Carbon crush
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- With compulsory carbon reporting rolling out, ultimately every business will have to track and report on its carbon emissions.
- Spend tracking is simpler, but less accurate. Activity tracking is more accurate, but requires significantly more data.
- With their existing client knowledge, accountants are a natural choice for businesses looking for help with carbon accounting – a great opportunity for the profession.
After years of talk, carbon accounting is finally here. New Zealand made trackingof greenhouse gas emissions mandatory for larger companies on 1 January 2023 and Australia will follow suit on 1 July this year.
Enterprises must report not just the emissions they create driving their own delivery vans and powering their factories, but all the emissions of the products and services they consume in the process of running the business. The requirement to track Scope 3 emissions – those generated through your supply chain – will force thousands of smaller businesses to track their own carbon emissions.
“For example, a bank will want to show that it is reducing greenhouse gas (GHG) emissions in its loan portfolio. They don’t just want to be using an average factor for measuring the emissions of their loan book, they want to have specific data,” says Karen McWilliams, sustainability and business reform leader at CA ANZ. We’re going to start to see smaller entities that don’t have reporting requirements but will need to communicate their emissions up and down their supply chain.”
The Australian and New Zealand governments are modelling their legislation on the global standard released by the International Sustainability Standards Board (ISSB) last year. This standard has also been adopted by the International Financial Reporting Standards (IFRS) body.
In Australia, the initial reporting requirements will apply to the ASX100. However, the federal treasury expects that by FY28 more than 20,000 businesses will need to report on their carbon footprints. Due to Scope 3 reporting, this will also cover every single supplier.
“It’s my strong belief that within five years every single company will have a publicly disclosed carbon footprint. And that will be the only way to do business,” says Catherine Long, CEO and co-founder of Trace, a carbon accounting software company.Tracking by spend
Now that the fight against climate change is moving from platitudes to P&Ls, the number of purpose-built, emissionstracking tools has blossomed.
The first question when shopping for carbon accounting software is how precisely you want to measure emissions. If you’re looking for a general indicator of your emissions or if you have a fairly predictable office-based business, then your expenditure is a quick and easy proxy.
Some types of carbon accounting software will pull your expenses from your (financial) accounting software and assign an average emissions value per dollar. The value varies depending on category; a dollar of air travel will presumably generate more carbon emissions than a dollar of office supplies.
The upside of this approach is that it can be largely automated. Once you have reconciled your transactions and coded them to the chart of accounts, the carbon accounting software can tally up your emissions. As businesses and their external accountants familiarise themselves with carbon accounting, ease of use is a critical factor. Financial-based carbon accounting will likely be popular with those small businesses that are sucked into the reporting framework because of their enterprise customers.
Cogo has built a strong profile in carbon accounting using the spend model. It was built to work with Xero and analyses transaction data to calculate a business’s carbon footprint. Cogo then highlights carbon hotspots and provides tools to reduce emissions. The business can set a target for its emissions based on industry averages and implement recommendations to hit that target.
Cogo has also built Business Carbon Manager, an interface for accounting firms to manage the carbon emissions of their clients. It calculates emissions, prepares carbon accounting reports and incorporates sustainability into your advisory meetings.
It provides personalised advice and actions and is available for firms in Australia, New Zealand and the UK through the Xero App Store. New Zealand businesses can also access the app through a deal with Kiwibank.
The downside of this approach is that it’s not very accurate. For example, a $3000 business ticket from Sydney to Auckland creates fewer emissions than a $2500 premium economy ticket from Auckland to San Francisco. If one of those trips was on a plane using biofuels to reduce its carbon emissions, a financially based calculation would fail to register it.
If you want to use spend-based software, it should plug straight into your accounting software. It is worth checking the list of integrations for each option to make sure you can automate this process, rather than having to manually export data.
“It’s my strong belief that within five years every single company will have a publicly disclosed carbon footprint. And that will be the only way to do business.”
Tracking by activity
Instead of monitoring spend, you can also track emissions by activity. This is where carbon accounting software justifies its value; by making calculations based on specific actions that involve a mix of products and services.
Larger companies with mandated reporting requirements must track Scope 1 and 2 emissions by activity and not spend, according to the global standards agreed to by the ISSB, the Task Force for Climate-Related Financial Disclosures and the Greenhouse Gas Protocol for Carbon Emissions Accounting.
For example, Australian financial comparison site Finder collected data from attendees to measure carbon emissions for its annual Green Awards event. It used Trace carbon accounting software to measure the number of attendees, the type of catering offered, the size and nature of the venue, and the anticipated modes of transport attendees would use to commute to the event. This research produced an expected total for carbon emissions, similar to a budget forecast.
Finder then validated the actual emissions by asking attendees how they travelled to and from the event, a process that Trace calls ‘true up’.
Finder also sought to influence attendee travel choices by sending them green commuting tips in its pre-event communications advocating for lowemissions transport.
Finder’s efforts to track attendee emissions for its event are an example of Scope 3 requirements. Scope 3 tracking is now a standard feature in carbon accounting software. Governments have signalled that the requirement for Scope 3 will eventually extend from enterprise down to small business.
Higher accuracy for Scope 3 emissions may not matter from a compliance perspective, McWilliams says. “Some software companies say, ‘Our software is activity based and not spend based, so
we’re better than the others because we meet the standards’. But that is nonsense. he standards don’t actually specify which method to use.”
Learning the ropes
While carbon accounting is a relatively straightforward record-keeping process, it does require understanding various reporting standards and terminology. A number of carbon accounting software companies offer educational programs and products specifically for accountants to help them get up to speed.
Trace has a fellowship program that consists of three workshops to certify you as a carbon accounting practitioner and join its community of environmental, social and governance (ESG) professionals. The workshops show you how to use Trace for reporting and include a technology and carbon model that maps spend and activity-based data to international standards and best practice.
Carbon accounting app Sumday has its own academy and claims to follow an education-first approach, with practical training for public practices. It also retains terminology familiar to accountants, such as a carbon trial balance and carbon general ledger.
CA ANZ has already been fielding inquiries from accountants in public practice looking to help their clients with carbon accounting, McWilliams says. “It’s a bit like doing your tax return. You don’t have to get an accountant to help you do your return, but a lot of people do because they go into their accounting software once a year and have to try and remember how to even log on.
“Accountants already know their client’s business, so once they get familiar with a GHG emissions calculator, they can ask the right questions and help their clients measure their emissions.”
How much detail is enough?
Crunching the numbers to get a carbon cost per unit can take a lot of effort, more than many accounting firms can handle on their own.
Consequently, carbon consultancies such as 2XE and farming-focused Agri-Intel are sprouting up to handle more complex activity-based tracking. These consultancies often have their own software tools, such as 2XE’s Net Zero Management System which manages net zero programs, projects and client data.
The drive for detail in Scope 3 emissions will most likely end up tying carbon accounting to operational reporting. Then, businesses construct the carbon footprints of their products and services based on unit economics.
Enterprises such as Apple and Qantas already provide the carbon cost for each laptop or flight and, in Apple’s case, use it as a marketing pitch over competitors. McWilliams agrees that unit economics will probably be the end goal for carbon tracking, “but I think there is a need to balance the cost and effort with the outcomes of the approach,” she says.
“Smaller businesses that don’t have very high emissions need to be opting for the easiest tool to implement,” McWilliams says. “A larger entity that is publicly reporting its emissions, particularly Scope 3 emissions within that value chain up and down, it’s going to want to get more accurate data to show the impact overtime.
“It comes back to your objectives for measuring emissions and how much time and money you are willing to invest.”
However, Trace’s Long says that operational reporting is not enough; the data required to calculate a carbon footprint comes from multiple sources that aren’t captured by production software such as enterprise resource planning (ERP).
“I completely agree that if you’re a manufacturing business you ideally want the data about the raw materials you’re buying. But equally, you need to know what you’re spending on services, like your printing or your software solutions. Similarly, you need to figure out how your staff are travelling to work, how many days they’re working from home and whether they have green energy at home. That doesn’t come from an ERP platform,” Long says.
“I think it’s going to be like this web of data. That’s what we’re trying to solve, working out which are the most commonly used data sources for our clients so that we can pull it all into one place.
“But every company has a different tech stack. So, it’s going to take a few years to be able to bring it all into one place.”
Getting started
New Zealand is further ahead in embracing carbon accounting and helping businesses reduce emissions. The government released a Climate Action Toolbox that asks a few basic questions about your business and then provides recommendations. For example, how to reduce employee footprints during their commutes encourages active transport such as walking, cycling or scootering.
Each recommendation includes change management tips such as incentivising staff by refunding bus or train fares and disincentives, like having staff pay for parking if it’s currently free.
Some of the recommendations require a bit of work. The advice for reducing office waste by separating garbage by category (landfill, recyclables, paper, food scraps) over a two-week period, and then working out how to reduce each category by 10–30%.
The Australian government has provided educational resources about the impact of climate change. Climate Change in Australia, a collaboration between the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Australian Bureau of Meteorology, is a large modelling dataset that shows predictions of changing weather patterns.
To view CA ANZ’s updated Climate Change Policy Statement that offers member support, including ongoing CPD offerings, guidance and resources, click here.
This article was first published by Acuity Magazine at the following URL: https://www.acuitymag.com/technology/carbon-accounting-software?adobe_mc=MCMID%3D00923008634377684322108664998657937165%7CMCORGID%3DE8464D1A576ABE727F000101%2540AdobeOrg%7CTS%3D1707102484
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