With urgent climate change action at the forefront of global sustainability efforts, carbon accounting is quickly becoming a business-critical consideration. As investors and regulators alike demand greater transparency, those in the private markets need to rise to the challenge to accelerate decarbonization and achieve meaningful emissions reduction targets.
To help firms get a handle on carbon accounting, Novata recently held a webinar addressing the challenges and opportunities in the private markets. Moderated by Meredith Binder, Chief Marketing Officer at Novata, the session explored how companies can navigate the complexities of carbon accounting with Mark Fischel, Head of Product at Novata, and Mark Kroese, an industry leader and a Novata Sustainability Board Member.
Here are a few trends and key takeaways from the session:
1. The Prominence of Carbon Disclosures in Regulations
In line with the Paris Agreement’s aim of limiting global warming to 1.5°C, mandatory carbon disclosures are steadily gaining momentum globally. One such regulation is the EU’s Corporate Sustainability Reporting Directive (CSRD), which is setting new standards for rigorous carbon accounting of a company’s emissions across its operations and value chain.
The CSRD requires the granular emissions reporting and setting of reduction targets across Scopes 1, 2, and 3 for over 50,000 companies globally. Although the first set of firms in-scope will be reporting in 2025, research shows that not everyone is prepared to comply.
BCG found that only 10% of global firms were able to comprehensively measure and report all relevant emission sources. This is despite the CDP estimating that supply chain emissions (Scope 3) are on average 26 times higher than operational emissions (Scopes 1 and 2), with Scope 3 contributing to 99.98% of emissions in the financial services sector. Amid rising regulatory and investor interest, it’s clear that carbon considerations can no longer be ignored in sustainability reporting.
2. Rallying Support in the Journey to Net Zero
For many firms, even knowing when and how to start accounting for their greenhouse gas (GHG) emissions can be a challenge. But understanding why reducing emissions is important to the firm is a good place to begin.
Novata’s Mark Fischel shares that putting carbon accounting in a broader business context can be highly effective when it comes to gaining stakeholder buy-in, as it demonstrates the ways it can be a lever of strategic value creation. He adds that achieving climate neutrality is a responsibility that goes beyond the sustainability department — open a dialogue to get everyone on board to support this process, from HR to procurement, and engage employees to be an active part of building a culture of sustainability.
On that note, Novata’s Mark Kroese recommends mobilizing a centralized, specialized task force to lead the charge in operationalizing sustainability, which involves seamlessly integrating sustainability considerations with good business practices. Doing so provides a more coordinated approach to your ESG initiatives, and is also crucial for setting the right targets and measuring progress in the pursuit of decarbonization.
3. Gaining Carbon Data Clarity for More Effective Reporting
Grasping the extent of your current carbon footprint starts with having the right data. Fischel notes that your carbon accounting progress should answer the question of how quickly can you decarbonize your business. “Getting a quality data set is key to benchmarking your performance against peers and competitors in the same industry,” he stated.
A good starting point is to calculate your controllable operational emissions, which fall under Scope 1 (direct emissions) and 2 (energy emissions). Focusing on direct emissions helps companies establish a baseline to better understand their material impact on the environment, and allows for targeted reduction strategies to improve efficiencies and performance.
Once firms have built a solid foundation for their carbon accounting efforts, they can then perform a high-level materiality exercise to work out which parts of Scope 3 are most relevant to the business. To make Scope 3 calculations a more manageable task, Kroese advises applying the 80-20 rule to identify high-emitting emission sources (i.e., 80% of impact will come from 20% of emissions sources).
4. Promising Developments in Carbon Accounting
Although challenges such as capital constraints and reporting inconsistencies persist, there are signs of progress in the race to attain net zero.
Fischel points out that prioritizing Scope 3 reporting can unlock plenty of opportunities for companies, as decarbonization can be a powerful market differentiator. Carbon accounting can offer insights that yield substantial financial and business benefits, such as higher valuations and reduced operating costs. The numbers corroborate this: A 2023 survey on carbon emissions showed that 40% of respondents reported an annual financial benefit of $100 million for meeting their reduction targets.
Data gaps have historically been one of the major barriers to emissions reporting, further exacerbated by poor data quality and value chain visibility. This has led to a reliance on spend-based, or secondary and proxy data in place of primary data, which lacks granularity and cannot accurately reflect a company’s actual GHG emissions.
However, Kroese shares that the industry is seeing a significant shift in quantifying carbon data, transitioning from a spend-based methodology that utilizes industry averages to a more sophisticated, detailed activity-based methodology. “It is a really exciting thing that will get that carbon ledger in the world to be more accurate,” he said.
5. Harnessing the Power of Technology To Ease Reporting Struggles
Advancements in technology are helping to ease the complexities of carbon accounting. In fact, according to BCG, companies that leveraged automated digital solutions are 2.5 times more likely to report their emissions more comprehensively. For firms considering investing in a solution, our panelists outlined some key features to look for:
- Interoperability: The solution should seamlessly integrate with existing legacy applications and software. By syncing with existing ERP, finance, and other business-critical systems, it pulls and centralizes GHG emissions across different sources to streamline the data management process.
- Dynamic emissions calculation coverage: From preparing a robust carbon inventory to automating the real-time collection, tracking, and reporting of Scope 1-3 emissions, the selected software should empower companies with the business intelligence to make progress on decarbonization goals.
- Purpose-built carbon accounting technology: Having a digitized, end-to-end emissions management solution can enhance data transparency, strengthen regulatory compliance, and assist in the development of risk mitigation and emission reduction strategies.
The Novata Carbon Navigator offers these capabilities and more, including API integrations, built-in investor-grade audit trails, and proprietary benchmarks to see how your reduction targets compare.
Simplify Your Journey With the Right Support
Carbon accounting is not without its challenges; but with proper preparation, processes, and support in place, firms can establish a solid framework to measure and reduce their carbon impact. Check out the resources below to learn more:
- Watch the full webinar replay here.
- Access your complimentary copy of our Carbon Playbook.
- See the Novata Carbon Navigator in action.
- Get expert guidance from Novata’s Advisory team.