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Introduction to Greenhouse Gas Accounting

by | May 6, 2022 | ESG

Introduction

The total greenhouse gases generated directly and indirectly by a firm or organization’s operations are quantified in a corporate or organisational greenhouse gas (GHG) emissions assessment. It’s also known as a carbon footprint, and it’s a crucial tool for evaluating and controlling your company’s climate change implications. Mandatory GHG reporting in directors’ reports, investment due diligence, and stakeholders’ communication are all driving forces for corporate Greenhouse Gas Accounting. Accounting for any company’s greenhouse gas emissions is becoming more and more of a routine requirement.

Following the World bank group Environment Strategy, the World Bank has a corporate mandate to account for greenhouse gas emissions in investment loans. The World Bank and its clients may evaluate the impact of operations on GHG emissions earlier in the project cycle by greenhouse gas accounting.

This information may assist task teams and client nations in mainstreaming climate change mitigation action into project design, which is a critical step in efficiently controlling and lowering GHG emissions.

Client nations are also better positioned in new climate frameworks, where GHG accounting is key information, by collaborating with the World Bank on GHG accounting. GHG accounting has begun in the forestry, energy, agricultural, transportation, water, and urban sectors, according to the World Bank.

Greenhouse Gas Accounting

What Are Greenhouse Gasses (GHGs)?

Gases that trap heat in the atmosphere are known as greenhouse gases. Any gas that absorbs and reradiates infrared radiation (gross heat energy) emitted from the Earth’s surface, hence contributing to the greenhouse effect. These gases and processes of heating are even important for the survival of life on earth.  Carbon dioxide, methane, and water vapour are the most prominent greenhouse gases.

Despite making up a small percentage of total atmospheric gases, These GHG gases have a substantial influence on the energy balance of the Earth system. Concentrations of greenhouse gases have changed extensively over Earth’s history, and these oscillations have resulted in major climatic alterations across a wide range of time periods. In general, greenhouse gas concentrations have been high during warm periods and low during cold ones.

GHGs are further divided into two categories: Feedback GHGs and Forcing GHGs.

Water vapour is a feedback GHG. They are extremely active elements of the climate system, implying they respond quickly to changes in circumstances, and they only endure a few days in the atmosphere. By circulating the greenhouse effect or amplifying the warming impact of driving GHGs, they operate as feedback to GHGs.

Carbon dioxide, nitrous oxide, methane and fluorinated gases are the four gases that are forcing GHGs. They take a long time to exit the environment and are unaffected by changes in air pressure or temperature, making them difficult to remove.

More about GHGs: https://www.adecesg.com/resources/faq/what-is-ghg/

Importance of GHG Accounting

Comprehensive GHG accounting is critical for organisations attempting to address the effects of climate change because it provides data and insight into where emissions are created and absorbed.

GHG accounting is critical for assigning accountability for different aspects of your organisation and the value chain’s contributions to the firm’s carbon emissions.

GHG accounting not only gives you the information you need to quantify and measure your company’s GHG emissions but also helps you make educated decisions about greenhouse gas mitigation measures.

As the need for carbon accounting has grown, cutting-edge tools and technology have emerged to make it simpler for organisations to precisely monitor, calculate, and track their greenhouse gas emissions and their reduction actions across many aspects of their operations.

There are several reasons to conduct complete GHG accounting, including:

  • GHG reporting is now required in directors’ reports.
  • Due diligence on investments and finance
  • Communication with stakeholders and shareholders
  • Employee participation,
  • Green advertising,
  • Criteria for government and corporate contracts, as well as tendering requirements

Accounting Frameworks & Guidance

An accounting framework is a collection of established guidelines for measuring, recognising, presenting, and disclosing information in a company’s financial statements. Financial statements for a business must be created using a recognised framework. Otherwise, auditors will not offer a clean audit opinion.

General Accepted Accounting Principles (GAAP) and international financial reporting standards (IFRS) are the most widely utilised accounting framework. In the United States, GAAP is employed, but IFRS is used in most other parts of the world. These two frameworks are intended to be broad in scope and so suitable for a wide range of organisations. Various accounting frameworks, sometimes known as other comprehensive bases of accounting (OCBOA), are intended for specific scenarios.

The International Accounting Standards Board (IASB) are now using the new Conceptual Framework for Financial Reporting (Conceptual Framework), which was released in March 2018. The new Conceptual Framework is applicable for annual reporting periods starting on or after January 1, 2020, with earlier application authorised for organisations that utilise it to set accounting standards.

The updated Conceptual Framework for 2018 states:

  • The goal of financial reporting for all purposes;
  • The properties of valuable financial data on a qualitative level;
  • The reporting entity’s boundaries and a description of the reporting entity;
  • Definitions of an asset, equity, liability, revenue, and costs, as well as supporting guidelines;
  • Recognition criteria for assets and liabilities in financial statements, as well as for instructions on when to remove them (derecognition);
  • Measuring foundations and when to employ them;
  • Presentation and disclosure principles and guidelines; and
  • Capital ideas and capital maintenance concepts

Value of GHG Accounting to Investors

Investors value firms consider greenhouse gas (GHG) emissions as an unfavourable component of stock value, and this price is consistent across companies who voluntarily declare to the Carbon Disclosure Project (CDP) and companies that do not.

The fact that investors see CDP sums and emissions estimates as equally valuable shows that stock values are influenced by GHG data from sources other than the CDP.

GHG emissions incur a market-implied equity discount of $79 per tonne, or nearly half of one per cent of market capitalization, for the typical S&P 500 company.

Emissions from investments should be attributed to the reporting company based on the proportional share of the investee that the reporting business owns. Companies should identify investments by picking a fixed point in time, such as December 31 of the reporting year, or by utilising a representative average throughout the course of the reporting year because investment portfolios are complex and can frequently change all throughout the reporting year.

Making assumptions about the asset’s functioning and estimated lifetime is common when calculating predicted lifetime emissions. The information required to calculate projected emissions will vary depending on the project.

Average-data method for calculating emissions from equity investments:

Emissions from equity investments = Sum across equity investments: ∑ ((investee company total revenue ($) × emission factor for investee’s sector (kg CO2 e/$ revenue)) × share of equity (%))

Detailed Greenhouse gas emission accounting calculations: https://ghgprotocol.org/sites/default/files/standards_supporting/Chapter15.pdf

 

Author

  • The author has done a master's in Environmental science and is currently working as chief Environmental Advisor with New Delhi State Government.

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