Nasdaq ESG Solutions

The best strategies for reducing greenhouse gas (GHG) emissions depend on a basic skill: counting. Without the ability to measure and track emissions like carbon dioxide (CO₂) and other GHGs, there would be no way to measure and monitor the impact of corporate activity to make real progress. Carbon accounting was developed to give companies the ability to quantify their emissions, improve outcomes, and report progress in terms of credible, verifiable data.

The fundamental concept of carbon accounting may be simple but implementing an effective program can be a long and complex process. Even the initial step of determining an emissions baseline poses difficult challenges. Companies need to generate emissions data with a verifiable audit trail to demonstrate accountability to shareholders and other stakeholders. Also, companies must increasingly comply with mandatory government regulations rather than voluntary standards.

Accordingly, for many companies carbon accounting has become an essential aspect of doing business in the 21^st century and must integrate it into all corporate operations. But decarbonization is not only a matter of corporate responsibility—it can also yield direct economic benefits. Effective implementation of carbon accounting can ultimately lead to improved planning and control, increased efficiencies, reduced costs, and enhanced investor relations, among other positive outcomes. Successful carbon-reduction programs may also contribute to driving business value and generating a positive return on investment (ROI).

Carbon accounting is a method of tracking CO_² emissions from business operations. A company’s process for addressing its role around climate concerns begins with determining a baseline for emissions. Accurate carbon accounting is the first step in setting carbon emission reduction goals and strategies and plays a critical ongoing role in monitoring progress and defining future opportunities.

Carbon accounting involves measuring CO_² and other GHG emissions, which have a climate impact that can oftentimes be far higher than that of CO_². These other GHGs must be converted into a metric unit known as “carbon dioxide equivalent” (CO₂e) for standardization. Each GHG has its own “global warming potential” (GWP), which is the warming effect that one ton of the gas will have in a specified period of time, commonly 100 years, compared with the GWP for an equivalent amount of CO₂. Converting all GHGs to a CO₂e value enables a company to produce a comprehensive emissions inventory.

The carbon accounting process is complex. Companies need to calculate historical performance, track current operations, and make projections for the future. Data collection at the corporate level encompasses operating units across the organization, external sources (such as energy providers), and emissions associated with the supply chain. Companies typically will not have sufficient in-house resources to plan and manage all aspects of the process, so designing and implementing effective strategies may require outside support. For example, Nasdaq ESG Advisory offers a suite of services to help companies at all stages of addressing carbon emissions, from foundational metrics to governance and communication.

Unlike ESG reporting, which has a variety of standards and frameworks, carbon accounting has three main bodies: the Greenhouse Gas (GHG) Protocol, ISO 140064, and the Science-Based Targets initiative.

Carbon accounting is complex—the initial step of calculating a company’s baseline carbon footprint can be lengthy and challenging for any company. Corporate strategies for reducing emissions will involve different operating units across an organization, which means effective coordination and collaboration is critical but difficult to maintain in practice. Carbon data may be fragmented across teams, trapped in organizational silos, or difficult to sufficiently audit, among other potential complications.

Carbon accounting software can provide solutions for many of these problems. A well-designed software platform can help calculate emissions and footprints, facilitate data collection, centralize information, support compliance efforts, and create a traceable, verifiable, and reportable data chain.

While the benefits are significant, the process of selecting and implementing carbon accounting software may itself be a difficult undertaking. Carbon accounting is only one of the many components of corporate sustainability efforts and broader ESG programs. Thus, an optimal software solution should be able to go beyond the specialized function of tracking emissions and footprint data.

Nasdaq Metrio™ provides end-to-end sustainability reporting software that streamlines the way companies collect, analyze, and share ESG data. The software includes the ability to create custom key performance indicators (KPIs) and calculate a carbon footprint from multiple sources, transforming the data into standard reporting metrics.

Carbon accounting has enabled corporate progress on a variety of fronts. The frameworks have provided benchmarks, guidelines, and tools for companies and stakeholders. For companies in particular, carbon accounting has proven valuable for defining baselines, setting targets, tracking progress, and generating verifiable, reportable data. Adoption is expanding and accelerating. Over the next five years, financial institutions alone are expected to drive an increase in spending on software systems for calculating carbon footprints, especially for tracking Scope 3 emissions.

However, existing standards for carbon accounting do have shortcomings. For example, because Scope 3 as defined by the GHG Protocol is virtually impossible to measure or manage in practice, guidelines allow companies to use industry averages and other “guesstimates” rather than actual data from their own value chains. Carbon accounting data also provides critical data for ESG reporting, and the variety of and differences between ESG frameworks is seen by many corporate leaders as frustrating and an impediment to progress. While this problem is focused on the larger issue of ESG and sustainability reporting frameworks, not carbon accounting per se, the accounting systems related to sustainability are interconnected.

These types of concerns combined with the growing implementation of regulatory standards (raising compliance risks) may lead to significant changes for carbon accounting practices, if only as a part of changes to broader sustainability standards. Just as conventional financial reporting standards and general accounting principles continue to evolve in response to new challenges, carbon accounting standards can be expected to change over time.

Understanding how to apply carbon accounting to set and achieve meaningful targets and communicate results to stakeholders will continue to be a process of iteration and adaptation for all companies, regardless of the maturity of their carbon-reduction strategies. Changing methods and evolving standards will create demand for in-depth knowledge of best practices. Services range from software solutions, such as Nasdaq Metrio™, to comprehensive analysis and planning, such as that offered by Nasdaq ESG Advisory.