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Feb 26 2024

GHG Accounting and Target Setting: A Guide for Corporates

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GHG Accounting and Target Setting: A Guide for Corporates

The business case for GHG accounting and target setting is clear and compelling. As the impacts of climate change accelerate, companies that fail to proactively measure and manage their emissions face a range of risks, from physical disruptions and regulatory pressures to reputational damage and market shifts. At the same time, the transition to a low-carbon economy is creating new opportunities for innovation, efficiency, and growth that companies can seize by setting and achieving ambitious emissions reduction targets.

Over the past decade, a growing number of companies have recognized the strategic importance of GHG accounting and target setting, and have taken steps to align their practices with the latest standards and best practices. According to the Science Based Targets initiative (SBTi), more than 1,000 companies worldwide have committed to setting emissions reduction targets in line with the goals of the Paris Agreement, representing over $15 trillion in market capitalization.

However, despite this progress, the gap between corporate ambition and action on climate change remains wide. A recent analysis by CDP found that while 85% of companies have set some form of emissions reduction target, only 18% have targets that are aligned with limiting warming to 1.5°C above pre-industrial levels, as called for by the Paris Agreement. Furthermore, many companies are still struggling to accurately measure and report their emissions, particularly for Scope 3 emissions in their value chain, which can account for the majority of their total carbon footprint.

To close this gap and accelerate the pace and scale of corporate climate action, it is critical that companies adopt a robust and science-based approach to GHG accounting and target setting. By following the steps and best practices outlined in this guide, companies can build a strong foundation for measuring, managing, and reducing their emissions in line with the urgent needs of the climate crisis.

Step 1: Conduct a comprehensive GHG inventory

The first step in any GHG accounting and target setting process is to conduct a comprehensive inventory of your company's emissions across all relevant scopes and boundaries. This inventory should follow the principles and requirements of the Greenhouse Gas Protocol, the most widely used global standard for corporate GHG accounting.

Under the GHG Protocol, emissions are divided into three scopes:

- Scope 1: Direct emissions from sources owned or controlled by the company, such as fuel combustion in company vehicles or boilers.

  • Scope 2: Indirect emissions from the generation of purchased electricity, steam, heating, or cooling consumed by the company.
  • Scope 3: All other indirect emissions that occur in the company's value chain, such as from purchased goods and services, business travel, employee commuting, and use of sold products.
    To conduct a GHG inventory, companies should follow these key steps:

Define organizational and operational boundaries: Determine which facilities, operations, and emissions sources are included in the inventory based on your company's organizational structure and control. This may involve choosing between the equity share, financial control, or operational control approach for consolidating emissions.
Identify relevant emission sources: Identify all sources of GHG emissions within your established boundaries, including from stationary combustion, mobile combustion, process emissions, and fugitive emissions. Categorize these sources into the appropriate scope based on the GHG Protocol definitions.
Collect activity data: Gather data on the relevant activities that generate GHG emissions, such as fuel consumption, electricity use, or miles traveled. This data may come from a variety of sources, including utility bills, purchase records, or surveys of suppliers and employees.
Select emission factors: Choose the appropriate emission factors to convert activity data into GHG emissions. Emission factors are based on the carbon content and other properties of different fuels and materials, and may vary by region or supplier. Use widely accepted sources such as government agencies or industry associations to ensure the accuracy and credibility of your factors.
Calculate GHG emissions: Use the activity data and emission factors to calculate total GHG emissions for each source and scope, in units of carbon dioxide equivalent (CO2e). This involves multiplying the activity data by the emission factor and the global warming potential (GWP) of each gas, which expresses its impact relative to CO2 over a given time period (typically 100 years).
Compile and report results: Aggregate emissions data across all sources and scopes to determine your company's total GHG inventory. Report this inventory internally to management and externally to stakeholders using a recognized reporting framework such as CDP or GRI. Be transparent about any exclusions, assumptions, or limitations in your data or methodology.
Conducting a comprehensive and accurate GHG inventory is critical for setting a baseline for emissions reduction targets and tracking progress over time. It also helps companies identify the most significant sources and hotspots of emissions in their operations and value chain, which can inform strategic decisions about where to focus reduction efforts and investments.

Step 2: Set science-based emission reduction targets

Once you have a clear picture of your company's current emissions footprint, the next step is to set ambitious and science-based targets for reduction. Science-based targets are GHG emissions reduction goals that are in line with the level of decarbonization required to meet the goals of the Paris Agreement – to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.

The Science Based Targets initiative (SBTi) provides a robust framework and methodology for companies to set science-based targets, based on the latest climate science and emissions scenarios. To be approved by the SBTi, a company's targets must meet several key criteria:

- Cover all relevant scopes and GHGs, including Scope 3 emissions if they are significant (over 40% of total emissions)

  • Be consistent with the level of decarbonization required to keep global temperature increase well below 2°C compared to pre-industrial temperatures
  • Have a minimum timeframe of 5-15 years for the target year, and a maximum timeframe of 15 years for the long-term vision
  • Be reviewed and updated every 5 years to reflect the latest science and business developments

To set a science-based target, companies should follow these key steps:

Assess the feasibility and business impact of different target options: Conduct a high-level analysis of the emissions reduction potential and cost-effectiveness of different decarbonization levers, such as energy efficiency, renewable energy procurement, low-carbon product design, and supplier engagement. Assess the feasibility and business impact of different target options based on factors such as technology readiness, policy environment, and stakeholder expectations.
Choose an ambition level and target type: Decide on the level of ambition for your targets based on the SBTi criteria and your company's climate leadership goals. Choose between an absolute target (reducing total GHG emissions by a set amount) or an intensity target (reducing GHG emissions per unit of output or revenue). Consider also setting a long-term net-zero target to align with the most ambitious decarbonization pathways.
Calculate the target using the SBTi methodologies and tools: Use the SBTi's sector-specific methodologies and tools to calculate the emissions reduction required to meet your chosen ambition level and target type. This involves setting a base year for tracking progress, projecting future business growth and emissions, and determining the annual reduction rate needed to achieve the target.
Develop an action plan to achieve the target: Identify the key initiatives, investments, and partnerships needed to achieve your emissions reduction target, and develop a detailed action plan with milestones and responsibilities. Engage key stakeholders across the company and value chain to build buy-in and alignment for the plan.
Submit the target for validation and communicate to stakeholders: Submit your target and action plan to the SBTi for validation, and communicate your commitment and progress to internal and external stakeholders. Use your science-based target as a platform for climate leadership and collaboration, and report regularly on your performance and challenges.
Setting science-based targets is a powerful way for companies to align their climate ambition with the global goals of the Paris Agreement, and to drive transformative change across their operations and value chain. By committing to a level of decarbonization that is grounded in climate science, companies can catalyze innovation, investment, and collaboration toward a net-zero future, and demonstrate their leadership and responsibility on the defining issue of our time.

Step 3: Implement reduction initiatives and track progress

Of course, setting ambitious targets is only the first step – to achieve true emissions reductions, companies must translate those targets into concrete actions and investments, and track their progress over time. This requires a systematic and data-driven approach to identifying, prioritizing, and implementing emissions reduction initiatives across the company's operations and value chain.

Some of the key strategies and best practices for implementing emissions reduction initiatives include:

Engage employees and stakeholders: Foster a culture of climate action and innovation by engaging employees at all levels in the development and implementation of emissions reduction initiatives. Provide training, incentives, and recognition for climate leadership, and empower teams to identify and test new ideas for decarbonization. Engage external stakeholders such as suppliers, customers, and policymakers to align expectations and collaborate on shared goals.
Prioritize high-impact, low-cost opportunities: Focus initial efforts on the emissions reduction opportunities that offer the greatest impact for the lowest cost or effort, such as energy efficiency improvements, renewable energy procurement, or process optimization. Use marginal abatement cost curves or other analytical tools to identify and prioritize these "low-hanging fruit" opportunities.
Invest in low-carbon innovation and infrastructure: As the easier opportunities are exhausted, invest in more transformative and long-term solutions such as low-carbon product design, circular business models, or carbon capture and storage. Build the necessary infrastructure and partnerships to enable these solutions, such as renewable energy systems, sustainable supply chains, or research and development capabilities.
Embed emissions reduction into business processes and decisions: Integrate emissions reduction considerations into core business processes such as capital allocation, risk management, and performance management. Set internal carbon prices or other incentives to drive low-carbon decision-making, and include emissions reduction targets in executive compensation and business unit scorecards.
Monitor, report, and verify progress: Establish robust systems and processes for monitoring and reporting emissions data and reduction progress, aligned with the GHG Protocol and other relevant standards. Conduct regular internal audits and third-party verification to ensure the accuracy and credibility of emissions data, and report transparently on performance to internal and external stakeholders.
By implementing these strategies and tracking progress over time, companies can drive continuous improvement in their emissions performance and build momentum toward their science-based targets. It is important to remember that climate action is a journey, not a destination, and that setbacks and challenges are inevitable along the way. By staying focused on the long-term vision, learning from experience, and adapting to changing circumstances, companies can build resilience and leadership in the transition to a net-zero future.

Step 4: Communicate and engage stakeholders

Finally, to fully realize the value of GHG accounting and target setting, companies must effectively communicate their efforts and engage stakeholders in the process. This includes not only reporting on emissions data and reduction progress, but also using that information to build trust, credibility, and collaboration with key audiences.

Some of the key strategies and best practices for communicating and engaging stakeholders on GHG accounting and target setting include:

Report emissions and progress transparently and consistently: Use recognized reporting frameworks such as CDP, TCFD, or GRI to disclose emissions data and reduction progress in a transparent, consistent, and decision-useful way. Be clear about the scope, boundaries, and methodologies used in the inventory, and explain any changes or recalculations from previous years. Obtain third-party assurance or verification of emissions data to enhance credibility.
Highlight the business case and co-benefits of climate action: Communicate the strategic rationale and business benefits of GHG accounting and target setting, such as reduced costs, enhanced reputation, or new growth opportunities. Emphasize the co-benefits of climate action for other sustainability priorities such as public health, biodiversity, or social equity, and align communications with the company's overall purpose and values.
Engage stakeholders in the development and implementation of targets: Involve key stakeholders such as investors, customers, suppliers, and employees in the process of setting and achieving science-based targets. Seek their input and feedback on the company's climate strategy and performance, and collaborate on shared initiatives and solutions. Use stakeholder engagement to build buy-in, accountability, and innovation for climate action.
Advocate for supportive policies and market signals: Use the company's voice and influence to advocate for policies and market signals that support the transition to a net-zero economy, such as carbon pricing, renewable energy standards, or disclosure requirements. Collaborate with industry peers, policymakers, and civil society organizations to create a level playing field and drive systemic change.
Continuously improve and adapt to changing expectations: Stay attuned to the evolving landscape of climate science, policy, and stakeholder expectations, and continuously improve and adapt the company's GHG accounting and target setting approach accordingly. Seek out new partnerships, technologies, and business models that can accelerate the pace and scale of emissions reductions, and share learnings and best practices with others.
By communicating and engaging stakeholders effectively, companies can build a strong foundation of trust, collaboration, and accountability for their climate actions, and position themselves as leaders and catalysts of the net-zero transition. As the expectations and stakes for corporate climate responsibility continue to rise, those companies that can demonstrate a genuine commitment to transparent, science-based, and stakeholder-inclusive climate action will be the ones that thrive in the low-carbon economy of the future.

Conclusion
GHG accounting and target setting are essential tools for companies to measure, manage, and reduce their contribution to climate change, and to align their strategies and actions with the global goals of the Paris Agreement. By following the steps and best practices outlined in this guide, from conducting a comprehensive inventory and setting science-based targets to implementing reduction initiatives and engaging stakeholders, companies can build a robust and credible approach to climate action that delivers both business and societal value.

However, the journey to net-zero is not an easy one, and will require unprecedented levels of innovation, collaboration, and leadership from the private sector. Companies must be willing to challenge business-as-usual practices and assumptions, invest in transformative solutions and partnerships, and work across their value chains and ecosystems to drive systemic change.

The good news is that the benefits of this journey are clear and compelling, from reducing costs and risks to enhancing reputation and resilience. By taking a proactive and ambitious approach to GHG accounting and target setting, companies can not only do their part to mitigate the worst impacts of climate change, but also seize the opportunities of the low-carbon transition and build a more sustainable and prosperous future for all.

As a sustainability professional and business leader, I have seen firsthand the power of science-based climate action to drive meaningful change and value creation for companies and society. I have also seen the challenges and pitfalls that can arise along the way, from data quality and consistency issues to stakeholder skepticism and short-termism.

But I firmly believe that with the right mindset, tools, and partnerships, any company can overcome these challenges and become a leader in the race to net-zero. The key is to approach GHG accounting and target setting not as a compliance exercise or PR strategy, but as a core business imperative and driver of innovation and growth.

By harnessing the power of data, science, and collaboration, and by aligning climate action with the company's purpose and values, business leaders can inspire their organizations and stakeholders to aim higher, move faster, and think bigger in the face of the climate crisis. They can also help to build a more resilient, inclusive, and sustainable economy that works for people and planet alike.

The time for incremental change and half-measures is over. The science is clear, the stakes are high, and the opportunities are vast. As we enter the decisive decade for climate action, let us embrace the challenge and responsibility of GHG accounting and target setting, and use it to accelerate the transition to a net-zero future.

The road ahead is uncertain, but the destination is clear. Let us walk it together, with courage, compassion, and conviction, and let us leave a legacy of leadership and hope for generations to come.

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