Carbon accounting: Learnings from the governance journey

The recent adoption of the European Sustainability Reporting Standards (ESRS) is a watershed moment in public policy efforts to address the challenge of climate change. The reporting obligations of the ESRS aim to provide normalized transparency to both companies’ full value-chain emissions and also to their efforts to meet the goals of the 2015 Paris Agreement. It is a recognition that commercial activities are at the heart of carbon emissions. The pivotal role of companies in the climate crisis and its solution – something that impacts us all – is apparent. This represents a daunting challenge. For this reason, now seems to be a good moment to reflect on the governance journey that companies have undergone.

Supply chain in isolation

The first sustainability goals devised by companies were very simple, They usually involved a top-line reduction in waste and carbon1 over a defined horizon. In this era, there was not yet a distinction between carbon avoidance and reduction, so most sustainability objectives called for activity-based reductions rather than absolute reductions.

Importantly, these objectives were not enterprise objectives, they were supply chain objectives. For carbon in particular, the approach was facile in its thinking: emissions come from manufacturing and transportation, so the most effective way to lower emissions would be to challenge the supply chain through imposed objectives. Though simplistic, this siloed approach had its benefits at the outset. Not only did these efforts to consolidate shipments and find energy efficiencies in manufacturing often bear fruit, they also served as a useful prompt to improve operational savings. Indeed, these supply chain emissions are also responsible for the majority of overall greenhouse gas emissions from businesses – about 88% across sectors.

But for many supply chains, the low-hanging fruit was quickly harvested, and gradually this simplified corporate model of carbon governance began to show signs of strain. Before the precipitous drop in renewable energy prices in the early 2010s, any progress would forcibly come through trade-offs: Fewer shipments would mean higher inventories or longer lead times for example, running directly contrary to the e-commerce-driven trend of more frequent, faster deliveries to online customers.

This period coincided with the rise of financialization, where companies began increasing the presence of controllers and audits, and return on investment (ROI) became the dominant way to adjudicate issues and support decision-making. In the absence of a widely accepted protocol for price discovery of carbon, the business benefits of reducing carbon emissions were undervalued or not considered at all in the dispassionate math of ROI.

For supply chain managers, this placed them in a frustrating position. The era of making headway on their carbon objectives through efficiencies was ending. To continue demonstrating progress would require capital expenditures in solar, wind, geothermal, or other renewable energy sources but the cost framework would often not justify the investment on its own merits.

One Chief Supply Chain Officer (CSCO) of a major consumer goods company, when deciding upon transitioning factories to renewable energy sources, informed factory managers that ‘renewable energy projects must make financial sense’ before being greenlit. As long as companies were not ready to pay for carbon, the options for supply chain managers to reach their carbon objectives dwindled. There was a newly formed tension between sustainability and finance.