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GREENHOUSE GAS ACCOUNTING AND NET ZERO ADVISORY
Last updated: 05 Jul 2023 11:00
Posted in: Sustainability
In the second of a four part series, Dr Peter Ellington and Fran Ellington explain how forward-looking accountancy practices are offering greenhouse gas accounting and net zero advisory services, supporting businesses to transition to the new sustainable economy.
Accounting for greenhouse gas emissions is like accounting for costs. It starts with an estimation of total greenhouse gas emissions for a business split into categories. From this categorisation, the causes of the emissions can be identified. Once identified, options for reducing those emissions are evaluated. This leads to an agreed emission reduction plan that can be managed going forward.
Accountancy practices can provide a GHG Accounting service to their clients. Alternatively, they can appoint a third party to do the evaluation instead. Either way, greenhouse gas accounting and net zero advisory is a natural extension to their service. Nick Hajdu from AIA’s partner Net Zero Now says:
‘The bigger framing of this service is that larger businesses are already legally obliged to measure and report on their carbon emissions and that this legislation will be coming soon to all businesses of all sizes. So it will be like pensions: no matter how small your business, you’ve got to provide one. It will be the same for carbon emission reporting. And that’s where I think accountants come in – as every business will need to turn to their accountant for help with what is becoming known as “carbon accounting”. The savvy accounting practices will start offering this service early.’
The steps involved in a greenhouse gas accounting and net zero advisory are as follows:
Measure greenhouse gas emissions.
Develop plans to reduce greenhouse gas emissions.
Set targets and commitments.
Incorporate into advisory services.
Training and gaining knowledge
The first step is to identify training requirements and invest in programmes to expand your team’s environmental, social and governance (ESG) and greenhouse gas emission knowledge. Encourage staff to pursue certifications in sustainability accounting and undertake continuous professional development, such as AIA’s online CPD. This investment in training demonstrates your commitment to staying ahead in the field.
Partnerships and collaborations
Accountancy practices should consider partnerships with environment and energy experts. This will combine the accountant’s practical knowledge of business, accounting, measurement, management accounting, investment appraisal, critical thinking and target setting with practical expertise in innovative methods for reducing carbon.
An alternative to developing an in-house service is to outsource to companies such as AIA partner Net Zero Now or others such as Auditel or Greenly. Even when outsourcing, accountants should remain involved with their clients’ greenhouse gas accounting and reduction plans to ensure that they are integrated into their clients’ finances and the advice that they provide.
Understand what is being measured
Greenhouse gases are gases that trap heat in the earth’s atmosphere, contributing to global warming. Major greenhouse gases include carbon dioxide, methane, nitrous oxide and fluorinated gases. Human activities, like burning fossil fuels and deforestation, have increased greenhouse gas concentrations, leading to accelerated climate change.
Scope 1 emissions are direct emissions from sources that an organisation owns or controls, such as diesel vans or gas boilers for heating and water.
Scope 2 emissions are indirect emissions from fossil fuel burned elsewhere on a business’s behalf, such as the consumption of purchased electricity, steam, heat and cooling.
Scope 3 emissions encompass all other indirect emissions that do not fall under Scope 2, including upstream and downstream emissions from purchased goods and services, capital goods, upstream transport, downstream distribution, waste and water consumption, processing of sold products, business travel and commuting (value chain emissions). Measuring Scope 3 is often challenged, but in many cases it represents between 60% and 80% of a business’s emissions. By measuring Scope 3, we can accelerate the global net zero target by putting pressure on suppliers and designers of products and services to decarbonise and work towards a circular economy.
Step 1: Measure greenhouse gas emissions
Accountants can establish a comprehensive greenhouse gas accounting and net zero advisory service by integrating greenhouse gas emissions estimation tools and add-ons to cloud accounting systems like Xero, QuickBooks and FreeAgent. Platforms such as Normative, Sage Earth or Ecologi Zero can seamlessly connect with these accounting systems, enabling the efficient tracking of an organisation’s carbon footprint.
Most of these emission estimators are aligned with the international standards set by the Greenhouse Gas Protocol, the Task Force on Climate-related Financial Disclosures (TCFD) and Science Based Targets initiative (SBTi) reporting.
There is a list of emission estimators below. These carbon-tracking software platforms (aligned with cloud accounting solutions) are designed to simplify emission estimations and are accessible to accountants. They require a small amount of activity-based data such as heat, power, fuel and water consumption, employee commuting and waste.
By analysing a business’s Scope 1, Scope 2 and Scope 3 emissions, accountants can propose a combination of short, medium and long-term solutions to reduce emissions in line with the business’s goals. This process establishes a reliable estimate of greenhouse emissions.
The measurement of greenhouse gas emissions can be accounted for like costs. Once established, as with costs, accountants can use their skills to identify what activities cause the emissions.
By identifying causes, accountants can advise and budget for carbon reduction plans and net zero strategies. By combining these tools with tailored workshops which include key stakeholders within each business, plans can be designed to address each client’s unique circumstances.
Forward-thinking accountancy practices are providing crucial information for their clients to create customised net zero targets, strategies and authentic narratives about their sustainability journey.
Carbon Trackers (that integrate with accounting packages)
This is the best globally available manual calculator which estimates all three scopes of emissions. The Business Carbon Calculator is optimised for businesses with fewer than 50 employees and is offered, among others, via the UN Race to Zero-backed SME Climate Hub for free. Many small businesses will need the help of a ‘friendly accountant’. Expenditure from P&L Account is cross-referenced with final accounts. Data needs to be categorised and manually uploaded.
Normative is a full-service tool for businesses to account for and reduce their emissions. Normative uses the GHG Protocol’s hybrid methodology to process both spend-based and activity-based data, ensuring comprehensive, accurate and scientifically rigorous emissions calculations.
Automatically links with expenditure. Manual uploads of activity-based data required. Current integrations (UK only at present): Sage Business Cloud Accounting, Sage 50, Xero, QuickBooks On the way: Other Sage products, Dynamics, FreeAgent
Simple to set up and free to use. Automatically imports business transactions. Requires input of a small amount of activity data. Identifies emissions hotspots and provides reduction advice. UK Service industries only Companies with 100 employees or less
Carbon footprint is third-party verified. A very different and possibly more accurate approach – one to watch! 10% discount code: enter TBL10 into the promo code area on checkout. Syncs with utility bills and csv files to measure the types of products and services being used rather than the amounts being spent US and Canada
Focus on employee education and engagement, including staff footprint quiz, presentations and comms toolkit. Alongside spend-based data, activity-based data such as electricity, employee commuting, fuel and waste are required. Integrates with Xero expenses for spend based analysis. CSV upload or digital data input for companies not using Xero Australia, New Zealand, UK
Note: The above list is not exhaustive and there are new platforms that we have not yet tested; for example, Reshift works with Xero, and Net Zero Now are developing a platform that will be available later in 2023.
Click here for a comprehensive list of carbon trackers.
Step 2: Develop plans to reduce greenhouse gas emissions
After measuring emissions, businesses should consider implementing practical, straightforward and cost-effective plans to reduce Scope 1, Scope 2 or Scope 3 emissions. Many of the estimators provide suggestions for reducing emissions that can be used for further analysis and planning.
The following ideas, categorised by emission scope, are examples of how companies can reduce emissions and meet the targets that they set.
Scope 1 emissions: Direct emissions from owned or controlled sources
Building energy use: Undertake regular maintenance of heating and cooling systems; consider insulating walls, floors, ceiling, windows and doors; consider mechanical ventilation with heat recovery systems; reduce hot water temperature while maintaining hygiene; and display posters to remind staff to turn the power off when it is not required.
Transportation: Replace company cars or delivery vans with electric vehicles, which can also offer significant tax benefits for the owners of companies and staff; and plan and combine journeys to optimise the use of vehicles.
Scope 2 emissions: Indirect emissions from the generation of purchased energy
Lighting: Use LED light bulbs; and implement a lights-off policy with motion sensors.
Electricity generation: Explore renewable energy sources for cost-effective power; and think about longer term investment in energy micro-generation such as solar, wind and biogas.
Scope 3 emissions: All other indirect emissions that occur in an organisation’s value chain
Building materials and fitouts: Choose durable, sustainable furniture to reduce waste and environmental impact.
Commuting: Encourage employees to use lowcarbon modes of transportation; implement a Cycle to Work scheme; and provide electric vehicle charging points.
Purchased goods and services: Buy from environmentally friendly and local suppliers that use sustainable materials and practices; and lobby service providers to disclose their net zero strategy.
Capital goods: Consider the carbon footprint of manufacturing laptops and other electronic devices; and promote recycling and responsible disposal.
Water: Reduce the use of water where possible; and consider rainwater harvesting for toilet flushing.
Waste and recycling: Implement a recycling programme and provide proper bins for different waste types; educate employees about waste reduction and recycling best practices; and encourage reusing and repurposing items before considering disposal.
IT: Review the amount of data that needs to be stored and the carbon footprint of that storage; and don’t needlessly reply to emails!
By implementing measures such as these, targeted to a business’s unique carbon footprint, they can set realistic and achievable targets for reducing emissions across all three scopes.
Step 3: Set targets and commitments.
Setting annual targets is crucial for an effective net zero reduction programme over time. Greenhouse gas emission reduction programmes are like cost reduction programmes. Plans and targets for monitoring are critical to success.
Here’s why setting annual targets is essential:
Monitor progress: Targets provide a benchmark for monitoring progress and identifying improvement areas. Regularly reviewing performance enables data-driven decisions, strategy adjustments and effective resource allocation.
Accountability and transparency: Setting and reporting targets fosters accountability and transparency, encouraging employees to take ownership and building trust with stakeholders.
Adapt to change: Annual targets allow businesses to adapt strategies in response to evolving market conditions, regulatory changes or technology advances, maintaining momentum in their net zero journeys.
Drive employee engagement: Targets can boost employee engagement, motivation, productivity and innovation as they work together to achieve common goals. Accountancy skills are essential for setting and monitoring targets. For example, to make comparisons over time, it will be likely that adjustments are necessary to make meaningful comparisons, such as carbon intensity per employee or per unit of expenditure or unit of output/activity.
Whether an accountant manages the whole process or outsources it, carbon targets must be aligned with financial budgets and cost-benefit appraisals to ensure that sustainability initiatives are integral to the business’s financial planning and decision-making processes.
Step 4: Incorporate into advisory services
As businesses increasingly prioritise sustainability, accountancy practices have a unique opportunity to offer their clients greenhouse gas accounting and net zero advisory services. With their expertise in financial management, reporting, strategy, planning and budgeting, accountants are well-positioned to help clients transition to a sustainable economy. Thereby, they can combine the accountant’s practical knowledge with plans for achieving the following benefits:
Cost reduction: Actively working to lower carbon emissions can reduce energy consumption and resource usage, resulting in long-term cost savings for businesses.
Customer attraction: As society becomes more aware of climate change issues, customers are drawn to businesses committed to sustainability. A net zero plan can enhance a brand’s reputation and drive customer loyalty.
Competitive edge: Government entities, larger suppliers and other vital stakeholders increasingly prioritise the sustainability credentials of their partners.
Employee engagement: Demonstrating a commitment to sustainability helps attract and retain top talent, fostering a positive and productive work environment.
Easier access to financing: Investors, lenders and funders increasingly consider ESG factors when making investment decisions. A net zero plan signals a business’s commitment to sustainability, making it easier to secure financing.
Accreditation: Accountants can assist their clients with obtaining accreditation. Options include: PAS2060 – Carbon Neutral (BSI); ISO 14064 (based on greenhouse gas protocol); B-Corp (broader and overlaps with ESG); and SBTi Carbon Footprint Certification (certified carbon neutrality).
Accountancy practices can play a pivotal role in helping clients to achieve the benefits of a sustainable business strategy while adapting to the changing market landscape. This proactive approach can add value to their service offerings and solidify their position as trusted advisors in the transition to a low-carbon economy.
Accountants can offer valuable support to businesses as they work towards their net zero goals. It is a natural extension of the accountant’s role to measure greenhouse gas emissions alongside the finances of a business and to help their clients set goals to reduce their emissions and to align these plans to their finances.
Linking greenhouse gas emission estimators to cloud accounting packages is now a recognised extension to a business’s accounting function. Facilitating workshops to brainstorm solutions that are linked to financial plans is a natural add-on to an accountancy practice’s advisory services. By adopting carbon accounting, accountants can contribute to a greener planet and develop their practices for the future.
Circular economy: In a circular economy, things are made and consumed in a way that minimises our use of the world’s resources, cuts waste and reduces carbon emissions. Products are kept in use for as long as possible, through repairing, recycling and redesign – so they can be used again and again. (World Economic Forum)
Carbon neutral: A business can claim to be carbon neutral annually when it has measured its greenhouse gas (CO2e) emissions, offset historical emissions and published a target and plan to reduce these emissions to net zero by at least 2050.
Carbon offsetting: Carbon offsetting involves compensating for greenhouse gas emissions by investing in projects that reduce emissions elsewhere. This could involve funding renewable energy, reforestation or energy efficiency projects. The goal is to achieve carbon neutrality by balancing out carbon emissions with actions to reduce or offset these emissions. NB Carbon offsetting does not achieve net zero.
CO2e (Carbon dioxide equivalent): Each greenhouse gas is given a relative factor based on its comparative global warming potential over a 100 year timeframe. For example, 1 tonne of methane is reported as 25 tonnes of CO2e.
Net zero: According to the SBTi (Science Based Targets Initiative) most businesses can claim to be net zero once they have reduced their emissions by at least 90% from their baseline year. Global net zero will be achieved when the total amount of greenhouse gases released and the amount removed from the atmosphere reaches an equilibrium.
Fran Ellington is the Sustainability and Business Development Director at Triple Bottom Line Accounting
Dr Peter Ellington is CEO and Founder of Triple Bottom Line Accounting, a UK based digital practice providing a range of services to SMEs.
"Accountants can offer valuable support to businesses as they work towards their net zero goals. It is a natural extension of the accountant’s role to measure greenhouse gas emissions alongside the finances of a business and to help their clients set goals to reduce their emissions and to align these plans to their finances."