By Sebastian Steinhaeuser, Chief Strategy Officer, SAP

We are caught in the throes of an environmental crisis and businesses are under tremendous pressure from customers, investors, employees, and regulators to reduce the negative impact of their green house gas emissions. Increasingly, the C-suite is expected to deliver a profitable, sustainable, and low carbon business transformation that complies with the ever-increasing number of Environmental, Social and Governance (ESG) rules and regulations.

The central question is no longer why, but how?

Tracking Emissions – You can’t manage what you can’t measure

Publicly listed companies are increasingly required to disclose their greenhouse gas (GHG) emissions and climate-related risks – not only within their own business operations but along their value chain.

But the reality is that only 10% of companies have a comprehensive view of their greenhouse gas emissions and their impact across the entire value chain, and 2/3 do not report on scope 3 emissions, where typically 80% of emissions are. What’s more, companies estimate an average error rate of 30% to 40% in the measurements they do make as they rely on averages calculated in excel spreadsheets or one-off tools, making comparing data across companies a difficult task.

The current accounting system for supply chain emissions ( the rules and approaches used to calculate these emissions) relies on data that often lacks accuracy, granularity, and comparability. Carbon accounting is still often done using spreadsheets and semi-automated tools that use estimates and averages for carbon footprints.

This needs to change – not only to fulfill tightening reporting requirements, but also to support companies in making investment decisions and differentiating products and services based on carbon intensity as much as price and quality.

Enterprises need the ability to track actual emissions, and an accounting system for emissions that is auditable, transparent, and as reliable as financial accounting. We need to redefine “resource” in enterprise resource planning (ERP) and extend our understanding of resources beyond financials.

Introducing transactional carbon accounting in the cloud

Companies should start treating carbon like money and managing sustainability data with the same rigor as financial data. Only with such a system in place, it is possible to accelerate decarbonization while recovering costs associated with high-carbon output.

Learn more about how to take climate action with transactional carbon accounting here, and download a recent WBCSD paper on how companies can help achieve it. Also listen to me discuss this topic on The Future of ERP podcast.

Real, measured, and credible emissions data must be accessible and passed along the value chain from one company to the next, tied to specific products and services in the form of a carbon invoice. SAP already touches 90% of the world’s finance and goods flows, and our cloud ERP solution is the best place to capture both the environmental and financial data.

Transactional carbon accounting brings carbon emissions and finance transactions together beyond reporting, uniquely enabling decisions to drive sustainable business transformation.

The journey to a Green Ledger

Transactional carbon accounting is enabled when an enterprise can record, report, an act on carbon in sync with financial data for every business transaction. To do that, you need to apply the same rigor to managing carbon as you do with money.

This means being able to set carbon budgets at cost center level and to control carbon plans in the same way you control financial plans.

Untimely, you need to embed carbon into business decision making at the point where a decision is made. Here are three steps to enabling this:

1. Manage your sustainability footprint

Before you can reduce carbon emissions from across your business and value chain, you first have to understand what those emissions are. Calculating carbon flows at a company, process, and product level across Scope 1, 2, and 3 emissions is based on available input data; until accurate data available from all participants a flexible carbon management solution can be used to aggregate actuals, and to fill in the blanks with indirect calculation following the GHG Protocol methodology, to calculate the total footprint.

MORE FROM FORBESSAP BrandVoice: Can Accountants – And CEOs- Save The World With A Carbon Accounting System?

With this baseline in place companies can begin to reduce their climate risk and make progress towards their climate commitments by better adhering to and reporting on rapidly changing standards. They can also achieve operational excellence by dramatically improving the speed, accuracy, and efficiency of emissions calculations and management.

2. Ensure accurate and timely sustainability data

It is estimated that over 80% of a company’s carbon footprint is in scope 3 emissions from their hidden in the value chain, and most businesses depend on a network of suppliers to aggregate real measured carbon footprint data. Securely gathering actual carbon emissions directly from these partners is critical. Ensuring that this data standardized and consistent across companies means leveraging the carbon data interoperability standards established by the Partnership for Carbon Transparency (PACT).

3. Track the financial and environmental impact of every transaction

Companies need to treat carbon like money – and a carbon accounting system that mirrors the financial accounting system – as costs for emission allowances and carbon taxes become more significant.

To manage carbon related risk but also opportunities, carbon needs to be accounted for with much more precision and control by using actual data values across business operations and supply chains, in sync with financial flows, to enable transactional accounting for carbon.

Deep insights that enable effective decision making only become possible by combining financial and environmental data and business process.

Using these three powerful capabilities that reinvent carbon accounting, executives can have a future-proof tool kit to help manage and reduce their carbon footprints.

Learn more about how to take climate action with transactional carbon accounting here, and download a recent WBCSD paper on how companies can help achieve it. Also listen to me discuss this topic on The Future of ERP podcast.

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