The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.
Greenhouse gas accounting systems do two fundamental things:
First, they help us measure and estimate emissions from all sources as accurately as possible.
Second, they help us measure and understand whether the things we’re doing to reduce or remove emissions are actually working.
Both are critical components of understanding a company’s climate impact. But these two pieces of information are answering fundamentally different questions. Therefore, it’s not surprising that each requires different accounting tools to measure them accurately.
Unfortunately, voluntary target-setting bodies, such as the Science Based Targets initiative, have increasingly looked exclusively to GHG inventories to understand progress towards climate targets. This has left companies struggling to accurately measure and report some of the actions they’re taking to reduce emissions and demonstrate progress towards their voluntary climate targets.
Many mitigation actions – especially those deep in company supply chains — simply aren’t captured by current GHG inventory calculation methods. It can be confusing to figure out how and where to report actions when they’re not easily or directly tied to operational footprints or don’t “show up” in their inventories due to data limitations and current, incomplete GHG accounting systems.
Calculating inventory vs. impact
A company’s GHG footprint is foundational for business planning, target setting, risk assessment, and internal decision-making. However, year-to-year changes in reported inventory emissions can result from many factors — intentional climate actions, shifts in business operations and strategy, weather events and natural disasters, or simply new data becoming available.
While these factors may result in changes to a company’s GHG inventory, traditional inventory accounting doesn’t isolate or clearly demonstrate the specific climate actions a company has taken toward meeting a climate target or their net impact on global emissions. It was designed to measure carbon footprints, not to accurately reflect the actions that companies are taking to reduce their emissions – both across their operations and supply chains and outside of them.
Impact accounting, on the other hand, gives sustainability leaders the ability to measure the results of their climate actions both inside and outside of their inventory. For example, impact accounting can measure the difference in emissions if a company moves from a higher-emissions-intensity to a lower-emissions-intensity fuel source for its fleet vehicles. It can also measure the impact of protecting standing forests or planting new ones.
A dual necessity
There have been many active conversations about whether “inventory accounting” or “impact accounting” is superior and whether impact accounting should have a place in corporate climate accounting and target setting. This is a false dichotomy. Inventory accounting and impact accounting measure different things, so both are necessary to provide a full account of companies’ climate impact.
Together, the two form a comprehensive and complementary pair. Using both inventory and impact accounting consistently, within one framework, allows companies to develop comprehensive climate strategies and share the outcomes transparently. But to do this, companies need a way to report their inventory separately from the impact they’ve measured from investments beyond and within their value chains. Enter multi-ledger reporting structures.
The value of multi-ledger accounting
Multi-ledger GHG accounting makes clear and consistent reporting across both inventories and impacts possible. Multi-ledger accounting has several important benefits for both companies and their stakeholders.
1. Improved Transparency
By separating emissions inventories from mitigation impacts, companies can present a clearer picture of both their total emissions footprint and also the impact of the actions they’re taking to reduce emissions. This clarity helps prevent misunderstandings and makes disclosures easier to interpret.
2. Incentivizing More Climate Action
When companies know their climate investments can be transparently reported without distorting their emissions inventory, they may be more willing to invest in the best climate solutions available. This creates space for companies to make progress towards reducing their own emissions while also incentivizing them to contribute to sectoral and global decarbonization efforts.
3. Reduced Greenwashing Risk
Combining emissions reductions inside a company’s value chain and external mitigation activities in a single number can be misleading and risks a lower-integrity, lower-transparency system. Multi-ledger accounting prevents confusion by ensuring that different types of climate outcomes are disclosed separately and transparently side-by-side.
4. A More Complete Climate Story
Today, companies are pursuing climate action in many forms: operational efficiency, renewable energy procurement, supplier engagement, technology investments, global mitigation projects and more. A company’s inventory cannot – and should not – capture the impact of all of these activities.
Inncentivizing more climate action
As corporate climate action evolves, so must the accounting systems that measure and report its impact. The Task Force for Corporate Action Transparency (TCAT) provides comprehensive disclosure guidance for the full range of emission reductions and removals across all three scopes and beyond the value chain. The soon to be released Advanced and Indirect Mitigation (AIM) Standard is the result of three years of work to develop clear guidance for how impactful emission reductions can be clearly reflected and reported within a company’s Scope 3 value chain. Used together, these standards provide detailed and comprehensive guidance for transparently calculating and reporting the full range of actions companies are taking today.
The GHG Protocol Actions and Markets Instruments Request for Information, recently released, builds on the work of TCAT and AIM and is seeking comment on the use of multi-ledger reporting structures in their update process. This is a promising development.
To fully reflect and measure the impact of the many actions companies are taking across their supply chains and beyond them, impact accounting is an essential, not optional, part of comprehensive corporate target accounting and reporting.
By integrating both inventory and impact accounting approaches into a multi-ledger structure, companies can report their climate impact more clearly and transparently leading to the ultimate goal: not just better reporting, but better climate outcomes.