Boardroom challenges for carbon reporting

As Green Deal compliance deadlines start to kick in or loom closer, interested parties are scrambling to respond to the Mandatory Era’s new regulatory environment. They include:

  • Regulators
  • Manufacturers
  • Traders
  • Banks
  • Consultancies
  • NGOs
  • Environmental institutions

Businesses need to identify reliable, credible consultancies, accounting and auditing businesses to ensure regulatory compliance, and ensure competitiveness.

Businesses falling under the new regulations have the same basic options:

  1. Follow: make sure you’re fulfilling your internal governance obligations by complying with the new external regulations.
  2. Lead: profit from the new business opportunities by offering compliance services
  3. Innovate: both 1 and 2. Some companies can extend their own range of services to offer compliant services/​products to existing or new customers, including accessing environmental-focused funding and finance.

The search for stability: for businesses and government

Whether you’re a reactive business seeking comfort in the peloton, a proactive business looking to set the pact, or a government regulator applying new race rules, all parties benefit from achieving a stable, consistent, balanced carbon reporting system as soon as possible.

But for all parties, the fact that carbon reporting is still in its infancy creates new challenges and opportunities.

For the regulators like the EU, the challenge is to build systems from scratch, fast, with as few loopholes as possible.

For innovators embracing the new regulatory environment, it’s a unique, narrow window of opportunity to grab first-mover advantage, and define the standards for carbon reporting’s Mandatory Era.

The EU’s Green Deal, and other legislation has created this space because while it details what must be reported when and by whom, it does not specify how.

This lacuna creates three major challenges/​opportunities for Reactive, Proactive and Regulator alike – how to tackle the Mandatory Era’s three main challenges

  1. SMEs
  2. Rules
  3. Data.

Carbon reporting challenges

1. SMEs

Small and Medium-sized Enterprises (SMEs) hold the key to accurate carbon reporting, because they form most of the Scope 3 of big businesses (usually defined as 250+ employees).

Mandatory Era regulations focus on Scope 3 for good reason: big businesses generate 30% of global business emissions, while the SMEs in their supply chain emit 70%.

The challenge is that SME emissions are currently almost entirely guesswork. This creates the ​‘SME paradox’.

Big Businesses:

  1. need accurate data from their SME supply chain to be compliant with Scope 3 reporting.
  2. can afford to pay specialist carbon consultants to calculate their own Scope 1 and 2 compliance but not for their suppliers too
  3. need to know the percentage of their suppliers business they represent, in order to apportion a fair proportion to their own Scope 3

Conversely, SMEs:

  1. are not yet required by law to report their carbon emissions accurately
  2. can’t afford to pay consultant fees
  3. don’t want to reveal commercially sensitive information specifying their dependence directly to their major customers

This leaves big businesses in a bind:

  • They could compel their suppliers to cooperate, e.g. by making reporting their carbon data a contractual condition
  • They’re reluctant to spend their hard-earned supply chain goodwill on compelling their suppliers to provide them this information.

This is a cultural/​psychological/​storytelling issue, immune to technological solutions, because there’s no accurate, granular, consistently taxonomised public dataset on which to train an AI (see Data below).

Mandatory Era legislation seeks to square the ​‘SME Paradox’ circle, as accurate carbon reporting is otherwise impossible.

2. Rules

Thirty years of voluntary schemes operated by dozens of competing commercial standards have created a trillion-dollar carbon trading industry, but bequeathed no consistent, universal, standardised rules for carbon accounting.

The EU legislation signals a destination and direction of travel, but does not provide a detailed road map of how to get there.

Financial accounting provides a useful analogy for carbon reporting, but the latter currently is nowhere near the sophistication, complexity, and granular detail of the former.

Here are some very basic questions for which the financial equivalents are obvious, but which are still far from clear when it comes to carbon reporting compliance:

  • Is there a list of acceptable methodologies for reporting?
  • When is it OK to use carbon footprint, and when LCA?
  • If LCA, should my business apply ISO 14040 and 14044, Publicly Available Specification (PAS) 2050 or the GHG Protocol Life Cycle Accounting and Reporting, or something else?
  • How far down my supply chain do I need to go to be compliant?
  • If I’m a wholesaler, should my Scope 3 just include the transport costs of the boxes shipped to my warehouse, or all the embedded energy of the products in the boxes?
  • If a supplier sells me 50% of their output, should I assign myself 50% of their carbon footprint, or take on the whole lot?
  • Are there any ​‘certified’ auditors who can guarantee compliance?
  • Who will audit my reports, under what circumstances, and applying what rules?
  • How can I get accurate information from my supply chain?

For reactive business executives, who see a new layer of red tape as a threat, lack of clarity can be exploited to delay, defer or dodge. They point to the lack of available tools/​vehicles/​maps to take the path laid out by the Green Deal, and lobby for less onerous/​cheaper ​‘interpretations’ that will permit ​‘business as usual’.

For proactive entrepreneurs, embracing the spirit of the law, the lack of clarity presents a unique opportunity to set the new standards and become pioneering leaders.

3. Data

Data is the lifeblood of the Digital Era, presenting a particularly pressing problem for businesses seeking the right symbiotic partners in the Mandatory Era.

Business executives now need to rapidly learn how to speak two different languages:

  1. Carbon accounting: knowing your Scope 1 from your Scope 3, understanding the the difference between carbon footprint and LCA methodologies, and their various variants.
  2. AI: the critical importance of high quality training data, consistent taxonomies, prompt engineering, and hallucination-spotting.

Both can be full of jargon and new concepts, making it hard for non-specialists to sort the wheat from the chaff, or the doomed from the vigorous.

Successful business leaders are increasingly fluent in both languages, but need to rapidly acquire fluency in carbon reporting’s dialects.