How Carbon Impact Relates to Financial Impact

As it becomes more imperative for companies to measure and manage their greenhouse gas (GHG) emissions, an effective starting point is reviewing the business and economic activities that produce those emissions.

Because any GHG emissions will result from an activity that requires an economic cost, financial accounting provides a powerful starting place to identify corporate emissions sources that can then be augmented with activity-based carbon accounting for even deeper insights.

By examining the intersection of carbon-emitting activities and their resulting financial impact, you’ll be better able to prioritize your emissions-reduction efforts by targeting high-priority activities that can also help reduce operating costs, enhance efficiency, or mitigate other environmental risk factors.

GHG emissions are classified in three categories, known as “Scopes,” to help organizations understand, measure, and report those emissions:

Scope 1, or direct, emissions are produced from sources an organization owns or controls. These can include:

Scope 2 emissions result from the generation of purchased energy such as electricity, steam, heat, and cooling. Although these emissions occur where the energy is generated, the consuming organization is responsible for reporting them. As such, they are also considered direct emissions.

Scope 3, also known as value chain emissions, are the indirect emissions that occur in an organization’s upstream and downstream activities. These often include:

Understanding these business activities provides valuable insights into organizational emissions, and the associated opportunities to reduce emissions and operational costs across a company’s entire value chain.

Consider an organization’s vehicle expenses. Identifying how much fuel the organization (or a business unit) spends on fuel in a year provides a great baseline for estimating annual fuel-related Scope 1 emissions. Augment this with reliable activity-level data such as how many gallons are purchased, how many miles are driven, and the mileage the organization’s fleet gets per gallon will provide a much more precise, and actionable, picture.

Repeating this analysis for additional organizational activities, such as product packaging or end-of-life disposal strategies, will provide insights into what the organization is doing, the related costs, and the resulting emissions. This will enable management to identify patterns and understand the core sources of organizational emissions.

This data, in turn, will help the organization develop emissions-reduction action plans by uncovering the highest emissions as well as the areas with the highest financial impact. The organization can then cut back or change the activities to be more efficient, reduce emissions, and save money.

As the realities of climate change increasingly take a financial toll on private enterprise and civil society, companies will undoubtedly face enhanced regulatory, marketplace, and investor mandates to expand the breadth and depth of their GHG emissions measurement and reduction, and broader sustainability efforts.

In the United States, for instance, California’s Climate Corporate Data Accountability Act includes two separate bills that require companies to measure and report their emissions and climate-related financial impacts:

These regulations are likely to inspire similar legislation in other states.

Internationally, many U.S.-based companies face mandates, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) to disclose sustainability-related information. Common reporting frameworks include the International Sustainability Standards Board’s IFRS Sustainability Disclosure Standards (ISSB) and the European Sustainability Reporting Standards (ESRS).

Interoperability guidance developed by the IFRS Foundation and the European Financial Reporting Advisory Group (EFRAG) is available to help companies reduce complexity, fragmentation, and duplication by understanding the alignment of general requirements including key concepts such as materiality, presentation and disclosures for sustainability topics other than climate. The guidance also helps companies starting with one set of standards identify how to apply the same data to another. 

Aside from direct disclosure mandates at the sub-national or national level, U.S. companies are increasingly subject to sustainability information requests from larger customers and business partners who face disclosure requirements for their value chains. To meet these mandates, many large companies are asking suppliers for detailed information about their GHG emissions and other ESG data.

A growing number of investors are also factoring climate-related evaluations into their due diligence and risk management processes.

Sensiba provides sustainability services that help middle-market companies integrate GHG reporting and emissions reductions into their planning initiatives. To learn more, reach out to our sustainability professionals today.