Navigating the Wild West of Corporate GHG Accounting

Reporting on GHG emissions is becoming a must for many corporations. In the EU, this is required by the Corporate Sustainability Reporting Directive. In the US, GHG reporting is on the agenda of the Security and Exchange Commission, and the IFRS standard for climate-related disclosures has now been launched.

While the space is developing rapidly, there are pitfalls to watch out for. Here we will discuss these pitfalls and offer suggestions on how to avoid them – based on 20+ years of GHG accounting experience in the Inogen Alliance.

GHG Emissions Sources

The rules for Corporate GHG accounting are formalized by the GHG Protocol – this is the industry standard. According to the GHG Protocol, there are three types of emissions:

1. Scope 1 are the direct emissions from sources controlled or owned by the company. This includes stationary and mobile combustion, emissions due to physical or chemical releases (flaring, certain chemical reactions, emissions from animal rearing and fertilizer use), as well as use of refrigerants.
2. Scope 2 are emissions from the generation of purchased electricity, heating, or cooling.
3. Scope 3 are all other indirect emissions in the value chain. This includes 15 separate emission categories. According to CDP, the most significant sources are typically purchasing of goods and services in the supply chain, as well as the use of the company’s sold products. These make up around 90% of Scope 3 emissions on average.

Typically, Scope 1 and 2 emissions are much easier to calculate than Scope 3. So where do companies get these wrong? Let’s find out.

Corporate GHG Data Management is Still Very Poor

A recent scientific paper showed that in the majority of cases, some of the world’s largest corporations with a long-standing history of GHG reporting do not accurately disclose even Scope 1 emissions. Their emission calculated for each fuel source do not add up to the reported total. This is concerning since Scope 1 emissions are the easiest to calculate, and making sure the total adds up is achievable in basic spreadsheet software. What is more, if some of the world’s largest companies can’t handle even the easiest GHG reporting, then what should we expect from smaller companies that will also have to disclose? Here is out advice for making sure you get the data right:

You can’t just outsource

Organizing the company’s emissions data can be a challenge for companies. It’s tempting to just throw money at the problem and hire a consultant. Consultants can be invaluable to help you identify the right data sources in your company. But you know your business best – an external consultant will not be able to navigate the intricacies of your corporate structure without your help.

You need a good internal project manager, guided by an experienced advisor who understands your business and can help you identify and collect the necessary data. Your internal project manager should have the final responsibility of checking your data before reporting. Consider also formalizing this role by designating at least a dedicated Sustainability Manager. Otherwise, you risk silly errors like your emissions not adding up. Low quality reporting ultimately means extra audit costs and multi-year restatements, plus wasting internal staff time to fix issues that should have been easy to avoid in the first place.

It’s about data, not software

When it comes to GHG accounting, it’s tempting to try to automate. More and more GHG and sustainability reporting software tools are popping up. Some are also used by us in the INOGEN Environment Alliance. However, overly relying on software is not productive. As the example above shows, with bad data, you get bad results. Focus on data first, and software solutions second.

We Are Still in the Wild West of GHG Calculations and Audits

Another study by King’s Business School showed that many consultants calculate Scope 1 and 2 emissions with methodologies that are simply not allowed under the GHG Protocol. Yet somehow these calculations manage to pass audit and make their way onto public reporting platforms such as CDP. This is quite concerning – as mentioned above, Scope 1 and 2 emissions are much easier to calculate than Scope 3. The GHG Protocol – the corporate standard for emissions accounting - is also quite clear on what methods are allowed in what circumstances – auditors should be able to easily spot any errors.

What is more, the study shows that with different calculation methods, you can get widely different results for the same type of emissions. This is even more concerning since investors rely on accurate data to prioritize investments. If emissions reporting can be lowballed by cherry-picking methods, then the investment community is in big trouble.

The quality of solutions providers is evidently varied, and the market practice is not yet fully established. Here are some things you can do to make sure your reporting is up to par:

If outsourcing, choose the right advisor

External advisors are invaluable for helping you quickly get up to speed with GHG calculation methods. If you are working with an external advisor, make sure to pick one that is experienced not just in GHG calculations, but also in sectors and companies of similar size as yours. After all, if your advisor can’t navigate the intricacies of your corporate structure, the applicable methodologies, and the sector-specific data that is required to calculate emissions, can they really guarantee that they will provide you with accurate and actionable results? We don’t think so and neither should you.

Don’t treat audits as a formality

Let’s face it - most companies just don’t have their processes set up for annual GHG accounting. So, the data quality is not always as good as for financial reporting, and errors do occur. Your auditor can and should help you spot any major errors so that you can improve your accounting. Then you should be able to avoid non-compliance, plus also silly errors like your emissions not adding up. But not all auditors are created equal – make sure to pick a provider that has experience in GHG calculations. After all, you would not hire a GHG specialist for your financial report, nor should you hire a non-specialist for your GHG account. Otherwise, you risk your auditors missing obvious errors.

When calculating, always err on the side of caution

Unfortunately, the GHG Protocol does not formally mandate what methods companies should use. So cherry-picking methodologies that calculate the lowest amount of emissions is not strictly non-compliant, at least when considering GHG standards. However, it’s still dishonest, and intentionally misleading investors is still a crime. So, if there are multiple ways to calculate the same type of emissions (such as different sources of emissions factors), always choose the most conservative one. In ESG, the precautionary principle applies – in this case not just because of the planet, but also for your own peace of mind.

Scope 3 is Where Companies Are Least Prepared

Scope 1 and 2 emissions are usually not difficult to calculate. The difficulty is usually in Scope 3, which is typically also the largest source of emission in most companies. This is confirmed by a recent report by CDP for EU companies – Scope 3 is by far the most important for Science-Based Targets for GHG reduction, yet companies are also the least prepared.

Here are some tips for setting up and achieving a Scope 3 emissions target:

For Scope 3 targets, you have two options:

1. An absolute emissions reduction target – you have up to 10 years to achieve this.
2. A supplier engagement target – you don’t commit to reducing emissions, just to engaging 2/3 of your suppliers for setting their own reduction targets. You have up to 5 years to achieve this.

Scope 3 can be scary, no doubt. Companies are worried that they can’t guarantee that their suppliers will reduce their emissions, so then they can’t guarantee that they will achieve an absolute reduction target. So, they opt for supplier engagement – you don’t have to claim emission reductions, just that you have “engaged” your suppliers. Don’t think that a supplier engagement target is easier than absolute reduction

Seems easier? Not if you consider the implications. If you want to reduce supply chain emissions, you need to engage your suppliers anyway – that is how you get the data you need to track the target! So instead of a supplier engagement target, consider absolute reduction – then you have 10 years to engage your suppliers and not five.

Engage internally and focus on traceability

As noted in the beginning of this article, purchase of goods and services and use of the company’s products are the most significant emissions sources in most cases.

Emissions from the use of your products can be direct – such as the energy consumption of an appliance. But some use phase emissions are also indirect – e.g. if you want to use shampoo for your shower, you also need some hot water – the emissions for heating up the water should be accounted for. Calculating use phase emissions should be achievable if you dedicate internal staff – after all, you know your products best, and have access to the best data about the usage specs for your products. An external advisor can help you identify the right level of detail for such calculations so that you can make the process efficient.

Emissions from purchased goods and services in the supply chain is where most companies stumble. Often you only know who your direct supplier is, but not where the product is manufactured, even more so when considering complex products with intricate supply chains. So, the GHG Protocol allows workarounds in the form of average data, typically from LCA databases such as Ecoinvent and GaBi, or spend-based average data from input-output models such as USEEIO, EORA and EXIOBASE. This is good enough as a start, but with average data you only get average results – you don’t know if the supplier’s emissions are improving. So, your goal should always be traceable data – only then can you track your target. Working with your procurement team is key - an external advisor can help you in setting up a supplier traceability and engagement process.

You are not alone in engaging your suppliers

According to the latest progress report of the Science-Based Targets initiative (SBTi), 1/3 of global market cap is covered by GHG emission reduction targets. This means that if your organization is setting Scope 3 reduction targets, you are likely to find yourself in the company of your peers. So, chances are that some of your suppliers may already have emission reduction targets and may already be reporting data to platforms such as CDP. An external advisor should be able to easily help you find and use this data for improving your GHG inventory.

What is more, if your peers already have their own targets, then there is room to put joint pressure on your suppliers. Make sure to engage with relevant industry initiatives – climate change is a shared challenge, so solving it will also require collaboration.

In Closing

GHG accounting is becoming a must and it can be challenging if you are just starting out. With this advice, you can hit the ground running and avoid some common pitfalls. Keep in mind that like annual financial reporting, GHG reporting is also here to stay, so don’t let “perfect” be the enemy of “good” – start out simple and build up what you need as you go along. An experienced advisor can help you set up a long-term GHG accounting roadmap so that you can confidently work on improving your data and reporting quality over time in the most efficient way – focusing on the biggest emissions sources and the largest opportunities for improvement.

Let us know how we can help you in GHG accounting and inventories, Science-Based Target setting, and identifying emission reduction opportunities in a wide range of sectors.

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