With most businesses continuing to evaluate their sustainability credentials and assessing their environmental impact, many SMEs are exploring – what is carbon accounting exactly?
If you don’t know for sure, there’s a good chance you can take an educated guess!
But in this guide we will explore the different steps involved, the variations between protocol scope 1, 2 and 3 emissions, carbon accounting frameworks and much more.
Many businesses are interested in the amount of retail spend from consumers whose purchases are linked to sustainability concerns. It’s estimated at £150bn or 35% of UK consumers according to OC&C Strategy Consultants, as reported in Consultancy.
Carbon accounting – sometimes called greenhouse gas accounting – is a valuable practice for several reasons, including:
- Assessing environmental impact
- Benchmarking performance
- Identifying emission sources
- Planning to reduce emissions
- Reporting and compliance
Let’s take a look at what carbon accounting involves.
What is carbon accounting?
Arguably there are three important principles involved in carbon accounting for SMEs.
- Data collection: Different ways of collecting carbon data include calculating emissions, monitoring activity data and making direct measurements. The data needs to be comprehensive for accuracy and factor in both direct and indirect emissions – more on these shortly.
- Reporting: After collecting the data, SMEs need to organise and analyse it to produce carbon reports. Key stakeholders need these for an accurate picture of carbon emissions the business is responsible for to set reduction targets or KPIs, track progress and so on.
- Recommendations: After assessing the impact, look for methods to reduce emissions. There could be cost benefits to this, such as through more streamlined operational processes or identifying new sustainable business opportunities.
Businesses need to apply these carbon accounting principles over time, tracking the data to monitor potential improvements.
Scope 1, 2 and 3 emissions
There are three widely accepted sources of emissions for carbon accounting. The developer of these sources is the Greenhouse Gas (GHG) Protocol, from World Resources Institute.
Many of the Fortune 500 companies use the GHG Protocol. The three scopes are:
- Direct emissions from the company: These are emissions generated from a company’s production processes. Larger scale emissions would come from machinery or equipment, vehicles and so on.
- Indirect emissions from company purchases: This scope 2 guidance standardises how companies measure indirect emissions from their purchased energy, including electricity – arguably this is the most common scope for SMEs.
- Other indirect emissions from the company’s supply chain: There are 15 categories of indirect supply chain emissions. While some companies won’t see these as their responsibility, it is possible to reduce scope 3 emissions by choosing suppliers with more sustainable practices.
It’s not only the GHG Protocol that’s worth knowing about though.
Other carbon accounting frameworks and standards
You’re likely familiar with ISO 27001, from the International Organisation for Standardisation. It’s the international standard for managing information security.
There’s also ISO 14064 which standardises environmental management. It helps companies to measure and report their carbon footprint accurately and consistently for reliable data.
Other accounting frameworks and standards to consider include:
- CDP: Also known as the Carbon Disclosure Project, this not-for-profit charity also helps companies accurately measure and reduce their emissions.
- SBT: This is the Science Based Targets initiative and it helps companies to set emissions reduction targets that align with the latest scientific climate change data.
- CAR: Also known as Corporate Accounting and Reporting, this is an international accounting standard from the GHG Protocol
One other aspect of carbon accounting you may be interested in is offsetting. Let’s take a look.
Carbon offsetting
Carbon credits and offsetting provides an option to compensate for businesses’ emissions. A wide range of projects and initiatives are available for companies to contribute to that remove greenhouse gases.
Carbon offsetting involves investing in a process to remove an amount of emissions equivalent to that generated by the business. The projects should be certified – for example, a genuine reforestation programme.
Similarly there are carbon credits available. One carbon credit is equal to removing one metric tonne of carbon dioxide.
Arguably, carbon offsetting and credits are short-term solutions for SMEs. They can balance out carbon accounting on an ad hoc basis, but ideally the end goal would be to identify long-term solutions to reduce a business’ CHG scope emissions.
Other guides for SMEs
We hope this article has helped you think about the dos and don’ts when considering using carbon accounting.
Our blog is full of other useful guides for SMEs.
For example, check out our guide to research and development (R&D) tax credits, a government initiative to incentivise these projects.
We also have a guide on capital gains tax for small businesses and recommend reading about some of the most common accounting errors – plus how to avoid them.
We are Accountants East London, experienced experts offering great fixed prices. For all of your accountancy needs, please don’t hesitate to get in touch with us.
