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March 24, 2023

How Net Zero Carbon Goals May Soon Affect Accounting Practices

The US joined the Paris Agreement (PA) in 2016, resulting from the work of the United Nations Framework Convention on Climate Change (UNFCCC), which the nation had previously ratified with Congressional consent in 1992. Every five years, each member state must provide its target statement, or “Nationally Determined Contributions” (NDC). The stated goal is non-binding.

Upon joining the agreement in 2016, the US NDC committed to reducing greenhouse gas emissions (GHG) by 26% to 28% below 2005 levels by 2025. In 2021, the US NDC targeted a net reduction of GHG emissions by 50% to 52% below 2005 levels by 2030.

Tech Leaders Focus on Goals

The PA goals have inspired major corporations worldwide to adopt environmental, social, and governance (ESG) initiatives to meet ambitious sustainability targets. Accurately accounting for GHG emissions and, therefore, carbon footprint data has become one of the first and biggest challenges companies are facing.

Companies have hired Chief Sustainability Officers (CSOs) and put greater demands on their Chief Information Officers (CIOs) to automate corporate accounting of the three tiers of GHG emissions. Scope 1 accounts for direct GHG generation in producing goods and services. Indirect GHG emissions from companies’ energy purchases like electricity, natural gas, wind power, or solar power fall into Scope 2. The trickiest metric involves accounting for the GHG emissions from a company’s supply chain, Scope 3. Determining this value relies on data from vendors.

Many companies have incorporated sustainability software to help them automate their GHG accounting processes and quantify their progress overall on ESG goals. Some software even helps target areas where corporations might reduce carbon or progress in ESG goals. Still, many companies are struggling to agree on reporting standards in this dynamic new environment, increasing the costs of preparing reports for investors and multinational governments.

Proposed Regulations

While there are currently no US government regulations enforcing cooperation, global financial institutions and supply chains have strongly encouraged corporate participation. However, in March 2022, the Securities and Exchange Commission (SEC (News - Alert)) proposed SEC Release No. 33-11042, new reporting rules in line with Scopes 1, 2, and 3 with a targeted publication date of October 2022. After working with industry leaders, the SEC reopened comments on the proposal in October 2022.

In December 2022, several business leaders, including the president of the Center for Climate and Energy Solutions (C2ES), wrote a letter to Gary Gensler,

Chair of the SEC, recommending the adoption of the proposed rule with specific caveats. In particular, the group recommended that the SEC adopt the International Sustainability Standards Board (ISSB) International Financial Reporting standard as the global baseline. The Financial Stability Board’s (FSB’s) Task Force on Climate-Related Financial Disclosures (TCFD), working in concert with the ISSB, proposed the standard.

The C2ES president and other financial leaders suggested the SEC should require Scope 3 reporting but exempt most smaller companies. They also pointed out that required and standardized reporting would enhance corporate participation, reduce the cost of producing reports, and open non-compliant businesses to market consequences.

Many observers now believe the proposed SEC standard will become official with the next update of the Certified Federal Register (CFR). Yet the difficult task of gathering quality data on which to base calculations has already begun in many cases.

Info-Tech Research Group issued a 2022 report indicating that most multinational companies would need the ability to report their 2023 sustainability data by 2024. The timeline agrees with the fact sheet provided by the SEC.

Still, the report, based on a survey of 813 global IT professionals, indicated that “Many organizations are still behind on this issue” despite international regulators moving toward enacting reporting requirements. 

As time progresses, regulators, financial institutions, investors, and supply-chain partners will all demand better reporting on carbon footprint and other ESG data. Firms will have to modify their accounting practices to accommodate the demands.

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