At the end of 2021, Palladium Thought Leader and co-creator of the Balanced Scorecard, Dr Robert S Kaplan, published “Accounting for Climate Change” in the Harvard Business Review. In it, he and co-author Karthik Ramanna make recommendations for improvements to the way companies report on environment, social, and governance (ESG) matters.

In their proposed system, which they dubbed E-liabilities accounting, organisations can account for not just their own carbon emissions but for those emissions from suppliers in their value chain. These “Scope 3 emissions” often get left out of records, despite their importance. The proposed system is in response to the GHG Protocol, the standard used by over 90 percent of Fortune 500 companies to account for greenhouse gas (GHG) emissions. The authors argue that this standard doesn’t capture the full picture of an organisation’s emissions.

“If companies can start reliably reporting their GHG numbers, and their customers and consumers begin looking for this type of information, it can create lasting, realistic changes in behaviour across the economy to address climate change,” explains Kaplan. Imagine a scenario in which product labels include greenhouse gas emissions the way nutritional information is provided now.

In a new follow-up article, “We Need Better Carbon Accounting. Here’s How to Get There”, Kaplan and Ramanna go a step further to dig into why problems with the GHG Protocol have persisted and offer up solutions for carbon accounting that don’t require rescinding the Protocol, (which is included in many global climate agreements) and the benefits for organisations that adopt E-Liabilities.

Where the Protocol falls short is in its standards around Scope 3 emissions, which as Palladium’s Director of Thought Leadership Eduardo Tugendhat explains can negate any accounting an organisation does around their emissions. “Because there’s no way to properly account for the carbon in the upstream or downstream parts of the supply chain, beyond the immediate company, there’s no credibility to the numbers.”

In addition, reporting around Scope 3 emissions are voluntary and according to the authors, most companies skip reporting on their supplier and customer emissions. While doing so may make their emissions numbers look better, it doesn’t give the full picture.

“The E-liability system we’ve proposed will stimulate aggressive decarbonisation actions along the supply chain by providing a contractual and enforceable basis for customers and investors to specify maximum amount of tolerable GHG emissions in the products and services they purchase and finance,” the authors explain.

But who should be using such a system?

According to Kaplan and Ramanna, companies with environmentally sensitive customers or equity ownership would benefit the most from an early adoption the E-Liability system. They also identify a third type of company which would have high motivation to adopt a more accurate system; those with high direct emissions in their own production processes and supply chains like companies with intensive production processes.

“Such adoption would enable them to credibly report their lower per unit GHG outputs to environmentally conscious customers, investors, and the public at large,” the authors add.

As corporations around the world continue to face mounting pressure to address and reduce emissions within their operations and supply chains, systems such as Kaplan and Ramanna’s E-Liabilities will be a critical piece of the puzzle in reaching a truly net zero economy.

Read the HBR article and contact info@thepalladiumgroup.com for more information.