Newtral
Mar 07 2024
Sustainability reporting has come a long way in recent years, evolving from a niche practice to a mainstream expectation for companies across all industries and geographies. According to the KPMG Survey of Sustainability Reporting 2020, 80% of the 5,200 largest companies in the world now report on sustainability, up from just 12% in 1993. This trend is driven by a growing recognition among investors, regulators, customers, and other stakeholders that ESG factors are material to a company's long-term value creation and risk management, and that transparency and accountability on these issues are essential for informed decision-making and trust-building.
At the heart of sustainability reporting lies a company's environmental performance, and specifically its greenhouse gas (GHG) emissions. GHGs, such as carbon dioxide, methane, and nitrous oxide, are the primary drivers of climate change, which poses existential threats to ecosystems, economies, and societies around the world. As a result, measuring, managing, and reducing GHG emissions has become a top priority for companies, investors, policymakers, and civil society alike, and a key focus of global sustainability efforts such as the Paris Agreement and the United Nations Sustainable Development Goals (SDGs).
In this context, GHG accounting – the process of quantifying and reporting a company's GHG emissions from direct operations, purchased energy, and value chain activities – has emerged as a critical tool for sustainability reporting and performance management. By providing a standardized and verifiable way to measure and disclose emissions, GHG accounting enables companies to:
- Assess their climate-related risks and impacts across the value chain
- Identify opportunities for emission reductions and operational efficiencies
- Set science-based targets and track progress towards decarbonization goals
- Benchmark their performance against industry peers and best practices
- Communicate their climate strategies and actions to stakeholders in a credible and decision-useful way
- Meet the growing demands for climate-related disclosure from investors, regulators, customers, and other stakeholders
In short, GHG accounting is the foundation upon which corporate climate action and sustainability reporting are built. Without accurate, comprehensive, and reliable emissions data, companies cannot effectively manage their climate risks and opportunities, nor can they credibly communicate their sustainability performance and impacts to stakeholders.
Scopes and boundaries: Companies should clearly define the scopes and boundaries of their GHG emissions reporting, in line with recognized standards such as the GHG Protocol Corporate Standard. This includes reporting emissions from direct operations (Scope 1), purchased energy (Scope 2), and relevant upstream and downstream value chain activities (Scope 3), as well as any exclusions or limitations in the data.
Methodologies and assumptions: Companies should transparently disclose the methodologies, assumptions, and data sources used to calculate their GHG emissions, including any changes or restatements from previous years. This helps stakeholders understand the reliability and comparability of the emissions data, and any uncertainties or limitations therein.
Targets and performance: Companies should report their GHG emissions reduction targets, including the base year, target year, and scope of emissions covered, as well as their progress towards those targets over time. This helps stakeholders assess the ambition and credibility of a company's climate commitments, and hold them accountable for delivering on those commitments.
Initiatives and investments: Companies should disclose the key initiatives and investments they are undertaking to reduce their GHG emissions, such as energy efficiency projects, renewable energy procurement, low-carbon product development, or supplier engagement programs. This helps stakeholders understand the concrete actions behind a company's climate strategy, and the potential for future emissions reductions.
Risks and opportunities: Companies should discuss the climate-related risks and opportunities they face, including physical risks (e.g. extreme weather events), transition risks (e.g. policy and market shifts), and opportunities (e.g. low-carbon products and services). This helps stakeholders assess a company's resilience and positioning in the face of climate change, and the potential financial implications thereof.
Governance and accountability: Companies should disclose the governance and accountability mechanisms they have in place for managing climate-related issues, including board oversight, executive remuneration, and stakeholder engagement. This helps stakeholders understand how climate considerations are integrated into a company's strategy, risk management, and decision-making processes.
By integrating GHG emissions data into sustainability reports in this way, companies can provide a more holistic and decision-useful picture of their climate performance and impacts, and enable more effective engagement with stakeholders on these critical issues.
Challenges and best practices in GHG accounting and sustainability reporting
Of course, integrating GHG accounting into sustainability reporting is not without its challenges and pitfalls. Some of the key issues that companies face include:
Data availability and quality: Collecting accurate and complete GHG emissions data across complex global value chains can be difficult, particularly for Scope 3 emissions from suppliers, customers, and other partners. This can lead to data gaps, inconsistencies, and uncertainties that undermine the reliability and comparability of sustainability reports.
Methodology and boundary inconsistencies: The lack of standardization and harmonization in GHG accounting methodologies and boundaries can make it difficult for stakeholders to compare and benchmark emissions performance across companies and industries. This can lead to confusion, misinterpretation, and mistrust in sustainability disclosures.
Assurance and verification: The credibility and decision-usefulness of GHG emissions data in sustainability reports depends on the level of assurance and verification provided by independent third parties. However, the cost and complexity of assurance can be a barrier for many companies, particularly smaller ones with limited resources.
Integration with financial reporting: The growing demand for climate-related financial disclosures, such as those recommended by the Task Force on Climate-related Financial Disclosures (TCFD), requires a closer integration of GHG emissions data with financial metrics and narratives. However, this integration can be challenging due to differences in methodologies, timeframes, and materiality considerations between sustainability and financial reporting.
To overcome these challenges and ensure the effective integration of GHG accounting into sustainability reporting, companies can adopt several best practices:
Establish robust GHG accounting systems and processes, with clear roles and responsibilities, data management protocols, and quality assurance mechanisms. This can help ensure the accuracy, completeness, and consistency of emissions data across the organization and value chain.
Use recognized and widely-accepted GHG accounting standards and methodologies, such as the GHG Protocol, ISO 14064, or sector-specific guidelines, to ensure the comparability and credibility of emissions disclosures. Where possible, align with the methodologies and boundaries used by industry peers and sustainability reporting frameworks.
Obtain third-party assurance or verification of GHG emissions data, ideally at a reasonable level of assurance, to enhance the reliability and credibility of sustainability reports. Consider using recognized assurance standards such as ISAE 3410 or ISO 14064-3, and engaging with experienced and reputable assurance providers.
Integrate GHG emissions data with financial metrics and narratives, using the TCFD recommendations as a framework for identifying, assessing, and disclosing climate-related risks and opportunities. Work closely with finance, risk management, and strategy teams to ensure a consistent and coherent approach to climate-related disclosures across the organization.
Engage with stakeholders, including investors, customers, suppliers, and civil society, to understand their expectations and information needs around GHG emissions and sustainability reporting. Use this feedback to continuously improve the relevance, clarity, and decision-usefulness of sustainability disclosures, and to inform strategic decisions and actions on climate change.
#### The future of GHG accounting and sustainability reporting
As the urgency of the climate crisis grows, and the demand for transparent and decision-useful sustainability information rises, the importance of GHG accounting in corporate sustainability reporting will only continue to increase in the coming years. Several key trends and developments are shaping the future of this field, including:
The convergence and harmonization of sustainability reporting standards and frameworks, including the recent merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), and the ongoing work of the IFRS Foundation to establish a global sustainability reporting standard-setter. This convergence is expected to drive greater consistency, comparability, and reliability in corporate sustainability disclosures, including GHG emissions data.
The expansion and mainstreaming of climate-related financial disclosures, as more companies, investors, and regulators adopt the TCFD recommendations and integrate climate considerations into financial decision-making and risk management processes. This trend is likely to accelerate the integration of GHG accounting with financial reporting, and increase the scrutiny and expectations around the quality and decision-usefulness of emissions data.
The growing use of technology and digital solutions to streamline and automate GHG accounting and sustainability reporting processes, from data collection and calculation to analysis and assurance. These solutions, such as blockchain, artificial intelligence, and Internet of Things (IoT) sensors, can help companies improve the efficiency, accuracy, and scalability of their emissions measurement and reporting, and unlock new insights and opportunities for decarbonization.
The rise of science-based targets and net-zero commitments, as more companies align their climate strategies and actions with the goals of the Paris Agreement and the latest climate science. These commitments require a robust and credible foundation of GHG accounting data, as well as a clear understanding of the emissions reductions needed across the value chain to achieve net-zero emissions by mid-century.
The increasing emphasis on the social and economic dimensions of sustainability, including issues such as human rights, diversity and inclusion, and the just transition to a low-carbon economy. This trend is likely to drive a more holistic and integrated approach to sustainability reporting, that goes beyond GHG emissions to consider the broader impacts and dependencies of companies on people and society.
To navigate this rapidly evolving landscape, and to harness the full potential of GHG accounting and sustainability reporting for driving positive change, companies will need to adopt a proactive, collaborative, and innovative mindset. This means:
Staying informed and engaged with the latest developments and best practices in GHG accounting and sustainability reporting, and actively participating in the standard-setting and framework development processes.
Building strong partnerships and collaborations with industry peers, value chain partners, and other stakeholders, to share knowledge, resources, and solutions for accelerating climate action and sustainability performance.
Investing in the skills, capabilities, and technologies needed to effectively measure, manage, and report GHG emissions and other sustainability data, and to integrate this data into core business processes and decision-making.
Communicating openly and transparently with stakeholders about the challenges, opportunities, and progress in reducing GHG emissions and achieving sustainability goals, and seeking feedback and input to continuously improve the relevance and impact of sustainability disclosures.
Ultimately, the role of GHG accounting in corporate sustainability reporting is not just about compliance or reputation management – it is about driving the fundamental transformation of our economy and society towards a more sustainable, resilient, and inclusive future. By providing the foundation for credible, comparable, and decision-useful sustainability information, GHG accounting can help companies, investors, policymakers, and civil society work together to accelerate the transition to a net-zero emissions world, and create long-term value for all stakeholders.
The path ahead is clear, but it will require bold leadership, innovative thinking, and collaborative action from all actors in the corporate reporting ecosystem. As a sustainability professional, I am excited and encouraged by the progress and momentum we are seeing in this space, and I am committed to working with my colleagues and partners to help shape a future where sustainability is truly integrated into the core of business and finance.
The time for incremental change is over. The stakes are too high, and the window for action is rapidly closing. We need nothing less than a paradigm shift in how we measure, value, and report corporate sustainability performance – and GHG accounting is a critical piece of that puzzle.
Let's seize this moment, and use the power of sustainability reporting to drive the change we need, at the speed and scale required. Together, we can build a better world for ourselves and for generations to come.
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