How to choose carbon accounting software?

TL;DR 

• According to SEC regulation from 2022 businesses will be obligated to disclose specific climate change details on their financial reports

• Adding that requirement to the already existing sustainability performance expectations from investors, stakeholders, and consumers creates immense pressure on companies

• At the same time, it creates a multi-billion-dollar market in the climate tech space

• There are new vendors popping up every month. ClimateHub recommends looking at the DataOps framework to analyze, which of the products can do the job. Not just in the reporting itself but to actually enable emissions reduction

Sustainability is the new digitalization but with a bigger impact on the bottom line. Digitalization is optional, yet highly important, and can yield tremendous results if done properly. Climate change is a game changer. Companies are now getting hit with carbon emissions fees, investors are demanding climate risk assessments and punishing high carbon-exposed companies. Energy price volatility is driving up the cost of goods sold, and consumers are looking to reward carbon-positive products and businesses. It's a whole new ballgame, and those who don't adapt will be left behind.

🚀 How it all started ...

The private sector has experienced a significant increase in sustainability reporting via voluntary carbon market (VCM) activity since the ratification of the Paris Agreement in 2016. Oil and gas majors launched "carbon-neutral" initiatives involving the purchase of offsets, while the aviation industry introduced the CORSIA scheme to reduce and offset emissions shortly after. In 2020, momentum across the entire private sector grew as thousands of companies committed to achieving net-zero emissions, often through initiatives like the Science Based Targets Initiative.

In 2022, The Securities and Exchange Commission (SEC) introduced a regulation that, for the first time, requires companies to disclose their greenhouse gas emissions as well as their exposure to climate change risks.

Similar regulations were introduced already in Europe, and frankly, there are more in the making. What’s important, it imposes a duty on enterprises to communicate about the entity's sustainability performance and ESG to stakeholders, including investors, customers, and employees. Such a level of transparency around corporate sustainability efforts has not been seen before.

... and why it is not working 😰

Many companies are beginning their ESG journeys by utilizing spreadsheets and deploying consultants to produce PDF-based corporate sustainability reports once a year. Although the approach does the job, it doesn’t current expectations for investment-grade, auditable ESG data. It presents data quality issues, doesn't scale, and requires significant manual effort each time a new stakeholder is involved.

And most importantly, it makes it hard for companies to take decisions and actions to drive improvements and demonstrate progress in reducing emissions.

To make the actual change, to accurately measure a company's emissions, data from all aspects of the operation must be collected and converted into carbon intensity using algorithms and assumptions. Additionally, the traceability of each piece of data is crucial for auditors to pinpoint the exact source of carbon emissions.

💡Opportunties for startups and innovators

The aforementioned issues created a new multi-billion dollar market called carbon accounting and emissions tracking.

Companies are seeking to generate revenue from two sources - the SaaS revenue linked to tracking software and the long-term audit and consulting contracts related to sustainability disclosure reports.

The business opportunity is tremendous and sparked interest from various sides of the business world. Today, we can distinguish, three types of players:

• Specialized software offered by Sweep, Persefoni, Watershed, and many others

• Big Four accounting firms (PwC, Deloitte, KPMG, and EY) consulting companies like McKinsey with their Catalyst Zero product

• Incumbent software majors, like Microsoft, Salesforce, or Amazon each launched sustainability products aimed at helping customers analyze emissions data across their entire organization and monitor their cloud usage

🧑‍💻 So how is it to work with carbon accounting software today

Most of the providers offer a similar set of tools to help companies in their carbon accounting efforts. In essence, they enable you to:

1. Aggregate relevant data sources

2. Calculate of carbon footprint or sometimes extract other actionable insights

3. Create dashboards that enable progress monitoring and comparison with competitors, and help set targets for the future

4. Provide a marketplace for pre-packaged, easy-to-purchase carbon offsets

Some startups, like Plan A and Sweep, have even established consulting services to help businesses reduce their carbon impact. Larger players such as Salesforce have teamed up with companies like AT&T to offer more comprehensive assessments by integrating data from enterprise resource planning (ERP) systems and internet of things (IoT) devices throughout the supply chain.

❓What are the key features to look at?

Market demand for enterprise ESG and carbon accounting software is on the rise, driven by aforementioned regulatory requirements and increasing sustainability ambitions. We are in a period of intensive market expansion, with several new vendors entering the market each month. Selecting a good one is not a trivial task.

So how not get lost in the plethora of players and find one that will meet current requirements and enable meeting our long-term emissions targets?

ClimateHub proposes the following the DataOps framework.

At the core of the DataOps framework are two concepts: data product and contextualization.

Data Product

A data product is an owned and governed set of data that is built for the purpose of consumption. In the world of carbon accounting, it can be, for example, annual emissions from the fleet of corporate cars. Such data product:

• has its own data source(s) - can be a company ERP system or in our example direct reading from the fleet monitoring system

• is truthful - data product is equipped with data validation/quality assurance, data lineage, and monitoring

• is trustworthy - the data product includes an owner or a dedicated team that cultivates the data set and governs recent changes

• is accessible - information cannot be siloed in the annual PDF report or hidden table in the SAP. Authorized stakeholders should have both GUI and programmatic access

• is understandable - the data products' usefulness is understood through downstream lineage, documentation, and usage metrics

Contextualization

Contextualization is the underlying feature of all carbon & emission accounting tools. You need to tie data together in a scalable way .. unless you prefer to overpay for consulting services.

Within the DataOps framework, there are three features that are fundamental in properly implementing carbon accounting and emissions tracking solutions.

Data lineage is the ability to track the dependency of data.

Data lineage documents how data flow throughout the organization—from the point of capture or origination to consumption by an end-user or application, often including the transformations performed along the way.

Data pipelines also suffer from leaks, but this typically doesn’t mean you’re losing data. The leak we’re concerned with is lost context. As data moves through the pipeline, from source to target, what that data means and represents may change at each step.

Imagine a situation.

Carbon accounting software provides you with a single number on the screen.

Total CO2 equivalent emissions of your business.

Can you see all constitutions behind the calculations?

Can you trace a single number from the screen to the source?

Can you determine which actions impact that number?

Having a full lineage of all data contributing to emissions is fundamental in both getting an accurate view as well as giving you the ability to act upon that.

Another feature, closely related to lineage, is data quality.

Data quality is the ability to ensure that the data meets the required quality at all times.

What can be measured:

• Data Completeness - are we getting all data we expect?

• Data Freshness - is data up to date? Are we missing any data points?

• Data Correctness - is the value correct? Is it within the expected range? Can we verify if the source sensor requires calibration?

• Errors / Failures - was there any error during data extraction or processing?

According to an SAP Insights survey, only 21% of business executives said they were completely satisfied with the quality and availability of data collected for sustainability.

The possibility to restrict and provide access to data sets.

In the world of stringent reporting and regulations, the ability to quickly provide and restrict access to a particular data product is key to companies' execution and efficiency.

That aspect was already a hot topic during a number of digital transformation initiatives and digital frontrunners are well-positioned to succeed with ESG reporting requirements. At the end of the day, it’s about the ability to handle data streams across the company.

⏭️ but here is the trick

Today, the current carbon accounting ecosystem of startups is too focused on setting up baseline monitoring and taking “easy” data to track. Such data resides in fairly modern ERP systems, internal databases, or web services.

But the vast amount of emissions come from production facilities, manufacturing sites, power plants, and heavy-asset industrial areas. If you truly want to decarbonize, this is where you should focus on. The snag is, that the majority of the carbon accounting vendors haven’t yet looked into siloed data hidden across industrial systems.

And that’s a completely different ball game in terms of data integration and contextualization:

⭐️ Wide range of different machines (pumps, turbines, compressors ) and systems (SCADA, historians, control systems) from various vendors and built at different times (even decades ago)

⭐️ Multiple data formats (proprietary, XML, images, videos, drawings, documents) and protocols and interfaces (OPC-UA, Modbus, DNP3, flat files) and data modeling standards (IEC-61850, IEC 61450-25, RDS-PP in the power sector)

⭐️ Very large datasets with plants providing dozens of thousands of comes often at a sub-second resolution

How to handle this? Well, we leave that for the next post so subscribe to our newsletter in order not to miss it!

🎯 Summing it up

In 1933, the SEC implemented disclosure requirements for publicly listed firms. Today, companies already have a century of experience in managing and organizing financial data. However, there are no established precedents or frameworks for reporting emissions or calculating a carbon footprint.

On the contrary, we are essentially constructing the airplane while we fly it. The standards are evolving simultaneously with the development of a traceability system and dedicated markets.

Software is playing a crucial role in the process.

But many, mistakenly perceive carbon accounting and ESG reporting SaaS solutions as a remedy and solution to the energy transition.

Software should be treated as an enabler.

Since the climate change problem goes beyond the digital world, software alone cannot provide a solution. Nevertheless, our proficiency in software engineering can serve as a valuable instrument to assist in endeavors aimed at advancing climate action. There is a number of solutions at our disposal (see our home page for ideas).

DataOps is a prime example of how software can be a critical competency in enabling carbon accounting and the realization of companies’ emissions reduction targets.