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Get out your green eye shades….the next battleground for climate and sustainability is the fast paced world of accounting.  

For years now, investors have clamored for material climate information to be included in financial reports. The US Securities and Exchange Commission (SEC), the European Union, and other countries responded with new policies requiring climate and other ESG matters be included in financial reports – these policies are already being implemented in Europe.

Behind the scenes for all of this new reporting are accounting rules. In other words, the rules for how to measure both financial and now climate impacts. As climate accounting begins to merge with financial accounting, a new battle is brewing between the US and the rest of the world.  

When it comes to accounting, the United States is a little different. More than 140 nations use the financial accounting standards from the International Financial Reporting Standards (IFRS) foundation. This is the same group that spawned the International Sustainability Standards Board (ISSB) in 2021 and recently published guidance for how companies can share climate risk reporting in financial statements. 

The US uses its own financial accounting standards issued by the Financial Accounting Standards Board (FASB). Back in June, the FASB asked for comment on ESG related disclosures and issued a draft accounting standard for Environmental Credit Programs.

These moves triggered the anti-ESG movement. This week two dozen finance leaders from Republican states preemptively petitioned the FASB not to “politicize” the Generally Accepted Accounting Procedures (GAAP) by including sustainability or climate disclosures.

The letter calls out the SEC climate risk disclosure rule, among other frameworks, saying they ”purport to be about financial reporting but in reality, are about commandeering the financial system to advance a substantive climate agenda that has not been democratically approved in the United States.”

Pushing For Carbon Accounting Standardization

Adam Schiff (D-Calif.) Image by Lezlie Sterling

On the other end of the spectrum, the Democrats are pushing for more guidance and standardization for carbon accounting. The aptly named Standardized Calculation of Operational Polluting Emissions (SCOPE) Act introduced by Adam Schiff (D-Calif.) will require the Environmental Protection Agency (EPA) to produce guidance on how companies should calculate Scope 3 emissions.

The bill would require the EPA to “conduct a study, and publish guidance on calculating and reporting…Scope 3 emissions above thresholds the Administrator determines appropriate.” The EPA would determine the thresholds, calculation methodologies, frequency of monitoring, and assurances. 

Schiff said, “My SCOPE Act will close a clear gap by directing the EPA to establish across-the-board guidance for companies that choose to disclose their Scope 3 emissions.”

The aim of this bill would be to incentivize more companies to report on Scope 3 and to complement existing guidance on Scope 3.

The SCOPE Act has received widespread support from environmental groups. Patrick Drupp, Ph.D. of The Sierra Club, said, “The Sierra Club strongly supports the SCOPE Act…this legislation will help ensure our federal government finally has a window into the financial industry’s contribution to fossil fuel pollution and can begin addressing it.” 

Creative Accounting for Carbon Credits

An analysis by the Financial Times dug into the use of Renewable Energy Certificates (RECs) by big tech firms.  RECs represent proof that electricity was generated from a renewable energy source. The issue is that the actual sources of power used by these companies are determined by their electricity provider and are often from more polluting sources. So, by buying the RECs, these companies can report fewer greenhouse gas emissions. The analysis found one example of real-world emissions from power consumption to be 3.9 million tonnes compared to the 273 tonnes claimed after applying the RECs. 

Matthew Brander of the University of Edinburgh likened RECs to “buying the right from a fitter colleague to say you have cycled to work, even though you arrived by a car that runs on petrol.” 

The use of RECs is a well established practice, and buying these credits supports the growth of clean energy. These tech giants have financed research that helps back RECs. But big tech is itself split on how to craft the rules. A coalition that includes Amazon and Meta is pushing a plan that critics fear will allow companies to report emissions numbers that bear little relation to their real-world pollution and not fully compensate for those emissions.

The stakes are high. Future accounting rules will determine whether companies continue to support RECs and other carbon market credits or backtrack on their climate targets and upend the carbon credit market.