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Are Carbon Accounting Challenges Impeding Progress Towards Net Zero?

by Heather Davies

Are Carbon Accounting Challenges Impeding Progress Towards Net Zero?

by Heather Davies

Published 06-21-23

Submitted by SAP

Over a third of the world’s largest publicly traded companies now have net-zero targets to radically reduce their greenhouse gas emissions by 2050 or earlier. But, 65% of corporate targets do not yet meet minimum procedural reporting standards. This is indicative of a data issue that has more far-reaching consequences than annual reporting requirements. As has been drummed into us, we cannot manage what we do not measure and the stark consequences of not addressing human-caused climate change have been clearly set out in the 2023 IPCC AR6 report.

Carbon accounting is still undertaken manually or using semi-automated tools that rely on estimates or averages. Additionally, many more organizations still need to set targets. To move forward, they must first ascertain current emissions levels. But with supply chain emissions representing a much higher proportion than direct emissions, this is proving challenging for four key reasons: a lack of data, poor or unreliable data, a skills gap preventing effective data analysis, and issues exchanging data.

Organizations must account for carbon, not only for climate and compliance reasons but to aid decision-making, reveal opportunities for efficiencies and growth, and differentiate their business. As a result, organizations across industries are racing to slash the carbon footprint of their products and services. As businesses at every level of the value chain ramp up their own decarbonization efforts, business leaders know the lowest carbon offerings are likely to become the most desirable and hence the best opportunity for growth and profit.

A Lack of Emissions Data

Emissions data is used in three areas of a company’s net-zero strategy: to measure and identify hotspots for emissions reduction; to make improvements such as selecting suppliers and redesigning products and processes; and to continuously anticipate business outcomes and identify new opportunities for greenhouse gas reduction.

For successful decarbonization, emissions data must be embedded in an organization’s decision-making process. Incomplete and unreliable data hinders the creation of an effective net-zero strategy. This issue is particularly prevalent across the value chain in scope 3 emissions, which regularly account for 75% of a company’s emissions across all sectors. Due to a lack of influence and control and an absence of disclosure rules, supply chain emissions go vastly underreported, weakening net-zero strategies.

It is essential for companies to close the gap and gather data on all scope 3 emissions. Not doing so leaves them open to allegations of greenwashing and non-compliance penalties as policymakers worldwide move increasingly towards making scope 3 emissions reporting mandatory.

Poor Quality Data

Data that is accurate, granular, and comparable is indispensable for a comprehensive understanding of an organization’s carbon footprint. However, much of the data being relied upon is spend-based, estimated, or reliant on regional or sector-based averages as opposed to primary data directly from a business’s operations and suppliers.

By its nature, secondary data cannot provide an accurate indication of a company’s greenhouse gas emission hotspots, nor can it be used for comparison purposes. It also lacks granularity, impairing decision-making. Relying on inconsistent data carries potentially significant risks, which can lead to a decline in trust and credibility.

Sustainability Skills Gap

The number of green jobs grew by 8% between 2015 and 2021 and is expected to continue to increase. But there is a significant skills shortage, and candidates don’t yet have the competencies to be able to fulfill the roles. Short courses and micro-credentials run by universities, professional bodies, and NGOs are helping to fill the gap, but on-the-job training and upskilling are also necessary to equip employees and business leaders with the necessary skills to be able to interpret the data and turn pledges into progress.

Data Exchange Issues

Carbon accounting challenges within a single organization are an issue, but the problem is multiplied when it comes to achieving carbon transparency between companies in a given value chain. Incompatibility of data, inconsistencies in carbon accounting rules, software platforms that don’t easily interact, and a lack of collaboration across supply chains leave business leaders fumbling in the dark for information.

The automobile industry is an obvious example. With 98% of emissions falling into scope 3, exchanging carbon footprint data can seem like an impossible task due to its complex supply chain, a lack of trust between suppliers and customers, a scarcity of quality data, inconsistent carbon accounting methodologies, and incompatible data management platforms.

The Impact of Carbon Accounting Challenges

The aforementioned challenges result in wasted time and resources, compromised decision-making, an inability to affect meaningful emissions reduction, missed opportunities, a lack of transparency, and higher exposure to business risks, not to mention the global risks of deadly heat waves, devastating floods, rising sea levels, and a decline in biodiversity.

Moving Towards a Green Ledger

What if sustainability performance could be managed with the same rigor as financial performance? Where it becomes as effortless as financial transactions in your enterprise resource planning (ERP) systems, where a carbon network makes data exchange easy, and where end-to-end carbon accounting tracks product emissions across the entire value chain?

Ledger-based transactional carbon accounting provides all of this and more – and it’s not new. It is an amalgamation of a suite of solutions, an ecosystem of platforms. Working together, they have the power and interactivity to collect and assimilate emissions data using a hybrid approach to help businesses transition from estimated or average emissions values to actual and verified data. A double entry approach allows companies to balance emission in- and outflows.

A sustainability ledger provides auditable carbon reports and attaches emissions to financial costs and revenue. This provides companies with the capability to analyze carbon emission hotspots through a financial lens across cost centers, profit centers, and market segments.

Finding the Key to Collaboration in the Automotive Industry

Perhaps most importantly, the sustainability ledger approach provides a platform for collaboration and integration of data throughout an entire value chain. The Catena-X Automotive Network is the first open and collaborative data ecosystem capable of allowing companies to work together to establish transparent processes and common data standards from material acquisition to manufacturing and distribution to meet sustainability and regulatory requirements.

By partnering with the World Business Council for Sustainable Development (WBCSD), Catena-X was able to achieve a standardized carbon footprint value that could be used throughout the supply chain.

Thanks to the GreenToken by SAP solution, companies can manage this standardized product carbon footprint data and share it easily, on a material level, between business partners in an efficient and secure way.

Other Industries Incorporating the Green Ledger

The automotive industry isn’t alone in identifying a need for a more scientific and collaborative approach. Other industries, including manufacturing and healthcare, are moving towards a more holistic green ledger solution.

Multinational chemical and consumer goods company Henkel has recently implemented SAP S/4HANA while simultaneously transitioning to the cloud. Henkel will benefit along its entire value chain from increased data-driven, real-time decision-making and leaner and more sustainable processes.

The Next Steps

Plugging the gaps and improving the quality of emissions data is a clear priority to turn an organization’s carbon reduction targets into actionable plans, but collaboration must not be underestimated if a real reduction is to be achieved across industries. Companies now need to identify the best software solution for their business that will not only collate emissions data on a transactional basis but also report it holistically and provide the possibility to share it throughout the supply chain.

Find out more about SAP Sustainability solutions.

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