SINGAPORE: In his opening speech at the Climate Ambition Summit in September, United Nations Secretary-General Antonio Guterres warned that “humanity has opened the gates of hell” with climate inaction. His remark comes at a time when the world is facing a climate crisis.
The first UN Global Stocktake Report published in September gave a damning report card for global climate efforts. The report showed that the world is not on track to meet the climate goals under the Paris Agreement, and it urged countries to take more ambitious action to cut emissions, or risk broad and serious consequences for humans, ecosystems, and economies.
A fundamental tool to address climate change is carbon accounting. Only with an accurate measure of our carbon footprint can we expect to effectively mitigate our environmental impact. While there are several international standards to guide carbon emissions accounting, gaps that can result in greenwashing remain.
Carbon accounting, also known as greenhouse gas (GHG) accounting, is a set of methods that organisations use to track their emissions. It is measured and reported under three categories: Scope One, Two, and Three.
THE ONE, TWO, THREE OF CARBON ACCOUNTING
Scope One emissions refer to direct emissions produced by the company. It accounts for emissions that are released into the atmosphere as a direct result of the companies’ activities, much like cooking dinner in your kitchen, where you’re fully aware of the amount of gas you’re using and the smoke you’re producing.
Scope Two emissions are indirect emissions from purchased electricity consumed by the end-user. Take, for example, the electricity that powers the fans and lights in your kitchen.
Scope Three emissions are also indirect, but they comprise emissions that occur throughout the company’s value chain, including upstream, like transport and distribution, and downstream emissions, like end-of-life waste disposal.
This is akin to emissions from the supermarket where you shop for ingredients to cook. While the supermarket doesn’t belong to you, you’re partially responsible for the emissions from the delivery trucks that bring your ingredients to the store.
Ideally, companies should report emissions across all three scopes, which would ensure a clear picture of companies’ carbon footprint and allow regulators to hold them accountable.
OMITTING SCOPE THREE REPORTING
In reality, companies report Scope One and Two emissions, falling short of Scope Three. Scope Three emissions are difficult to track and trace, especially for companies with complex webs of global supply chains. Some companies, particularly those in polluting industries, also intentionally avoid reporting Scope Three emissions to evade scrutiny.
Missing one out of three reporting scopes may not seem like a big deal – but it is. Carbon Disclosure Project, a non-profit that provides a system for investors, companies and governments to disclose their environmental impact, estimates that Scope Three emissions account for about 70 per cent of a company’s total emissions. This figure rises to nearly 90 per cent for oil and gas companies.
In this context, leaving out Scope Three emissions reporting is akin to solving a jigsaw puzzle without the largest piece – the picture is never complete.
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The lack of mandatory reporting for Scope Three emissions provides a loophole for companies to strategically transfer their Scope One and Two emissions to Scope Three. This could take the form of outsourcing production to overseas suppliers in countries with poor carbon emissions regulations.
Doing so allows companies to give the impression that they are greener than they are, which in essence is greenwashing.
Why should the average person care about carbon accounting? The reality is that lax carbon accounting will impact our lives and health. Failure to curb emissions leads to higher environmental costs like pricier clean water caused by pollution. Higher exposure to pollution also leads to an increased risk of respiratory complications and heart diseases.
It is beyond doubt that we all have a stake in ensuring accurate and transparent carbon accounting.
CLOSING LOOPHOLES IN CARBON ACCOUNTING
There are other ways to exploit loopholes in carbon accounting. Major corporate polluters may sell their carbon-intensive assets, for example, coal plants, to unlisted companies in the name of divestiture. In this instance, the company can move emissions off its books.
Because there is no universally accepted methodology for carbon accounting, major polluters can also cherry-pick their favourable comparison points and calculation methods to create the illusion of progress in reducing their emissions. It’s like choosing your worst photo as the “before” in a before-and-after transformation to make the “after” look more impressive.
In Singapore, the Accounting and Corporate Regulatory Authority’s (ACRA) recent proposal on climate change disclosure aims to address these challenges. The proposal includes requiring big private companies to report their climate impact, use international standards for easy comparison, and get data externally verified.
This proposal would undoubtedly make it harder for companies to shift their pollution to unreported sectors and manipulate their emissions data. It would also make it easier to hold companies accountable for their carbon footprint and help regulators identify inconsistencies and red flags.
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However, the proposals may not be able to nip the problem in the bud. Companies can still rely on voluntary carbon offsets, a controversial process where they invest in projects that are alleged to reduce or remove emissions from the atmosphere, to compensate for their own emissions.
The Singapore government has moved to attempt to stem the tide recently, by setting up new eligibility criteria governing international carbon credits that companies can buy to offset their taxable emissions, but it remains to be seen if stricter rules can stop the exploitation.
Other methods include using innovative legal structures, like joint ventures, to minimise their reported emissions. In such arrangements, large polluters can claim minimal emissions by asserting that they do not have operational control of the polluting assets, even if they continue to use them 24/7.
Furthermore, the majority of current rules only require a superficial review of companies’ carbon emissions rather than a robust verification of the data’s accuracy. A true audit is necessary to ensure that the numbers can be trusted and are not greenwashed.
Mandatory reporting of all scopes and more stringent audit requirements can close carbon accounting loopholes. Regulators could also mandate companies to disclose their carbon offsets, renewable energy credits, and the transfer of polluting assets to prevent greenwashing.
Mandated disclosures can help shine a light on some dark corners, but accurate emissions data is just the starting point. Ultimately, the goal is to ensure companies tally numbers in their ledgers and account for their true carbon footprint. Only then can we close the “gates of hell”.
Kelvin Law is Associate Professor of Accounting at Nanyang Technological University, Nanyang Business School, and his research examines corporate sustainability and financial fraud.
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