Transparency is key as the climate change juggernaut rolls…

The era of climate change and energy transition is upon us, fully and truly defining what our future focus needs to be and pushing us to go back to the drawing board to review and revise business strategy, investment plans and financials.

Whether you are a company in the transportation industry or manufacturing, building infrastructure, Energy, Oil & Gas, Steel, Chemicals, or industrial sector, the impact of Climate change and the call for action to shift from carbon-intensive energy sources to green energy sources have never been louder.

What does this mean?

To companies that are part of the core economic activity such as cement, steel, manufacturing the shift is going to be very hard and long.

As per World Economic Forum report, demand for materials, such as aluminium, steel and cement, is rapidly growing as the need to build the infrastructure for energy transition is increasing. These materials represent 25% of the world’s carbon footprint, and most of it is produced using fossil fuels. Electric vehicles, energy-efficient buildings and renewable power infrastructure will not result in net zero, unless the materials they are made from are decarbonized. Therefore to get to net zero, we must intensify the green transition of the materials sector. for this , stronger traceability of a product’s footprint is key.

Who is affected?

This is a multi-party stakeholder issue as consumers, suppliers and intermediaries come together to reconfigure the value chain.

Customers are looking for providers who can deliver aluminium with the lowest possible emissions and have credible pathways towards net zero.

Industry frontrunners are entering into strategic partnerships helping to establish joint roadmaps and pushing the frontier of what is possible and affordable.

What can be done?

The focus has to shift towards competing for the lowest level of emissions and minimizing the environmental or social impact, as well as costs.

Take the case of car manufacturers. It is mind boggling to note that each car consists of 30,000 components, each contributing emissions during production. Today, steel, aluminium and plastics represent more than 80% of the embedded emissions of a car. That means careful material selection is key, as is transparency about the numbers.

Carbon calculation & transparency

While industries such as food, rubber, leather etc have been able to develop standardized certifications and reporting methods, the metals industry is struggling to do so. This discrepancy can result in greenwashing, distorting market prices for truly greener products and contributing to a lack of transparency and misinformed consumers.

To accelerate change and have incentives to minimize adverse impacts from production, reporting on production emissions should be mandatory for all. Transparency around recycled content and how to measure the carbon footprint is necessary to avoid greenwashing and drive a real circular, low-carbon economy.

Carbon Accounting assumes significance

Carbon accounting, is a technique used by analysts and management teams to understand the extent of an organization’s carbon emissions — both direct and indirect.

As such, more organizations and funds are increasingly using an ESG framework to manage risks and opportunities, so regulators in many jurisdictions are requiring that organizations (especially publicly traded companies) disclose their GHG emissions.

Emissions are broken out into scopes 1, 2, and 3. Once an aggregate emission figure is calculated, it’s referred to as the organization’s GHG emissions footprint.

Scope 1, 2 & 3 Emissions

Scopes can be thought of as “levels” of emissions, with some occurring under the company’s direct control and others occurring within the supply chain or elsewhere outside of management’s direct control.

• Scope 1 encompasses direct emissions from owned (or controlled) sources like company vehicles and manufacturing facilities, etc.
• Scope 2 includes indirect emissions from the generation of purchased electricity, steam, heating, and cooling.
• Scope 3 is a very broad category that includes all “other” indirect emissions like business travel, investments, end-of-life treatment of sold products, and purchased goods and services (among others).

Why is Carbon Accounting Important?

There are several key reasons why all players should understand carbon accounting:

Evolutions in the regulatory environment

Many regulatory bodies, including (notably) the United States Securities and Exchange Commission (SEC), are mandating that management teams publicly disclose corporate emissions, climate risk impacts, and other material ESG issues.

Analysts and management teams at public issuers must know how to account for carbon emissions in order to remain compliant with these emerging regulations and avoid accusations of greenwashing.

Comparison & benchmarking

Comparing current emissions to historical emissions illustrates improvements (or declines) and comparing one firm to another sheds light on an organization’s relative performance. This is a big part of a rating agency’s due diligence process when assigning ESG scores.

Access to capital

Many large asset managers and global banks have publicly declared that ESG factors are a growing part of their investment and capital allocation decisions.

To sum up, the advent of climate change and the requirements to be met in the run to achieving Net Zero makes it imperative for various industries to assess their current state and draw up a road map of the desired future state, drive the right interventions and ensure complete transparency and traceability in the process to eventually be able to succeed in their mission.