Since the Kyoto Protocol in 1997 (the first international treaty for GHG reductions), carbon accounting standards, guidelines, and regulations have been slowly iterating. From the inception of the initial carbon accounting guideline, the Greenhouse Gas Protocol (GHGP), carbon accounting standards have become more specific to certain parts of carbon accounting and reporting and increasingly sector-specific. The importance of these standards lies in the alignment of a company’s emissions calculations, with them, verifying the veracity of their carbon accounting.
The increased ambition of the 2015 Paris Agreement emboldened standard-setters to further carbon accounting standards to be more in line with financial accounting standards. As a result, the Taskforce for Climate-related Financial Disclosures (TCFD) and Partnership for Carbon Accounting Financials (PCAF) were designed to help companies better understand how their businesses affect and will be affected by climate change and to perform more specific carbon accounting, such as for financed emissions in the case of PCAF.
Global climate disclosure mandates are now beginning to coalesce around these standards and move them from the realm of voluntary disclosure to statutory. The importance of aligning with carbon accounting standards in some jurisdictions is no longer an option but a mandatory requirement.
The Greenhouse Gas Protocol
The most recognized and utilized carbon accounting standard is the GHGP. It was created in 1997 off the back of the Kyoto Protocol and provides guidelines for organizations to develop inventories of GHG emissions. The GHGP was designed to simplify, improve consistency in carbon accounting, and provide businesses with the capabilities to report and manage their emissions.
Under the GHGP, all emissions are broken down into three scopes. Scope 1 and 2 are required to be measured, whereas Scope 3 is optional.
Scope 1 refers to the direct emissions from an organization's operations, including company vehicles and buildings.
Scope 2 categorizes indirect emissions like purchasing electricity, heating, and cooling.
Scope 3 comprises all other indirect emissions that exist in a company's value chain, such as employee commuting and investments.
Scopes 1 and 2 can be mitigated more easily by switching to renewables and improving an organization's branches and offices’ energy efficiency. Scope 3, however, covers all other emissions from the value chain, which typically make up the majority of companies' emissions (for banks and asset managers over 99%) and are the hardest to reduce and mitigate.
Created in 2006, the ISO 14064 is an international standard for measuring and reporting greenhouse gas emissions. The standard is part of the International Standardization Organization environmental management standards and is broken into three parts, each with a different technical approach.
- Part 1 - Refers to the guidance of quantifying a greenhouse gas inventory for organizations using a bottom-up data collection approach.
- Part 2 - Addresses the quantification and reporting of emissions from individual project activities.
- Part 3 - Established a process to verify the validity of an organization’s emissions.
The ISO 14064 is continually being developed with new iterations improving and fine-tuning the standard. The ISO 14064 is consistent with and derived from the GHGP. The two documents differ in that the GHGP focuses on the provisions of best practices for making GHG inventories. At the same time, ISO14064 establishes minimum levels of compliance against the GHGP best practices. Although only slightly different, the two standards complement each other. Companies can benefit from adopting both as the ISO 14064 identifies what to measure and the GHGP how to measure when conducting GHG inventories.
The Task Force for Climate-Related Disclosures (TCFD)
In response to the increased awareness of the economic instability climate change-related disruptions will bring, the Financial Stability Board created the TFCD standard in 2015. The TCFD’s guidance recommendations for climate-related disclosures were released in a 2017 report. They set a clear and consistent structure for climate-related disclosures.
The proposals were designed to be applicable to all organizations in all jurisdictions and give reliable, comparable, and forward-looking information for investors to base decisions. The adoption of TCFD provides prospective investors with the relevant information to understand their opportunities and risks associated with the climate risk in a market. The report offers a structure for companies to report the financial impacts of climate change on their business. Four main recommendations focus on the primary themes for disclosure:
- Governance - Disclose the company's governance around climate-related risks and opportunities.
- Strategy - Disclose the actual and potential impact of climate-related risks and opportunities on the organization’s strategy and financial planning.
- Risk Management - Disclose how the organization identifies, assesses, and manages climate-related risks.
- Metrics and Targets - Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Under these four thematic areas are 11 more recommended disclosures to bring further transparency to carbon reporting. In addition, the TCFD filled some of the gaps that previous reporting schemes had left, including a focus on integration, integrating climate information with risk and financial information, and climate information integrated into mainstream reporting. The TCFD is the carbon accounting standard, which tells companies what to measure and what and how to report this information.
The Partnership for Carbon Accounting Financials (PCAF)
PCAF was created by Dutch banks in 2015 and was adopted as a global standard in 2019 to assist financial institutions in aligning their financed emissions with net-zero targets by 2050 (in line with the Paris Agreement). It was specifically developed to be a disclosure standard for financed emissions. The standard provides in-depth methodological guidance to measure and disclose the GHG emissions of eight asset classes, which is expected to grow as the standard evolves.
The PCAF was built on and conforms with the GHG protocol requirements outlined in Scope 3 Category 15: investment activities. PCAF allows financial institutions to measure financed emissions in a harmonized manner, meaning data is easily transferable and verifiable. This enables financial institutions to assess climate-related risks in line with the TCFD, set science-based targets based on SBTi, report emissions to stakeholders, and make more informed decisions on climate strategies and actions.
How Can Carbon Accounting Software help with Standards?
As carbon accounting standards continue to evolve, streamline, and are increasingly mandated by statute, fast alignment with new standards like the upcoming International Sustainability Standards Board (ISSB), will be essential.
Historically, alignment with carbon accounting standards was performed manually with spreadsheets and trained consultants. Now with carbon accounting software, alignment with these standards can be automated, and the whole carbon accounting process can be made to feel simple.
Climate Management and Accounting Platforms have codified the most important carbon accounting standards to ensure users are automatically aligned with them. Furthermore, alignment with carbon accounting standards and a growing number of carbon disclosure mandates can be performed at a fraction of the price with carbon accounting software than otherwise. Find out how you can automate your alignment with carbon accounting standards; schedule a free demo today.