Beyond ESG compliance: How carbon reporting drives corporate sustainability

Organisations are under increasing pressure to make their business operations more sustainable and reduce their carbon footprint. And while the CSRD is the minimum expectation, many organisations are looking to the future and noticing the extra strategic value carbon reporting and carbon accounting can bring to the business, including cost savings, resilience, and more.

So, not only do you become more transparent about your carbon emissions (building trust in your local and global communities), but you can also enjoy the long-term benefits that go hand in hand.

What’s the difference between carbon reporting and carbon accounting?

Carbon reporting is the data shared with stakeholders, professional bodies, and customers — basically, anyone interested in learning more about your carbon emissions. This data is usually presented in a standardised format so key figures can be read easily.

Carbon accounting, on the other hand, is the process of monitoring greenhouse gas emissions. This process includes gathering details about direct emissions (Scope 1), indirect emissions (Scope 2), and other indirect emissions from your supply chain (Scope 3).

Suggested reading: A 2024 guide to Scope 3 carbon emissions (including, definition, examples, and more).

Four big benefits of carbon reporting

Who doesn’t love a benefit? Especially when the impact is potentially so far-reaching. Here are four of the biggest benefits to carbon reporting:

1. Enhancing transparency and accountability

Building trust is essential in today’s world. Investors, customers, and other stakeholders care about your sustainability efforts. According to Statista, 44% of consumers said they were more likely to buy from a brand with a clear commitment to sustainability.

By reporting emissions on demand, companies can verify their green actions, sidestepping any accusations of greenwashing. Carbon reporting allows companies to share that they’re taking real action against climate change.

2. Easily identify areas for improvement

Understanding exactly what emissions your company is producing, both directly and indirectly, helps you avoid any nasty surprises. You know exactly what you’re emitting, which means you can take actionable steps to improve and change.

Perhaps you identified a supplier with sustainability goals that don’t align with your own, meaning it might be time to start looking at new suppliers to help reduce your emissions further.

You need accurate and reliable data to identify areas for improvement and consistent carbon reporting is a great start.

3. Gives you a competitive advantage

E-commerce goods trading has never been more prevalent, meaning competition is fierce and the market is saturated. Companies are always looking for new ways to get their hands on a competitive advantage, and carbon reporting is one way to offer just that.

It’s not just about strategic pricing strategies and clever marketing campaigns; customers are more focused on the brand as a whole. If you’re known for your combative sustainable practices, you can build a robust reputation of trust, transparency, and sustainability, which can put your heads and shoulders above the competition.

4. Plan your budget more effectively

ESG data needs to work in tandem with your financial planning.

For example, your data might reveal issues with your product packaging and sustainability. And to improve it might mean making changes which also come with a financial cost.

Understanding the implication of any sustainability-driving initiatives can help you plan and stick to your budgets more accurately.

Six tips to implement an effective carbon reporting strategy

It’s all well and good talking about how transformative carbon reporting can be, but it’s meaningless if you don’t follow through and implement effective carbon reporting strategies form the get-go.

With that in mind, here are six tips when implementing a carbon reporting strategy.

1. First, understand the impact of carbon reporting on corporate sustainability
   Before you can enact real change, it’s important to understand the effect carbon reporting has on your corporate sustainability. What benefits will reporting emissions generate for your business? Being able to quantify this, particularly to stakeholders, ensures everyone is working towards the same goals from the very beginning.

2. Define your emission sources
   It’s time to map out all of your emission sources from Scope 1, Scope 2 and Scope 3 (if applicable). Before you start collecting data, you need a good understanding of which carbon sources to track.

Psst. Payhawk ESG reporting tool helps you track your Scope 3 carbon emissions on all card spend automatically.

3. Incorporate carbon reporting into your long-term sustainability planning

Sustainability planning must be part of your long-term corporate goals. It’s a cyclical, ongoing process to become more sustainable; it doesn’t happen overnight. You can make small changes immediately, but drastically reducing your carbon footprint is a strategy that requires long-term planning.

By aligning your sustainability goals with your long-term corporate goals, your sustainability practices become more focused.

Erik Stadigh co-founder & CEO at Lune, (a Payhawk partner), says:

My recommendation? Put the right processes in place before they’re mandated so that you can save time (and costs) later. If you don’t, you may have to work with consultants, which can be extremely costly.

4. Stay up-to-date with ESG regulations

As ESG standards evolve, so must you. To ensure compliance, you need to keep up with emerging industry-relevant frameworks and regulations (which can already sound like a big job). However, having a representative of each department in an internal ESG committee can ensure accountability throughout the ongoing process.

You should also use an expense management platform that includes features to track your card spend carbon emissions (like Payhawk), to make managing regulations easier and more automated. This way, you always remain compliant, meaning there are fewer things for you to worry about.

5. Innovate with advanced carbon reporting tech

The previous point moves us nicely onto this next tip: Use the right technology in your carbon reporting.

Not only does software like ours keep you up to date with ESG regulations, but it also removes the need to sit and manually calculate how much carbon John’s latest business travel emitted, which only drains your financial resources.

Our software calculates the carbon emissions for each expense directly from your business card spending. And maximises the efficiency and accuracy of your carbon data collection and analysis.

6. Continually measure the business benefits of reporting on your carbon emissions

Implementing carbon reduction strategies isn’t enough of a long-term strategy to achieve sustainability; that’s why it’s important to measure the benefits of your carbon reporting so you can realise a way forward.

It’s crucial to remain agile. This means continually identifying the risks climate change may have on your business and rectifying them before they have a lasting impact, i.e. the impact of more drastic weather on your facilities or shorter ski seasons due to impacting seasonal tourism.

Being able to accurately measure and report on the business benefits of carbon reporting — and any gaps in your roadmap — can keep everyone focused and motivated to look for new and better ways to reduce your business carbon footprint further.

As Veroniki Zerva Senior Manager of the CFO Program at Accounting For Sustainability explained in our previous webinar:

Gap analysis will help you determine what you have in place and what you need to do to close the gaps.

Overcoming the challenges of carbon reporting

Data accuracy is key when reporting your carbon emissions to the public. You want to build and maintain trust, proving that your organisation is not only compliant with ESG regulations, but also motivated to make a difference through actionable reporting and strategic planning.

At Payhawk, our ESG tracking tool makes reporting on your Scope 3 carbon emissions simple and straightforward (related to any corporate card spend) and integrates seamlessly with your business expense management processes. Employees just need to spend on their card as usual and submit their expenses digitally, and our tech will automatically calculate the CO2 generated for each business expense.

You and your finance team then have instant access to accurate, verified emissions data ready to report to stakeholders. Book a personalised demo today to learn more about our ESG reporting features and much more and see how they can directly help your business tackle growth and efficiency.

Key changes to IFRS 15

One of the most significant changes introduced by FRED 82 is the alignment of FRS 102 with IFRS 15, which deals with revenue from contracts with customers. This change is crucial as it introduces a new five-step model for revenue recognition, which will impact how companies report their income.

The five-step model for revenue recognition

• Identify the contracts with a customer: The contract must have commercial substance, and both parties must be committed
• Identify the promises in the contract: Determine the specific obligations and any implied promises
• Determine the transaction price: Consider whether the price is fixed or variable, and account for any refund liabilities
• Allocate the transaction price to the promises: Split the transaction price among different obligations if necessary
• Recognise revenue: Revenue should be recognised when the entity satisfies a promise, either at a point in time or over time

This model provides a structured approach to revenue recognition, ensuring consistency and comparability across industries. However, businesses must assess the impact of these changes on their current contracts and financial reporting practices.

Maggie says:

Regarding the new revenue recognition standards, the shift to a five-step model aims to simplify the process but requires a deep dive into contract specifics. This can particularly affect how and when revenue is recognised, potentially altering the timing of revenue reported in the financial statements. For businesses, this means revisiting contract terms and possibly restructuring them to align with the new model, ensuring revenue is recognised at appropriate times to reflect true business performance.

IFRS 16: What's new?

Another critical update relates to lease accounting under IFRS 16. This standard, which significantly changes how leases are reported, will now apply to entities using FRS 102.

The challenges of IFRS 16

Under the new standard, all leases must be recognised on the balance sheet. This includes leases that were previously classified as operating leases and reported as off-balance-sheet items. The change aims to improve transparency but introduces several challenges, particularly for smaller entities.

• Data collection: Companies must review all lease contracts and gather comprehensive data, including lease terms, renewal options, and variable payments
• Discount rates: Lessees must discount lease payments using the rate implicit in the lease or, if that rate is not available, the incremental borrowing rate. This requires careful judgment and can impact financial metrics
• Financial statement presentation: All leases will now be recognised on the balance sheet, affecting key financial ratios and profitability metrics. Companies must understand how this will impact their financial performance
• Ongoing monitoring: Changes in lease terms or modifications can significantly impact the recognition and measurement of lease assets and liabilities. Companies must have processes in place to monitor and update lease agreements regularly

Maggie says:

The alteration in lease accounting, which requires nearly all leases to be reported on the balance sheet, is a significant shift. This will inevitably increase the gross assets and liabilities reported by businesses, impacting several key financial metrics. Most notably, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) will likely see an increase as operating lease expenses previously recorded in the income statement move to depreciation and interest expenses on the balance sheet. While this might improve EBITDA, a commonly tracked performance metric, it could also lead to increased financial leverage ratios, affecting how investors and lenders evaluate the financial health of a business.

Some good news for SMEs

There is some relief for smaller entities under FRS 102. For leases with terms of 12 months or less or involving low-value assets, companies can opt to treat these as expenses on a straight-line basis. Additionally, the use of the gilt rate for discounting purposes provides an accessible and publicly available rate, simplifying the calculation process.

Updates to FRS 102 Section 1A

FRED 82 introduces changes to FRS 102 Section 1A, too, particularly relevant for smaller entities. These updates aim to make the standard more accessible and relevant to SMEs.

New sections and clarifications

• New Section 23: This section incorporates the IFRS 15 five-step model for revenue recognition, tailored with simplifications for smaller entities
• New Section 20: This focuses on accounting based on the IFRS 16 Leases on-balance-sheet model, also with simplifications for smaller entities
• New Section 2A: The appendix on fair value measurement, previously part of Section 2, is now given a more prominent place as Section 2A in the proposed standard

Additionally, FRED 83 proposes changes to FRS 101 and FRS 102 to align with OECD Pillar 2 rules for international tax. These changes introduce temporary exceptions for deferred tax and reporting requirements for smaller entities.

Your next steps

Given the scope of these changes, it's essential for businesses to start preparing now. Here’s what you should do:

• Engage with your auditor: Discuss the implications of the new reporting changes with your auditor. They can help you understand the impact on your financial statements and what adjustments may be needed
• Assess the impact: Evaluate how the changes to IFRS 15 and IFRS 16 will affect your current contracts, leases, and financial reporting practices. Identify areas that require adjustments and plan accordingly
• Update systems and processes: Ensure that your accounting systems can capture the necessary data for compliance with the new standards. This may involve upgrading your systems or implementing new processes
• Train your team: Provide education and training to your finance team and relevant stakeholders to familiarise them with the new requirements and their implications
• Review contracts and leases: Review existing contracts and leases to identify any modifications or specific terms that may impact revenue recognition and lease accounting under the new standards
• Plan for disclosures: Develop a robust system for gathering and reporting the required disclosures under IFRS 15 and IFRS 16. Ensure that this information is captured accurately for transparent and informative financial reporting

Maggie says:

These shifts underscore a fundamental transformation in how leases are accounted for and reported. Businesses must now take a proactive approach in reviewing their lease agreements and financial reporting processes. It will be crucial to communicate with financial stakeholders — investors, lenders, and auditors — to ensure they understand the reasons behind the changes in financial metrics and how these reflect the company's actual economic circumstances rather than a deterioration in performance.

Summary: Early preparation is essential

The upcoming changes are designed to bring UK GAAP closer to international standards, enhancing the transparency and comparability of financial reporting. However, these changes also introduce new challenges, particularly for smaller entities.

By starting to prepare now, businesses can ensure a smooth transition to the new standards and avoid any last-minute compliance issues. This includes engaging with auditors, reviewing contracts and leases, and updating systems and processes to capture the necessary data. Early preparation will not only ensure compliance but also position your business for success in an evolving regulatory landscape.

Maggie says:

Overall, while these updates aim to bring UK GAAP closer to global standards, enhancing comparability and reliability of financial information, they also require businesses to make significant adjustments. The transition might be challenging, but with the right guidance and adjustments, businesses can use these changes to their advantage, showcasing stronger and more transparent financials to stakeholders and potential investors.

If you're looking to streamline your accounting processes and ensure compliance with the new standards, consider investing in smart spend management software that integrates seamlessly with your ERP system.

Book a demo today to learn more about how we can help you navigate these changes with ease.