1.1 Understanding Carbon Accounting
If you are familiar with standard financial accounting, you may also be aware of the rising prominence of carbon accounting. Carbon accounting, also known as carbon footprinting or greenhouse gas (GHG) accounting, is the process of quantifying and tracking the greenhouse gas (GHG) emissions produced directly and indirectly by an organisation’s economic activity. While complex in practice, the fundamental premise is measuring the carbon footprint tied to operations.
In carbon accounting, GHG emissions are represented by the symbol ‘CO2e’, meaning ‘carbon dioxide equivalent.’ This is because carbon dioxide (CO2) is the most common greenhouse gas emitted, resulting in all other significant GHGs being assigned a CO2e value.
Determining the equivalent value of a GHG involves multiplying its quantity by its global warming potential (GWP). The GWP of a GHG represents the amount of energy that one tonne of that GHG will absorb within a specific timeframe relative to the emissions of one tonne of carbon dioxide. Essentially, it serves as a metric to standardise the impact of different gases on global warming.The higher the GWP, the more significant the contribution to global warming. For example, methane (CH4) has a higher GWP than carbon dioxide because, although it persists for a shorter time in the atmosphere, it is much more effective at trapping heat during that time, thus amplifying its warming potential.
Off the back of ongoing Government consultation on climate-related financial disclosures, NetNada predicts that disclosures such as a firm’s carbon emissions will become mandatory by 2025. Furthermore, with relevant legislation currently before Parliament, the Australian Accounting Standards Board (AASB) is poised to develop climate-related standards in the near future.
These soon-to-be reporting frameworks are ultimately the result of rising investor and stakeholder interest in firms’ Environmental, Social and Governance (ESG) performance. Clearly, the climate reporting train is departing soon, and we’re going to board quickly so we stay ahead of impending regulations.
But before we can report or action anything, we must have data. This is where carbon accounting comes in. By engaging in carbon accounting, we can assess a firm’s environmental impact and identify opportunities for emissions reductions and sustainable practices. Then, we can relay how we have metrically improved and the initiatives we have actioned in our reports. Standardised protocols for carbon accounting have been established worldwide, notably the Greenhouse Gas Protocol. We will unpack these standards comprehensively in later modules.
Here at NetNada, we offer tailored software and templates to assist companies in carrying out carbon accounting aligned with recognised global standards. At its core, this involves gathering data on emission sources within the business, like energy, transportation, materials, and procurement. Existing financial records can serve as a starting point for extracting activity information. Conversion factors are then used to translate activities into carbon equivalents.
Industry-accepted greenhouse gas accounting principles have been formulated through the Greenhouse Gas Protocol, providing a consistent framework. NetNada equips companies to conduct carbon accounting in conformity with these universal GHG standards.
1.2 Why the Focus on Carbon Accounting?
In 1978, online messaging emerged through hobbyists' Bulletin Board System. Real-time chat followed in '88. By 1997, social networking allowed strangers to connect across the world, and between 2003 and 2006, LinkedIn, Myspace, Facebook, Flickr, Reddit and Twitter (now X) formed the earliest foundations of ‘Social Media’.
Retrospectively, it may feel extremely obvious that all the signs were there for businesses to begin developing their online presence and investing in digital communication channels. For example, we can all point our fingers at the Blockbuster’s of the world and say “how did you not see that coming?”
Climate Change is the same unstoppable force entering the business world that brought down the likes of Kodak, Nokia, Blackberry, Polaroid, Toys “R” Us - businesses that failed to adapt to global digitisation.
Behind all the misinformation, disinformation, politicisation, commercialisation, fraud, and so on, the fact remains that across vast geological timescales, the planet we live on has experienced natural interglacial cycles that see global temperatures warm and cool, ice caps melt and freeze, and sea levels rise and fall - climate change.
Indeed, climate change is natural, but the rate at which humans have accelerated the process is not. Human-induced greenhouse gas emissions have tipped Earth’s delicate balance of complex systems into disequilibrium, and continue to do so. So why should businesses care?
Businesses rely on the natural conditions that compose our world to generate growth. Climate change threatens to destroy these natural conditions, resulting in zero growth.
There’s a great irony in the traditional (environmentally-ignorant) business model; that is, businesses’ dependence on natural conditions to increase production results in the degradation of these natural conditions. Consequently, production decreases as supply costs rise.
So businesses are fundamentally incompatible with environmental sustainability?
No, it is the perception that businesses must exploit the environment to generate growth that is incompatible.
Let me propose to you a business concept pioneered by academics Michel Porter and Mark Kramer. The idea goes that businesses’ can create environmentally efficient win-win solutions that see corporate profits increase alongside, and because of environmental improvements. They call this ‘Shared Value’. And yes, it is possible!
Among other things, sustainable initiatives can safeguard businesses against the risks of climate change, build consumer and investor trust, create brand reliability and differentiation, provide access into emerging markets, encourage talent attraction and retention, and ensure compliance with tightening environmental regulations.
Indeed, corporate sustainability has become a licence to operate. Businesses can no longer exist in isolation from their broader social and environmental context. To thrive in a rapidly changing world, businesses must contribute positively to society, minimise harm to the environment, and align their practices with the evolving expectations of stakeholders.
1.3 Differentiating Carbon Neutrality vs. Net Zero
Delving deeper into terminology, it's vital to grasp the nuances between carbon neutrality and net zero. While both terms suggest a commitment to minimising carbon impact, carbon neutral is when an organisation completely offsets all its greenhouse gas (GHG) emissions, whereas net zero is when it emits zero GHGs. Depending on the nature of your firm, business leaders should be working to achieve either of these goals.
Carbon Neutrality: Achieving Balance Through Offsetting
Carbon Neutrality refers to the state in which an organisation balances the amount of GHGs it emits with an equivalent amount that is offset or removed from the atmosphere. Achieving carbon neutrality involves a dual commitment: firstly, to measure and understand the total carbon emissions produced by the organisation, often referred to as the carbon footprint, and secondly, to offset these emissions through investments in projects that either reduce, avoid, or capture an equivalent amount of greenhouse gases.
Net Zero: Originating without Carbon Emissions
Net Zero signifies a state where no carbon emissions are generated in the first place. It goes beyond the idea of offsetting emissions after they occur. In a Net Zero scenario, the focus is on preventing the release of carbon into the atmosphere from the outset. This can be achieved through sustainable practices, renewable energy sources, and the elimination of reliance on fossil fuels.
1.4 Overview of Voluntary Markets vs. Compliance
In the realm of carbon accounting, it's crucial to distinguish between voluntary markets and compliance. Voluntary markets involve organisations taking proactive steps to offset their carbon footprint beyond regulatory requirements. This voluntary action often stems from a commitment to corporate social responsibility and sustainability goals. Compliance, on the other hand, refers to adhering to mandatory regulations set by governments or industry bodies. Understanding the dynamics of both markets is essential for businesses to align their efforts with either or both, depending on their objectives and the regulatory landscape in which they operate.
Voluntary Markets: Proactive Environmental Stewardship
Voluntary markets emerge from a proactive stance on environmental stewardship. In these markets, organisations voluntarily choose to offset their carbon emissions, often surpassing regulatory requirements. This initiative is driven by a commitment to ESG, environmental sustainability, and a desire to be leaders in combating climate change.
Compliance: Meeting Regulatory Standards
In contrast, compliance mechanisms are driven by mandatory regulations set by governments or industry bodies. Governments worldwide are increasingly recognising the urgency of addressing climate change and are implementing regulations to control and reduce carbon emissions. Organisations operating within these jurisdictions must comply with set emission reduction targets and standards. Compliance typically involves meeting specific emission reduction targets within a stipulated timeframe, adhering to government-mandated reporting requirements, and often participating in cap-and-trade or carbon pricing systems.
1.4 Overview of Voluntary Markets vs. Compliance
In the realm of carbon accounting, it's crucial to distinguish between voluntary markets and compliance. Voluntary markets involve organisations taking proactive steps to offset their carbon footprint beyond regulatory requirements. This voluntary action often stems from a commitment to corporate social responsibility and sustainability goals. Compliance, on the other hand, refers to adhering to mandatory regulations set by governments or industry bodies. Understanding the dynamics of both markets is essential for businesses to align their efforts with either or both, depending on their objectives and the regulatory landscape in which they operate.
Voluntary Markets: Proactive Environmental Stewardship
Voluntary markets emerge from a proactive stance on environmental stewardship. In these markets, organisations voluntarily choose to offset their carbon emissions, often surpassing regulatory requirements. This initiative is driven by a commitment to ESG, environmental sustainability, and a desire to be leaders in combating climate change.
Compliance: Meeting Regulatory Standards
In contrast, compliance mechanisms are driven by mandatory regulations set by governments or industry bodies. Governments worldwide are increasingly recognising the urgency of addressing climate change and are implementing regulations to control and reduce carbon emissions. Organisations operating within these jurisdictions must comply with set emission reduction targets and standards. Compliance typically involves meeting specific emission reduction targets within a stipulated timeframe, adhering to government-mandated reporting requirements, and often participating in cap-and-trade or carbon pricing systems.
