What Gets Measured Gets Managed: The Challenge and Importance of Carbon Accounting

Francesca Whitehead
G2 Insights
Published in
7 min readJan 10, 2022

“You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal,” Bill Gates wrote in The Wall Street Journal in 2013. “This may seem basic, but it is amazing how often it is not done and how hard it is to get right.” While Gates was referring at the time to global public health and education outcomes, the principle describes one of the core challenges in our collective efforts to combat climate change.

As the urgency of the climate crisis has become apparent, hundreds of companies — including some of the biggest global emitters — have made net zero commitments. At the core of these pledges are three key measurements: the level of current greenhouse gas (GHG) emissions, the impact of decarbonization strategies, and the quantity of carbon offsets necessary to reach net zero. Future blog posts will explore decarbonization and carbon offset markets, but an antecedent to the entire net zero movement is the ability to simply count GHG emissions. Tellingly, The Climate Pledge, a net zero organization with large multinational signatories, lists regular measurement and reporting as the first element of the pledge.

Source: Climate Pledge

Why is this hard?

Carbon accounting is complex because businesses are complex. Take the example of an international clothing manufacturer, Label A. Label A produces clothes at their own factories that are spread out across the globe. So how should they measure their total GHG emissions? The first piece — referred to as Scope 1 emissions — is the measurement of direct GHG emissions of their own production processes, which requires a massive data collection undertaking for a company of significant scale. Scope 1 includes emissions from all company buildings (fuel, heating, etc.), fuel/emission for all company vehicles, and emissions from any industrial processes (e.g., CO2 from textile production, factory fumes, chemical dye usage). Each of the items listed in Scope 1 are challenging to measure on a standalone basis: much of this data isn’t collected today, there are multiple different people/departments that manage these areas, and the data format is likely analog and heterogeneous. Scope 2 emissions are the indirect emissions caused by Label A purchasing energy, generally through a utility provider.

Though Scope 1 and 2 are not without their challenges, the real difficulties are introduced by Scope 3. These are the up- and downstream emissions that Label A is indirectly responsible for, including (but certainly not limited to) business travel, employee commuting, waste disposal, buying and transporting products from suppliers, the emissions produced by selling in stores, and the end-of-life emissions when consumers discard used clothes. This can be especially challenging if a co-manufacturer that services other brands was used in the production process, as Label A would need to measure what percentage of the co-manfactuerer’s total emissions they are responsible for without double counting. However, Scope 3 emissions are a necessary part of carbon accounting: for many businesses, these emissions account for more than 70% of their total carbon footprint. Shell, for example, estimates Scope 3 accounts for 90% of the company’s footprint, and it includes Scope 3 for their energy products in their 2050 climate target. Nonetheless, significant challenges remain for any enterprise to accurately account for these emissions. Because of these complexities, some businesses don’t account for Scope 3 emissions at all, leaving their carbon footprint systematically undercounted. And the SEC may not include Scope 3 in potential carbon disclosure rules.

Before we explore how technology plays a primary role in solving these accounting challenges, it’s important to understand where we are now.

Source: GHG Protocol

What are the current reporting frameworks?

While the ‘Label A’ example was illustrative of the general challenges in measuring Scope 1, 2, and 3 emissions, it failed to capture the specific heterogeneity across industries. No company is the same, but companies in the same industry or sector are likely to have similar emissions drivers, data sources and types, and carbon accounting challenges. But unlike financial disclosures that rely on well-established standards (GAAP) and regulatory regimes, carbon accounting is primarily self-regulated. Without clear and agreed-upon standards, standards have fractured across industries and regions.

Within this balkanized environment, frameworks have been created by non-profit organizations (e.g. SBTi), for-profit companies (e.g. GRESB), and government entities (e.g. EPA). There are also industry organizations that have aligned themselves with, or even created, specific frameworks. Sustainable Apparel Coalition (SAC), for example, created the Higgs Index, but reporting to the index is optional to members. Other industry organizations require members to sign onto their frameworks when joining, such as SASB and PRI. Some companies will become members of industry groups and report to these suggested frameworks, while also voluntarily reporting to additional frameworks. For example, Walmart co-created SAC and reports to the Higgs Index, in addition to reporting on GHG Protocols and SBTi.

Significant variance also exists regionally, as governments create divergent frameworks and enforce different levels of disclosures. In the US, the only mandatory framework is from the SEC, which does not have public disclosure requirements. However, there are a number of mandatory frameworks in Europe and a handful in other regions. For example, in the UK, Switzerland, and the EU, companies’ public disclosures must be in compliance with the TCFD framework.

While far from exhaustive, this brief overview highlights the tremendous variety of frameworks that exist across industries and regions. For companies that have global scale and span multiple industries, these complexities are especially burdensome. And not only are there high administrative costs to companies, but without uniform standards, there is also fear of greenwashing through imprecise carbon accounting.

Where does the data come from?

In short, GHG emissions data comes from everywhere. Data comes from multiple sources across all three Scopes, often in different structures. This is especially challenging for Scope 3 emissions. While a company is likely to measure their own Scope 1 and 2 emissions in a consistent manner, they have to rely on other companies to report emissions related to Scope 3, creating the potential of mismatched accounting frameworks and hard-to-merge data sources. Some companies might use software with APIs, enabling an accessible data stream; others might measure their emissions but do so without easy external access; and certain companies may not measure their emissions at all.

How can technology help?

The market is at an inflection point because many companies, both large and small, have announced net zero targets. The current carbon management TAM is estimated to be $9.5Bn and spend is split between consultants, compliance, and software. Software is currently a small portion of total spend, but as the market continues to mature, it will likely become a larger segment. And unlike the linear growth of consulting and compliance spend, software has the greatest potential to make a scalable impact — and do so relatively quickly.

There are a growing number of software startups focused on carbon accounting, though the players and the market are still in early stages of their lifecycle. Software has the potential to make audits more efficient; enable easier reporting; make historical data accessible; and automate decarbonization suggestions using advanced statistical models, such as machine learning. A useful analogy is the utility of ERP systems for end-of-year financials, which automate and consolidate data flows for an entire enterprise. Carbon accounting software has the potential to add similar value for emissions tracking.

However, key challenges remain for carbon accounting software solutions: the heterogeneity across industry emission factors and regional reporting frameworks, the difficulty of pulling all necessary data in a fully automated way, and serving global clients with complex supply chains.

Within this environment, carbon accounting software solutions have the potential to create tremendous value for companies, but to do so, they should:

  • Be framework agnostic so that companies can report to multiple frameworks until there is more uniformity. Some analysts think that framework consolidation will occur within the next five years, potentially making it easier for accounting softwares to capture larger market share across industries and geographies. But until that happens, working across frameworks will be essential.
  • Provide a SaaS solution that leverages automatic data pulling from multiple databases/sources.
  • Digitize and scale consulting services, such as automated framework outputs, offset recommendations, identifying the largest emission culprits in a supply chain, and decarbonization suggestions.
Source: Making sense of ESG by Monica Varman

Currently, software solutions have substantial progress to make across the bottom row, such as “basic” capabilities for static measurement, periodic reporting, and verification of emissions performance. However, as companies make progress towards net zero pledges, they will look for increasingly sophisticated tools. These capabilities will likely include the prediction of emissions-related risks, identification of emissions drivers and high-value interventions, and dynamic reporting to enable performance tracking.

“What gets measured gets managed,” management theorist Peter Drucker famously said. And while there’s still a long way to go for companies to accurately measure GHG emissions, technology has the potential to help companies — and, as a result, our world — make significant progress on tackling climate change.

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Published in G2 Insights

G2 Venture Partners is a venture and growth capital firm investing in transformative technology companies at their inflection points to build a sustainable future. | www.g2venturepartners.com

Written by Francesca Whitehead

Climate-Technology Investor at G2 | Previously at GS (Investment banking) & KKR (Global Impact) | Brown

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