In today’s corporate world, the call for environmental responsibility has never been louder. For businesses, this means keeping track of your environmental impact is no longer an optional task, but a critical component of ensuring your company’s future.

Carbon accounting has quickly become the tool of choice for businesses looking to measure, manage, and reduce their carbon footprint. And in many countries, measuring carbon emissions is not just recommended – it’s enforceable by law for certain businesses.

While effective carbon accounting takes time and effort, getting it right can unlock numerous benefits. This article unpacks why carbon accounting matters, explores the most common methods to quantify emissions, and shares five practical steps to ensure your accounting fits today’s sustainability reporting requirements.

We’ve also thrown in a free, step-by-step guide on how to set up your accounting so it can be used for carbon footprint mapping. So, let’s dive in.

The importance of carbon accounting in sustainability reporting

With small and mid-market companies accounting for at least 50% of the business sector’s greenhouse gas (GHG) emissions, businesses of today face immense pressure to reduce their carbon footprint. 

Customers, employees, investors, and regulators are demanding more transparent information on a company's carbon emissions. In Europe, regulations like the Corporate Sustainability Reporting Directive (CSRD) are setting deadlines for EU businesses to report their environmental impact as early as 2025. 

But as the saying goes: “You can’t manage what you can’t measure.” And that’s where carbon accounting comes in – the process that enables businesses to quantify their emissions so they’re in a better position to manage them.

Besides being a key tool in the global fight against climate change, carbon accounting is good for business, too. From complying with regulations to boosting brand image, and cutting costs, it's a strategic move that helps you gain a competitive edge for years to come.

The GHG protocol and carbon accounting 

The Greenhouse Gas Protocol (GHG Protocol) is the world's most widely adopted carbon accounting standard. Used by more than 9 out of 10 Fortune 500 companies reporting to CDP, it’s the ‘gold standard’ for how to measure, manage, and report GHG emissions.

Effective carbon accounting 

Effective carbon accounting relies on accurate data collection and data processing. Here are some tips for getting it right:

• Gather comprehensive data: Make sure to collect data from all three emission categories. These include direct emissions from your own activities (Scope 1), indirect emissions from purchased electricity (Scope 2), as well as indirect emissions from your value chain (Scope 3).
• Choose the right methodology: Pick a carbon accounting method based on your company’s unique needs, resources, and objectives (more on this soon).
• Take advantage of specialized tools: Enhance the accuracy and speed of your carbon accounting efforts by using carbon accounting software like Coolset.

Three carbon accounting methods for measuring emissions

There are three main carbon accounting methods: Spend-based, activity-based, and a hybrid approach that combines the two. Here’s a breakdown:

1. Spend-based methodology

The spend-based approach is an indirect way to estimate emissions based on the amount of money a company spends on goods and services. It translates financial expenditures into GHG emissions by applying emission factors – representative values that quantify the environmental impact of products and processes. 

For example, let’s say your company spends €50,000 on flights. If the emissions factor for flights averages 0.25 kg CO2e per euro spent, the total emissions from company flights would be €50,000 * 0.25 kg CO2e = 12,500 kg CO2e.

It’s a simple yet reliable starting point for small to mid-market companies looking to understand their carbon footprint.

2. Activity-based methodology

The activity-based method relies on granular emissions data tied to specific business activities. For instance, the emissions associated with the energy consumption of your facility. 

Although this approach requires more time, resources, and detailed data collection, it can provide a highly accurate picture of your carbon footprint. It’s a good fit for larger companies with complex operations.

3. Hybrid methodology

The hybrid approach combines both the spend- and activity-based methodologies. It’s a balanced approach that uses financial data to estimate emissions when activity data isn’t readily available or is too complex to gather. The approach is suitable for a variety of businesses and can offer a complete view of a company’s carbon footprint.

The importance of spend-based carbon accounting within the GHG protocol

The spend-based method is particularly useful for calculating indirect emissions known as Scope 3 emissions under the GHG Protocol. These are the indirect GHG emissions that occur along an organization’s value chain like the production and transportation of purchased goods and services, among other things.

Since these emissions usually make up the majority of many sectors’ carbon footprints – sometimes up to 90% – accurately measuring and managing them is crucial for an accurate picture of your environmental impact.

Spend-based carbon accounting also makes it easier to identify emission hotspots and prioritize reduction strategies. Despite its benefits, its accuracy relies on the quality and completeness of financial data – and that’s where ledgers and vendors come in.

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The role of ledgers and vendors in carbon accounting

Accurate spend tracking is the key to getting a precise overview of your carbon footprint. One tried and tested approach is to organize financial data in a table format featuring columns for ledgers, vendors, and descriptions.

Ledgers 

Ledgers are the category names you give to similar types of business activities. By being specific with these categories, you can make it easier to identify and classify carbon-related expenses. 

For example, rather than lumping everything under a broad category like ‘Expenses,’ it’s more effective to break them down into descriptive labels like ‘Office supplies’ or Corporate travel - Air.’

Vendors 

Vendors refer to the suppliers of the goods or services you purchase—for example, KLM or Microsoft.

Descriptions 

Adding a clear description helps you to understand the purpose of each transaction and any relevant environmental impact factors. For instance, instead of a vague description like ‘Travel expenses,’ include more detail like ‘Employee air travel from Amsterdam to Paris, Economy class.’

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5 steps to prepare your accounting for sustainability

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Preparing your accounting for sustainability reporting is crucial to ensure your information is accurate and aligns with the latest sustainability regulations. Here are five simple steps to get you started:

1. Identify gaps in sustainability reporting

Begin by reviewing your company’s current reporting practices to identify areas where environmental impact data is lacking. This could involve assessing how your business currently reports on things like energy consumption, waste management, supply chain, and other activities.

2. Determine KPIs

Establish Key Performance Indicators (KPIs) to address the reporting gaps identified in step one. This will make sure the company is on track to gather the data you need for an accurate view of your company’s carbon footprint. Plus, these KPIs will serve as benchmarks for measuring your progress.

3. Implement tools for tracking 

Take advantage of specialized carbon accounting tools designed to make tracking sustainability metrics easier. These platforms empower organizations to accurately measure, analyze, and manage GHG emissions.

From detailed dashboards to automated reporting and compliance, solutions like Coolset are quickly becoming a must-have for businesses.

4. Engage stakeholders 

Carbon accounting and reduction is a team effort. Therefore, it’s important to actively involve stakeholders at all levels for feedback, support, and collaboration. This can cultivate a culture of sustainability throughout the business.

5. Create a sustainability report structure

From increasing ESG value to benchmarking your sustainability performance, adopting a structured approach to sustainability reporting has many benefits. 

The Global Reporting Initiative (GRI) standards are a set of guidelines that help you structure your reports according to globally recognized, trusted standards. Used correctly, these standards ensure your reports cover all the key environmental, social, and economic impacts of your organization in a clear, accessible, and well-structured way. 

Make sure to use plain language in your reports and provide necessary context so it’s understandable to a broad range of readers. Adding visual aids like graphs, charts, and infographics can also help with clarity.

Prepare your accounting for sustainability reporting today

Now you’ve got a good overview of what accounting for sustainability reporting involves, you’re probably wondering “How to get started?” Our free downloadable guide covers the essential steps to align your accounting practices with today’s sustainability reporting requirements.

Automate sustainability reporting with Coolset 

Looking to streamline your sustainability reporting? Coolset is here to simplify your carbon accounting process with automated, insightful sustainability reports that comply with global standards. Talk to one of our experts for advice on how to simplify sustainability measurements, improvements and compliance today.