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What Is Carbon Accounting And Why Is It Important?


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We talk a lot about climate change and greenhouse gasses. For Earth Day, President Biden announced a new commitment to protecting America’s old growth forests. But while headlines ring alarm bells and warn of impending legislation and measures like carbon taxes, many people and businesses don’t know where to start when it comes to measuring their climate impacts.

Greenhouse gasses include a number of different gaseous compounds like carbon dioxide, methane and nitrous oxide. They’re byproducts of natural processes like cellular respiration and decomposition, and also from industrial processes like burning fossil fuels.

Today, carbon emissions reporting is often required as part of larger Environmental Social and Governance or ESG reporting programs. Investors look for formalized ESG reports and carbon accounting that comply with global carbon accounting standards so they can make confident financial decisions.

Understanding a business’s operational impact on climate change starts with estimating carbon emissions. But it’s more than simply looking up last year’s utility bills. Full carbon accounting can include process emissions, but also emissions up and down the supply chain or throughout an investment portfolio. Suddenly carbon accounting isn’t so simple.

What Is Carbon Accounting?

Carbon accounting is the process of calculating GHG emissions. Although there are a number of different GHGs to consider, the term carbon accounting comes from the harmonization of emissions into what is referred to as carbon dioxide equivalents, or CO2e. Carbon dioxide is the most common greenhouse gas, though others have a more significant impact on global warming.

To estimate total CO2e, businesses need to compile operational information like fuel combustion for process or comfort heat, as well sources of greenhouse gas emissions in the supply chain or from their financial portfolio.

Organizations use internationally verified frameworks and emission factors to estimate impacts. Emission factors calculate releases of gaseous byproducts based on, for example, the total amount of natural gas burned over the course of a year.

Why Is Carbon Accounting Important?

Carbon accounting is part of a changing view on sustainability that makes the goal of becoming a sustainable business something that is quantifiable. It’s not enough to tout a recycling program or community clean up volunteering. Businesses striving to meet sustainability targets need to be able to show progress.

Although individual businesses have made great strides to understand and reduce their carbon footprint, the truth is, the financial industry still has over $3.8 trillion invested in the fossil fuel sector. To make better decisions going forward, they need to understand where their dollars are still supporting major emitters, and which parts of their portfolio are making better progress in finding options to decrease carbon emissions in the future.

Ultimately, the benefit of carbon accounting is the ability to provide investors with consistent and verifiable data from which they can make confident financial decisions. Using global carbon accounting standards means that emissions can be compared within a portfolio, across industries, and year over year.

What Are Methods In Carbon Accounting? 

With this focus on consistency, businesses need to acquaint themselves with carbon accounting standards and methodologies. This task alone can be daunting, before the calculations even start, with hundreds of standards to choose from.

In late 2021, the Partnership for Carbon Accounting Financials (PCAF) and CDP announced a collaboration to help the financial industry quantify and understand its financed emissions. The Global GHG Accounting & Reporting Standard for the Financial Industry was first published by PCAF in 2020. The standard covers five major elements of GHG reporting for banks and lenders including:

  • Understanding what GHG accounting is
  • Identifying business goals
  • Reviewing accounting and reporting principles and rules
  • Reviewing and applying accounting methodologies for each asset class
  • Reporting emissions

The asset classes included in the standard are listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans.

Find the Right Carbon Accounting Partner

Carbon accounting is an ongoing process, with regular updates required for leadership and investors. The standards and methodologies continue to evolve, and staying up to date can be a time consuming process. 

Many businesses and investors are looking for partners who can help streamline their GHG emissions calculations, and help keep them current. FigBytes is a cloud-based platform that helps organizations keep track of their ESG reporting, including carbon accounting. Working with a partner like FigBytes helps businesses:

  • Establish a credible GHG inventory
  • Predict the best strategy to reduce GHG emissions
  • Reduce climate accounting costs

If you’re looking to better understand how climate accounting fits into a larger ESG reporting program, check out this article here.

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