Mastering the complexities of GHG accounting

The demand for financial-grade greenhouse gas (GHG) accounting is rapidly growing as investors and businesses seek to understand both their own emissions profile, and that of the entities in their value chain. The most widely used approach for GHG emission calculations is the GHG Protocol. Yet as GHG accounting continues to evolve and attract more scrutiny, complexities are emerging that can trip up even the most experienced reporters. This is where GHG reporting software can make a significant difference in capturing the required metrics, conducting the GHG calculations and producing robust reports.

In this article, we explore those challenges: including how to account for renewable energy purchases and how to approach Scope 3 emissions calculations.

Under the GHG Protocol Corporate Standard, GHG emissions are divided into scopes for calculation and reporting:

• Scope 1 includes all “direct” emissions from an organization, which includes company vehicles, fugitive emissions from manufacturing processes and fuel combustion onsite (such as burning gas to produce heat).
• Scope 2 encompasses “indirect” emissions from the consumption of purchased electricity, heat or steam.
• Scope 3 requires organizations to look for implications of carbon emissions outside of their direct physical footprint. This includes embodied emissions within resources consumed by the organization—paper used, waste produced, coffee consumed—along with the emissions of suppliers, which can be significant..

Several years ago, the GHG Protocol updated the reporting standard to require two methods of Scope 2 emission calculations: the location-based method and a newer, market-based method.

Traditionally, organizations were required to report their Scope 2 emissions based on a standard set of grid-average emissions factors. Following this approach, known as the location-based method, all emission-reduction efforts should be excluded from the GHG inventory. Initially, this made sense, as it enabled organizations to be compared directly. However, it prevented some organizations from showcasing their efforts or taking credit for their green power purchases in their emissions totals. The Scope 2 market-based approach addressed this issue.

This market-based approach instructs organizations to apply energy attribute certificates (EACs), such as renewable energy certificates (RECs) or guarantees of origin, to their electricity consumption and then source emission factors from contracts or suppliers where available.

In instances where consumption is not covered by EACs or other factors, residual mix factors are applied to consumption. Residual mix factors are similar to grid-average factors but are calculated based on electricity generated from non-renewable sources (oil, gas, coal, etc.) or other sources not backed by EACs.

If residual mix factors are not available for a region, then standard grid-average factors should be used, as they are in the standard location-based method.

Using the market-based method should prove helpful as your organization pursues intentional procurement of clean and renewable energy. The first step of this accounting process is to understand your organization’s electricity purchases. There may be a mix of sources, especially if the organization works across various regions. Once tallied, contact each supplier and collect their emissions factors as comprehensively as possible.

Once the energy procurement strategies are understood, it may be easier to categorize your emissions. Whether your organization already has begun the process of clean energy procurement or is just getting started, remember the following tips to allow for market-based Scope 2 emissions calculations:

1. If your organization purchases renewable electricity directly, the EACs should already exist and are known as “bundled certificates.” These certificates also can be purchased separately from electricity and are known as “unbundled certificates.” Use GHG Protocol’s Scope 2 Quality Criteria to ensure that these certificates can be used.
2. Unbundled certificates must be allocated across your organization according to the Quality Criteria, with careful attention to points 4 and 5.
   • Point 4 requires that certificates are “issued and redeemed as close as possible to the period of energy consumption to which the instrument is applied.” This means it would be incorrect to allocate certificates issued in 2018 to electricity consumption from 2021.
   • Point 5 requires that certificates are “sourced from the same market in which the reporting entity’s electricity-consuming operations are located and to which the instrument is applied.” This means that it would be incorrect to allocate certificates issued in the US to consumption in the UK.
3. If your organization has power purchase agreements, the certificates may not exist. In this scenario, determine the emissions factor tied to the contract and document accordingly.
4. Only use the publicly available residual mix emission factors that are within the region that is being accounted for if the supplier’s direct information is not accessible.
5. Ensure your organization’s data management and reporting platform can support both location and market-based calculation methods.

According to the CDP’s 2022 Supply Chain Report results of respondents show that supply chain emissions are on average 11.4x greater than emissions coming directly from the operations of their businesses.

While significant in emissions impact, the process of sourcing and accurately capturing data for Scope 3 can be a challenge. The breadth of the data types can be large, and the size and complexity of the challenge should not be underestimated. While a cloud-based data collection tool such as IBM Envizi can help to collect and sort the information, this process requires manual cross-functional stakeholder cooperation. 

To ease the Scope 3 calculation and reporting process, consider the following suggestions:

• Remember that ESG software can automate what otherwise would be a painstaking manual data collection process.
• Be prepared to rely on manual surveys and conversations with individuals that represent your organization’s supply chain for some of the data collection.
• Maintain flexibility in the data structure. Data files provided from various supply chain members will be formatted in different ways, and your data framework must be flexible enough to ingest, process and analyze this data.
• During each step, make sure to keep a detailed, thorough audit trail to explain the approach and document your organization’s decisions.
• Consider seeking advice from a specialist or consultant. They can help resolve the challenges related to geographic spread and data management confusion.

Accurate GHG accounting is critical to advancing decarbonization goals and instilling stakeholder confidence in your organization’s progress. IBM Envizi has been supporting organizations with GHG accounting and reporting for over a decade and is well placed to help organizations tackle the associated challenges. In summary:

1. When using the market-based emissions method for Scope 2 emissions, be sure to follow best practices when allocating green power purchases and sourcing the latest emissions factors. IBM Envizi can support market-based emissions calculation processes.
2. For Scope 3 emissions, use automated data capture processes where possible and be prepared to rely on manual surveys and conversations with individuals that represent your supply chain for some of the data collection.
3. Maintain flexibility in the data structure for your Scope 3 data so they can be ingested, processed and analyzed without issues. To learn more about how IBM Envizi supports Scope 3 emissions accounting visit https://www.ibm.com/topics/scope-3-emissions.

The complexities of GHG accounting can be simplified with dedicated and knowledgeable resources such as GHG reporting software and sustainability consultants to help your organization select and allocate factors, account for green power purchases and manage Scope 3 emissions.