The Evolution of GHG Accounting and Corporate Climate Disclosures

The origin of greenhouse gas (GHG) accounting, or measuring emissions from companies and other entities, dates to the late 1990s, but interest has grown exponentially in the past few years with the proliferation of both voluntary and more recently, mandatory corporate climate disclosure initiatives.

The U.S. Securities and Exchange Commission (SEC) proposed a new rule in 2022 that would require public companies to disclose information about their GHG emissions. The agency is expected to vote on the proposal on March 6, 2024. The European Union enacted the Corporate Sustainability Reporting Directive (CSRD) in 2023, which will require companies operating in Europe to disclose their emissions beginning in 2025. The International Sustainability Standards Board (ISSB) released a voluntary GHG reporting standard (IFRS S2) in 2023; three countries have made it mandatory for corporations operating in their nation, while several others are considering doing the same. And significantly, almost 400 organizations have committed to advancing the adoption or use of the ISSB’s sustainability standards (including IFRS S2) at a global level.

GHG emissions disclosure is a critical climate change mitigation and accountability tool, as well as a key step towards achieving ambitious emissions-reduction goals. To avoid the worst impacts of climate change, global greenhouse gas emissions need to drop by nearly half by 2030 and ultimately reach net zero. The process to achieve these GHG emissions reductions starts with GHG accounting.

Here, we answer questions about this rapidly evolving field: 

What is GHG accounting?

Greenhouse gas (GHG) accounting, also called carbon accounting (carbon dioxide being the most common greenhouse gas), refers to measuring and monitoring GHG emissions using standardized methods and reporting on them per agreed-upon protocols. These standardized methods enable companies, governments and individuals to measure the quantity of GHG emissions resulting from their activities, both directly through their operations and indirectly through their upstream supply chains and downstream customers.

Corporate GHG accounting is especially important, as business is a primary driver of GHG emissions. Just 100 companies are responsible for 70% of the world’s industrial GHG emissions, according to a 2017 report from CDP.

How did corporate GHG accounting and emissions disclosures begin?

Many events and initiatives have contributed to the evolution of corporate GHG accounting and reporting over the past 25 years. The signing of the  in 1997 marked the advent of a global decarbonization requirement, paving the way for the introduction of emission-reduction targets for 37 countries and the European Union.

At the time, there were no guidelines for companies to measure their emissions. WRI and World Business Council for Sustainable Development (WBCSD) launched GHG Protocol in 1998 as an NGO-business partnership to establish standardized methods for GHG accounting that would address the need for a globally agreed upon methodology. Today, GHG Protocol’s framework of “three scopes” is the foundation for corporate GHG accounting.

What kinds of emissions should companies measure and disclose?

For companies to comprehensively assess their climate impact, they need to measure not only the emissions caused by their own operations, but also from the raw materials they source and use of the goods they sell. Calculating the totality of a company’s impact on emissions requires evaluating three scopes:

• Scope 1 refers to direct GHG emissions from sources that a company owns or controls. These emissions typically occur on-site, such as the combustion of diesel used for driving a truck or the burning of coal to generate electricity.
• Scope 2 refers to indirect emissions from purchased electricity, steam, heat and cooling. For example, an electricity user’s scope 2 emissions would be the scope 1 emissions of the power generating company.
• Scope 3 refers to indirect emissions from a company’s upstream and downstream activities. They occur outside a company’s control and are associated with its value chain. For example, the indirect emissions that occur when a mobile phone user charges their phone would be the mobile phone manufacturing company’s downstream scope 3 emissions. Similarly, the emissions from the materials it took to build the phone would be the mobile phone manufacturer’s upstream scope 3 emissions.

Why are GHG accounting and corporate climate disclosures important?

With a standardized method to measure and report emissions, companies can identify areas in which they can reduce their carbon footprint and contribute to global emissions-reduction efforts. GHG accounting can also help  companies identify risks and opportunities associated with value chain emissions, engage value chain partners in GHG management and participate in GHG markets.

Accurate and reliable greenhouse gas accounting and reporting can increase stakeholder and investor confidence in a company’s sustainable practices and future prospects. GHG accounting standards also serve as the foundation of both voluntary and mandatory corporate emissions disclosure and target-setting initiatives.

A growing number of companies are participating in these kinds of initiatives, such as CDP (formerly known as the Carbon Disclosure Project) and the Science Based Targets initiative (SBTi), all of which use GHG Protocol accounting standards to track and report progress. In 2022, more than 18,700 companies submitted climate disclosures via CDP, 42% more than in 2021 and over 233% more than when the Paris Agreement was signed in 2015. In 2022, 2,151 organizations made a commitment to set a science-based target via SBTi. The number of organizations committing to set a science-based target has increased by over 2,000% since SBTi’s inception in 2015.

Are GHG accounting and corporate emissions disclosures mandatory?

GHG reporting is mandatory for some companies, depending on where they do business. In the past few years, GHG reporting has been integrated into law in many areas of the world.

For example, the European Commission adopted the European Sustainability Reporting Standards (ESRS) for use by all large companies listed in the E.U. subject to the Corporate Sustainability Reporting Directive (CSRD) in July 2023. The European Sustainability Reporting Standards directly reference GHG Protocol’s standards and are expected to impact 50,000 companies across the European Union.

Another example is California’s Climate Disclosure Accountability Act, signed into law in October 2023. The legislation requires the California Air Resources Board to develop and adopt regulations requiring companies with over $1 billion in revenues that do business in California to publicly disclose their scope 1 and 2 emissions starting in 2026, and their scope 3 emissions starting in 2027.

Several countries also are opting to use voluntary reporting frameworks to create reporting requirements. For example, the International Financial Reporting Standard (IFRS) S2 climate-related disclosures standard is being adopted into regulatory frameworks in Turkey, Nigeria and Brazil, requiring companies in those countries to disclose their scope 1, 2 and 3 emissions. Other governments have expressed intention to make IFRS S2 mandatory, including New Zealand, the Philippines, Singapore and Taiwan. The IFRS S2 standard is estimated to affect between 100,000 and 130,000 companies globally.

What’s next for corporate GHG accounting?

A key moment for GHG accounting and emissions disclosure in 2024 will be the release of the final U.S. SEC’s Climate Disclosure Rule. While the draft rule proposed in 2022 calls for the disclosure of Scope 1, 2 and 3 emissions, Reuters recently reported that the SEC dropped the requirement for U.S.-listed companies to disclose scope 3 emissions. That’s a problem since Scope 3 emissions account for an average 75% of companies’ total emissions. The SEC is slated to vote on the Climate Disclosure Rule on March 6, 2024.