Tracking Carbon Footprints in the Next Evolution of Accounting

Accounting has been around for thousands of years, emerging with the birth of civilization and evolving ever since. When bartering was the norm, accounting meant keeping track of goods traded and received. Records were initially made with objects like clay tokens, then maybe carved on tablets, and as trading sizes increased, maybe calculated with the beads or beans on an abacus (hence the phrase bean-counter to describe an accountant).

With the emergence of paper and money, bookkeepers were employed to write down the financial sums of what was owned and owed to whom in ledgers. In the 14^th c., an Italian mathematical monk named Pacioli, “the father of accounting”, introduced the system of double-entry bookkeeping and balance sheets.

With the rise of capitalism and the emergence of corporations, more integrated, faster, and larger markets and business transactions, investors required ever more information to make business decisions. Accounting accelerated in complexity. Detailed financial statements with balance sheets, income and cash flow statements were published annually, and then quarterly, to demonstrate the soundness of a company’s business. Alongside this has been the rise of accountancy as a profession and an academic discipline.^*1

Today we are in the next stage of evolution in accounting. The new strain in accounting practices – what has been called the “DNA of capitalism”^*2 – has been efforts to provide accurate metrics on the non-financial aspects of a company’s operations, classified as its social, environmental, and governance (or ESG) elements. In particular, the focus and development has been on accounting and managing the E of the three elements, that is, chiefly in measuring carbon emissions and climate change impacts and risk.

This trend is driven by the underlying goal of reducing emissions for the planet. And it is being made concrete by regulators and investors who are putting in systems to have accurate, granular information to verify claims of emissions.

In recent years, regulatory regimes and policies – such as the EU’s ETS and CBAM, US federal Buy Clean Initiative and IRA programs – have been passed which are underpinned by such product-embedded emissions accounting.^*3 These regulatory pressures for more carbon accounting are becoming increasingly unavoidable and significant, particularly for those doing business in Europe.

From 2026, the EU will enforce a stricter regime to put a fair price on carbon emitted during the production of carbon-intensive goods imported into the EU. Sectors affected include cement, iron and steel, aluminum, fertilizers, electricity, hydrogen, chemicals and products made from steel and aluminum. Importers of these items will be required to report not just the theoretical, but actual carbon footprint and required to pay a carbon price, in the form of buying CBAM certificates, based on the total CO2 emitted during production.^*4

A rising tide of ESG investing also is driving carbon accounting evolution.^*5 Of the estimated 30 trillion or so USD of investment assets which fall under the ESG umbrella in 2022, a majority of those relate to reducing GHG emissions.^*6 With more stringent regimes on reporting, there is pressing need to accurately and transparently account for emissions across such investments.^*7

Knowing how much GHG has been emitted for any particular service or product is essential. It provides greater transparency to investors and governments and actionable data across the supply chain so producers and providers better know where to cut emissions – particularly “hot spots” - more effectively.^*8 The capacity to accurately achieve such “Carbon Footprint of Product” (CFP) tracking and reporting is also needed to achieve a more circular economy.^*9

“Clear and consistent frameworks for embedded emissions accounting can provide a range of benefits to companies. These include proving their low carbon credentials to catalyse new markets, obtaining regulatory and market competitiveness, accessing lower trade barriers for agreed environmental goods, and accessing subsidies and tax breaks under green industrial policies,” explains authors for a World Economic Forum report on emission accounting.

But being able to account for emissions from “cradle to gate” is a tricky task.

Particularly so for Scope 3 emissions, which represent the majority of embedded GHG in a product. These emissions are those generated by the activities of multiple suppliers, customers, and actual use of a product.

To achieve reliable measurements from all sources and stakeholders across the supply chain is a key challenge. The need to integrate and connect this data to provide output reports which meet diverse and evolving regulatory frameworks and investment disclosure standards is another. And finally, all this requires industry-wide data exchange and collaboration.^*10

Or as the authors of the earlier report states: “The world needs the emissions reductions and other benefits circularity can provide. Across countries and sectors, we need to come together and take a deep dive into the complex world of embedded emissions accounting for circular products.”

Yokogawa, expert in measuring, connecting, and integrating Operational Technology and Information Technology systems, is offering one technological solution to this challenge: the Carbon Footprint Tracer.

This cloud service tracks and calculates CO2 emissions across the supply chain for the process manufacturing industries, using Yokogawa’s technologies to track Scope 1 and 2 emissions and combines that with the SAP® Sustainability Footprint Management service and ERP solutions offered by SAP to track Scope 3 emissions.

The solution is based on tracking various data (energy, raw material information, manufacturing specifics, shipping details, and more collected from factories) to achieve unprecedented precision in carbon footprint accounting. The data are gathered to an edge gateway set up on site, sorted, time-stamped and sent to Yokogawa’s Cloud to be recorded.

The Tracer’s accuracy is raised by including usually unaccounted-for materials and processes which generate emissions during the production of a discrete product. These include so-called “indirect materials” involved in production such as electroplating chemicals, cleaning detergent, and electricity and gas bills for the offices within factories.

These measurements from the manufacturing process are combined with SAP’s service which provides emissions data on specific products involving upstream suppliers and downstream users for tracking Scope 3 GHG emissions.

Furthermore, the partnership with SAP allows for the visualization and management of CFP based on European standards and the ability to produce emission reports compliant with regulatory frameworks. As a cloud-based solution the service can be continually updated to keep up with evolving environmental regulations and standards.

Yokogawa expects a wide range of industries will benefit from the Tracer: oil and gas extraction and refining processes, pipelines and other transportation processes, plants for petrochemicals, chemicals, renewable energy, electric power, pulp and paper, food and pharmaceuticals, steel, non-ferrous metals, water distribution, and water treatment.

The Tracer, though, is only one example of the company’s broader commitment to working with customers to help them shift to reliable, sustainable, and inexpensive energy. And only one example of its solutions towards a more circular and sustainable society.

Looking forward, Yokogawa believes the world is becoming one where everything is ever more intricately connected into a system of systems (SoS). When integrating independently operated and managed systems into larger systems, synergies and value emerge. Those effective connections are precisely what Yokogawa hopes to help deliver through optimized integration, autonomy and digitalization of systems.

Even as various parts of our economic systems become ever more interconnected, the world is also decoupling in a significant way. Growth no longer is linked to rising GHG emissions^*11. In this new reality, business decision makers are thinking of how reductions of GHGs can become a source, and not just an unfortunate cost, of greater growth and profit.^*12 Achieving the next level of carbon accounting throughs technologies like the Carbon Footprint Tracer will accelerate such decoupled growth for economies and provide new business opportunities for individual companies.

*SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP SE in Germany and other countries. Please see https://www.sap.com/copyright for additional trademark information and notices. © 2024 SAP SE. All rights reserved.

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References

*1 Investopedia: https://www.investopedia.com/articles/financialcareers/09/ancient-accounting.asp 
https://www.investopedia.com/articles/08/accounting-history.asp 
Gojo & Company, Inc.: https://gojo.co/how-accounting-can-influence-the-capitalism-transformation-jp 
*2 Financial Times: https://www.ft.com/content/2543a652-3313-45f2-81c8-627a31fc3c1a 
*3 World Economic Forum: https://www.weforum.org/agenda/2023/09/how-product-embedded-emissions-accounting-frameworks-offer-opportunities-for-circularity/ 
*4 European Commission: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en 
*5 World Economic Forum: https://www.weforum.org/agenda/2022/12/carbon-accounting-what-it-is-and-why-your-company-should-start-doing-it/ 
*6 Bloomberg: https://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence/ 
*7 The Economist: https://www.economist.com/business/2022/07/21/can-watershed-corner-the-market-for-carbon-accounting 
*8 World Economic Forum: https://www.weforum.org/agenda/2023/09/this-is-why-product-carbon-footprint-exchange-is-the-key-to-scope-3-decarbonization/
Carbon Chain: https://www.carbonchain.com/carbon-reporting 
*9 World Economic Forum: https://www.weforum.org/agenda/2023/09/how-product-embedded-emissions-accounting-frameworks-offer-opportunities-for-circularity/ 
*10 World Economic Forum: https://www.weforum.org/agenda/2023/09/this-is-why-product-carbon-footprint-exchange-is-the-key-to-scope-3-decarbonization/
Trident Utilities: https://tridentutilities.co.uk/news/overcoming-the-top-five-challenges-of-carbon-accounting 
Carbon Chain: https://www.carbonchain.com/carbon-reporting 
*11 International Energy Agency: https://www.iea.org/commentaries/the-relationship-between-growth-in-gdp-and-co2-has-loosened-it-needs-to-be-cut-completely 
*12 World Economic Forum: https://www.weforum.org/agenda/2024/01/decoupling-economic-growth-emissions/