What is carbon accounting? An introduction to helping your clients go green

Carbon accounting is the process of calculating how much greenhouse gas a business produces directly and indirectly from its activities. Once a business understands the specifics of its environmental impact, it can effectively try to lower its carbon emissions and contribute to nationwide efforts to achieve net zero.

More than just about personal or corporate values, greenhouse gas (GHG) accounting is increasingly becoming a legal obligation too. The UK government requires some businesses – mostly large ones – to report on their emissions. And even small businesses can benefit from carbon accounting to demonstrate their sustainability to customers and investors.

Carbon accountants will likely be asked: what is carbon accounting? We’ll explain with some examples, plus share some initial advice on collecting and processing the necessary data for your clients.

Why is carbon accounting important?

Also known as greenhouse gas accounting, carbon accounting is an essential part of the global move towards greater sustainability. As awareness of climate change grows, consumers expect a business to not only show sustainable credentials in its branding but to actively prove how it’s helping to protect the environment.

That’s where carbon accounting comes in. Accountants and bookkeepers can empower their clients with the necessary skills and tools to measure their business carbon footprint. Such measurements can be used to highlight particular areas for improvement or perhaps suggest a change in general business practices.

As for government compliance, while it’s mostly large businesses that must report their greenhouse gas (GHGs) emissions each year, carbon accounting is fast becoming a professional standard for medium and small businesses as well.

How to do carbon accounting

Accountants and bookkeepers can help clients to manage the necessary data for carbon accounting. Here are the main steps:

Step 1. Collect your data

This can be a complicated process as it requires access to both real-time and historical energy data, all of which must be accurate and traceable for the sake of reporting (and government compliance if applicable).

Two types of data are required:

1. Business data covers the activities performed by a business. This might include both spend data – the amount of money paid to a particular company for a good or service; and activity data – the amount of material bought (e.g. litres of fuel or kilograms of plastic).2. Emissions factors cover the amount of greenhouse gas emissions associated with a particular unit of business data. Simply put, it’s the amount of GHG per unit of measure – for example, 1 litre of diesel has 2.628kg of CO2e. Tables of emissions factors are produced by the UK government every year. Alternatively, you can go to your supply chain for data on carbon content.

Step 2. Choose your carbon accounting method

Once you’ve got the data, the question is: how does carbon accounting work?

There are three different ways to calculate GHG emissions and produce a carbon report:

The spend-based method

Using this method, you take the financial value of a good or service your client bought and multiply it by the relevant emissions factor to give you an estimate of the emissions produced.

While relatively straightforward, there’s a drawback to using this carbon formula. Emission factors are based on industry averages of GHG levels so they can produce inaccurate estimates. For example, if you bought new staff uniforms, the spend-based approach wouldn’t account for the specificity of these items – for example, their fabric or durability.

The activity-based method

This calculates emissions based on the actual quantity of purchased products or materials (for example, litres of fuel or kilograms of cotton). It generally uses scientific studies to identify emission factors and so benefits from more accurate data.

However, it can be tricky to gather a client’s activity data across its entire value chain. You’ll likely need to work hard to tally up all the activities including travel and other expenses.

The hybrid model method

As recommended by the Greenhouse Gas Protocol, the hybrid methodology combines spend-based and activity-based methods. This popular approach sees accountants use as much activity-based data as possible for the sake of maximum accuracy, then supplement this with spend-based data for estimating the remaining emissions.

Why should accountants and bookkeepers use carbon accounting?

There are many advantages to your clients becoming more environmentally aware. For example, carbon footprint reporting:

Minimises the risk of greenwashing

Not so long ago a business might shout about its so-called green credentials without any proof. These days, consumers and stakeholders are savvy about precisely how a business lives up to such claims. As an accountant or bookkeeper, you can give your client the necessary figures to avoid any claims of ‘greenwashing’.

Builds brand equity

Although most business owners want a good reputation in sustainability, it can be tough to know where to begin. By helping your client with carbon accounting, you can provide concrete steps to meet the growing demands of their consumers, employees, and investors to achieve net zero emissions. Explain that it can be a lengthy process but – over time – they can prove themselves to be a positive force for change.

Reduces inefficiency

It’s not just about environmental goals. Carbon accounting enables accountants and bookkeepers to advise their clients on how to quantify their entire operational footprint. This helps them identify inefficiencies within the value chain and thereby both cut carbon emissions and save money.

Important carbon accounting standards

The Greenhouse Gas Protocol was created by the World Resources Institute and World Business Council for Sustainable Development. Here, accountants and bookkeepers can find information on carbon accounting standards that will help to track and measure the process of decarbonisation.

The resource includes advice on how to understand the full life cycle emissions of a product and how to spot the best opportunities for GHG reduction.

What tools can be used for carbon accounting?

Greenhouse gas accounting can be a time-consuming job. Even a small business might require you to work with complicated data sets that change over time. Using software such as Xero can help simplify everything by storing the data in one secure place and automating the data processing. Designed with sustainability in mind, Xero also works with carbon accounting tools and apps that can measure and manage emissions.

The hours you save can then be spent helping your clients figure out the all-important carbon strategy.

For more info, check out this article on how small businesses can become more sustainable and our resource hub for accountants and bookkeepers.