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Understanding CSRD and the carbon accounting challenge

The CSRD regulations are launching a new era of accountability, requiring a much higher level of transparency in how companies manage and report on their ESG-related impacts, risks and opportunities. Find out what this means for your company’s emissions disclosures, the challenges involved and how to start strong on your Scope 3.

As global focus on environmental issues continues to intensify, organisations across the world are redoubling their efforts to get a handle on and reduce their greenhouse gas (GHG) emissions. Regulatory drivers play no small part in this. Among other things, the Corporate Sustainability Reporting Directive (CSRD) has rolled out new standards for carbon accounting, which will require more detailed emissions disclosures and reduction targets from close to 50,000 companies. 

However, collecting emissions data from the entire organisation and value chain is proving a thorny challenge for many businesses.

What is carbon accounting?

Carbon accounting involves measuring, managing and reporting an organisation’s greenhouse gas (GHG) emissions in a structured way. The outputs are generally measured as ‘CO2 equivalents’ (CO2-e), which standardises the impact of common GHGs against CO2 for a set period. This approach quantifies carbon footprints, helping businesses to understand impacts and develop strategies to reduce emissions and promote sustainable practices.

Scope 1, 2, 3 emissions explained

The Greenhouse Gas Protocol introduced the division of emissions into Scope 1, 2 and 3 to provide a clear overview of where a company’s emissions are occurring in its operations and its wider value chain.

Scope 1: direct GHG emissions from sources owned or controlled by the organisation, such as on-site fuel combustion and process emissions, directly contributing to its carbon footprint. 

Scope 2: indirect GHG emissions from the generation of electricity, steam, heating and cooling, that is purchased and used by the organisation. 

Scope 3: other indirect GHG emissions occurring from sources not directly owned or controlled by the organisation, such as supply chain, transportation, product usage or disposal.

Taken as a whole, the emissions represent the carbon footprint of your organisation.

What does the CSRD require for carbon accounting?

The CSRD mandates granular emissions disclosures and the setting of reduction targets across Scopes 1, 2 and 3, with the European Sustainability Reporting Standards (ESRS) specifying how and what information and metrics companies must report to comply with the CSRD.

The initial set of standards adopted in July 2023 focus on the organisation’s material impacts on people, environment and operations throughout the organisation and value chain, including carbon emissions. The next set of standards to be adopted in June 2024 will serve to finetune the reporting, where focus will sharpen on Scope 3 and its importance is gauging social and environmental impacts.

Disclosure Requirement E1-6 in the ESRS makes it mandatory to disclosure gross Scope 1, 2 and 3 emissions in metric tons of CO2 equivalents. Furthermore, there are 15 categories in Scope 3, and organisations must identify and disclose their ‘significant’ Scope 3 categories based on the magnitude of emissions and other criteria such as financial spend, influence, related transition risks and opportunities or stakeholder views.

Getting going on Scope 3 will be critical for all in-scope companies to properly prepare for upcoming requirements and have a system in place for resource-efficient data management and reporting.

3 best practices for tackling Scope 3

Although Scope 3 emissions generally account for more than 70% of a company’s total emissions, they are difficult to understand, calculate and mitigate given their indirect character. Few companies have yet to set targets. Many enterprises struggle to navigate complex value chain dynamics and acquire quality data for reporting and reduction plans.

1. Understand your own impact on the supply chain

Large companies are decarbonising their supply chain at scale and speed, and you are likely part of it. This means that your Scope 1 and 2 emissions are your customer’s Scope 3, and there will soon be expectations to support them with quality data. It can be difficult to gain a clear picture of the boundaries between your own operations and value chain. However, understanding this is critical. Not only does it drive proper greenhouse gas accounting, it also enables effective dialogue with customers with a view to reducing emissions throughout the value chain.

Best practice: As a first step, get a good understanding of which activities fall within your Scope 3 and where the biggest impact lies. Depending on the different asset ownership structures within the chain, there can be varying interdependencies in terms of both reducing emissions and helping to track data. Make sure that you understand how your customers are looking at their own value chain emissions – e.g. focus areas and metrics – as this will enable you to communicate progress and look for further improvements both up- and downstream.

2. Improve your data quality over time

Companies often go too granular in their first year and get stuck right at the start. They underestimate the lack of data and availability as well as the sheer number of stakeholders. By jumping right to individual suppliers as a data source, many ignore where their biggest impact actually lies, which activities drive their emissions and where they should focus. It becomes a lengthy and excruciating process which they have to repeat the following year.

Best practice: You don’t have to do everything all at once. In terms of data quality, the minimum approach you should take is a spend-based method, in the absence of better data. This estimates emissions by collecting data based on spend, while also using relevant industry average emissions factors. It gives a good feel for where your biggest Scope 3 emissions lie as well as which products and services drive your impact. Once this starting point is established, aim to move from spend-based data to activity-based data to reduce your Scope 3 emissions and inform your procurement choices.

3. Professionalise your collection and storage of data 

The current and upcoming disclosure regulations in the EU, UK and US are creating a shift towards mandatory emissions reporting and external assurance of data. This demands traceable, quality data and verification-ready documentation. The number of data points to be managed as data quality improves will quickly become overwhelming if managed manually.

Best practice: Streamlined reporting is key. Implement a data collection and reporting system that allows you to slim down processes, prioritise your collaboration and gain access to updated emission factors. When you start out with Scope 3 mapping and get a better understanding of where your impact lies and originates, knowing where to focus is key. Collaborate with key suppliers who can support you with their own developed data management processes, increasing the number of suppliers over time. Make sure the system supports your work with a fixed and up-to-date set of emissions factors and ensures resource-efficient reporting.

Carbon accounting done right

Position Green’s carbon accounting software helps you track your targets and understand your global impact, adapting to your company’s ambitions over time. Easily measure, report and reduce CO2 emissions across all scopes and build your climate strategies on data you can trust.

Take steps to consolidate and report your GHG data in line with key standards and frameworks straight out of the box – from CSRD and GHG Protocol to CDP and SBTi.

Book a free demo with one of our experts to get you started.

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