Evaluating Carbon Accounting Startups

The wide base of natural resources which India possesses can very well be leveraged into assets. In terms of arable land area, India ranks second after the USA (159.7 million hectares). Nearly 25% of the land is under forest cover. These forests play an important role in carbon sequestration and hence businesses focusing on tracking this ecosystem will scale rapidly. This intelligence data can be used in nature-based project solutions aimed at restoring these forestlands and oceans and wetlands.

Not just in nature-based projects, carbon accounting businesses have also been given a greater push due to the increasing government regulations for the companies to reveal their scope 1, 2 and 3 emissions in an attempt to achieve net zero emissions.

• Scope 1- These are direct greenhouse gas emissions from the activities of the reporting company, like operations of furnaces and boilers
• Scope 2- These are indirect emissions caused by assets, managed by the reporting company, used in heating, cooling or transportation, like the cooling systems or the fuels used in transporting goods
• Scope 3- Indirect emissions caused by the assets not managed by the reporting company but the company is indirectly affecting them- can include employees’ commute emissions or any emissions in the entire value chain. Scope 3 emissions are considered to be the most difficult to calculate.

(There are Scope 4 emissions through which companies report avoided emissions via their more efficient products as compared to lesser efficient alternatives but they are not mandatory to be reported, hence we will avoid it for our discussion)

Accurately calculating carbon emissions by a business can drive significant business decisions across various stages of a supply chain like resources, equipment, vendors, and transportation. Such accurate carbon accounting can assist not only in reducing the environmental impact but improve economic costs and improving branding for the company.

• Economic costs- Reporting companies will shift to renewables which leads to overall lower costs in the long run and they can opt for asset-light models where they incur marginally higher OpEx. Companies also avoid higher emission costs in the future, fuelled by the increasing emissions.
• Branding- Several global studies have established that employees prefer working in an environment-conscious company. Even customers would prefer purchasing a product which is more economically sustainable than a marginally cheaper alternative.

Some broad factors that a fund while investing in carbon accounting software or a company opting for a carbon accounting software vendor can look at are-

• Automation in measuring emissions- Companies looking to minimize the climate impact of their operations should be transparently able to identify the major sources of emissions. This would require the precision of the scopes as defined since otherwise, the process of calculating is quite complex and challenging. Software should be such that customizations according to the needs of the business is possible and inputs are recorded automatically so that business can focus on their operations rather than calculations. Data collection and benchmark reporting should be offered by any software.
• Compliances- With more private equity funds focusing on building a green portfolio, it may be helpful for businesses to have consistency in accounting practices as per the regulations for better third-party audits.
• Unified accounting- To make workflows more effective, having one plugged-in software for Scope 1, 2 and 3 emissions rather than multiple software for particular scopes would save a lot of time for the businesses. A comprehensive product offering valuable insights and flexible dashboards would have an edge over other alternatives. In addition, if the software has a favourable user interface for the business officials to navigate through the reports, businesses can save a lot of costs in training the employees for compatibility with the software
• Accurate assessment of the supply chain- Many organizations lack the resources to accurately classify an emission under particular scope owing to narrow definitions. Hence, a carbon accounting business which accurately understands the supply chain and can plug-in the software for automated and quicker accounting will prove more beneficial for a business (for example, financial institutions may not identify Scope 2 and Scope 3 emissions but their portfolio assets emissions are considered under Scope 2 emissions)
• Guidance on reducing emissions- Carbon accounting businesses should be able to offer actionable insights in addition to accounts along with a detailed plan of action to reduce emissions effectively. Such tools will enable businesses to assess their baseline performance, compare year-on-year performance, implement ESG strategies, set priorities and activate policies according to the priorities.

Conclusion

There are increasing global regulations in the carbon accounting sector relating to changes in the definitions of the scopes and methods of accounting and hence, this space is quite dynamic. For any business, it is important to check all the boxes in deciding on software. As for global trends, while carbon accounting startups are on a rise, we may see an influx of end-to-end carbon management platforms as well (this interview by Jon Goldberg of Carbon Direct is elaborate enough to understand a carbon management platform). Just as usual, VC firms will be on the lookout for new trends!