Greenhouse gas reporting is often arithmetically simple to calculate, but to be accurate, it requires a nuanced understanding of drivers and assumptions.

In many organisations, actual emissions cannon be not captured directly. Instead, they are calculated based on different types of activity drivers x emission factors. The International Financial Reporting Standards (IFRS) have adopted the definitions from the Task Force Climate Disclosures (TFCD) and is a starting point for mid-sized organisations. These standards begin to put carbon accounting and sustainability reporting on par with financial accounting and disclosure to provide standardised information for investors.

They encompass a range of activities that generate emissions, from the electricity your manufacturing plant consumes, to the kilometres your clients travel to get to your stores. And while these emissions are linked to you in some way, it might not make sense to compare some types of emissions.

That’s why Operational Scopes are useful. With these you bucket different types of emissions in your greenhouse gas (GHG) inventory so you can better assess how you can affect them and more effectively prioritise decarbonisation decisions. Let’s look at what they mean for your finance team.

Scope are split into direct Scope 1 (e.g. furnaces, vehicles), indirect Scope 2 (e.g. electricity, heating) and other indirect Scope 3 (e.g. purchased products, transport, product usage). Before we explore Scopes further, here are three notes for context:

• Note 1: The reason scopes are used, is to prevent double counting of Scope 1 & 2 - so two or more organisations don't classify the same emissions as Scope 1 & 2 (this would be like two companies counting the same expense or revenue). Measuring direct and indirect emissions across multiple companies in a value chain, using Scope 1, Scope 2, and Scope 3 buckets allows multiple organisations to each reduce emissions in their own way, at the same time. More than one entity may report the same scope 3 emissions. This is why Scope 3 emissions shouldn't be summed across organisations to calculate total emissions (e.g. across a region).
• Note 2: we’re looking at all greenhouse gas (GHG) emissions, measured using CO2e equivalents. Common practice is to estimate emissions using activity data for each source and use emissions factors to calculate the GHG. If you’re unfamiliar with these terms - you can read about them here.
• Note 3: Before putting your emissions into scope buckets you need to define Organisational scope. There are multiple approaches, including based on ownership, control and equity depending on your sector. Like boundaries around your financial accounting, this is often based on how much is under management control. This becomes relevant with subsidiary companies, joint ventures and whether and when you recalculate your baseline when things change materially. We examine this here.

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SCOPE 1

Scope 1 captures the direct emissions produced by your owned or controlled sources, for example the operation at your own facilities.

It’s split into stationary emissions such as manufacturing machinery, furnaces, chemical production and mobile emissions from company vehicles.

• Where to get the data? For Stationary data from fuel providers, e.g. from your accounts payable. For Mobile, total fuel consumption or annual KM travelled for each vehicle type, data from fleet management or accounts payable.
• For office-based businesses, it includes other company-owned items that produces GHG such as gas from aircon units (known as fugitive emissions - calculated based on the change in base inventory each year or estimated from the types and quantities of refrigerants used). Activity data can be found in your maintenance records and coolant purchases.
• For manufactures, resource-companies, and primary producers, there are sector-specific frameworks for chemical and physical processes other than fuel - for example, aluminium, paper, and cement. Combustion of 'biomass' (e.g. wood and wood waste) are tracked separately from other direct emissions and reported separately from the scopes.

Scope 1 emissions vary significantly by sector. A service-based business might have very little Scope 1, while a manufacturer or a primary resources producer will produce more. Scope 1 does not include the emissions from creating the electricity to power those items.

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SCOPE 2

That’s where the indirect emissions from Scope 2 come in. All electricity required to power your manufacturing machinery lighting, heating, and other appliances in any buildings you own is included in Scope 2 emissions. Emphasis there on “you own” - if you’re leasing out buildings or vehicles then the electricity required to keep them going doesn’t show up on your Scope 2 reporting.

For mid-sized organisations, you can get activity information (i.e., how much electricity you’ve consumed) from your utility bills, meter data, or property management data combined with floor-space estimates. From here you need to select the relevant emissions factor. The 'GHG Protocol for Scope 2' requires you undertake dual reporting using both location-based and a market-based methods, while currently 'IFRS S2' only requires location-based while allowing market-based emissions. Why is this?

Electricity generation produces around 25% of GHG worldwide. Market-based, which means based on your electricity contract, has been critiqued as not likely to increase the amount of renewable energy generated (there are multiple reasons for ‘market-failure’ including that electricity suppliers may be already generating renewables to achieve compliance targets, and then selling these on the voluntary market), nor allows for accurate calculations:

• If company A purchases renewable energy, it could claim 0 emissions for Scope 2.
• Company B instead invests in energy efficiency to reduce Scope 2 by 15%. Company B has reduced demand for grid energy, including some from fossil fuels.
• However, while company A's electricity contracts haven’t reduced emissions in the atmosphere and indeed may represent an opportunity-cost against tangible activities it could have funded, its ESG performance may appear more attractive to investors.

Location-based means all electricity consumers in a grid use the same average emissions factors. This means if a grid improves the emissions factors, all entities can report progress against Scope 2 decarbonisation:

• For example, in the state of Victoria, Australia, the brown coal power station in Yallourn will shut down in 2028 (it produces around 3% of Australia’s emissions) and Loy Yang A will shut down in 2035.
• With the state government setting a target of 50% renewable energy by 2030 (with 20% contributed by rooftop solar) Victoria-based companies will achieve emissions-reduction progress without individual effort using the location-based method.

Critiques of location-based argue that investments to actively contribute renewable capacity to the grid won’t receive additional recognition. One consequence could be that instead of incentivising companies to develop renewable capacity (e.g., with market-based instruments like power purchase agreements) – they are incentivised to move to where the grid provides cleaner electricity - for example, by relocating to a different state in Australia.

Scope 2 also covers the use of imported steam, district heating, cooling and electricity from combined heat and power.

SCOPE 3

Scope 3 emissions is a big bucket as it includes everything else in your value chain (suppliers include logistics, franchisees, materials providers, lessees and lessors, waste management, plus employees, travel, retailers, customers). Scope 3 highlights the interdependent nature of value-chains, as your upstream suppliers’ Scope 1 can become your Scope 3. For example, with components from more than 200 suppliers contributing to an iPhone it’s no surprise about 92% of Apple’s emissions are Scope 3.

For mid-sized organisations, Scope 3 can include:

• As a retailer: your logistics provider that delivers stock to your warehouse and fulfils orders to end-customers.
• As a consulting services firm: business travel and fuel expended by staff driving to work, through to emissions produced during the manufacture of equipment from computers to coffee machines, to solar panels.
• As a manufacturer: upstream emissions from material acquisition and pre-processing, through to downstream emissions including distribution, storage, use, and end-of-life.

In the US, the SEC may not include Scope 3 - and one argument is that it would force many small and non-public organisations to start reporting to support their listed downstream customers (actually, given how small & medium business make up most of the economy - 90% worldwide and 99% in the US - this 'snowball' effect would be an effective driver of behaviour change).

Work, by organisations such as World Business Council for Sustainable Development, is driving new standards to simplify sharing data along the supply chain. (see The GHG Protocol’s Corporate Value Chain Accounting and Reporting Standard for example) There are parallels to cost accounting. Just as cost of goods are carried through each step, the CO2e cost will need to be shared along the value-chain. There can be multiple levers to incentivise and align tier-2 suppliers and beyond including financial and non-financial penalties and rewards. Large corporations like Apple have already set carbon neutral targets (2030 for their supply chain - not the same as net zero, but directionally important).

Scope 3 is critically important in incentivising the right behaviours for companies - and for countries. Returning to the Australian resources/energy sector:

• For emissions generated onshore there are targets for 205-million tonne reduction through Australia’s proposed ‘safeguard’ mechanisms (our Scope 1 & 2 will see progress by 2030).
• Over the same timeframe, there are 116 new/planned coal and gas projects in the pipeline. These are for export (Scope 3 as other countries will burn the coal and gas) and collectively would contribute 24 times more GHG (an estimated 4.8 billion tonnes by 2030).
• In contrast only 0.4GW of new renewable investment has been financed in 2023 YTD according to Clean Energy Council CEO, Kate Thornton.

This is a yawning gap from the ‘superpower transformation’ proposed by economist Ross Garnaut where Australia, in addition to removing our own 1.3% global emissions (with 0.3% of world's population, per-capita emissions are high) we could reduce global emissions by 7% by making the right zero-carbon investments. Australia gets the most sunlight per metre-squared of any continent (58 million petajoules) and has one of the best onshore and offshore wind resources globally. If Australia invested in extracting value from renewable resources (traditionally Australia has been very good at digging things out of the ground), it would be cheaper for Australia to process minerals locally rather than send overseas for value-add (e.g., iron ore to steel). Australia might also end up exporting power, if the Sun Cable ends up connecting with Singapore and being switched on.

The decarbonisation task and cost for industries early in the value-chain can be high, but the incremental cost per SKU by the time it hits consumers can be incremental. In one study by consultancy BCG and the World Economic Forum, found the additional cost for many fully decarbonised products – for example a car - would be 1-2%, or less. They found the same for major product groups across seven areas including buildings, electronics, and food. While this depends on economies of scale, lowering costs, and the need for significant early investments, forerunners in decarbonisation can be typically valued 10-15% higher across sectors. Accurately sharing Scope 3 costs along the value-chain makes it easier for upstream suppliers to share costs, and reap the benefits.

GETTING STARTED

Clarity on how much you are emitting today is a critical step in the zero-carbon transformation - you need to mitigate your emissions while you adapt your business model to the changing climate.

With increasing regulatory focus (for example, the ISSB), getting a clear baseline of your current emissions is key so you can understand where you sit relative to your peers and set realistic reduction targets. Scope 1 and 2 can bring quick-wins but to get a full picture on where you can lower emissions, you ultimately need visibility on Scope 3. Bringing an emissions and sustainability lens into strategy means everything from where you site your office, to packaging, to which suppliers you select and work with.

Mid-sized organisations can get started with Scope 1 and 2 with training for the finance team and by picking the right place manage data. Beyond this, a key focus for Scope 3 is upskilling supply chains to share the data to support accurate calculations without resorting to high-level assumptions, and sector-based averages.

For finance teams, this includes selecting the right place to model and store data that will bring clarity around decision-making and drive sustainability. Options range from:

• Using Excel. Not recommended except while learning and building capacity.
• Enhancing existing Enterprise Performance Management/Business Intelligence tools to incorporate emissions. With this approach you can incrementally build capacity - developing driver-based & predictive models alongside existing processes or fully integrate with finance & supply-chain optimisation models. EPM (planning) and BI (reporting) tools such as Microsoft PowerBI, SAP Analytics Cloud, Pigment, Jedox, and TM1/IBM Planning Analytics have the raw functionality to do the modelling (data ingestion, calculation, presentation) - but you may need to build more from scratch.
• Implementing cloud-based carbon accounting & emissions-reporting platforms. These include emissions factors, embed good-practice and can have subject matter experts on their implementation teams. These range pure play carbon-accounting tools like Sumday, focussed vendors like Plan A, and Persefoni who can also provide broader ESG reporting, to large-vendor offerings like Microsoft Sustainability Cloud, Net Zero Cloud by Salesforce, IBM Environmental Intelligence Suite. They can include standard disclosure formats. However, they also sit outside your existing financial and management reporting processes and internal budgeting and forecasting, and may only operate at a corporate rather than operational level.
• Extending/upgrading ERP/Finance platforms. From Xero for SMBs (this may be a compelling if your suppliers record their emissions in Xero and can connect seamlessly to your accounts), through to SAP Sustainability Footprint Management which supports cradle-to-gate footprint calculations. These can capture a system of record at a transactional level, not may support scenario planning and what-if analysis.

Starting this journey requires capability-building, learnings, and technology investment for better data. To learn more how to get started follow for more insights and get in touch today.

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FAQs for Greenhouse Gas Reporting

1. What is the significance of greenhouse gas reporting in organisations? Greenhouse gas reporting is crucial for organisations to understand and mitigate their environmental impact. It involves accurately tracking and reporting emissions to comply with regulations, set reduction targets, and drive sustainability initiatives.

2. How are greenhouse gas emissions calculated in organisations? Greenhouse gas emissions are often calculated based on various activity drivers and emission factors. These factors quantify the amount of emissions produced by different activities, such as energy consumption or transportation, within an organisation's operations.

3. What are operational scopes, and why are they important for greenhouse gas reporting? Operational scopes categorise emissions into Scope 1, Scope 2, and Scope 3, allowing organisations to assess and prioritise decarbonisation efforts effectively. Understanding these scopes helps in identifying emission sources and implementing targeted reduction strategies.

4. How do organisations differentiate between Scope 1, Scope 2, and Scope 3 emissions? Scope 1 emissions include direct emissions from owned or controlled sources, such as manufacturing machinery or company vehicles. Scope 2 covers indirect emissions from purchased electricity used in operations, while Scope 3 encompasses all other indirect emissions throughout the value chain, including suppliers, logistics, and employee travel.

5. What steps can mid-sized organisations take to start their greenhouse gas reporting journey? Mid-sized organisations can begin by training their finance teams on emissions reporting and selecting suitable tools for data management. They should focus on understanding their Scope 1 and Scope 2 emissions initially, then expand to incorporate Scope 3 emissions by collaborating with supply chains and investing in appropriate technology solutions.

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