assessment to identify and quantify the potential business impacts of climate change and the low-carbon transition, and develop mitigation and adaptation strategies accordingly
  • Embed GHG emissions and reduction considerations into core business processes and tools, such as supplier scorecards, product lifecycle assessments, and capital allocation frameworks
  • Engage proactively with investors, customers, policymakers, and other stakeholders to understand and respond to their expectations and concerns around climate risk and decarbonization

Pitfall 6: Inadequate or misleading communication and disclosure

A final common pitfall in GHG accounting is the failure to effectively communicate and disclose emissions data and performance to both internal and external stakeholders. Many companies struggle to provide clear, consistent, and decision-useful information on their GHG emissions and climate strategies, due to challenges such as:

- Inconsistent or cherry-picked data, metrics, and narratives across different reporting channels and audiences

  • Lack of alignment with recognized reporting standards and frameworks, such as GRI, SASB, TCFD, or CDP
  • Insufficient context or explanation of key drivers, trends, and uncertainties behind emissions data and targets
  • Overemphasis on offsetting, renewable energy certificates, or other low-quality carbon credits, rather than actual emissions reductions
  • Inadequate or misleading claims around "carbon neutrality," "net zero," or other ill-defined terms and commitments

To avoid this pitfall, companies should:

- Develop a clear and consistent narrative and messaging around the company's GHG emissions performance, reduction strategies, and climate commitments, aligned with the overall sustainability and business strategy

  • Report GHG emissions data and performance in a transparent, consistent, and comparable manner, using recognized standards and frameworks, and obtaining third-party assurance where appropriate
  • Provide clear and detailed explanations of any changes, adjustments, or restatements to previously reported emissions data, as well as any limitations, uncertainties, or assumptions in the current inventory
  • Use specific, measurable, and time-bound language when communicating GHG reduction targets and initiatives, and avoid vague or misleading claims around carbon neutrality or net zero
  • Engage proactively with stakeholders to understand and respond to their information needs and expectations, and solicit feedback and input on the company's GHG disclosure and communication practices
  • Continuously improve the quality, relevance, and decision-usefulness of GHG disclosure over time, based on evolving best practices, standards, and stakeholder expectations

The Path Forward
GHG accounting is a critical tool for companies to measure, manage, and ultimately reduce their climate impact and risk exposure. However, it is also a complex and evolving practice that requires careful planning, execution, and continuous improvement to avoid common pitfalls and ensure the accuracy, consistency, and credibility of emissions data and disclosures.

By understanding and proactively managing the challenges outlined in this article, from boundary-setting and data quality to Scope 3 accounting and strategic integration, companies can establish a robust and reliable GHG accounting system that supports meaningful climate action and long-term value creation.

At the same time, it is important to recognize that GHG accounting is not a static or one-size-fits-all exercise, but rather a dynamic and context-specific process that requires ongoing learning, innovation, and stakeholder engagement. As the expectations and requirements around corporate climate disclosure and action continue to evolve, so too must companies' approaches to GHG accounting and management.

Some key trends and best practices that are shaping the future of corporate GHG accounting include:

- The increasing convergence and harmonization of GHG accounting and reporting standards and frameworks, both globally and across different sectors and regions

  • The growing use of digital technologies and analytics, such as IoT sensors, blockchain, and machine learning, to automate and improve the accuracy and efficiency of emissions data collection and analysis
  • The rise of new carbon accounting and valuation approaches, such as internal carbon pricing, science-based targets, and natural climate solutions, to drive more ambitious and impactful GHG reduction strategies
  • The deepening integration of GHG accounting with other sustainability and business management systems, such as ESG risk management, supply chain traceability, and product lifecycle assessment
    As companies navigate this complex and rapidly evolving landscape, it is critical to stay informed, engaged, and proactive in developing and implementing best practices for GHG accounting and disclosure. This may involve seeking guidance and support from industry associations, consultants, and other expert organizations, as well as collaborating with peers and stakeholders to share knowledge and drive collective action.

Ultimately, the goal of GHG accounting is not just to measure and report emissions, but to drive meaningful and lasting reductions in line with the urgent need to combat climate change. By avoiding common pitfalls and embracing best practices, companies can not only enhance the integrity and value of their GHG disclosures, but also accelerate the transition to a net-zero emissions future and a more sustainable and resilient economy.

The time for action is now, and the stakes have never been higher. With the right tools, strategies, and mindset, corporate GHG accounting can be a powerful lever for change and a critical enabler of the global climate solutions we need. Let's work together to get it right.

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