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NET ZERO NOW | ACCOUNTING FOR ‘SCOPE 3’ CARBON EMISSIONS
Last updated: 23 Oct 2023 08:30
Posted in: AIA
Net Zero Now's Eddie Herbert explains ‘Scope 3’ carbon emissions, or how accountants can make a real difference to our planet, one balance sheet at a time.
With climate change a growing concern worldwide, all businesses are under increasing pressure to reduce their greenhouse gas emissions. However, the majority of companies overlook their greatest source of emissions – those that go by the name of ‘Scope 3’.
As trusted advisors with extensive financial and operational insights, accountants are well‑positioned to help clients accurately measure and reduce these ‘hidden’ emissions across their value chains. By mastering the complex arena of Scope 3, accountants can play a leading strategic role in accelerating the emissions reductions needed globally.
What do we mean by ‘Scopes’?
Greenhouse gas emissions are categorised into three Scopes by the Greenhouse Gas Protocol:
Scope 1 covers direct emissions from a business’s operations; for example, those arising from the fuel being burned by a business in boilers and vehicles.
Scope 2 refers to emissions from purchased energy, like the electricity used by an office.
So, what about Scope 3? Simply put, it’s everything else that a business causes indirectly, through its operations. When a supplier ships parts for assembly, an employee commutes to work or a customer disposes of a product, greenhouse gases are released into the atmosphere.
And herein lies the problem in calculating Scope 3 measures. While Scope 1 and 2 emissions from operations and purchased energy are relatively simple to calculate from data that is more readily available (such as an energy bill), Scope 3 encompasses emissions all along the value chain, making them challenging to measure and reduce. However, since they often comprise over 70% of a company’s total carbon footprint, we really can’t let a little complexity get in the way of full accounting.
Overcoming complexity and inconsistency
Some of the problems of calculating Scope 3 emissions arise from the complexity that is inherent in value chains, which are often global. The huge number of emissions sources both upstream from suppliers and downstream from customers, and the difficulty of accessing good quality data, make this job tricky, to say the least.
On top of this, different data collection processes and measurement standards mean that data is often inconsistent, missing and difficult to compare. Variations in methodologies, what to include and attribution methods often result in data gaps and inaccuracies. This inconsistency makes it extremely difficult to develop a comprehensive and reliable Scope 3 emissions profile.
And this is where accountants come into play. Fortunately, with immense expertise in collecting, consolidating, analysing and reporting financial information, accountants have an unparalleled understanding of, and access to, the operational data needed to calculate emissions.
This puts accountants in a prime position to overcome data accessibility challenges and unlock accurate Scope 3 measurements. Some Scope 3 emissions, such as employee commuting or business hotel stays, can be captured relatively easily, through surveys, for example.
As more businesses are beginning to measure and report on their carbon emissions, data is increasingly available to businesses looking to understand the impact of their supply chains. For example, suppliers are being increasingly asked about the footprint of their services and/or products, and so are incentivised to measure and provide this information to retain customers.
David Rothera, Head of Sales at carbon measurement and reduction platform (and AIA partner) Net Zero Now, says: ‘In the fight against climate change, accountants can play a pivotal role, and their understanding of carbon accounting is their secret weapon. By calculating its carbon footprint, including Scope 3 emissions, an accountancy firm is not only acting responsibly but also seizes the opportunity to provide an invaluable service to its clients. It’s a commitment to painting the full picture of financial and environmental stewardship, one balance sheet at a time, and catalysing a sustainable future.’
Scoping out an opportunity
Getting to grips with Scope 3 undoubtedly presents a major business opportunity for accountancy firms.
With climate action accelerating across all sectors, demand is growing for guidance on emissions measurement, reporting and reduction strategies. By conducting supplier audits, accountants can help clients to decarbonise their supply chain, as suppliers measure, report and reduce impacts.
Reducing Scope 3 emissions requires increasing collaboration with suppliers and stakeholders. As trusted advisors, accountants have established relationships and credibility that facilitate this engagement, helping to secure quality emissions data.
Their oversight of supplier audits enables clients to drive decarbonisation across their supply chain while expanding sustainable procurement options. Moreover, as more suppliers respond to client requests by disclosing their own environmental footprints, the availability of high-quality Scope 3 data will progressively expand.
Keeping ahead of regulation
As jurisdictions across the globe mandate climate-related financial disclosure rules, the regulatory landscape is shifting rapidly. More rigorous sustainability reporting requirements mean that companies must measure and disclose Scope 3 emissions from across their value chain.
Accountants well-versed in emerging regulations can provide immense value by ensuring that their clients are compliant. This includes advising them on which emissions data needs to be reported, and by which methodologies and standards. With their extensive experience guiding regulatory compliance, accountants are perfectly positioned to consult clients on sustainability disclosure.
Measuring your client’s emissions need not only be part of their Net Zero goals, but can also reduce their costs. Accountants can help their customers to reduce inefficiencies through technology investments with good ROIs or simply help to increase the efficiency of the business’ operations (energy, travel and logistics, and so on).
Uncovering these win-wins enables you to provide immense strategic value as clients work to simultaneously cut costs and combat climate change.
The bottom line
The bottom line is that understanding Scope 3 is imperative for accountants guiding clients to Net Zero. This is why accountancy firms who equip themselves to navigate the Scope 3 challenge will cement themselves as true strategic advisors.
With their unparalleled view into the financial and operational data of organisations, accountants have a unique capability and responsibility. By mastering the complex arena of Scope 3 emissions, accountants can play a leading role in accelerating the massive emissions cuts needed across all sectors, globally.
Eddie Herbert is from Carbon Measurement and Reduction Platform Net Zero Now.
"In the fight against climate change, accountants can play a pivotal role, and their understanding of carbon accounting is their secret weapon. By calculating its carbon footprint, including Scope 3 emissions, an accountancy firm is not only acting responsibly but also seizes the opportunity to provide an invaluable service to its clients."