By Roger Ballentine, President of Green Strategies, Inc.
Originally published on E&E Leader for a Sustainable Tomorrow
Well, maybe a lot of companies. But they should not be. Or maybe companies are not really thinking about it all. But they should be. Other companies may not see impact accounting as an opportunity. But they should. And the time to focus on this is now, especially since the Greenhouse Gas Protocol (GHGP) is in the process of considering the development of an impact reporting framework and has issued a Request for Information (RFI) on the topic that is open until May 31st.
What Exactly is “Impact” Accounting?
“Impact” (or “consequential”) accounting is a simple concept – measure and report the actual real-world change in greenhouse gases (emissions avoided, reduced, or removed) by a company’s intervention. The concept of impact accounting is not new – the GHGP released its Project Protocol in 2005, which was primarily intended to provide guidance to developers undertaking projects that could qualify for credits under the Kyoto Protocol. Impact accounting differs in important ways from the traditional inventory accounting. Inventory accounting is about allocating (or “attributing”) to a company the emissions resulting from its business activities within its “value chain” (Scopes 1, 2 and 3). Both inventory accounting and impact accounting are important; but they answer different questions. While a company’s inventory is considered its “footprint”, an impact accounting ledger can be thought of as a measurement of its “handprint”.
What’s In it For You?
Companies adopt climate programs for a variety of different reasons – to be a leader, in response to competitive pressures, to enhance social license, to mitigate risk, for cost savings, for new market development, for community and stakeholder relations, as well as for talent attraction and retention. Regardless of the reasons, a company would like to be able to show (and claim) that their actions resulted in actual climate benefit. Most companies set targets based on inventory accounting and measure progress through inventory reductions. But inventory changes do not necessarily match real-world emissions impacts. Impact accounting helps us better answer perhaps the most important question – how much did my actions actually matter?
Impact accounting can help a company make investment decisions. A company with facilities in California and Nevada may want to choose a site for on-site solar. Both have good solar resources, and similar performing systems in either state will yield the same number of zero-carbon per megawatt hour certificates (RECs) and result in the same market-based inventory reduction. But because Nevada’s grid is 20-25% dirtier, the actual emissions impact of adding the array there is notably larger. Impact accounting reveals the real impact the company would achieve from each potential project.
Impact accounting also can expand the options a company has to reduce emissions beyond what inventory accounting reflects. A company installs a combined heat and power unit at an industrial facility. Because the unit’s capacity is sometimes greater than the company’s needs, it provides heat and power to the local community, displacing fossil fuels. With inventory accounting, the climate benefit of reducing the community’s fossil fuel use is not captured – and if anything, the company’s Scope 1 emissions go up and therefore the company shows a net inventory penalty from this climate service. But with impact accounting, the company can calculate and report the emissions benefit it caused.
Impact accounting also provides a way to make more defensible claims. Scrutiny of company climate claims is increasing. Because a decrease in inventory “tons” may or may not correspond to the actual tons to the atmosphere reduced or avoided, using that decrease to make claims about emissions benefits (such as “the equivalent of taking X cars off the road”) is risky. Using impact accounting to measure actual emissions benefit to the atmosphere, on the other hand, provides the basis for a stronger claim.
Impact accounting may also provide a pathway to new claims. A company with a large facility in Singapore, for example, has little to no opportunity to buy new clean electricity in that jurisdiction. The company could, however, invest in new RE in a clean energy deprived grid like Vietnam, but if it does not also have load there, the company has no pathway to report this action using inventory accounting. With impact accounting, the company could make the investment, measure the emissions benefits, report that in an impact ledger, and make a defensible claim.
The case for incorporating impact measurement into what companies are expected to do to set and reach “science-based” targets is strong. Today’s target frameworks do a good job at sending investment signals for companies to reduce their value chain inventories. But, by using inventory reductions and not actual emissions reductions to measure progress, these frameworks are not necessarily sending signals to companies to make emissions-optimized investments. Further, those investment signals are only for investments within a company’s value chain — while emissions reductions anywhere equally contribute to reaching global net zero. Climate science is precisely about measuring actual GHG flows in the atmosphere. “Science-based” targets aspiring to align with the mitigation pathways science tells us society must follow to avoid the worst effects of climate change should also be based on actual emissions impacts. It is both critical and foreseeable that target setting programs adopt or incorporate impact accounting in the not-so-distant future.
What’s Wrong with Impact Accounting?
Some argue that it would encourage companies to pursue emission reductions outside their own carbon footprints, thus “abdicating” their “responsibility” for their “own” emissions. But why does that really matter? It is likely that companies will find large and addressable emissions reductions opportunities in their own value chain. But they may not — like in the Singapore example above. The climate does not care what emissions are in whose inventory – it only cares about emissions. And the worst thing we can do is discourage companies from investing in climate mitigation simply because that impact does not lead to inventory reduction “credit” and progress towards a “science-based” target.
Companies today are inundated with a myriad of different calculation and disclosure requests and requirements and are understandably wary of any additional tasks. Impact accounting is another task, but one that aligns directly with what corporate climate investments are really meant to accomplish – climate benefit.
Ensuring that impact accounting frameworks will work for companies begins with participating in their development — such as by responding to the GHGP’s current RFI. The future is being shaped now, and it could be a future where companies are better recognized for the impact they create and are empowered to do more.
