Global Carbon Accounting Standards Converge
As demand for a global standardized GHG accounting system grows, leaders from a range of industries have responded by developing partnerships with previously established GHG accounting systems to establish reporting standards that are transparent, accurate and comparable. The demand for standardization was reaffirmed following the decision by the Security and Exchange Commission (SEC) to require disclosure of climate related information in the interest of investors. The overwhelming interest in standardizing GHG accounting is unsurprising as the sustainability industry has now received the largest reallocation of capital in history. This financial support combined with increased regulatory action is leading to impactful progress against the climate crisis.
Accounting and Credit Standards
In response to the explosion of interest in ESG investing, the Financial Accounting Standards Board reversed their 2019 position on addressing carbon credits. The U.S. accounting board now is looking to create consistent and specific guidance for environmental credits in order to guarantee that credits are being accounted for in a comparable manner. Carbon credits take a variety of forms and are not consistently regarded as either inventory or intangibles by financial reporters, and the convergence would continue without standardization.
Companies and investors who are looking to buy into carbon credit schemes will benefit from clear and transparent rules, and various private agencies are being set up and tasked with sustainability related financial reporting standards. The International Sustainability Standards Board was set up under the mandate of the International Financial Reporting Standards Foundation in 2021. This agency is aiming to fully establish a specific framework for sustainability related disclosures that can be used worldwide.
Partnership for Carbon Accounting Financials
A number of financial institutions have also come together to create a global GHG reporting standard for the financial industry to measure and disclose the emissions of loans and investments. This standard has been reviewed by the previously established GHG protocol and conforms to the Scope 3 requirements for category 15 investment activities. The PCAF Standard is being implemented globally, with 5 designated regions that will receive training and technical assistance to implement accounting and reporting.
However, major progress is still needed from the organization to see that it is creating and applying a consistent standard. They currently lack enforcement mechanisms for failures to disclose all relevant and necessary information leading to concerns that the standard will be used as part of ongoing greenwashing campaigns. One report actually found that not a single PCAF signatory is fully compliant with the standard, signaling the need for more reinforcement.
The Future of Carbon Disclosure
While the Environmental Protection Agency requires major sources of emissions to be reported, the voluntary effort by industry leaders is more important than ever, as the EPA’s ability to mandate climate action is increasingly being limited by the judiciary. While standardization is of relevance to responsible investors, the wider impact of creating transparency and accuracy in GHG accounting will be instrumental in ensuring the transition to sustainability is fulfilled.
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