In this article, we’ll explain what ESG banking is, why it is important, and how you can apply ESG in banking.

Applying ESG in Banking

Businesses today have a lot more to deal with than ever before, such as appealing to younger consumers concerned with climate change and aligning their finances to fit the mold of ESG banking and sustainable finance.

The typical business finance model isn’t as simple as it used to be anymore, meaning that companies wishing to grow their business sustainably will need to find ethical investments and apply ESG banking to their financial activities. 

ESG in banking refers to financial activities that take the environment, society, and governance factors into account – such as by avoiding an investment that would cause excess GHG emissions or would harm a local community. 


💡 As opposed to traditional banking, where the main goal is financial growth, ESG in banking will seek to prioritize ESG values being met over profits.

In order to practice ESG banking, companies and individuals alike must consider the impact a particular investment may have on the environmental, society, or governance factors.

Explore how banks and financial companies are integrating ESG (Environmental, Social, and Governance) factors into their operations in this insightful video. We cover:

Introduction to ESG in banking
The growing importance of ESG factors in finance
How banks incorporate ESG into their operations
ESG-focused lending policies, investment strategies, and risk management
Benefits of ESG for banks and financial companies
Real-life case studies highlighting success stories
Conclusion: Future trends in ESG banking

Join us to understand how ESG is transforming the financial sector and driving sustainable finance practices.

Lindsay Hampson is the Founder and ESG & Sustainability Consultant at ThisRock Inc. Lindsay has her FSA Credential from the IFRS, and holds a Sustainability Leadership Certification from the University of Toronto. 

Read our ESG Banking blog here: https://thisrockesg.com/esg/esg-banking/ 

Learn more about our ESG consulting services across reviews, assessments, strategy, implementation, communications and training for your organization at ThisRock at www.ThisRockESG.com  

#ESGBanking #SustainableFinance #GreenFinance #FinanceTrends #CaseStudies #BankingInnovation #FutureOfFinance #ESGFactors

How Banks & Financial Companies Use ESG

Here’s a breakdown of how ESG in banking works:

Several big-name banks across the world are still primarily concerned with providing their customers with the best interest rates possible as opposed to protecting the environment – such as with the top 6 banks in the United States having previously helped to finance fossil fuels to the tune of $1.8 trillion.

💡 Luckily, some of these top tier banks, such as Wells Fargo – have since made the effort to address carbon emission, energy usage, and how their projects are financed. For example, Wells Fargo has finally set net-zero by 2050 emission reduction targets for 2030.

Applying the ‘E’ in ESG banking will require:

Banks to re-evaluate how their investments and financial projects impact climate change, energy usage, and various emissions

Banks to set targets in line with international agreements such as the Paris Agreement

Banks to remain aware of current and future environmental impacts as a result of their financial and business activities  

Certain banks may address societal issues more consistently than others, such as with Climate First Bank’s effort to help society by donating $100 to non profit organizations to help uninsured residents of Florida gain access to healthcare – a massive struggle in the United States, especially in the midst of the most recent presidential election.

Applying the ‘S’ in ESG banking will require:

Banks to determine their current impact on local and larger communities, such as by evaluating criteria like ethical labor practices, human rights, and other DEI values

Banks to partner with non profit organizations, such as Climate First Bank’s efforts, to help support low-income communities during difficult times and to illustrate they care about their societal impact

Banks to prioritize loans to smaller businesses over big-name corporations to help boost diversity and inclusion 

Often one of the the more overlooked factors of applying ESG in banking, governance refers to how a bank takes accountability for their actions – essentially, striving to be the opposite of the Deutsche Bank scandal. 

Governance is imperative when applying ESG in banking as it is one of the most important factors to cultivate long-lasting sustainability and trust in business relationships – all of which are essential to develop a lucrative banking business in today’s more ethically-conscious world.

Applying the ‘G’ in ESG banking will require:

Banks to determine how and if they can improve their current ethical practices and efforts to comply with environmental regulations

Banks to develop new anti-corruption policies and ensure diversity 

Banks to take full accountability for any greenwashing scandal or business mishaps that may occur

Here are some well known examples of ESG in banking:

Green Financing – This refers to issuing green bonds and loans for renewable energy projects, adhering to the ‘E’ in ESG banking. 
ESG Reporting – Working towards clear-cut communication in terms of a bank’s ESG efforts can help them to align with global frameworks like the UN’s Sustainable Development Goals (SDGs) or the Task Force on Climate-related Financial Disclosures (TCFD), adhering to the ‘G’ in ESG banking.

Donating to Non-Profit Organizations – Allowing customers to choose a donation as a result of signing up for a new bank account can help to adhere to the ‘S’ in ESG banking.

Exclusion Policies –  Banks that work to avoid financing industries with significant negative environmental impacts, such as coal mining – can adhere to the ‘E’ in ESG banking.

👉 ESG is becoming a cornerstone of modern banking, shaping how financial institutions operate and contribute to sustainable development.

ESG in baking is important since banks are one of the last industries to get on board with ESG values and sustainability – meaning that their environmental and societal impact remains colossal, and that applying ESG in banking can help them to reduce their current ESG footprint. 


💡Unlike fast fashion or travel, which are extracurricular activities and hobbies, next to everyone in the world has a bank account – whether it be for business or to pay your personal bills. 

In addition to this, businesses that choose ESG banking can help to grow their business in a sustainable way – as ESG-related finances tend to be more modest and less risky than traditional investments.

 Here are some more reasons why ESG banking is important:

Comply with Environmental Regulations – Major banks across the world may struggle to comply with ESG mandated compliance requirements, but seeking to apply ESG in banking can help companies to comply with current and future regulations.

Risk Mitigation – Applying ESG in banking can help banks to determine their current risks associated with ESG factors, and help them to avoid greenwashing or loss of transparency – all of which are paramount to maintain an effective and sustainable business. 

Stakeholder Engagement – Increasingly, stakeholders and investors alike prefer banks that demonstrate strong ESG performance, reflecting a long-term, sustainable strategy.

👉 Furthermore, several banks are not on track to achieve net-zero emissions by 2050 – even if they have committed to emission reduction targets. This demonstrates that consumer incentive to choose truly ethical and ESG-committed banks is essential to reduce emissions in the financial sector.

The table below will share big-name banks and their current efforts to employ ESG:

<table border="1">
  <tr>
    <th>Bank</th>
    <th>ESG Initiatives</th>
  </tr>
  <tr>
    <td>Chase (JPMorgan Chase)</td>
    <td>
      Invested $2.5 trillion in sustainable development and climate-related initiatives from 2021 to 2030, including renewable energy and energy efficiency projects.
    </td>
  </tr>
  <tr>
    <td>Bank of America</td>
    <td>
      Achieved carbon neutrality in 2019 and committed to $1.5 trillion in sustainable financing by 2030. Implements robust ESG governance and provides extensive ESG disclosures to stakeholders.
    </td>
  </tr>
  <tr>
    <td>HSBC</td>
    <td>
      Pledged to provide $1 trillion in sustainable financing by 2030. Set goals to achieve net-zero carbon emissions from its financed portfolio by 2050.
    </td>
  </tr>
  <tr>
    <td>Wells Fargo</td>
    <td>
      Launched a 10-year Banking Inclusion Initiative to support underbanked communities. Committed to $500 billion in sustainable finance by 2030 and enhanced community-focused programs.
    </td>
  </tr>
  <tr>
    <td>Capital One</td>
    <td>
      Focused on creating environmental impact through green buildings and reducing carbon footprints while supporting financial inclusion and education for underserved communities.
    </td>
  </tr>
  <tr>
    <td>BNP Paribas (France)</td>
    <td>
      Strong advocate for renewable energy financing, exiting coal power by 2030 in OECD countries, and by 2040 globally. Provides green bonds and sustainable investment products.
    </td>
  </tr>
</table>


What are the benefits of applying ESG in banking?

There are numerous benefits for banks that choose to apply ESG in banking, such as by allowing greater access to capital, enhanced customer loyalty, more sustainable business growth, and boosting overall transparency. 


💡 Applying ESG in banking can help banks to improve both their business partnerships and customer relationships, allowing for new opportunities to expand business growth.  

It is important to remember that customers will also have benefits of using a bank that applies ESG to its business model, as they can feel better about the environmental impact of their investments and ensure their bank is committed to long-term, sustainable growth.

How can applying ESG in banking help your business to grow?

Here are some of the benefits for banks that choose to apply ESG in their business models:

Boost Brand Reputation – Banks that make an effort to apply ESG are often viewed as more ethical and desirable amongst customers. As consumers become more concerned with associating themselves with eco-friendly products and services, this means that applying ESG in banking could help a banking business to grow. 

New Access to Capital – Investors are becoming increasingly interested in banks that align with ESG factors, meaning that applying ESG in banking could help financial firms to gain access to new financial opportunities.

Greater Customer Loyalty – A whopping 77% of consumers want companies to become more cognizant in terms of ESG, meaning that applying ESG in banking could help to attract new customers.

Reduced Business Risk – Banks that choose to incorporate ESG values into their business models can ensure reduced financial risks for both insurers and investors, making the bank more competitive and attractive to current and potential customers.

Potential for Partnerships – Choosing to apply ESG in banking can allow for new business relationships to be fostered, such as with various non-profit organizations, investment researchers, or data providers – all of which can help to expand your banking business. 

Encourage Other Businesses to Utilize ESG Practices – ESG banking may encourage small businesses and clients to employ the same ESG practices in their own companies or day-to-day lives, which can help to further reduce our global environmental and social impact. 

👉 Ultimately, ESG in banking can help businesses and banking clients alike to reduce their ESG impact and make long-term adjustments to go green in both their personal and professional lives.

Businesses can apply ESG in baking by implementing sustainable practices across their business interactions, such as in their investment choices and how they interact with customers.

Here are some ways that businesses can employ ESG banking:

Green Financing – This can allow businesses to fund various projects such as energy efficient buildings or sustainable farming. 

Sustainable Investments – Utilizing green bonds and eco-friendly stocks can help to ensure no investments support fossil fuel usage.

Reducing Emissions – Any efforts to reduce energy consumption, use renewable energy sources, or cut back on waste can help to employ ESG in banking. 

Inclusive Banking – Developing financial products and services accessible to all communities or smaller businesses could help to attract customers of all kinds while also  adhering to the ‘S’ in ESG banking.

DEI Policies –  Cultivating a workplace that allows all genders and minorities to be represented can make employees, clients, and business partners feel more comfortable and motivated to invest in your bank or company. 

Partnerships – Teaming up with local organizations to support recent natural disasters or local hardships can help foster a greater sense of community. 

Publicly Disclose Information – Making a greater effort to be transparent such as by sharing annual ESG or progress reports can help your business to align with global frameworks such as the Global Reporting Initiative (GRI).

Encourage Ethical Business Practices – Banks that develop stronger anti-corruption policies can ensure compliance and a level of safety and satisfaction from clients and stakeholders alike. 

Use Carbon Accounting to Track New Regulations –  Using third party organizations like Greenly can help ensure that your business is up-to-date with all current and future regulations. 

Additional ways to employ ESG in banking include:

Improving the screening process for investments and loans to ensure they align with ESG protocols

Educating customers with various information to help them make more ESG-friendly investments

Implementing relevant technology to help measure ESG risks in real-time

Working with non-profit organizations and government agencies to promote the importance of ESG in banking

👉Alongside this, opting for more eco-friendly banks can help to make applying ESG in banking easier.

Think of how going to the gym with a personal trainer is much easier than going alone and trying to figure out which exercise or the right machinery to use to achieve your goals. The same goes for having a guide who is already experienced in ESG banking, as choosing a bank already committed to ESG principles can provide multiple paths to help your company achieve its ESG financing goals.

Here are some of the most ethical banks to choose from to help kick-start your journey in ESG banking:

Climate First Bank – Excellent choice for those who value diversity and want to support local communities.

Amalgamated Bank – Great for customers who want to ensure their investments do not finance fossil fuel related projects. 

Clean Energy Credit Union – Best green bank for those looking for loans to be used for green energy projects.

Spring Bank – Good choice for those who want a local bank dedicated to offsetting their emissions. 

Overall, applying ESG in banking can help to reduce the finance industry's current environmental and social impact – while also inspiring business partners and clients to do the same.

If reading this article on applying ESG banking to your business has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

It can be overwhelming to figure out how to effectively reduce your environmental impact in terms of finances, but don’t worry – Greenly is here to help. Click here to schedule a demo to see how Greenly can help you find ways to ensure your company is complying with all current and future environmental regulations. 

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

In this article, we’ll explore the key steps to develop an ESG strategy that not only meets global standards but also aligns with your company’s unique goals.

How to develop an ESG strategy

The business landscape is shifting. Companies today are under increasing pressure to adopt sustainable practices, engage meaningfully with stakeholders, and ensure ethical governance. But while Environmental, Social, and Governance (ESG) strategies have become a critical focus for businesses, knowing where to start can feel overwhelming.

Building an effective ESG strategy isn’t just about meeting stakeholder expectations - it’s about creating long-term value for your business while contributing to a more sustainable and equitable future.

👉 In this article, we’ll explore the key steps to develop an ESG strategy that not only meets global standards but also aligns with your company’s unique goals.

An ESG strategy outlines a company’s approach to managing its environmental, social, and governance responsibilities. It provides a framework for embedding sustainability and ethical practices into business operations, ensuring that the company addresses issues ranging from climate change to employee well-being and corporate transparency.

Rather than being a standalone initiative, an ESG strategy integrates with the overall business strategy, helping companies manage risks and seize opportunities. For example, prioritizing energy efficiency or sourcing sustainable materials can reduce costs while also meeting stakeholder expectations.

A good ESG strategy is proactive, transparent, and measurable. It considers the unique challenges of the business and its industry, setting clear goals that align with global standards like the UN Sustainable Development Goals (SDGs) or the Paris Agreement.

In short, an ESG strategy is a roadmap for building resilience, fostering trust, and driving positive change - both within and outside the organization.

ESG on the Clock is designed for those starting their environmental, social, and governance (ESG) journey.

In this video, Abhay Krishna, Director of Value Management at Workiva, discusses how companies can determine their ESG strategy in five steps:

1. Figure out your why
2. Do your research
3. Do your materiality assessment
4. Do a feasibility analysis
5. Start small

Learn more about ESG here: https://sm.workiva.com/3NYP8lm

What is an ESG Strategy?

Why does your company need an ESG strategy?

In today’s market, a strong ESG strategy is no longer optional - it’s a business must-have. Companies that fail to act risk falling behind competitors, alienating stakeholders, and even facing regulatory penalties. 

An effective ESG strategy offers numerous benefits, including:

Risk mitigation: Addressing environmental and social risks, such as supply chain disruptions or regulatory changes, can safeguard your business against future challenges.

Enhanced reputation: Companies with strong ESG commitments are more likely to attract customers, investors, and employees who value sustainability and ethical practices.

Improved operational efficiency: Initiatives like reducing energy consumption or minimizing waste can lower costs while advancing sustainability goals.

Access to capital: Investors are increasingly favoring companies with robust ESG credentials, as they’re seen as lower-risk and more future-proof.

Beyond these practical benefits, an ESG strategy enables companies to contribute to broader societal goals, such as combating climate change or promoting social equity. Businesses that embrace ESG are not just meeting expectations - they’re shaping a more sustainable future for everyone.

Creating an ESG strategy that drives meaningful change requires a structured and thoughtful approach. Whether you’re starting from scratch or refining existing efforts, these steps provide a roadmap for success:

Before setting goals, it’s essential to understand where your business currently stands. Start with a materiality assessment to determine the environmental, social, and governance issues most relevant to your operations and stakeholders.

A materiality assessment involves identifying the topics that have the greatest impact on your business and are most important to your stakeholders. This ensures your ESG strategy focuses on what truly matters.

Next, gather comprehensive data on your current performance. Key areas to assess include:

Environmental metrics: Carbon emissions, energy usage, waste generation, and water consumption.

Social metrics: Workforce diversity, employee satisfaction, community engagement, and supply chain practices.

Governance metrics: Transparency, compliance, and ethical practices.

Creating a baseline will help you identify strengths, weaknesses, and opportunities for improvement. This step is also crucial for measuring progress over time.

ESG initiatives impact a wide range of stakeholders, from employees and investors to customers and local communities. A successful strategy depends on meaningful engagement with these groups to understand their priorities and expectations.

Surveys and focus groups: These tools allow you to collect qualitative and quantitative insights.

One-on-one interviews: Speaking directly with key stakeholders, such as senior executives or community leaders, can provide valuable perspectives.

Partnerships: Collaborating with NGOs, industry groups, or academic institutions can help align your ESG efforts with broader sustainability goals.

Engaging stakeholders not only ensures your strategy addresses real-world concerns but also builds trust and support for your initiatives.

Your ESG goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Setting realistic yet ambitious targets ensures accountability while aligning with global standards like the UN Sustainable Development Goals (SDGs) or Science-Based Targets (SBTi).

Environmental: Reducing greenhouse gas emissions by 30% within five years or transitioning to 100% renewable energy by 2030.

Social: Achieving a 50:50 gender balance in leadership roles or improving employee satisfaction scores by 15% within two years.

Governance: Implementing a transparent supply chain policy or achieving ISO certification for ethical governance.

Break these goals into measurable key performance indicators (KPIs) to track progress. KPIs provide clarity on what success looks like and help demonstrate accountability to stakeholders.

An ESG strategy is only as effective as the plan that supports it. Once you’ve set your goals, outline the specific steps needed to achieve them.

Prioritise initiatives: Focus on high-impact areas that align with your company’s values and stakeholder priorities.

Allocate resources: Determine the budget, tools, and personnel required for each initiative.

Assign responsibilities: Clearly define who is accountable for each part of the strategy to ensure execution.

For example, if one of your goals is to reduce emissions, your plan might include:

Implementing a company-wide recycling program.

The key is to integrate ESG initiatives into everyday business operations, making sustainability a core part of your company’s identity.

Transparency is critical for building trust with stakeholders and maintaining accountability. Communicate your ESG strategy and progress both internally and externally.

Educate employees about your ESG goals and how they can contribute.

Highlight progress regularly through company meetings, newsletters, or intranet updates.

Publish an annual sustainability report using recognized frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or Task Force on Climate-related Financial Disclosures (TCFD).

Use your website and social media channels to share updates, successes, and challenges.

Clear and consistent communication ensures stakeholders stay informed and engaged with your ESG journey.

Developing an ESG strategy is not a one-time exercise - it’s an ongoing process. Regularly monitor your progress, evaluate your performance against KPIs, and adapt to changes in regulations or stakeholder expectations.

Track performance: Use dashboards or software to visualize data and measure progress in real-time.

Conduct audits: Internal or third-party audits can validate your efforts and identify areas for improvement.

Respond to feedback: Actively seek input from stakeholders and adjust your strategy to address emerging concerns or priorities.

For example, if new regulations require stricter emissions reporting, update your monitoring processes to ensure compliance. Similarly, if a stakeholder survey reveals dissatisfaction with your social initiatives, consider refining your approach.

By staying flexible and proactive, your business can ensure its ESG strategy remains impactful, credible, and aligned with evolving expectations.

EY leaders discuss why using ESG commitments as a box-tick exercise is no longer enough.

How should companies design and deliver an ESG strategy?

While developing an ESG strategy is essential, it’s not without its challenges. Many businesses encounter obstacles that can slow progress or make implementation more complex. Here are some common challenges and how to address them: 

<table>
  <thead>
    <tr>
      <th>Challenge</th>
      <th>Details</th>
      <th>Solution</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td>Limited resources</td>
      <td>Small and medium-sized businesses often lack the time, money, or personnel to dedicate to ESG efforts.</td>
      <td>Start small by focusing on high-impact areas and scale up over time. Use tools like Greenly's platform to streamline processes and reduce costs.</td>
    </tr>
    <tr>
      <td>Data gaps</td>
      <td>Gathering accurate data, especially for Scope 3 emissions and supply chain activities, can be difficult.</td>
      <td>Leverage technology and partnerships to bridge data gaps. Use platforms specializing in ESG metrics to monitor performance effectively.</td>
    </tr>
    <tr>
      <td>Resistance to change</td>
      <td>Employees or leadership may resist ESG efforts due to uncertainty about long-term benefits or misaligned priorities.</td>
      <td>Educate and communicate with employees and leadership. Show how ESG initiatives align with company goals and highlight the business case for sustainability.</td>
    </tr>
    <tr>
      <td>Evolving regulations</td>
      <td>Constant updates to ESG reporting requirements can make compliance challenging for businesses.</td>
      <td>Stay informed about regulatory updates and partner with ESG compliance experts to keep your strategy current.</td>
    </tr>
    <tr>
      <td>Measuring impact</td>
      <td>Quantifying the impact of ESG initiatives, particularly social or biodiversity improvements, is often challenging.</td>
      <td>Develop clear KPIs and use recognized frameworks to standardize measurement. Seek third-party certifications for external validation.</td>
    </tr>
  </tbody>
</table>


Developing a robust ESG strategy can feel overwhelming, but established frameworks and standards offer a valuable starting point. These tools provide guidance on structuring your approach, setting goals, and reporting progress. Here are some of the most widely recognized ESG frameworks and standards:

The GRI is one of the most commonly used frameworks for ESG reporting. It provides detailed guidelines for companies to disclose their environmental, social, and governance impacts. The GRI’s comprehensive structure helps organizations identify material issues, track progress, and communicate their performance transparently.

Why it matters: GRI standards are widely recognized, making them an excellent choice for businesses looking to build credibility with stakeholders.

Sustainability Accounting Standards Board (SASB)

SASB focuses on industry-specific sustainability metrics, making it highly relevant for companies operating in sectors with unique challenges. It provides a set of standards tailored to 77 industries, covering material ESG topics most likely to impact financial performance.

Why it matters: SASB standards help businesses align ESG efforts with financial objectives, making it easier to communicate value to investors.

Task Force on Climate-related Financial Disclosures (TCFD) / International Sustainability Standards Board (ISSB)

The TCFD framework for reporting climate-related risks and opportunities has been transferred to the ISSB (IFRS S1 and S2). In October 2023, the TCFD was disbanded, and its recommendations were incorporated into the ISSB standards, which now provide a global baseline for climate-related disclosures. These standards emphasize governance, strategy, risk management, and metrics related to climate.

Why it matters: ISSB standards, built on TCFD principles, are increasingly favored by investors and regulators. Companies aligning with these standards can effectively address climate-related risks while meeting evolving disclosure expectations.

The UN SDGs offer a global blueprint for addressing pressing environmental, social, and economic challenges. While not specifically a reporting framework, the 17 goals provide a valuable reference for companies aligning their ESG strategies with broader sustainability objectives.

Why it matters: The SDGs highlight the global impact of your ESG initiatives and connect your strategy to widely recognized priorities like gender equality, clean energy, and climate action

ISO (International Organization for Standardization) offers various standards relevant to ESG, such as ISO 14001 for environmental management systems or ISO 26000 for social responsibility. These standards provide practical guidelines for integrating ESG principles into business operations.

Why it matters: ISO standards are known for their focus on operational excellence and continuous improvement, making them ideal for embedding ESG into day-to-day practices.

Using these frameworks can help companies structure their ESG strategies effectively, ensuring alignment with global best practices and boosting stakeholder confidence. While no single framework fits every business, combining elements from multiple standards can provide a comprehensive approach tailored to your company’s needs.

No description has been added to this video.
Transcript
Follow along using the transcript.

Greenly - The go-to carbon accounting platform for your business!

Developing an ESG strategy is a complex process, but you don’t have to navigate it alone. Greenly’s expertise in carbon management and sustainability reporting makes it the ideal partner for businesses looking to build or enhance their ESG strategies.

Here’s how Greenly can support your journey:

Tracking and analyzing emissions: Greenly’s platform provides an intuitive way to monitor your Scope 1, 2, and 3 emissions, helping you identify high-impact areas for improvement.

Setting actionable goals: With industry-specific insights and data-driven recommendations, Greenly can help you set realistic and measurable ESG targets, whether it’s reducing emissions or improving supply chain sustainability.

Streamlining reporting: Reporting ESG progress can be time-consuming, but Greenly’s platform streamlines the process, ensuring your reports meet stakeholder expectations.

Driving long-term change: From identifying decarbonization pathways to recommending sustainable suppliers, Greenly’s comprehensive solutions empower businesses to create meaningful and lasting change.

By combining advanced technology with personalized support, Greenly makes sustainability actionable and achievable for companies of all sizes. Whether you’re just starting your ESG journey or looking to refine your strategy, Greenly is here to help. Get in touch with us today. 

How does carbon accounting work? Why is carbon accounting so important for your business in reducing greenhouse gas emissions?

Carbon Accounting: All You Need to Know

Finances are tricky to navigate when running a business, but did you know that keeping track of more than just your money, like carbon accounting, is just as important to monitor?

Accurate carbon accounting can help you and your company work towards a greener future and better environmental standards – such as developing an Environmental Management System or acquiring an ISO 14001 certification.

Why is carbon accounting a useful tactic to ensure your company is benefiting the environment? 

👉 In this article, we'll explain what carbon accounting is, the methods used for carbon accounting, and how your company can get started with carbon accounting.

What is carbon accounting? Why is it important for your business? 

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

What is carbon accounting and how to do it?

Carbon accounting, also known as greenhouse gas (GHG) accounting, refers to the process of measuring, tracking, and reporting the carbon dioxide and other greenhouse gas (GHG) emissions associated with an organisation’s operations, products, or supply chains. This process provides a foundation for understanding environmental impact and helps organisations take informed actions to reduce emissions.    

💡 Why it matters: Carbon accounting enables businesses to identify key sources of emissions, monitor progress over time, comply with regulations, and align with global sustainability goals. It also plays a crucial role in strategies like carbon credit trading and contributing towards global net-zero aspirations. 

Carbon accounting has many practical uses including: 

<table>
  <thead>
    <tr>
      <th>Purpose</th>
      <th>Description</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td>Regulatory Compliance</td>
      <td>Ensures adherence to local, national, and international environmental laws and carbon reporting requirements.</td>
    </tr>
    <tr>
      <td>Tracking Emissions</td>
      <td>Provides a clear picture of direct (Scope 1), indirect (Scope 2), and value chain (Scope 3) emissions.</td>
    </tr>
    <tr>
      <td>Carbon Reduction Planning</td>
      <td>Identifies high-emission areas to develop targeted reduction strategies.</td>
    </tr>
    <tr>
      <td>Sustainability Reporting</td>
      <td>Communicates an organization’s environmental performance to stakeholders through reports like CDP, GRI, or TCFD.</td>
    </tr>
    <tr>
      <td>Carbon Market Participation</td>
      <td>Facilitates the trading of carbon credits or offsets, enabling cost-effective emissions reductions.</td>
    </tr>
    <tr>
      <td>Stakeholder Engagement</td>
      <td>Demonstrates accountability and commitment to sustainability for customers, investors, and employees.</td>
    </tr>
    <tr>
      <td>Cost Savings</td>
      <td>Highlights inefficiencies in energy or resource use, potentially reducing operational costs.</td>
    </tr>
    <tr>
      <td>Risk Management</td>
      <td>Identifies potential risks from carbon-related regulatory changes or reputational damage.</td>
    </tr>
    <tr>
      <td>Product Lifecycle Analysis</td>
      <td>Assesses the carbon footprint of products, aiding eco-design and sustainable supply chain decisions.</td>
    </tr>
    <tr>
      <td>Alignment with Global Goals</td>
      <td>Supports compliance with initiatives like the Paris Agreement or science-based targets (SBTs).</td>
    </tr>
  </tbody>
</table>


💡 Calculating your company's GHG emissions and overall carbon footprint often requires the collection of precise emissions data regarding both your direct and indirect emissions. this can prove challenging but luckily there are several available types of carbon accounting software to choose from to make calculating your total greenhouse gas emissions easier, including our own platform at Greenly! 

What Is the Difference Between Carbon Accounting and Carbon Assessment?

Carbon accounting solely refers to the process of measuring the amount of greenhouse gas emissions a company is responsible for producing, whereas a carbon assessment is more complex.

Carbon accounting is nothing more than a number. Carbon accounting is like getting a test score back. Some people will get a bad grade on their last exam and have newfound motivation to want to do better. For others, the poor mark is nothing more than that – and it won't provoke any action or concern for potential improvement.  

👉 Carbon accounting doesn't require someone to reduce their carbon emissions, whereas a carbon assessment suggests that they would like to reduce their carbon footprint – as it is the process of using the data revealed through carbon accounting to implement new, better environmental habits. 

💡 Greenly provides comprehensive carbon assessments to support our clients in their journey toward becoming more eco-friendly and sustainable.

The main goal of carbon accounting is to measure, track, and report the greenhouse gas (GHG) emissions associated with an organization's operations, products, or supply chains. This enables businesses to identify emission sources, develop reduction strategies, comply with regulations, and align with sustainability goals. 

Overview of key objectives of carbon accounting:

Better Understanding of Emissions
Many companies struggle to grasp concepts like carbon dioxide equivalents (CO₂e) and emission factors, both of which are essential for tracking and reducing carbon emissions. Carbon accounting enables businesses to quantify and report their emissions accurately using established methodologies. This understanding lays the groundwork for effective emissions management.

Compliance with Environmental Regulations
As regulations mandating greenhouse gas (GHG) reporting expand globally, corporate carbon accounting has become crucial for staying compliant. By calculating and reporting emissions in line with legal requirements, companies can avoid fines and demonstrate accountability. This includes tracking GHG emissions, supply chain activity, and other environmental impacts to meet regional and international standards.

Identifying Opportunities to Reduce Emissions
Carbon accounting breaks down emissions into categories such as Scope 1, 2, and 3 emissions, as defined by the Greenhouse Gas Protocol. This granular approach allows organizations to pinpoint high-impact areas and develop strategies to reduce emissions, such as optimizing energy consumption and decarbonizing supply chains. By identifying these opportunities, businesses can work toward sustainable development and long-term emissions reductions.

Promoting Accountability
Carbon accounting raises awareness about the negative impacts of global warming and the role businesses play in contributing to emissions. By tracking supply chain emissions and corporate carbon footprints, companies are empowered to take responsibility and act on their climate impact. This accountability not only enhances brand reputation but also motivates organizations to meet their emissions reduction targets.

Informing Strategic Decision-Making
With a comprehensive overview of their emissions, businesses gain valuable insights to guide better decision-making. Carbon accounting helps companies identify inefficiencies, reduce indirect emissions, and align with global agreements like the Paris Climate Accord. These informed decisions can mitigate climate risks and improve overall sustainability practices.

Achieving Emissions Reduction Targets More Effectively
Many companies are unaware of their greenhouse gas emissions until they conduct carbon accounting. By creating GHG inventories and providing accurate data, carbon accounting enables organizations to track progress, implement reduction strategies, and improve their carbon management. This systematic approach makes hitting emissions reduction targets more feasible and achievable.

What Are the Main Methodologies Used in Carbon Accounting?

There are two main methods used in carbon accounting: the spend based method and the activity based method. 

The first approach to carbon accounting is the spend based method.

The spend based method works by multiplying the economic value of a product or service purchased by the relevant carbon emissions in order to calculate the amount of greenhouse gas emissions produced. The spend based method of carbon accounting utilizes environmentally extended input and output models, otherwise known as EEIO models, and is often less mathematically complex or time-consuming to calculate.

While using the spend based method for carbon accounting is simpler, it isn't always reliable given the economy and the tendency for prices to constantly fluctuate. Also, the inconsistency of exchange rates between foreign currencies makes it difficult to rely on the spend based method.

💡 Is the spend-based method of carbon accounting worth using?  The spend based method of carbon accounting is the best approach if the carbon calculations need to be done quickly. However, since financial data is often influenced by uncontrollable factors like inflation or currency exchange rate fluctuations, it can introduce inaccuracies, making it a less reliable basis for carbon accounting.

CARBON ACCOUNTING❓- This is what you need to know - There are two main approaches when performing Life Cycle Assessments: Spend-based and Activity-based approaches. Choosing one or the other can significantly impact the understanding of your emissions.

ReFlow has developed a platform that makes it easy to perform LCA assessments based on the Activity-based approach, which provides the clearest picture and uses more data through its granular approach.

The video below introduces Climate Chats, a concept that aims to discuss and explain relevant sustainability topics. Once a month or more, our in-house engineers will discuss these topics.

This time we are sitting down with our teammate Xueqian Zhang, who has a Ph.D. in Eco-industrial System Analysis and is an LCA Specialist at ReFlow - the environmental performance experts

Have a topic in mind? Feel free to suggest topics to us, as we aim to answer questions that are relevant to you!

Read our blog post on the topic: https://www.re-flow.io/2022/04/08/carbon-footprint-accounting-ghg/

Climate Chats: Carbon Footprint accounting - Spend based vs. Activity based

The second approach to carbon accounting is the activity based method.

The activity-based method of carbon accounting is more precise than the spend-based method, as it relies on detailed data to quantify the actual units of materials or components purchased by a company. This approach, often referred to as tracking "real flows" of physical data, provides a clearer picture of emissions across the company's value chain. 

What is the Paris Agreement ?

More articles

Applying ESG in Banking

How to develop an ESG strategy

Carbon Accounting: All You Need to Know

Join more than 800 companies committed to climate change