Zero Genie

Importance of Accounting

Traditional accounting took around 5,000 years to evolve. Accounting does not just predate writing, it is why writing was invented: the earliest written artifacts, such as this cuneiform clay tablet, were records of commodity trading.

However, carbon accounting at the company level has only been around for about 20 years. And though we are beginning to see more efforts like RMI’s steel emissions accounting guidance, efforts at the product level are only just beginning to take shape. While informed by earlier forms of accounting, a new set of carbon-specific building blocks is needed to allow buyers and sellers, auditors and entrepreneurs, software companies, and sustainability professionals to build and deploy interoperable systems that are as accurate and ubiquitous as those for traditional accounting.

As climate awareness increases along with social and regulatory pressure, over 800 of the largest publicly traded companies have made net-zero commitments to reduce their emissions. For companies to make good on these commitments and know where to focus their reduction efforts, they need emerging carbon accounting systems to understand their current emissions and the broader climate impacts of their decisions.

No company would launch a new product, make a strategic decision, or make capital investments without fully understanding the financial implications. With better carbon accounting, the same can and should be true for emissions. Understanding the carbon implications of decision-making should become an expected and required part of any business process, and creating an ecosystem of interoperable carbon accounting technologies is a means to that end.

These technologies are needed to give teeth to green procurement policies, such as those required by the Inflation Reduction Act, to know if companies are making good on their net-zero commitments, and to guide corporate strategy. We will not achieve meaningful decarbonization without them.

How It’s Done Today

The Greenhouse Gas Protocol, or GHGP, is the most common method of tabulating emissions. First released in 2001, over 92% of the Fortune 500 companies reporting emissions follow it.  Although the GHGP is being revised, and innovations such as consequential accounting are advancing the state of the art, the foundations of how to do carbon accounting are becoming established.

However, as with the web in the 1990s, there is no widely used common standard — no data format — for describing and exchanging emissions data. It is as if every phone took pictures in its own format, unreadable by that of anyone else. As a result, different companies cannot readily share emissions data, and when they do, it is difficult to use in decision-making.

Existing platforms for reporting carbon data, such as CDP and EcoVadis, are valuable tools, but they are geared toward annual reporting. Data released through them is inherently out of date by the time it is shared. Additionally, they focus on the organizational level rather than the product and transactional levels, where better data can help companies make operational decisions to lower carbon emissions.

Today, the typical process for exchanging product emissions data is as follows: someone on a company’s procurement or sustainability team figures out who to contact at each of their vendors, often not a mean feat. They then email each vendor to request emissions data. A vendor may or may not have that data, may or may not be willing and able to share it, and may or may not include (or even know) the methodology by which it was collected. Do they include all three Scopes? What boundaries do they use? Do they share the emissions factors they use or the proportion of direct data to be modeled or estimated data? Each vendor is likely to have different answers to those questions, have answers of varying quality, or provide no details at all — as a result, it is difficult to compare data across vendors.

Companies seeking carbon data will typically receive it in assorted formats: some vendors send spreadsheets, others send PDFs, some fill in vendor surveys, and some just copy and paste their data into emails. As the systems used by vendors and buyers cannot communicate with each other and do not use the same formats, they are not interoperable — meaning what in the financial world would be an automated and instantaneous exchange is instead highly manual and can take months. Once data is collected, someone on the receiving end needs to consolidate all this and make sense of disparate, often unstructured data. They are more than likely to then put it into an arbitrarily formatted spreadsheet of their own. When one of the company’s customers, in turn, requests carbon data, the process will be repeated.

Due to all these barriers, getting emissions data from suppliers is often an annual ritual timed around the release of a yearly sustainability report. This is not very useful for business decisions. Can you imagine trying to make a budget but only being able to see your bank balance once a year?

How It Should Work

Instead, imagine buyers logging in to their vendor’s system and simply downloading the data they need. They can do this knowing the data was gathered according to standard methodologies and is being supplied in a standard format, so it can be uploaded into the buyer’s system without having to be converted or poured over.

Likewise, vendors who once had to manually field dozens to thousands of individual requests for data can now provide high-quality data automatically at any time with much less effort. With the data they supply now being more easily compared with that of their competitors, they know they are evaluated on a level playing field and have an incentive to improve their scores.

Now imagine buyers’ and sellers’ systems being connected and data transferred automatically like the direct deposit of a paycheck — and buyers connecting to all their vendors and getting comparable data in the same format from each of them. With the benefit of standard formats, they do not have to use the same software — just software that supports the standard, the way word processing programs from Microsoft and Apple can read the same files (because they both read OpenXML — an open standard).

Using existing business intelligence software or a new generation of dedicated carbon accounting software, buyers could see the emissions consequences of their purchases in real time. They could more easily make low-carbon purchasing decisions, helping them meet net-zero targets and comply with a growing wave of product-level emissions regulations. By aggregating data from multiple suppliers, they could more accurately describe the embodied emissions of their own products and supply that data to their customers, allowing them to qualify for green procurement benefits.

No single piece of technology will accomplish all of this by itself. But as an ecosystem of standards and related technologies coalesces, they combine to make this vision possible. There are, however, several problems that must be addressed: