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Carbon Accounting Tug of War

Carbon Accounting Tug of War

Tim Mohin
16 Aug

Get out your green eye shades….the next battleground for climate and sustainability is the fast paced world of accounting.

For years now, investors have clamored for material climate information to be included in financial reports. The US Securities and Exchange Commission (SEC), the European Union, and other countries responded with new policies requiring climate and other ESG matters be included in financial reports - these policies are already being implemented in Europe.

Behind the scenes for all of this new reporting are accounting rules. In other words, the rules for how to measure both financial and now climate impacts. As climate accounting begins to merge with financial accounting, a new battle is brewing between the US and the rest of the world.

When it comes to accounting, the United States is a little different. More than 140 nations use the financial accounting standards from the International Financial Reporting Standards (IFRS) foundation. This is the same group that spawned the International Sustainability Standards Board (ISSB) in 2021 and recently published guidance for how companies can share climate risk reporting in financial statements.

The US uses its own financial accounting standards issued by the Financial Accounting Standards Board (FASB). Back in June, the FASB asked for comment on ESG related disclosures and issued a draft accounting standard for Environmental Credit Programs.

These moves triggered the anti-ESG movement. This week two dozen finance leaders from Republican states preemptively petitioned the FASB not to “politicize” the Generally Accepted Accounting Procedures (GAAP) by including sustainability or climate disclosures.

The letter calls out the SEC climate risk disclosure rule, among other frameworks, saying they ”purport to be about financial reporting but in reality, are about commandeering the financial system to advance a substantive climate agenda that has not been democratically approved in the United States.”

Pushing For Carbon Accounting Standardization

On the other end of the spectrum, the Democrats are pushing for more guidance and standardization for carbon accounting. The aptly named Standardized Calculation of Operational Polluting Emissions (SCOPE) Act introduced by Adam Schiff (D-Calif.) will require the Environmental Protection Agency (EPA) to produce guidance on how companies should calculate Scope 3 emissions.

The bill would require the EPA to “conduct a study, and publish guidance on calculating and reporting…Scope 3 emissions above thresholds the Administrator determines appropriate.” The EPA would determine the thresholds, calculation methodologies, frequency of monitoring, and assurances.

Schiff said, "My SCOPE Act will close a clear gap by directing the EPA to establish across-the-board guidance for companies that choose to disclose their Scope 3 emissions."

The aim of this bill would be to incentivize more companies to report on Scope 3 and to complement existing guidance on Scope 3.

The SCOPE Act has received widespread support from environmental groups. Patrick Drupp, Ph.D. of The Sierra Club, said, "The Sierra Club strongly supports the SCOPE Act…this legislation will help ensure our federal government finally has a window into the financial industry’s contribution to fossil fuel pollution and can begin addressing it.”

Creative Accounting for Carbon Credits

An analysis by the Financial Times dug into the use of Renewable Energy Certificates (RECs) by big tech firms. RECs represent proof that electricity was generated from a renewable energy source. The issue is that the actual sources of power used by these companies are determined by their electricity provider and are often from more polluting sources. So, by buying the RECs, these companies can report fewer greenhouse gas emissions. The analysis found one example of real-world emissions from power consumption to be 3.9 million tonnes compared to the 273 tonnes claimed after applying the RECs.

Matthew Brander of the University of Edinburgh likened RECs to “buying the right from a fitter colleague to say you have cycled to work, even though you arrived by a car that runs on petrol.”

The use of RECs is a well established practice, and buying these credits supports the growth of clean energy. These tech giants have financed research that helps back RECs. But big tech is itself split on how to craft the rules. A coalition that includes Amazon and Meta is pushing a plan that critics fear will allow companies to report emissions numbers that bear little relation to their real-world pollution and not fully compensate for those emissions.

The stakes are high. Future accounting rules will determine whether companies continue to support RECs and other carbon market credits or backtrack on their climate targets and upend the carbon credit market.

Trump and Musk On Climate

A fireside chat between Republican presidential nominee Donald Trump and Tesla Founder Elon Musk on Musk’s X social media platform (formerly Twitter) shed light on Trump’s climate position.

Among the many times energy and climate were mentioned, Trump's quote that stood out for many was when Trump challenged Musk’s view on the need for an energy transition with the claim that rising sea levels would create “more oceanfront property.” Climate expert Bill Mckibben labeled the conversation as “the dumbest climate conversation of all time.”

The IRA Turns Two

David Paul Morris/Bloomberg

The Inflation Reduction Act’s second birthday was this week, prompting new reports on its effectiveness. Since August 2022, the world’s largest-ever climate-tech investment policy has resulted in 334,565 new clean energy jobs across the country. Republican states that previously opposed the law are now asking their fellow GOP members not to repeal it.

However, new research from FT revealed that 40% of the IRA’s manufacturing projects have been delayed due to the uncertain political climate and changing market conditions. Some $84 billion worth of projects have been delayed, some of which are moving their manufacturing plants from blue to red states to protect their investments from a potential Trump administration.

Extreme Heat Takes Its Toll

Surprisingly, July was the first month in over a year not to break heat records, but extreme heat is still causing havoc worldwide:

All of this extreme heat is putting the planet on a dangerous trajectory toward tipping points that, if reached, would be impossible to overturn.

The views expressed on this website/weblog are mine alone and do not necessarily reflect the views of my employer.

Other Notable News:

US wind and solar energy are on track to overtake coal this year. With a surge in solar this year and ongoing coal plant retirements, wind and solar have produced more power than coal for the first seven months and are likely to continue.
Climate tech investing is seeing a resurgence in 2024, with more venture capital funding ($6.9bn) year to date than in all of 2023 ($5.2bn).
One company that may have created a blueprint for decarbonization while growing is Mars. Since 2015, Mars has managed to reduce its carbon footprint by 16% while growing by 60%.
This new resource from my company, BCG, features a series of articles and research on how to become a socially transformative company. It features an article I contributed to, “Why Companies Must Address Human Rights in Their Supply Chains.”
A recent report from IBM found that companies are spending 43% more on sustainability reporting than on sustainability innovation.
Climate Action 100+ lost another key member this week. Goldman Sachs Asset Management is exiting the beleaguered climate action group for investors, joining other high-profile exits like State Street, JPMorgan Asset Managers, and others.
This new research from my company , BCG, shows the huge potential for Bio-Energy with Carbon Capture and Storage (BECCS). The study finds that companies in some sectors have a huge potential to profit from carbon credits while reducing their carbon footprint if they implement BECCS.
More than 80 Nobel Prize winners criticized the removal of any mention of fossil fuels from a UN Climate Pact next month. The original text of the UN’s ambitious Summit of the Future included a reference to “transition away from fossil fuels,” but that was taken out.

Notable Podcasts:

This new podcast from Hollywood actor Alexander Skarsgård, “How we Fix This,” explores the natural and technological climate solutions springing up across the globe. Across the first season, he explores everything from carbon accounting solutions, methane-less cow farts, and improving access to solar for developing nations.
In this week’s episode of the BBC’s The Climate Question, the question is about what Afghanistan is doing on climate change. Afghanistan has contributed very little to climate change but is warming at double the global average, and its people are particularly vulnerable after decades of conflict and poverty.

Notable Jobs:

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