Many jurisdictions have experienced considerable progress relating to the disclosure of climate-related information, however internationally aligned (or consistent) disclosure standards and requirements have not been mandated on a global basis. The result is an environment within which we have limited discoverability, consistency, comparability, and quality across the climate data available.

1. CAN SOMEONE PLEASE EXPLAIN CARBON ACCOUNTING AND DEFINE
WHAT A CARBON LEDGER CONTAINS?
What do we mean by this provocative title?
During the last several months collaborating within a multi-disciplinary taskforce focused on Carbon
Accounting, it has become apparent that the climate community uses concepts and terms holding
specific meaning and purpose to the finance and accounting professional community, but which bear
little resemblance to how they are being used in practice now.
This will quickly become a meaningful gap as carbon accounting moves into a digital statutory reporting
regime starting in 2024, where concepts such as “comply or explain” and “carbon estimates” can no
longer be fit for purpose. In other words, the bar is about to rise dramatically on how carbon data is
captured, managed, aggregated (and disaggregated), documented, audited and reported to regulated
bodies – and do so in a manner akin to financial data.
It is clear, we need to fix this problem!
The transition to a carbon neutral economy requires accurate accounting
Regulation is shaping business sustainability management and corporate reporting requirements. It
influences how companies conduct business in its own and other jurisdictions, where carbon reporting is
no exception. A multitude of authorities are raising the statutory requirements on organizations to
disclose their climate risks and opportunities, where an area of focus includes GHG emissions.

2. A little accounting context helps to fully understand the challenges companies face. Statutory financial
statements are an organization’s official legal submissions to regulatory authorities. Regulatory bodies
may include cross jurisdictional entities such as locally appointed national storage mechanism (for
instance the US SEC’s EDGAR or the UK’s Morningstar systems) for public companies. In some countries
(such as the UK and Australia) business registries require annual statutory reporting for all companies of
all sizes. Interestingly the US and Canada are amongst the few countries where a company's statutory
accounts are not available in a public repository.
The emerging sustainability related statutory requirements elevate the need for companies to
accurately track, manage, measure, and disclose their emissions, which will need to do so at a
comparable level to that used for statutory financial reporting and auditing. This will mean that data
lineage, as well as quality, will become prominent considerations requiring common definitions,
structure and connectivity between systems and entities within an information supply chain. This is a
distinct difference from financial data which is typically generated and managed exclusively within the
reporting entity.
Today statutory financial statement preparation includes collecting, validating and managing data from
multiple source systems to produce financial reports including a trial balance and an income statement
amongst other things. They are all expressed in accordance with the country’s Generally Accepted
Accounting Principles (GAAP). From here, the statutory financial statements are produced, disclosed and
filed. With the growing requirement to digitally file, meaning in XBRL or Inline-XBRL and both supported
by validations rules, additional controls and processes to help ensure submissions are accurate and
meet the needs of its stakeholders.
In effect, generally accepted accounting principles provide a common set of financial accounting
standards, principles, methodologies, and in some cases rules that are defined by professional
accounting standards bodies. The standards, once regulated, provide authoritative accounting
requirements, and define commonly accepted methods of recording and reporting the underlying
transactions. Regulators around the world is widely expected to adopt international sustainability
standards (or regional standards in the case of the European Union, or local standards in the case of the
US Securities Exchange Commission). This will undoubtedly elevate need for strong data management
capabilities and controls surrounding how sustainability data is captured, managed, reported, and
audited in a manner like that used today for financial data.
Most capital markets require a management assertion of the company’s internal control system. A
control environment is, according to the Institute of Internal Auditors, the “foundation on which an
effective system of internal control is built and operated in an organization that strives to (1) achieve its
strategic objectives, (2) provide reliable financial reporting to internal and external stakeholders, (3)
operate its business efficiently and effectively, (4) comply with all applicable laws and regulations, and
(5) safeguard its assets. are policies and procedures put in place by management to ensure that, among
other things, the company’s financial statements are reliable.” In practical disclosure terms this means
that all annual financial reporting must include a statement acknowledging that management is

3. responsible for ensuring "adequate" internal controls, and an assessment by management of the
effectiveness of the internal control structure itself. In most jurisdictions auditors are required to assess
the efficacy of the internal control environment as part of its audit. It is reasonable to extend this
requirement into sustainability reporting as it enters a regulatory regime and becomes subject to
greater audit assurance. Historically, GHG accounting has been decoupled from the financial statement
audit process and from a financial auditor’s perspective, has been reported on the basis of limited
assurance—meaning that the information provided is not found to be materially misstated. Limited
assurance requires less evidence than reasonable assurance, which is typically the bar for financial
statement audits.
Many jurisdictions have experienced considerable progress relating to the disclosure of climate-related
information, however internationally aligned (or consistent) disclosure standards and requirements
have not been mandated on a global basis. The result is an environment within which we have limited
discoverability, consistency, comparability, and quality across the climate data available.
It is becoming clear that the practice of decoupling of financial accounting and carbon accounting
systems is no longer fit-for-purpose. The good news is that there is now considerable momentum to
drive increased integration of GHG emissions with financial reporting, as was recently acknowledged in
the Carbon Call report (see carboncall.org).
Achievement of carbon neutrality will require a clear and meaningful link to financial accounting so that
transition plans are specific, actionable, and reporting entities can be held accountable for their
decisions and actions.
CARBON ACCOUNTING DATA ECOSYSTEM
The inconsistent standards, definitions, or methodologies around carbon accounting has significant
business implications. For example, as illustrated in figure 1, within a supply chain that includes multiple
organizations. Today, when Widget Energy Co customer wants to calculate the total carbon footprint of
a product, it is virtually impossible as each supply chain participant stores data using its own standards,
data formats, and defined units. In addition, Widget Energy Co itself typically discloses data at its
estimated corporate footprint level and not at the individual product level. Of course, product level
disclosures would help interoperability significantly however doing so in a meaningful way, today,
remains elusive.

4. Figure 1: GHG Corporate Protocol: The Ecosystem Illustrated
One way to understand how corporate footprint emissions data could be disaggregated to the product
level is by contrasting it with a well-understood financial reporting example – a manufactured physical
good.
Before a good becomes a finished good inventory (FGI) item it is manufactured. Manufacturing entails
work in process (WIP)– from raw material inputs, to labour, and overheads (for facilities, management,
etc.).
Components are recorded in the financial systems at the supplier purchase price and are typically
presented as raw materials inventory. Labour is tracked and allocated by units manufactured using a
standard labour rate (typically the entity’s weighted average salary by job level) and overheads are also
tracked and allocated at a unit level (typically determined using an activity-based costing (ABC)
allocation approach).
Once the good is manufactured, the finished good unit cost is established by rolling up the production
costs. This simply means we add each unit’s raw material cost with the allocated labour and overhead
costs.
The finished unit is stored in a warehouse (and sits on the entity’s financial statements at finished good
unit cost). Monthly warehouse costs to manage finished goods are expensed to Operating Expenses
(OPEX) as incurred (they typically include labour, warehousing costs, utilities, security, cleaning services,
etc.).
Upon sale, the finished good is moved from the warehouse onto a distribution vehicle and shipped to
the customer’s designated site. In this process, all costs are expensed as incurred – and often managed
by third party service providers. Figure 2 illustrates this product lifecycle.

5. Figure 2: A Simplified Manufactured Product Lifecycle
If we extend this “simple” product manufacturing cycle example to consider carbon accounting, several
issues become immediately apparent (see figure 3):
1. Input materials acquired do not include carbon accounting of any kind, and when it does will
emissions be embedded in the purchase price? Should this be disaggregated to become a scope
1 or 3 emissions for reporting purposes for the manufacturer?
2. Transportation from the component supplier to the manufacturing entity is often embedded
within the component unit cost today. Should this also be disaggregated in the future as a
reportable scope item?
3. Manufacturing processes consume fossil fuels for heating, electricity, and cooling – today these
scope 2 items are not tracked or aligned to activity usage (such as particular production lines,
particular units manufactured, etc.). A carbon inventory tracking and allocation system would be
required to do so, assuming utility suppliers could disaggregate their customer usage (days,
times, outlets, etc.). The data would need to be sufficiently disaggregated that a third-party
could reperform the measurements and allocations for audit assurance purposes.
4. Warehousing similarly consumes utilities, cleaning services, security services and other third-
party services emitted carbon as a by-product of their activities, which would also require
carbon inventory tracking and allocation systems, as well as the ability to be assured.

6. Figure 3: A Simplified Manufactured Product’s Carbon Considerations
These issue examples could be quickly expanded to include the importance of baselines, leakage, timing
issues, permanence, and uncertainties. Additionally, a warehouse could be counted more than once if it
is subject to multiple activities. If the effects of activities are not additive, this would result in inaccurate
accounting. In this case, the carbon stock would be especially difficult to verify. There are additional
complexities depending on the nature of the company.
According to the GHG Protocol Corporate Standard, emissions resulting from the use of sold products
may be included as Scope 3 emissions in an “inventory”. However, since these emissions are often
exceedingly difficult to quantify, the benefits of including them in a corporate inventory should first be
weighed against the potentially prohibitive costs of collecting the data.
For instance, the GHG Protocol indicates that a company that purchases its electricity from a T&D
(transmission and distribution) system, but does not own any part of the system, T&D losses should not
be included in a Scope 2 inventory. They may be included in a Scope 3 inventory labeled “generation of
electricity that is consumed in a T&D system”. For a company that purchases its electricity and
transports it through a T&D system, T&D losses should be included in Scope 2 emissions, since the losses
are a portion of direct emissions from the “use” (loss) of purchased electricity. For a company that owns
the T&D system and produces the electricity that runs through it, T&D losses should be included in
Scope 1 emissions. This is because the emissions are a direct emission resulting from the production of a
good.
Each of these examples illustrates the sheer complexity of capturing, tracking, measuring, and reporting
carbon emissions and why the data exchange issues are real (see figure 4).

7. Solving these issues will take an international collaborative effort that is, and remains, in the public good
interest and under open licence. It can be done, and it is most likely to succeed at the technical data
level rather than at a policy or political level.
The DSD-Lab initiative (dsdlab.org) has been created for launched to achieve exactly this outcome – an
international collaborative consensus driven approach that spans disciplines and borders to establish
practical data and digitalization solutions to the sustainability reporting issues that we all face!
The GHG Protocol Initiative comprises two separate but linked standards:
1. GHG Protocol Corporate Accounting and Reporting Standard (provides a step-by-step guide
for companies to use in quantifying and reporting their GHG emissions)
2. GHG Protocol Project Quantification Standard (a guide for quantifying reductions from GHG
mitigation projects)
● GHG Protocol Initiative to develop complementary industry-specific calculation tools
● It covers the accounting and reporting of the six greenhouse gases covered by the Kyoto
Protocol
a. carbon dioxide (CO2),
b. methane (CH4)
c. nitrous oxide (N2O)
d. hydrofluorocarbons (HFCs)
e. perfluorocarbons (PFCs)
f. sulphur hexafluoride (SF6).