Insights

The ESG Revolution: Welcome to Carbon Accounting!

By Michael Kraten, PhD, CPA, Director of Accounting Program Initiatives, C.T. Bauer College of Business, University of Houston

As the sustainability movement grows and matures into a permanent sector of the global economy, the metrics of sustainability, such as Environmental, Social and Governance (ESG) data, are becoming core components of valuation and risk models.

One of the primary measurements of the ESG field involves carbon accounting. The impact of climate change on the global environment has inspired companies to respond to government mandates with private sector initiatives to measure and publish the amount of carbon emissions that they are generating from business operations.

Carbon Accounting

These companies are relying on standard-setting organizations to define formal methods for compiling and reporting such information. Professional guidelines like the Greenhouse Gas (GHG) Protocol, for instance, codify accounting methods for this data. Organizations like the Sustainability Accounting Standards Board (SASB) led efforts to integrate these policies into their technical reporting standards. Since August 2022, the International Sustainability Standards Board (ISSB), under the IFRS (International Financial Reporting Standards) Foundation, has taken responsibility for the SASB reporting standards with a mandate to create a globally consistent baseline for sustainability reporting.

In June 2023, the ISSB issued their first two sustainability disclosure standards: IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-Related Disclosures.

Carbon Reporting Requirements

What do firms need in order to report on their carbon emissions? For starters, they clearly require employees and advisors with the appropriate knowledge and expertise. In addition, they need the requisite systems infrastructure to perform the necessary tests. Furthermore, firms need to establish essential internal oversight and other controls to manage their measurement and recording processes and ensure the accuracy and completeness of their ESG data.

Some firms have hired ESG Controllers and Data Managers to compile the data in a reliable and systematic manner. New academic programs now teach this information to future carbon accountants and help them develop the requisite skill sets.

While the techniques for measuring and reporting climate-related information continue to evolve, the accounting and consulting profession is doing all it can to contribute its skill set to this emerging field.

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