How can we align financial and carbon accounting to take action?

Working to Develop an Accounting Framework That Supports the Transition

Is corporate accounting an obstacle to the decarbonization of a company’s operations? Does the conceptual framework of corporate accounting hinder corporate emissions reduction, or does it create blind spots regarding the physical reality of the world? Are environmental accounting and corporate accounting irreconcilable? At what point do these two accounting systems interact within a company? This article offers an answer intended for CSR managers, as well as CFOs and management controllers.

Decarbonization Strategy and Feasibility Issues

For nearly 20 years, Carbone 4 has been supporting companies in their decarbonization strategies.

First, our teams conduct an assessment of the company's reliance on physical flows via Assessing greenhouse gas (GHG) emissions: this is carbon footprint, for example by following the structure of the Bilan Carbone®. The carbon footprint is a measure of an entity's exposure to transition risks : The more a company “depends” on carbon, the more it is exposed to the risk of an abrupt transition if other economic actors—regulators, customers, competitors, etc.—embrace the transition before it does.

Next, we need to set GHG emission reduction targets consistent with a carbon budget calculated for its organization, based on the global carbon budget.

The IPCC has developed the concept of a "global carbon budget" as emissions cap that must not be exceeded to stay below 2°C. Since part of this carbon budget has already been emitted by human activities since the pre-industrial era, the IPCC also develops the concept of “remaining carbon budget,” which defines the leeway available to the international community.

A company’s carbon budget, calculated based on the global carbon budget, represents the maximum amount of GHGs a company can emit to remain on track with a given climate pathway, typically described by a target for average global warming—for example, limiting warming to 2 °C.

This amounts to assigning each company a time-limited “emission allowance.” To stay within this limit, the company must reduce its emissions year after year (with the ultimate goal depending on the industry). It is important to understand that the overall carbon budget is based on science ((science-based) : Economic actors are constrained by physical limits. A given volume of emissions corresponds to a certain level of global warming; therefore, if a company wants to contribute to mitigation at that same level of global warming, it must set a maximum emissions limit for itself. In other words, it is not possible to push these limits without jeopardizing the achievement of climate goals.

Finally, building on these two pillars, the company must develop a action plan to effectively reduce its carbon footprint and meet its target. The goal is to identify decarbonization strategies that are effective in terms of reduction, but also feasible in light of the company's various constraints.

Here, a new key variable comes into play in the decarbonization process: feasibility. This challenge likely explains why so many economic actors—who are committed to decarbonization and set targets to help mitigate climate change—face difficulties in actually reducing their dependence on material and energy flows, as reflected in greenhouse gas assessments.

Among the obstacles that stand in the way, reducing the feasibility of decarbonization, the first that come to mind are physical and technical barriers. Here are a few examples:

The conflict over the use of biomass—a resource essential to the energy transition for several sectors—poses an obstacle to the air travel industry, which aims to equip its entire fleet with Sustainable Aviation Fuels SAF to reduce carbon emissions, even though that same biomass could also reduce carbon emissions from road freight, or the land used for it could be put to other uses besides biofuel production (such as food or animal feed, for example)
The conflict over the use of wood will likely not allow us to meet all our needs: natural carbon sinks, timber for construction, wood for energy, etc.;
The technical challenges involved in implementing material circularity, particularly during the recycling process;
Conflicts over the use of metals, such as copper: while the average copper concentration in mines operated in the 1930s was 1.8%, it is now only 0.8%. And according to the IEA, to meet the needs of the energy transition, global demand could increase fourfold.

Next, we think barriers to acceptance :

Internal acceptance challenges, given that the roles, responsibilities, and objectives of teams within the same company may differ with regard to reduction efforts, and that operational practices may need to evolve (such as the transition of service or technical vehicle fleets toward greater electrification, for example);
But also challenges related to stakeholder relations—particularly with customers—such as by adjusting the composition of raw materials and finished products.

Finally, the economic and financial obstacles play a central role in decarbonization: companies clearly recognize that various types of investments (industrial machinery and equipment, information systems, R&D, marketing, etc.) will be necessary for the transition, and they recognize that some of these investments—as well as certain trade-offs—will not always be profitable. However, we rarely consider that the obstacles stem in part from the nature of the tools companies use to make their decisions—the primary one being accounting.

Corporate Accounting: Yet Another Obstacle to Decarbonization

However, one of the obstacles to decarbonization lies precisely in the conceptual framework available to businesses, particularly for their corporate accounting.

Today, businesses rely on accounting tools not only to to pilot their internal management and guide their arbitrations, but also for communicate with their stakeholders through a common language. Mastering accounting tools is fundamental to grasp a company’s language, to understand it, and to provide it with the conditions necessary for its decarbonization.

It should be noted that this accounting framework is not not neutral : It is situated in time and space, is subject to conventions, and has been developed and expanded over time to meet specific needs (for example, IFRS standards were introduced and influenced the French General Chart of Accounts in an effort to harmonize standards at the international level and to facilitate international investment). This allows us to question the scope of this language.

Finally, it is worth noting that while the accounting framework is effective in addressing many economic and financial needs, it quickly reaches its limits when it comes to incorporating climate—and, more broadly, environmental—issues. Let’s consider two examples:

For natural elements not privatized, consumption is simply not recorded: the impacts and pressures are therefore not mentioned. It should be noted that the “tragedy of the commons” phenomenon applies precisely to situations where a resource is not privatized but is excludable (i.e., its consumption by one economic agent prevents consumption by other agents): this can lead to overexploitation of the resource. A commonly cited example is that of fishery resources: fish stocks are non-privatized but excludable, which leads to overfishing in the absence of regulation;
For natural elements privatized (such as mines), and thus recorded in the owner’s books, this recording does not necessarily imply that the natural resource is being managed responsibly. Thus, extracting materials from a mine—which depletes this natural capital—remains a source of profit and may even lead to an increase in the asset’s value over time. Let’s take this a step further: when a mine is depleted (either because the resource is actually exhausted, or due to regulatory intervention, such as a ban on mining), it immediately loses its value (this is referred to as a stranded asset, or stranded asset) : Accounting was unable to prevent this phenomenon and is therefore turning against its primary stakeholders—the shareholders.

These two cases illustrate that accounting, in and of itself, does not encourage the reduction of environmental impacts, which likely explains, at least in part, the lack of concrete decarbonization efforts by companies.

Overcoming the Limitations of Current Accounting: Non-Financial Reporting

To address the limitations of financial accounting, standards and regulations have been developed that require companies to be transparent about their non-financial issues, particularly environmental ones. Today, two main models are competing regarding corporate transparency requirements:

An Anglo-Saxon model, promoted in particular by the ISSB, which advocates providing information solely on the risk that the environment poses to the company: the information must focus on the materiality of the risk, also known as financial materiality (a term that may seem counterintuitive, but which indicates, for example, that a physical risk leading to losses can be reflected in the company’s financial statements), and we refer to simple materiality ;
A continental model, promoted by EFRAG, which adds an impact dimension to its risk dimension: What is my company’s impact on the environment? This is referred to as dual materiality. It should be noted that the omnibus The European approach does not call into question this key concept of double materiality, confirming the need for a company to assess not only the risks and opportunities of a transition, but also its impact, in order to better mitigate it.

While these two models are currently at odds, both approaches have the merit of bringing non-financial issues to light—first and foremost for investors, who are the primary audience for these reports—but also for all stakeholders, which, incidentally, increases exposure to the transition risks mentioned earlier.

However, as long as this information remains precisely extra-financial considerations, their influence on the management of the business model and the company’s strategy will remain marginal. A company executive is, for the most part, primarily subject to financial requirements (growth and profitability, in particular), as these remain a higher priority than ESG issues.

Overcoming the Limitations of Current Accounting Systems: New Approaches

As we have seen, a first step is about to be taken with non-financial regulations. However, Carbone 4 has been engaged for several years now in efforts to go even further.

Initial discussions took place within a working group organized under the auspices of the Accounting Standards Authority (ANC): Taking advantage of the publication of the CSRD standards, this working group—in which the author of this article had the opportunity to participate—considered the topic of connectivity between sustainability reports and financial statements. Focusing on climate issues, we examined how these issues are addressed in these two types of documents: To what extent can climate-related information or assumptions be used to assess a company’s assets and operations? The aim of this study is not to challenge the accounting framework, but to use it to influence corporate strategies.

A second line of thought involves explore new accounting models, which goes by many names: integrated accounting, multi-capital accounting, ecological accounting, triple-capital accounting, EP&L (Environmental Profit & Loss), etc. These approaches vary widely in terms of methodology, scope, and feasibility, but they all share our common goal: to directly integrate environmental, social, and governance considerations into decision-making and communication tools. Carbone 4 explores these different approaches as part of its projects, applying them directly to real-world business situations.

In addition to these two lines of thought, our teams address the financial challenges of the transition by proposing approaches that make it possible to reconcile, at least in part, financial accounting and non-financial accounting.

We offer our services to relevant entities (Business Units, departments, sites) “carbon budgets” for certain emission categories—carbon budgets that are similar to spending budgets, compliance with which is monitored quarterly, at the same time as financial budget forecasts;
We also provide insight into investment or acquisition decisions by projecting the impact of these decisions on the carbon footprint, which offers additional support for decision-making;
- Example : decide between building a new plant closer to a hub transportation measures to reduce transportation emissions, and the renovation of a workshop in the existing plant located far from this hub ;
For each carbon reduction measure proposed in a decarbonization plan, we estimate the associated costs or savings using a qualitative or quantitative approach;
We prioritize our clients' product portfolios based not only on their environmental footprint, but also on their volume and profitability.
- Example : for a company in the retail, identifying product lines to be excluded from the product portfolio due to a high carbon footprint combined with low sales or low margins;
We guide acquisition decisions by assessing the risks of asset failure, via their exposure to transition risks (e.g., a company specializing in process fluid treatment technology decides not to acquire a firm specializing in fluid treatment for the oil and gas industry to avoid exposure to reputational and environmental risks) or to the physical hazards of climate change (e.g., a mechanical engineering company decides against purchasing a site built in a non-flood-prone area that, a few months later, was affected by the winter 2023–2024 floods in northern France).

As we can see, Carbone 4 does not simply quantify the emissions reductions achieved through a particular course of action; we also ensure that these courses of action are feasible and operational by helping to remove obstacles.