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Feb 20 2024

The Business Benefits of Accurate GHG Accounting for Corporates

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The Business Benefits of Accurate GHG Accounting for Corporates

The business landscape is changing rapidly as the world grapples with the mounting impacts and risks of climate change. Investors, regulators, customers, and employees are increasingly demanding that companies take bold action to reduce their carbon footprints and align their strategies with the goals of the Paris Agreement. At the same time, the transition to a low-carbon economy is creating new opportunities for companies to innovate, grow, and create value in ways that are more sustainable and resilient.

In this context, accurate and decision-useful GHG accounting has emerged as a critical tool for companies to measure and manage their climate-related impacts, risks, and opportunities. By providing a comprehensive and verifiable picture of a company's emissions across its value chain, GHG accounting enables business leaders to make informed decisions about where to focus their reduction efforts, how to engage stakeholders, and how to position themselves for success in the net-zero future.

However, despite the growing recognition of the importance of GHG accounting, many companies still struggle to implement robust and reliable emissions measurement and reporting practices. Common challenges include data availability and quality, methodological consistency and credibility, and lack of internal capacity and resources. As a result, many companies are missing out on the significant business benefits that accurate GHG accounting can bring.

In this article, we'll explore seven key business benefits of investing in high-quality GHG accounting, drawing on research, case studies, and expert insights from leading companies and organizations. By understanding and communicating these benefits, sustainability leaders and practitioners can build a strong business case for making GHG accounting a strategic priority and driver of long-term value creation.

Benefit 1: Cost savings and operational efficiency

One of the most tangible and immediate benefits of accurate GHG accounting is the potential for cost savings and operational efficiency improvements. By measuring and analyzing emissions data across their value chains, companies can identify hotspots of energy and resource waste, as well as opportunities for process and technology improvements that can reduce both emissions and costs.

For example, a comprehensive GHG inventory can help a company pinpoint inefficiencies in its logistics network, such as unnecessary transportation miles or underutilized vehicles. By optimizing routes, consolidating shipments, and shifting to lower-carbon modes of transport, the company can reduce fuel consumption and associated emissions while also cutting costs and improving delivery times.

Similarly, granular emissions data can reveal energy efficiency opportunities in a company's facilities and operations, such as outdated equipment, air leaks, or suboptimal building controls. By investing in upgrades, maintenance, and employee engagement programs, companies can often achieve significant reductions in energy use and costs, with relatively short payback periods.

A 2018 study by CDP found that companies that actively manage and reduce their emissions achieve an average internal rate of return of 27% on their low-carbon investments, with payback periods of just two to three years. The study also found that 79% of companies surveyed reported wider business benefits from their emissions reduction activities, such as improved brand reputation, increased innovation, and enhanced resilience.

Benefit 2: Risk mitigation and resilience

In addition to cost savings, accurate GHG accounting can help companies identify, assess, and mitigate a range of climate-related risks to their business, from physical impacts to transition risks. By understanding their emissions footprints and value chain dependencies, companies can proactively develop strategies to reduce their exposure to climate risks and build resilience in the face of growing uncertainty and volatility.

For example, a company with significant Scope 3 emissions from agricultural suppliers may face risks from extreme weather events, water scarcity, and soil degradation that could disrupt raw material availability and quality. By measuring and engaging with suppliers to reduce these emissions and improve sustainable farming practices, the company can not only reduce its carbon footprint but also enhance the resilience and security of its supply chain.

Likewise, a company with high emissions from energy-intensive manufacturing processes may face risks from carbon pricing, renewable energy mandates, and other policy and market shifts in the transition to a low-carbon economy. By accurately measuring and disclosing its emissions, the company can better anticipate and plan for these risks, such as by investing in energy efficiency, renewable energy procurement, or low-carbon product development.

The TCFD framework, which emphasizes the integration of climate risk considerations into corporate governance, strategy, and risk management processes, underscores the importance of accurate and decision-useful emissions data for effective risk mitigation and resilience building.

Benefit 3: Enhanced reputation and stakeholder trust

In today's world of heightened transparency and accountability, a company's reputation and social license to operate increasingly depend on its ability to demonstrate credible and proactive management of its environmental and social impacts. Accurate and comprehensive GHG accounting and disclosure can be a powerful tool for building trust and credibility with key stakeholders, from investors and customers to employees and communities.

By measuring and reporting its emissions in a consistent, comparable, and third-party verified manner, a company can show that it takes its climate responsibilities seriously and is committed to continuously improving its performance. This can help differentiate the company as a sustainability leader in its industry, attract and retain top talent, and strengthen relationships with environmentally and socially conscious customers and partners.

Conversely, companies that fail to accurately measure and disclose their emissions, or that make misleading or unsubstantiated claims about their climate performance, risk facing reputational damage, shareholder activism, and legal challenges. In recent years, a growing number of companies have faced allegations of "greenwashing" or insufficient climate action, leading to negative media coverage, consumer boycotts, and divestment campaigns.

A 2019 survey by PwC found that 76% of global consumers say they will stop buying from companies that treat the environment poorly, and 73% believe companies should be taxed according to the amount of plastic they use. These findings underscore the growing expectation among stakeholders for companies to take robust and transparent action on environmental issues like climate change.

Benefit 4: Access to capital and financing

As investors and lenders increasingly integrate ESG factors into their decision-making processes, companies with strong GHG accounting and disclosure practices are better positioned to access capital and financing on favorable terms. Accurate emissions data can help investors assess a company's exposure to climate-related risks and opportunities, as well as its progress towards emissions reduction targets and alignment with global climate goals.

In recent years, a growing number of investors have committed to aligning their portfolios with the goals of the Paris Agreement and achieving net-zero emissions by 2050. This includes major asset managers like BlackRock, State Street, and Vanguard, as well as sovereign wealth funds and pension funds. These investors are increasingly using tools like carbon footprinting, scenario analysis, and engagement to assess and manage the climate risks and impacts of their holdings.

At the same time, a growing number of banks and financial institutions are offering sustainability-linked loans and green bonds that provide preferential financing terms to companies that meet certain ESG performance criteria, including emissions reduction targets. For example, in 2021, Italian energy company Enel issued a $4 billion sustainability-linked bond that tied the interest rate to the company's achievement of its emissions reduction and renewable energy goals.

To access these sources of capital and benefit from the growing demand for sustainable investing, companies need to be able to provide accurate, reliable, and decision-useful emissions data to investors and lenders. This data should cover all relevant scopes and categories of emissions, be aligned with recognized reporting standards and frameworks, and be subject to rigorous quality assurance and verification processes.

Benefit 5: Regulatory compliance and competitiveness

As governments around the world ramp up their efforts to combat climate change, companies are facing a growing array of regulatory requirements and policy incentives related to GHG emissions measurement, reporting, and reduction. Accurate GHG accounting can help companies stay ahead of these requirements, avoid penalties and legal liabilities, and maintain their competitiveness in a rapidly evolving policy landscape.

For example, the European Union's Corporate Sustainability Reporting Directive (CSRD) will require nearly 50,000 companies to disclose detailed information on their environmental and social impacts, including GHG emissions, starting in 2024. Similarly, the proposed US Securities and Exchange Commission (SEC) rule on climate risk disclosure would mandate that public companies report their Scope 1, 2, and 3 emissions, as well as their climate-related risks and opportunities, in their annual filings.

In addition to mandatory reporting requirements, many governments are also implementing carbon pricing mechanisms, such as taxes or cap-and-trade systems, that put a price on GHG emissions and create financial incentives for companies to reduce their carbon footprints. Accurate emissions measurement and reporting is essential for companies to comply with these mechanisms and optimize their carbon pricing strategies.

By proactively measuring and managing their emissions in line with emerging regulatory requirements and policy signals, companies can not only minimize their compliance risks but also gain a competitive advantage by positioning themselves as leaders in the low-carbon economy. This can help them attract customers, investors, and partners who are looking for sustainable and future-proof business models.

Benefit 6: Innovation and growth opportunities

Accurate GHG accounting can also help companies identify and capitalize on new opportunities for innovation and growth in the transition to a net-zero economy. By analyzing emissions data across their value chains and benchmarking against industry peers, companies can spot areas where they can develop new low-carbon products, services, and business models that meet evolving customer needs and policy objectives.

For example, a company that accurately measures and reduces emissions from its transportation and logistics operations may identify opportunities to offer low-carbon delivery services to customers who are looking to reduce their own Scope 3 emissions. By investing in electric vehicles, route optimization software, and other clean technologies, the company can not only reduce its own emissions but also create a new revenue stream and differentiate itself in the market.

Similarly, a company that conducts a detailed analysis of its Scope 3 emissions from purchased goods and services may identify opportunities to collaborate with suppliers on the development of low-carbon or circular economy solutions, such as recycled materials, renewable energy inputs, or product-as-a-service models. By working together to reduce emissions and create shared value, the company and its suppliers can build more resilient and sustainable supply chains that are better positioned to thrive in a carbon-constrained world.

Accurate emissions data can also help companies set and track progress towards science-based emissions reduction targets, which are increasingly seen as a key driver of innovation and competitiveness. By aligning their targets with the latest climate science and the goals of the Paris Agreement, companies can future-proof their strategies and tap into the growing market demand for sustainable products and solutions.

Benefit 7: Contribution to global climate goals

Finally, perhaps the most important benefit of accurate GHG accounting is the ability for companies to contribute meaningfully to the urgent global effort to combat climate change and build a more sustainable and resilient world for all. By measuring, disclosing, and reducing their emissions in line with science-based targets and the goals of the Paris Agreement, companies can help accelerate the transition to a net-zero economy and limit the worst impacts of climate change.

This is not just a moral imperative but also a business necessity, as the risks and costs of inaction on climate change continue to mount. The latest report from the Intergovernmental Panel on Climate Change (IPCC) warns that the world is facing a "code red for humanity" and that we need to halve global emissions by 2030 and reach net-zero by 2050 to avoid catastrophic and irreversible impacts on ecosystems, economies, and societies.

To achieve this goal, we need all companies, across all sectors and regions, to step up and take ambitious and accountable action to reduce their emissions in line with the best available science. Accurate and transparent GHG accounting is the foundation for this action, as it enables companies to understand their impacts, set meaningful targets, and track and report on their progress over time.

By contributing to the global effort to mitigate climate change, companies can not only help create a more sustainable and prosperous world for all but also build trust and credibility with stakeholders who are increasingly looking to the private sector to lead the way on this critical challenge. This can help companies attract and retain top talent, customers, and investors who are aligned with their values and purpose, and create long-term value for all stakeholders.

Moreover, as the global economy shifts towards a low-carbon future, companies that are proactively measuring and reducing their emissions will be better positioned to seize the opportunities and benefits of the green transition, such as access to new markets, technologies, and sources of capital. They can also help influence and shape the policy and market frameworks that will drive the transition, by demonstrating the feasibility and benefits of ambitious climate action.

Conclusion

Accurate GHG accounting is not just a sustainability best practice or a reporting requirement – it is a strategic business imperative and a driver of long-term value creation. By investing in robust and reliable emissions measurement and disclosure, companies can unlock a range of significant benefits, from cost savings and risk mitigation to enhanced reputation and stakeholder trust, access to capital and financing, regulatory compliance and competitiveness, innovation and growth opportunities, and contribution to global climate goals.

To realize these benefits, companies need to approach GHG accounting as a core business function and integrate it into their governance, strategy, risk management, and performance management processes. They need to build internal capacity and expertise, invest in data management systems and technologies, and engage with stakeholders to understand their expectations and co-create solutions.

Importantly, companies need to use their GHG accounting data and insights to drive real and meaningful action to reduce their emissions in line with science-based targets and the goals of the Paris Agreement. This requires setting ambitious and accountable targets, implementing comprehensive and innovative emissions reduction strategies, and collaborating with value chain partners and industry peers to drive systems-level change.

The business case for accurate GHG accounting has never been stronger, and the imperative for action has never been more urgent. As the world grapples with the mounting impacts and risks of climate change, companies that proactively measure, disclose, and reduce their emissions will be the ones that thrive in the low-carbon economy and create value for all stakeholders.

The time for incrementalism and half-measures is over. The climate crisis demands bold and transformative action from all actors in society, and the private sector has a critical role to play. By embracing the power and potential of accurate GHG accounting, companies can be part of the solution and help build a more sustainable, just, and resilient world for generations to come.

The challenge ahead is immense, but so are the opportunities and benefits. With courage, collaboration, and commitment, we can rise to this challenge and create a better future for all. The journey starts with a single step – and that step is accurate and actionable GHG accounting.

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