The business of carbon accounting is experiencing significant growth as there is an increasing demand for information on corporate greenhouse gas emissions from regulators, investors, and consumers. Despite concerns about the accuracy of the data, venture capital investment in carbon accounting companies has soared from $60 million in 2020 to $767 million in 2022, according to data from PitchBook. The trend has continued in 2023 with $333 million already invested by venture capitalists in the sector. This surge in investment is driven by companies preparing for upcoming disclosure requirements in Europe and the US, as well as pressure from investors and customers to demonstrate climate-friendly practices.
The International Sustainability Standards Board released guidance in June on calculating emissions across supply chains, which was anticipated to be more stringent. However, the measures were less strict than expected, allowing corporations an additional year to report emissions across their entire value chain. Nevertheless, this development has prompted many companies to ramp up their tracking efforts. Adam Hearne, CEO of CarbonChain, which raised $10 million in series A funding, views this as the perfect opportunity for companies to organize their operations.
Investment in carbon accounting has also been bolstered by the US Inflation Reduction Act, which offers tax incentives for the adoption of green technology. In Europe, the Corporate Sustainability Reporting Directive will require companies to report emissions from 2024 to 2028, depending on their size. This has led to the emergence of new clients for carbon accounting start-ups like Greenly, which raised $32 million last year. The CEO of Greenly, Alexis Normand, acknowledges that many companies, even smaller ones, now face the challenge of addressing climate effects and are unsure where to begin.
However, the lack of standardized rules has resulted in companies adopting various methods for carbon accounting. Some directly approach suppliers for detailed data, while others use “emissions factors” – units that measure the equivalent amount of carbon dioxide generated based on cost or materials used. These emissions factors are often obtained from reputable scientific studies and databases provided by bodies such as the US Environmental Protection Agency and the UN Intergovernmental Panel on Climate Change. Nevertheless, the precision of these factors has been criticized. Karthik Ramanna, a professor at the University of Oxford, compares the situation to the US Securities and Exchange Commission asking for return on assets without specifying the calculation method, which creates opportunities for greenwashing.
Transparency is another challenge in carbon accounting, as some suppliers are reluctant to disclose sensitive data. For instance, the oil sector tightly guards its energy usage data, as it would reveal the cost basis of processing barrels of oil. Comparisons between companies are also difficult due to varying units of measurements used. There is a need to standardize measurements and develop a widely accepted framework like the Greenhouse Gas Protocol, which was set up by non-profit organizations. However, sustainability experts argue that this standard is inadequate due to the difficulty of sourcing emissions data and the risk of double-counting.
The most significant difficulty for companies is accounting for emissions from suppliers along the supply chain. It’s challenging to track all the products and services purchased from third parties and consider how consumers use the final products. Meanwhile, the SEC is grappling with the implementation of its proposed disclosure rules, and it’s uncertain when they will go into effect. The agency received a record 15,000 responses to its call for comments, including requests for exclusions from high-polluting industries like agriculture. A decision is expected in October after considering the feedback received.
Despite its challenges, estimating emissions remains valuable for companies. The ability to verify lower carbon intensity in commodities allows companies to align with their carbon goals. This information can influence decision-making in terms of material choices and suppliers. Markets are recognizing the value of this information and demanding more, even though there is still a lack of consensus on what constitutes good accounting.
In conclusion, the business of carbon accounting is thriving as stakeholders seek more information on corporate greenhouse gas emissions. Investment in carbon accounting companies has significantly increased, driven by upcoming disclosure requirements and pressure to demonstrate climate-friendly practices. Although there are challenges regarding standardization and accuracy of data, there is still value in estimating emissions, enabling companies to make informed decisions and align with their carbon goals.
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