Challenges of climate reporting

published on 7 november 2023 | reading time approx. 3 minutes

Due to the Paris Climate Agreement and the respective targets of the countries to become climate neutral by 20XX, many companies are faced with the challenge of obtaining an overview of the greenhouse gas emissions that are related to their own actions. However, the demands of stakeholders for climate reporting continue to increase – for example, from investors, legislators or the company’s own customers. What does this mean for companies?

According to the EU Corporate Sustainability Reporting Directive (CSRD), companies must disclose which climate-relevant emissions they are responsible for. In Germany, this affects around 15,000 companies and thus also German SMEs. While some companies are already required by capital market-oriented companies to provide information on their Scope 1, Scope 2 and Scope 3 emissions via the Suplly Chain Due Diligence Act (LkSG), others are still at the very beginning of greenhouse gas accounting.

How do you calculate your company’s greenhouse gas emissions?

According to the Greenhouse Gas Protocol Standard, the responsible emissions are divided into three categories:

Scope 1 covers all direct GHG emissions from own or controlled sources (e.g. operation of own vehicle fleet).
Scope 2 measures GHG emissions that occur during the generation of energy (e.g. electricity, heating, cooling, steam). These are indirect emissions, but can be clearly attributed to the company.
Scope 3 covers all other indirect sources of GHG emissions resulting from upstream and downstream corporate activities.

The main challenges of GHG accounting include the determination of high-quality emission factors, data availability and data quality. In particular, the emission values in Scope 3 are difficult to capture, so that companies have to resort to extrapolations.

There are now a number of tool providers that not only simplify the recording of company GHG emissions, but also provide access to different databases. This allows companies to quickly identify the appropriate emission factors. The calculation of the CO2 footprint also becomes easier as the consolidation of data is automated. Particularly for large companies with complex corporate structures, a software-supported accounting tool can reduce the workload and reduce the susceptibility to errors.

Double materiality: Two sides of climate reporting

GHG balancing is used to determine the status quo. Only those who know their CO2 profile can set goals for the future and derive suitable measures. Two perspectives must be taken into account – similar to the principle of double materiality.

OUTSIDE-IN PERSPEcTIVE

For more resilience, companies should measure and assess climate-related risks and opportunities. Entrepreneurs need to be aware of the impact of climate change on their own organisation and the resulting financial risks. Floods such as in the Ahrtal or in Croatia and Austria in 2023 can cause demage to real estate, which should be taken into account via climate scenarios as part of risk management. Supply bottlenecks or rising material costs that occur due to a changed climate can also have a significant impact on the company's own business activities. To integrate climate risks into governance processes and reporting, the framework of the Task Force on Climate-Related Financial Disclosures (TCFD) is recommended.

INSIDE-OUT PERSPEcTIVE

In addition to the outside-in perspective, the inside-out perspective is also relevant. It deals with the impact that companies have on the environment, because almost every company-related activity leaves a CO2 footprint.
In the first step, companies must identify their “hotspots” and develop a decarbonisation roadmap. In the second step, corporate climate targets are set. To ensure that these are not randomly, but make a signifikant contribution to the 1.5° target of the Paris Climate Agreement, it is recommended that the requirements of the Science-based Target Initiative (SBTi) should be taken into account. The aim of the initiative is to support companies set science-based net-zero targets.

The SBT approach forces companies to look beyond their own organisational boundaries and take responsibility for the entire value chain (Scope 3). The initiative is now considered the “gold standard”, as the reduction targets of participating companies are assessed and validated by external teams of experts.

Conclusion

According to the principle of dual materiality, companies consider two different but meaningfully complementary perspectives within climate reporting. It enables them to proactively address the impacts of climate change, avert financial risks and make their own business model fit for the future. It is advisable to start the preparatory work for comprehensive climate reporting at an early stage. Because the pressure on companies is increasing – whether directly via CSRD or indirectly via the supply chain.