Did you know that a tool as old as civilization could help your company tackle the pressing challenge of decarbonisation? Ledgers have been helping to track what’s valuable for millenia. Today, they can also enable the integration of critical environmental, social and governance (ESG) data — like carbon emissions — with the core infrastructure and architecture you already use to manage your business.
In this piece we're going to look at what a carbon ledger is, and how your business could make use of one to better meet its environmental goals.
What is a carbon ledger?
A carbon ledger is a system or database that tracks the carbon emissions of an individual, organization, or country. It is used to monitor and manage greenhouse gas emissions, often as part of a carbon trading or offset program.
A carbon ledger may include information on the sources of emissions, the amount of emissions generated, and any actions taken to reduce or offset those emissions. By tracking emissions in this way, a carbon ledger can help organisations and governments identify opportunities for reducing their carbon footprint and mitigating climate change. This is now a crucial goal for many organisations around the world.
A carbon ledger creates a shared, transparent view of data that helps people work together and make decisions from the same information. This can be an important part of developing strategies to improve your company's impact on the environment and manage natural resources sustainably.
There has never been a greater need for timely, accurate information regarding the climate impacts of products and operations. Thanks to the SEC's proposed new disclosure rules around climate change, this is an area that will continue to grow in importance, as investors, employees, lenders and customers increasingly demand transparency on these issues.
Companies often lack the ability to see their emissions and other key sustainability indicators in real-time, making it difficult to meet rising customer expectations. The challenge is not only collecting and verifying data for reporting requirements, but having information readily available to make decisions that will help reduce emissions and achieve net zero pledges.
Only by integrating greenhouse gas emissions and other ESG data into ERP can your company reach its goal.
Put your ESG policies into practice with the help of carbon ledgers
Much like a financial ledger tracks credits and debits, a carbon ledger records emissions, credits, and offsets of carbon. For it to function properly however, there must be a data model shared by all business functions , an auditable framework, as well as the correct processes and controls already set in place so that it produces accurate information to base strategic decisions off of while also being transparent.
Connecting carbon ledgers to ERP ensures that ESG doesn't get ignored, but instead is integrated into all business processes. For example, let's say you have two sources for a key ingredient. Supplier A is cheaper than Supplier B, but Supplier B produces the material with way less greenhouse gas emissions. Climate change needs to be accounted for in every company function if you want to compare progress towards becoming net zero and actually make money while doing it.
Some companies will want to be the first to pounce on this opportunity, as it could mean big rewards or appease concerned stakeholders. Others might proceed more cautiously, feeling it would be wiser to take a wait-and-see approach.
For early adopters of carbon ledgers:
- Emissions should be fully taken into account when decisions are being made. For example, companies who have stated that their goal is to achieve net zero emissions or reduce carbon dioxide emissions in some other way have started factoring greenhouse gas emissions into their business decisions like it's a cost. This might mean investing in capital projects that require more money upfront but will generate lower long-term climate impact. Or they could invent new products with less of a negative environmental effect.
- The proposed SEC rules governing climate risk disclosures will bring a huge change for all public companies. But it’s worth going beyond the minimum reporting requirements and exploring how to integrate emissions data into trading systems, sourcing decisions and other functions.
For companies slow to adopt carbon ledgers:
- By clearly defining ESG metrics and their boundaries, companies can prepare for enhanced disclosure requirements. It is vital to move past viewing climate-related issues as merely risks to mitigate; instead, see them as a source of lasting value and competitive advantage.
- When discussing sustainability, it's crucial to involve people from all departments of your company. This will help break down any barriers that exist around the topic and ensure that everyone is on the same page. The finance function has a strong understanding of accounting, reporting, and controls while sustainability leaders have in-depth knowledge about ESG topics. Are they collaborating? If not, you might want to think about creating an ESG controller role to act as a bridge between the two groups.
- Even if your company isn’t ready to fully integrate ESG into its ERP approach, it can still benefit from embracing technologies like artificial intelligence and process automation to speed up and improve reporting accuracy.
There is no one way to successfully implement ESG into enterprise resource planning. Every company faces different opportunities and challenges, so each will need to decide which standards, metrics, policies, procedures and controls are most relevant.
Just as a company creates its financial ledger by outlining the accounting policies/procedures/controls based on certain accounting standards (e.g., revenue recognition, transfer pricing, etc.), each company will need to go through this same process. The goal is to have repeatable procedures and controls in place so that anything entered into the ledger (or system) is done precisely the same way every time, no matter who input it or where they're from.
Data integrity and governance is a common challenge for many companies. To have a carbon ledger that accurately integrates ESG information, data needs to be reliable and trustworthy. The problem often lies in the availability of such data. As such, it's important for each company to establish a strong model of data management and governance to protect against any discrepancies.
How ESG factors affect your business
Incorporating ESG into enterprise resource planning isn't only helpful for meeting regulatory requirements or making shareholders happy by being transparent. It can be a vital part of delivering positive outcomes for all people involved with your company. Having a better understanding of how ESG factors play into the decisions that impact your company the most can help improve performance and make people more accountable.
If you marry ESG metrics and ERP processes, your CFO could provide reports that meet regulatory requirements, CSO may exceed shareholder/stakeholder expectations for net zero transparency, and CMO might find it easier to support claims about a product's climate impact--needs of a growing market for sustainable goods/services.
The carbon ledger concept is powerful in that it shows the potential of making ESG metrics and targets a regular part of enterprise resource planning, but this is only one possible application. A more holistic approach to workforce issues, resource consumption or responsible sourcing is also attainable.
This is because ESG priorities differ as much as strategies, operations, supply chains and stakeholders do. The unifying element here then is an overshadowed but important approach: placing emphasis on and emphasizing the importance of ESG across the enterprise to create value.
What are your thoughts on Carbon Ledgers?
We hope that you're now better equipped to understand and tackle carbon ledgers at your business. If you have any questions about anything discussed in the article above, don't hesitate to leave a comment below or to reach out to us.