Carbon disclosure

Carbon Disclosure

Carbon disclosure refers to the process by which companies and other organizations voluntarily or mandatorily report their greenhouse gas (GHG) emissions, climate-related risks, and opportunities. It’s a cornerstone of environmental, social, and governance (ESG) investing and crucial for achieving global climate goals like those outlined in the Paris Agreement. This article provides a comprehensive overview of carbon disclosure, its importance, methodologies, frameworks, challenges, and future trends, geared towards beginners.

Why is Carbon Disclosure Important?

The importance of carbon disclosure stems from several interconnected factors:

**Transparency & Accountability:** Disclosure provides transparency into a company’s environmental impact, allowing stakeholders – investors, customers, employees, and regulators – to hold them accountable for their contribution to climate change.
**Investor Demand:** Increasingly, investors are demanding carbon disclosure data to assess climate-related risks and opportunities within their portfolios. This demand drives capital towards sustainable businesses and away from those with high carbon footprints. See ESG Investing for more details.
**Risk Management:** Identifying and disclosing climate risks – both physical (e.g., extreme weather events) and transitional (e.g., policy changes) – helps companies proactively manage these risks and build resilience.
**Regulatory Compliance:** Regulations mandating carbon disclosure are becoming more prevalent globally. Companies need to prepare for and comply with these requirements to avoid penalties and maintain their license to operate. The EU's Corporate Sustainability Reporting Directive (CSRD) is a prime example.
**Improved Performance:** The process of measuring and reporting emissions often leads to a better understanding of a company’s energy consumption and operational inefficiencies, driving improvements in energy management and reducing costs.
**Reputational Benefits:** Demonstrating a commitment to environmental sustainability through transparent disclosure can enhance a company’s reputation and brand value.
**Supply Chain Management:** Disclosure extends beyond direct emissions. Companies are increasingly scrutinizing their supply chains (Scope 3 emissions – discussed later) and requiring their suppliers to report their carbon footprints.
**Benchmarking & Best Practices:** Publicly disclosed data allows for benchmarking against peers and identification of best practices in emissions reduction.

Scope 1, 2, and 3 Emissions

Understanding the different scopes of emissions is fundamental to carbon disclosure. The Greenhouse Gas Protocol, the most widely used international accounting tool, defines three scopes:

**Scope 1: Direct Emissions:** These are emissions from sources that are owned or controlled by the reporting company. Examples include emissions from burning fuel in company-owned boilers, vehicles, and manufacturing processes. This also includes emissions from owned or controlled wastewater treatment.
**Scope 2: Indirect Emissions (Electricity):** These are emissions resulting from the generation of purchased electricity, steam, heat, and cooling consumed by the reporting company. Even though the company doesn’t directly emit the GHG, it’s responsible for the emissions associated with its energy consumption. The location-based method and market-based method are used to calculate Scope 2 emissions.
**Scope 3: Other Indirect Emissions:** This is the broadest category, encompassing all other indirect emissions that occur in a company’s value chain, both upstream and downstream. This includes emissions from purchased goods and services, business travel, employee commuting, waste disposal, transportation and distribution, use of sold products, and end-of-life treatment of sold products. Scope 3 emissions often represent the largest portion of a company’s carbon footprint, but are also the most challenging to measure and report. Scope 3 Calculation Guidance provides detail.