Navigating ESG reporting: Expert insights on carbon accounting and sustainable practices

With new ESG reporting demands under the CSRD (and US directives hot on their heels), getting your green credentials in order has never been more important.

In light of the new regulations and the explicit goal to help businesses demystify their spend-related carbon impact, we partnered with Lune in 2023 to launch Payhawk Green. We recently researched some of the most frequently asked questions around ESG reporting online and shared them with Lune CEO Erik Stadigh; here’s what he had to say.

Introducing Lune

Erik is co-founder & CEO at Lune, a company on a mission to make every product and service climate-positive. Lune’s software allows companies to embed automated supply chain emissions calculations and high-quality carbon removal into their products.

What are the three most important things about CSRD that companies need to know?

“Number one: CSRD or similar ESG reporting will eventually be mandatory for everyone — it’s just a matter of time. Yes, for now, it’s companies of a specific size and/or who do business in the EU, but soon the remit will be much broader, and businesses are unprepared.

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.

Number two: It’s not just EU businesses, but any business outside the EU with operations in the EU. That’s tens of thousands of companies, with over 5,000 in the USA alone.

Number three: The CSRD emphasizes the entire carbon footprint of a business. The directive covers both the clear, direct footprint and the more indirect, harder-to-measure Scope 3 impact."

How is carbon tracking software transforming businesses towards sustainable practices?

It can seem daunting, but if you look at how financial software can help and the benefits of carbon accounting, things are getting much more straightforward. Carbon tracking software is drastically transforming businesses towards sustainable practices as they can finally accurately measure their impact. Hence, they know what policies to introduce, the activities they should reduce, and the carbon credits they should consider investing in.

Before technology like Payhawk Green, companies had to leverage lengthy consulting projects to take care of this but now you can track your footprint by corporate card spend at the click of a button.”

What are the biggest challenges in ESG reporting?

Scope 3 is notoriously difficult to measure as it covers your supply chain, and previously, companies would have worked with consultants and made best guesses.

As I mentioned before, this is where using Payhawk for spend management can help, as Payhawk Green tracks your corporate card spend and measures the carbon footprint of your expenses.

Double counting isn't a huge problem, to be honest. Think of it this way: supplier emissions will involve two companies by design: One company's (supplier) emission is another company's direct emission.

Rather than 'double counting,' the problem is that there are too many emissions! We should be overestimating emissions and not the other way around. Of course, you want to be perfect when measuring your actions, but the outcome is more important."

Why do companies struggle to measure their carbon footprint?

“There are a couple of big reasons here. You might miss that you’re eligible to report on your carbon footprint (potentially because of their business in the EU). Or you might miss reporting on supply chain emissions. Either way, you can avoid these kinds of mistakes and gaps by having good processes in place.

Setting up the right processes is a big one. You need to report on your footprint continuously and consistently, streamline how you track it, and ensure you do it all correctly. You must complete any calculations according to leading standards, following the GHG protocol, for example.

I think you won’t struggle if you use the right partner — but it’s very hard to do on your own.”

What is the best business process to manage carbon tracking? And how do companies know what KPIs to set?

“Your company can follow different metrics and standardized frameworks regarding tracking. The Global Reporting Initiative (GRI) is one example, Task Force on Climate-Related Financial Disclosures(TCFD) and others like this, where the frameworks provide clear guidelines and metrics.

But you can also set your own KPIs as long as they make sense for your business (especially if you do it voluntarily).

I recommend a simple three-step approach to get started:

1. Track relevant KPIs for your business and can support change
2. These KPIs can be as simple as focusing on CO2 emissions & setting reduction targets
3. Use the above info to contribute to carbon removal.”

Can you estimate corporate carbon footprint with externally available data?

“You could estimate - but why? External data will always lack specifics about how your company uses energy, manages its supply chain, and runs the business overall, making it impossible to get accurate numbers.

It’s much better to set up the process proactively, even if you don’t need to report yet.”

What is carbon accounting, and which framework should I use to tackle it?

“Carbon accounting reports a company’s carbon footprint (broken into scopes 1, 2, and 3).

We’ve also referred to it as carbon tracking because you can start taking action to mitigate the impact when you understand how, where, and why you create your footprint.

Choosing the right framework might seem a bit complicated, especially deep in the anagram soup, but with a little research, you should find the right one for you.

Here are a few terms to remember:

Sustainability Accounting Standards Board:
The SASB is now included in the International Sustainability Standards Board (ISSB standards), which is part of IFRS. The idea is to eventually make sustainability standards as ubiquitous as the International Accounting Standards Board (IASB).

Non-Financial Reporting Directive:
The NFRD is the old reporting system in which 11,000+ companies already report. Some large companies will have to move from this to the new directives.

Global Reporting Initiative:
The GRI is an independent global organization that supports businesses by acknowledging their environmental impact. It offers a ‘universal language for communicating these effects’ and helps entities take responsibility for their actions.

Task Force on Climate-related Financial Disclosures:
The TCFD is a structure designed to assist public companies and other organizations in better demonstrating climate-related risks and opportunities within their current reporting methods.”

What are the challenges based on size, for example, enterprise versus mid-size company?

“The challenges may get more complex the more people you have and the bigger your business, but providing you choose the right framework, your processes can stay pretty straightforward.

Technology will be vital even in the biggest companies with huge CSR teams. That being said, some frameworks may be overkill for SMEs initially due to the small scope of emissions involved.

Look into a couple and learn the differences. They’re all helpful, but nuances might make one better for your business. For example:

• SASB has industry-specific frameworks that could be very useful for some
• The GRI has specific small business frameworks (different to the normal GRI one, which is very comprehensive)

And don’t forget the B Impact Assessment (especially popular among SMBs), which you can use towards B-Corp certification.”

What benefits can businesses gain from carbon emission monitoring?

"Specific businesses must adjust to new regulations and challenges. And if they currently don't fall under these directives? It still makes sense to prepare.

Beyond regulatory compliance businesses, carbon emission monitoring will help you take a good first step in prioritizing sustainability in your company. It can let you identify the low-hanging fruit and inform an action plan of next steps.

Good sustainability practices go on to drive customer growth, employee retention, investor interest, etc, so the business benefits can be huge."

What are the next steps once you measure your carbon emissions as a business?

“It can be as simple as focussing on CO2 emissions, setting reduction targets, and contributing to carbon removal (back to that three-step approach I mentioned before).

Start by measuring what you can with what you have available, improve it over time, find the low-hanging fruit, and set targets like, ‘Let’s fly 10% less by the end of next year’, and it’ll have a drastic impact. Then, start contributing to impactful carbon removal projects like reforestation or biochar.

Businesses need to understand that it’s a marathon, not a sprint. Done is almost always better than perfect.”

Learn more about Payhawk Green

Getting ready to report on ESG? Find out how to monitor carbon emissions by spend and enhance your ESG reporting for a clearer view of your operations' environmental impact (including supply chain). Book a personalized demo today.