“We are at a crossroads. The decisions we make now can secure a liveable future. We have the tools and know-how required to limit warming, and if these are scaled up and applied more widely and equitably, they can support deep emissions reductions and stimulate innovation,” said IPCC chair, Hoesung Lee, after the release of the most recent IPCC report on climate action.
The world is now, arguably, more climate-conscious than at any other point in history. The evidence is there for all to see: increased extreme weather conditions, melting polar ice, and widespread drought. Governments are searching for ways to reduce dependency on fossil fuels and reduce greenhouse gas (GHG) emissions, knowing that time is running short before the severe impacts of global warming are irreversible.
In this way, carbon accounting should play a major role in helping make decisions on decarbonisation priorities and forming policy. Carbon accounting, or GHG accounting, refers to the processes used to measure how much carbon dioxide (CO2) equivalents an organisation emits through its business practices. Often, this data is used to create a carbon credit, which can be traded on carbon markets for offsetting purposes.
GHG emissions are categorised into three groups, or ‘Scopes’, by the most widely-used international accounting tool, the GHG Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. However, beyond these broad categories, there are varying carbon accounting analyses undertaken that often do not conform to a single methodology.
Analysing a working emissions measurement framework
Einar Gamman, senior partner at technology-focused impact investor, EV Private Equity (EV), says that companies claim that the use of their products or services will enable a reduction in GHG emissions, and that they are having an impact on sustainability. Questions remain, however, on how to quantify that impact.
“Imagine you are considering acquiring or investing in a small software company which provides an artificial intelligence (AI) -based energy efficiency solution to relatively large B2B customers,” explains Gamman. “Analysing the software company’s own Scope 1 to 3 emissions can and should be done, but such emissions pale in comparison in relation to the bigger picture of carbon accounting.
“But if, on the other hand, the software solution the company provides enables its clients to save substantial amounts of energy, then that company can rightfully claim to be providing meaningful GHG impact, and could be classed as a sustainable investment opportunity to pursue.”
To assess if the company enables emissions savings through its software solution, Gamman comments that analytical tools are required to quantify the actual Scope 1 to 3 emissions avoided in its customers operations. This environmental impact, he theorises, can also be labelled Scope 4, or ‘avoided emissions’. This quantitative analysis should be backed up with considerations of what baseline to compare against, the choice of parameters, and activity assumptions, along with other metrics, in sufficient degrees of detail to avoid accusations of greenwashing.
“At EV, we model future positive climate contribution from both technology and service companies in a structured manner,” remarks Gamman. “Before investing, we review investee company emissions and any claims of avoided emissions they enable in their customer’s value chain. We have made it part of our mandatory structured investment process, which has allowed us to gain educated and invaluable decision support insight.”
Based on this approach, EV launched xIQ, a Scope 1 to 4 emissions measurement framework which produces datasets that are easily accessible for assessments, and can be used both in the follow-up of their existing portfolio companies as well as in assessment and due diligence of new investment opportunities. They claim that the new ‘best practice’ in carbon accounting should do both a traditional financial return analysis, and the novel climate impact analysis in parallel.
“The same way an investment in a company gives you rights to a percentage ownership of the company’s shares, assets, dividends, and exit proceedings, the same invested capital should give a right to claim that your capital has enabled the same percentage ownership of any environmental impact created,” asserts Gamman
“In today’s climate-conscious era, where emissions reduction is paramount, it is important that we, as businesses and investors, validate claims to navigate the sustainable investment landscape.”
Limitations of current carbon accounting methods
Social scientific studies, however, challenge the idea that carbon accounting can be used as a sustainability measure. Mathias Lelievre, CEO at sustainability consulting and energy management company, ENGIE Impact, says that, while companies are facing increasing pressure from governments, regulators, clients, employees, and the public to disclose their sustainability performance, carbon accounting methods have historically been time-intensive and overly complex. Without a coherent, recognised methodology, organisations risks hindering the acceleration of decarbonistion solutions.
There have been efforts to introduce a standardised methodology. The Science-Based Targets initiative (SBTi), first established in 2015, is a collaboration between the Carbon Disclosure Project and other global governmental bodies designed to give businesses more insight into the steps needed to achieve net-zero.
According to the SBTi, science-based targets provide a clearly-defined pathway for companies to reduce GHG emissions, helping prevent the worst impacts of climate change and future-proof business growth. Targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
However, Lelievre argues that, as some elements of this standard remain unclear, and a number of the sector-specific guidance documents will not be released until late 2022, there is still some way to go before we have a full and comprehensive picture.
“Several carbon accounting methods, such as the supplier-specific method whereby greenhouse gas emissions data is collected from good or service providers, require an organisation to have extensive data sets in order to accurately measure and predict CO2 emissions. Many organisations, however, lack the data quality necessary to conduct such analysis,” Lelievre points out.
“Carbon accounting methods should, therefore, look to incorporate a programme that integrates emissions data into a single, open platform where the necessary AI and machine learning can be conducted to model missing data. This will enable more organisations to accurately accounts for their emissions data without having to spend huge amounts of time and money gathering data from multiple sources.
“Essentially, carbon accounting methods need to compliment the businesses they were created to support,” concludes Lelievre. “It is not only a question of compliance and reporting; it is, first and foremost, about enabling the internal sustainability transformation companies need to drive.”