Sustainable finance is a rapidly growing field that aims to align financial decision-making with environmental and social sustainability goals. This includes investing in companies and projects that have a positive environmental and social impact, as well as incorporating environmental, social, and governance (ESG) criteria into financial analysis and decision-making.
One important aspect of sustainable finance is carbon accounting. Carbon accounting is the process of measuring and reporting an organization's greenhouse gas emissions, in order to understand and reduce their impact on the environment. By measuring and reporting on their carbon footprint, companies can identify areas where they can reduce their environmental impact and set targets for emissions reduction. This not only helps them to meet their sustainability goals but also positions them to take advantage of new opportunities in the growing market for low-carbon products and services.
By the end of this Coolset Academy article, you will gain a comprehensive understanding of how carbon accounting plays a crucial role in sustainable finance and how companies, from large corporations to SMEs, can benefit from it.
The importance of carbon accounting in sustainable finance
Carbon accounting is the process of measuring and reporting an organization's greenhouse gas emissions, in order to understand and reduce their impact on the environment. It involves tracking and quantifying the amount of carbon dioxide and other greenhouse gases emitted by an organization, through activities such as burning fossil fuels, traveling, manufacturing, waste disposal, etc. Organizations report their carbon emissions along three dimensions, called scopes:
- Scope 1 emissions: These are direct emissions from sources that are owned or controlled by the organization, such as fuel combustion in boilers or vehicles.
- Scope 2 emissions: These are indirect emissions from the generation of purchased electricity, steam, heating, and cooling that an organization consumes.
- Scope 3 emissions: These are all other indirect emissions that occur in the value chain of the organization, including emissions from upstream and downstream activities, such as the extraction and production of purchased materials and services, employee commuting, and waste disposal.
By measuring and reporting on their carbon footprint, companies can identify areas where they can reduce their environmental impact and set targets for emissions reduction. This information can also be used to inform decision-making, demonstrate commitment to sustainability, and access funding from sustainable finance sources. Carbon accounting is an important tool in sustainable finance and helps organizations to understand their environmental impact and take steps to reduce it.
Many sustainable finance funds and investors require companies to demonstrate their environmental and social performance through the use of standardized reporting frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). By providing companies with the data they need to report on their environmental performance, carbon accounting can help them to meet these reporting requirements and access funding from sustainable finance sources.
Carbon accounting is also increasingly being used to inform investment decisions. Investors are becoming more aware of the risks and opportunities associated with climate change, and are incorporating environmental, social, and governance (ESG) criteria into their investment analysis. By measuring and reporting on their carbon footprint, companies can demonstrate their commitment to sustainability and position themselves to take advantage of new opportunities in the growing market for low-carbon products and services.
Measuring and tracking your organization's carbon emissions is not just for large companies. Here is how SMEs can also deploy carbon accounting and reap the benefits detailed in this article:
- Establish a baseline: Determine your current emissions by measuring and reporting on your organization's greenhouse gas emissions. This will give you a baseline from which to set emissions reduction targets.
- Identify areas for improvement: Identify areas of your business where emissions can be reduced. This might include energy-efficient lighting or heating systems, or changes to business travel or waste management.
- Set targets: Set targets for emissions reduction, and develop a plan to achieve these targets.
- Implement changes: Make changes to your business operations and processes to reduce emissions. This might include implementing energy-efficient technologies, changing business travel arrangements, or increasing the use of renewable energy.
- Monitor and report: Continuously monitor and report on your emissions, and track your progress towards achieving your targets.
- Use a carbon accounting software: SMEs can use a software such as Coolset to simplify the process of measuring and reporting on their carbon footprint. Coolset's user-friendly interface allows you to track and report on your emissions in real-time, making it easy to monitor progress and identify areas for improvement.
The benefits of sustainable finance for companies
Sustainable finance focuses on environmentally and socially responsible investments and practices. By incorporating sustainable practices into their operations, SMEs can reap a variety of benefits, including access to capital, cost savings, improved reputation and better risk management. In this section, we will explore four key benefits of sustainable finance for SMEs and explain how they can help businesses thrive in today's economy.
- Access to capital: Sustainable finance can provide SMEs with access to capital that they might not otherwise have been able to access. This can include funding for energy-efficient upgrades, renewable energy projects, and other sustainable initiatives.
- Cost savings: Implementing sustainable practices can help SMEs reduce their operational costs by reducing energy and water usage, and by reducing waste. This can lead to significant cost savings over time.
- Improved reputation: SMEs that adopt sustainable practices can enhance their reputation and attract customers who are interested in working with environmentally-friendly businesses.
- Better risk management: Sustainable finance can help SMEs manage their risk by reducing their exposure to environmental, social and governance issues that could negatively impact their business. By addressing these risks, SMEs can better protect themselves from potential liabilities and reputational damage.
Accessing sustainable finance
Meeting reporting requirements and demonstrating environmental and social performance is important for SMEs looking to access sustainable finance because it helps to ensure that the business is operating in a responsible and sustainable manner. Reporting requirements often include the disclosure of information on the business's environmental and social impacts, as well as its governance practices (ESG). This information helps investors and lenders evaluate the business's sustainability performance and assess whether it aligns with their investment criteria.
Moreover, by meeting reporting requirements and demonstrating environmental and social performance, SMEs can also demonstrate their compliance with laws and regulations related to sustainability, which can be beneficial in terms of risk management and can help them to avoid potential penalties or reputational damage.
In this section, we will go over five reporting frameworks that help SMEs and large enterprises to meet reporting requirements, and how you can easily start to align with regulations.
- Global Reporting Initiative (GRI): The GRI is a leading international framework for sustainability reporting, providing a comprehensive set of standards for organizations to report on their economic, environmental, and social performance. GRI framework is widely used by companies and organizations to report on their sustainability performance, and it has become a global standard for sustainability reporting.
- Sustainability Accounting Standards Board (SASB): The SASB is an independent organization that provides industry-specific sustainability accounting standards for publicly-listed companies in the US. It helps companies to identify and report on the most financially material sustainability issues that are relevant to their specific industry.
- Carbon Disclosure Project (CDP): The CDP is a global initiative that encourages companies to disclose their greenhouse gas emissions and climate change strategies. It provides a standardized reporting framework for companies to disclose their carbon emissions and other climate-related information.
- The Integrated Reporting Framework (IIRC): The IIRC is an international organization that promotes integrated reporting, which provides a holistic view of an organization's financial and non-financial performance. It encourages companies to report on their business strategies, governance, performance, and prospects in a way that reflects the interconnections between the organization and its external environment.
- The Task Force on Climate-related Financial Disclosures (TCFD): The TCFD is a global initiative that provides voluntary, consistent and comparable climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
Overall, these reporting initiatives and frameworks are important tools for SMEs to use in order to report on their environmental and social performance. They provide a standardized set of guidelines and metrics that can be used to measure and communicate the business's sustainability performance, which can be useful in terms of attracting investors and lenders who are interested in sustainable finance but are complex and hard to implement at the beginning of a sustainability journey.
Coolset helps SMEs measure and track their carbon emissions with autonomous software that reduces manual work to a minimum. Small businesses can automatically report on their environmental impacts and get their first foot in the sustainable finance space.