Carbon Accounting: How to Strengthen Corporate Climate Plans

James Burrow:  I truly believe that carbon accounting will become as fundamental as financial accounting to the businesses of tomorrow.

Michael Torrance: Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices, and our world.

Speaker 3:  The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates, or subsidiaries.

Melissa Fifield: Hi, I'm Melissa Fifield, head of the BMO Climate Institute. In today's episode of Sustainability Leaders, we're talking about carbon accounting and its role in corporate climate action plans. I'm joined today by Brent Thumlert, managing director and head of Climate Smart & Software Solutions here at BMO, and James Burrow, director of Sustainable Finance in BMO Capital Markets.

  I wanted to begin today's conversation by laying out some context. In our annual BMO Climate Institute Business Leaders Survey in 2023, we found that more US and Canadian companies are implementing climate mitigation plans, but we also found that business leaders, particularly in the US, have really become less certain about the impact that various actions have on actually reducing greenhouse gas emissions. The survey asked business leaders about six different actions to reduce emissions. Everything from recycling to using zero emissions energy sources. For all six of those actions, the percentage of leaders who believe the action will have at least some impact on emissions actually fell from the previous survey. Also, the share of business leaders who feel their companies could be part of the solution to climate change shrank to 76% from 84%. It actually seems counterintuitive as if the more companies take action, the less confident they are about actions having an impact on what's causing the climate to change. With that context in mind, Brent, let's start with you. Is it surprising to you that business leaders appear to be less certain about what it takes to cut their emissions?

Brent Thumlert: Thanks, Melissa. No, it's not very surprising. A company's carbon footprint is really complex and you need different tools and methodologies to help understand and measure that. It may involve operations across a very large value chain and it can be spread over different geographies as well. When you start looking at where your emissions sources are coming from, whether these are Scope 1 or 2, those are relatively easy to measure. But when you start moving into Scope 3 emissions, it becomes much more difficult. And you can't really measure how your impact of what you to do is without starting with a baseline. Climate Smart specifically helps with this. It helps organizations build capacity, understand their carbon footprint, and then come up with reduction strategies to then make these emission targets accessible.

James Burrow:  And maybe I can add a little bit onto the points you're making there about business leader sentiment, Melissa, because I think collectively as societies, we're all on a journey around how to get to grips with the problem of climate change and with the problem of our impact on the environment more broadly. And there's something called the Dunning-Kruger effect, and I don't want to get too complex here, but also, it kind of reflects the journey that people or organizations or even countries can go through when they're getting to grips with a problem. And you start with knowing nothing. And maybe let's say, I don't know, in the pre-2015 world or the pre-coyote world, we really didn't know as much as we should about climate change. Then we resolved to do something about it and everybody was optimistic because in 2015, the Paris Climate Accord comes out, it looks like momentum is gathering, but these are still kind of high level targets at the moment.

  And off the back of 2015, a lot of companies admirably, and I'm certainly not criticizing, admirably made net-zero commitments. But then there is the stage where you get into actually working out how we're going to realize on those commitments. And that's what everybody realizes, Jesus, it's actually kind of hard. There are some real trade-offs to make here. Some of these technologies aren't mature yet, or if they are mature, they may be more expensive than the alternatives. And in the Dunning-Kruger effect, that's called the valley of despair. Now, that sounds a little bit extreme. I don't want to give the impression that we're all in a valley of despair, but it's that moment when the magnitude of the problem becomes really apparent and what's needed to get to grips with it becomes apparent.

  But then in the Dunning-Kruger model, it doesn't end there. It goes to the slope of enlightenment and the plateau of sustainability where you've worked out what's the low hanging fruit, what can I do now to begin implementing my climate plans? What do I need to do next, and what's the hardest stuff that maybe I need to leave for 10 or 20 years time? So maybe the kind of business leader sentiment that you're seeing there in the survey almost reflects that transition from initial optimism to a bit of a kind of shock around what it's actually going to take, which I think we all hope and we can all agree on that we should hopefully move towards the slope of enlightenment. As climate action begins to gain traction, people gain experience, technologies mature, organizations mature, and we drive towards a net-zero future.

Brent Thumlert: Yeah, fantastic point, James. To build upon that, if we take a look at what Climate Smart has helped different organizations do, when you start looking at those initial actions of reducing your carbon footprint, those easy first wins, those things are starting to become commonplace if you started down this path. And you're now looking towards the complex carbon accounting and reduction strategies. And so in this space you're looking at perhaps really complicated waste stream solutions. We've worked with clients to help understand how garbage is handled within their operations. How do we reduce the impact of this garbage that's being produced? Do we need to sort it on site? Do we need to do waste stream diversion? All sorts of different things that are those large Scope 3 challenges. It's beyond just decarbonizing your Scope 1 and 2 emissions at this time.

Melissa Fifield: Maybe to help our listeners along their slope of enlightenment, Brent, could you maybe break down what is carbon accounting and why is it relevant for companies that are either just beginning to form or are actually implementing climate action plans?

Brent Thumlert: Sure. So carbon accounting is the process of measuring the emissions from the activities within the boundaries of your business. There is a kind of industry accepted protocol. This is the Greenhouse Gas Protocol that's used as the standard to understand the scopes, boundaries and activities that your business needs to track. Then within this space, there's three different scopes. Scope 1, Scope 2, and Scope 3.

  Essentially, Scope 1 emissions are things that you directly control that can bust fossil fuels. Scope 2 is going to be imported energy. This is primarily electricity, but this also could be district heat and some other different types of heat sources or energy sources you bring into your business. And then everything else sits in Scope 3. And Scope 3 is broken down into a bunch of different other categories. Everything from purchased goods, capital goods, employee commuting, employee travel, waste, product usage, all of that. And so all of this is laid out in the Greenhouse Gas Protocol.

  And so what you have to do to do carbon accounting for your business is you need to first set the boundaries, what's relevant to my business, and there's some kind of five principles in the Greenhouse Gas Protocol that drive us towards having an accurate, relevant, transparent and repeatable standard. And then from there, we need to start figuring out where are we going to get this data from? How are we going to bring all of this data together? What stakeholders do we need to engage across the business, whether that's finance or our suppliers? We need to bring that information together into a system.

  Once you have all this information, you then actually need to go through the process of actually calculating your carbon footprint. This is where you have to take a look at the energy, the distance goods have been traveled, the number of nights employees have stayed at a hotel, and you need to find the emission factors. What is the carbon that's being created by this activity? And it isn't just carbon. When we talk about carbon accounting, everything is distilled down into carbon effective units, but there actually are a bunch of other gases that we're tracking as well too. Methane is one of them, nitrogen dioxide, and then you start getting into some other ones that are used in different processes as well. Refrigeration is a primary one, and these have many, many more times the global warming potential of carbon. And so you have to track for all of these gases across your business. And this is quite complicated.

  So as you start to do that, you may want to understand what type of accounting solutions are out there to help you, and there's a bunch of different ones. There's right-sized solutions for every type of business. If you're a small organization, you always need to think about right sizing the solution, or if you're a large organization, you need to create capacity and you need to be able to use tools to engage the enterprise. Different solutions range all the way from homegrown solutions all the way through to some of the best cloud service providers and the tools that they have.

  Choosing the most effective solution though is really important. You need to look for a solution that has capacity building, something that can help your people understand these challenges, understand where they can get support, understand how they can execute this year over year effectively. You next need a tool that brings this data together that allows you to ingress data from a bunch of different data sources, whether that's utility providers, API endpoints, vendors. You want a system that your team can use to effectively move forward. And then you also want to have something to help support you when you have questions. You want to have someone that's able to provide you advisory services, that's able to provide thoughts towards how you can address your emission sources and the different kind of reduction strategies that would be most beneficial for your business.

Melissa Fifield: That's great. Thanks, Brent. Maybe we can turn to James with a practical application of carbon accounting. James, you've had experience working with BMO's customers on building retrofit projects in Canada's commercial real estate market. Why is a carbon accounting approach particularly important in that sector?

James Burrow:  Yeah, thanks Melissa. And maybe before even just stepping back or stepping into the real estate sector specifically, I almost want to make a larger point. The use of the term carbon accounting may sound off-putting to some, because if you're like me, you weren't necessarily particularly interested in accounting in high school or through university. Accounting isn't necessarily the most immediately relatable or exciting term, and apologies to all the accountants out there who might be listening. But it is a really, really important term in this context because if you think about accounting as traditionally conceived, fundamentally, accounting is the language of business. Businesses speak to their customers through marketing and various other means, but fundamentally, the health of a business is expressed through its accounts. And accounting returns are required for businesses that are publicly traded right through to really small family businesses that still have to prepare their accounts and their tax returns.

  I truly believe that carbon accounting will become as fundamental as financial accounting to the businesses of tomorrow. We're not necessarily there yet with all businesses of all sizes, but for some of BMO's largest publicly traded clients, they kind of are there. They have whole teams preparing their carbon accounting statements, those statements are audited, they're publicly disclosed, so it begins to look a lot like financial accounting. And why will this carbon accounting be important in future? Well, it's going to be important for some of the similar reasons that financial accounting is important.

  Number one, for a lot of big companies, it will be a regulatory disclosure that they have to make. For the companies that it isn't a regulatory disclosure immediately, a lot of their supply chain partners or the people that they sell to, whether that's the federal government or whether it's Amazon, will require carbon accounting statements. Their customers are going to want to understand what their carbon accounting emissions are. So in a way, 10, 15 years time, carbon accounting will be as fundamental to business operations as financial accounting. And it really has to be. If we're going to get to grips with the scale of the challenge of climate change, it has to be that way.

  So thinking more specifically about the real estate industry, why carbon accounting or even just getting a handle on your carbon emissions is important to them? I guess I'll give a couple of examples just at a very, very simple high level. Number one, a lot of municipalities or states in the United States and provinces up here in Canada are going to begin to ask real estate operators and are already doing so in places like New York and Vancouver for their GHG emissions reporting or their carbon accounting. So the cities will ask them for this, and if they don't provide it, there's going to be fines. So that's certainly something they're going to have to do.

  And I think beyond that, there are a whole host of attractive, very attractive incentives out there to help businesses and real estate decarbonize, but the only way you get access to those incentives is to provide a snapshot of where you are at in terms of carbon emissions right now, and a promise of future reductions in carbon emissions and evidence once those plans have been put in place, that you've achieved those future reductions. So in other words, there's a bunch of value on the table that can be captured right now if only you're willing to just take that little bit of time and effort and maybe in some cases a little bit of money to begin preparing your carbon accounting statements and kind of putting in motion plans to address your emissions.

Melissa Fifield: Certainly building retrofits can be capital intensive. How does thinking about the carbon impact affect the scope of those projects?

James Burrow:  Yeah, so I think in terms of real estate, getting to grips with the carbon impact of real estate, certainly in operational terms as in how much energy does your building use and what is the carbon emissions footprint of that is actually pretty simple really. It doesn't involve complex carbon accounting. What it does is it involves looking at the electricity and the natural gas that you're building is using, looking at the carbon intensity of the electricity grid if you're using electricity, and converting electricity usage and natural gas usage into greenhouse gas emissions, using what's called greenhouse gas emissions factors, which is for every gigajoule of natural gas that I use, what does that emit in terms of carbon? So really it's a couple of fairly simple sums supported by emissions factors that are relevant to your locality.

  Why is it important? I think number one, it does speak to the incentives that you can get access to. But I think number two, it does give you a better sense of what you need to do to decarbonize your buildings and helps drive the business decisions that are going to be involved in that.

  And Melissa, going back to the original point of the question there, I think you mentioned building retrofits can be capital intensive. How does thinking about the carbon impact affect the scope of these projects?

  I'd start by saying that a lot of real estate operators and hopefully all real estate operators in time have a net-zero target by 2050. So we are all collectively aiming towards the same place. But in the context of retrofits, I do think there's different routes there, and maybe I can just map out a few because ultimately decarbonization in the real estate space, it does need to fit with the needs of your business, the financial needs of your business, and the needs of the people that are living in those buildings. So I think a couple of routes to get there, one is almost a kind of sequential route.

  So you start by saying, well, my carbon footprint right now is a thousand and it needs to get to zero by 2050. I'm going to take that down in kind of five bite-sized chunks of 200 each. So I'm going to do a bit of cladding here when the cladding needs replaced. When the furnace comes up for renewal in 10 years time, I'm going to do that then. I can fit a building automation system now and do my lighting now. So I think one approach is to say it doesn't make business sense for me to do everything immediately right now. So I'm going to sequence this over stages. And I'm going to accept that my carbon account is going to be a little bit higher for longer, but it's going to be the thing that works for my business.

  What I would also say though, in real estate is there are opportunities to reduce that carbon account right down to zero, almost immediately. Changes in the building's use, for example, if you're converting it from an office to a residential building or you're repositioning the building, you're taking it from a fairly dilapidated residential building up to high-end condos or something like that. Another way of approaching it is to almost take a big bang approach and do everything at once when you're doing a bunch of other work on the building and take that carbon account from a thousand today right down to zero in five years, and then it stays at zero right through to 2050 and you're already there.

  So the real estate world is... There's different approaches to it in the real estate world, but I would say again, it does come back to Brent's original point. You can't reduce what you're not measuring. So the starting point for all of this is getting to grips with the scale of the problem in carbon terms, and then you can work out how best to address it after that.

Brent Thumlert: Yeah, James, that's an excellent summary. It's really interesting when you talk to organizations that are just starting this carbon accounting journey. They start with this massive challenge. It's an entire new lens to their business. It's an entire new nomenclature. It's an entire new problem that they're trying to solve. And so there's a couple key things that you need to do to make this successful.

  First, you have to capacity build within your organization. You have to enable the people that are going to solve this problem and create the carbon accounting results that we need. You need to give them the tools and the training to do that. You then need to help them with advisory support. You need to bring in external experts, whether those are engineers, building engineers, supply chain engineering, you have to bring those experts in and you have to help understand what is actually a decarbonization plan that makes financial sense to my business. And then you need to implement that. You need to have access to capital, whether that's through a financial institution, whether that's through grants or incentives. And then you need to repeat this process and continue to iterate to be successful in implementing your decarbonization plan to achieve your decarbonization goals.

James Burrow:  Maybe I could just build off that a little bit more, Brent, because I think that's great. What I would say is a lot of that kind of sounds quite intimidating. Capacity building, like, am I going to have to hire people? What's this going to cost? What I would say is this carbon accounting solutions out there, and this is coming back to a point Brent made earlier, but that I do think is worth emphasizing. There are solutions out there for businesses of all size. Your largest publicly traded organizations may find that it's more effective just to bring that capability in-house and hire four or five people amongst a global employee footprint of say, 50,000, hire four or five people just to manage their carbon accounting and sustainability on a full-time basis.

  Go right down to the other end of the scale, and you're just a small business that's turning over two or $3 million a year. There are a ton of solutions out there for you to help get to grips with your carbon footprint that don't involve hiring somebody first time when you've only got a staff of five people. It may be that this involves 5% of one employee's time done by a software as a service platform that can provide your business what it needs.

  So what I would say is I don't necessarily think there's a need to be intimidated by the idea of getting stuck in with carbon accounting right now. It may require a little bit of research to work out what the best solution is for a business of your size and whether there's any industry specifics, but I really do believe that there are solutions out there for businesses of all sizes.

Melissa Fifield: Thanks to you both for providing what is a fairly broad spectrum of what it entails to account for the carbon in your business and what the risks and benefits could be. I guess on a final note, what would you say to our listeners who are just getting their arms around this. Where there's a lot to do and a lot to think about, Brent, what would your advice be to get started? Where would you encourage them to go first?

Brent Thumlert: I would say that it is a daunting process. The first step is coming up with a strategy, and that strategy needs to be based upon data, and that needs to be based upon measurement and information that you gain from executing a carbon accounting project on your organization and its corporate emissions footprint. Once you have that information, it's an entire new lens that's going to allow you to then accurately create a strategy to then reach your admission goals.

James Burrow:  And maybe I can build on that because I do want to agree with Brent that it can appear to be a daunting exercise at first. What I would say though is it's tempting possibly for many business owners to just simply think about this as a cost of doing business, and primarily through that idea of a cost. This is just something that I have to do. It's kind of irritating. It's an additional process that isn't going to drive me any revenue, but it's kind of table stakes for the business environment today. So to see it in that slightly negative lens as an imposition on your business, an external imposition on your business. I wouldn't want to deny that in some circumstances it can be that. If a regulatory is telling you to do it and you have to, then it is an external imposition on your business. But I don't think that is the only lens that it should be seen through because I honestly see it as a way of uncovering opportunities that you may not have otherwise been able to access.

  And let me give you a couple of examples. I think one is from a cost perspective, like let's look at this from the cost perspective for a business in terms of actually reducing costs. Sure, it may cost a fairly limited amount to do your emissions footprint or do your carbon emissions calculation for your business, but that can actually uncover total cost of ownership savings and cost savings in your business that you wouldn't have been able to see had you not done that exercise. And those cost savings can come from minimizing waste, using more efficient transportation routes. They can come from using electric heating rather than gas-based heating, which has a lower total cost of ownership, or in some circumstances using electric vehicles versus gas-powered vehicles, which have a lower total cost of ownership.

  So I would certainly go into it with a lens of, well, hey, this could be an opportunity to uncover cost savings and efficiencies that I wouldn't have been able to see otherwise.

  I think the other one is on the revenue side of the business. We all know that to some greater or lesser degree, clients and customers of different types are sensitive to businesses. Sustainability reports and sustainability kind of profiles, it's backed up by lots and lots of surveys that customers tend to buy more from brands that have clear and strong sustainability value propositions than ones that don't. So depending on what sector your business is in, that could be a driver of revenue for you, whether you're selling on a B2C basis in the retail space, or selling on a B2B basis to clients like Walmart or Amazon or other large caps who have their own emissions commitments. So for me, as much as seeing it as an imposition and a necessary cost of doing business, I would also see it as a really, really good way of driving cost efficiencies and uncovering revenue opportunities that otherwise wouldn't be accessible.

Melissa Fifield: Thanks, Brent and James for the conversation. I think one key takeaway here is that this can be a really complex endeavor, identifying the risks, but also uncovering opportunities for your business. What it sounds like is that in any large, daunting, complex endeavor, it's helpful to find a trusted partner. And certainly James, you spoke to some of the experience that BMO has in helping our clients navigate through some of those challenges and unlocking opportunities for business growth. So here's to moving forward on that slope of enlightenment, and thanks to you both again for the conversation.

James Burrow:  Absolutely. Thanks very much, Melissa. And thanks Brent.

Brent Thumlert: Thank you.

Michael Torrance: Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button if you want to get notified when new episodes are published. We value your input, so please leave a rating, review, and any feedback that you might have or visit us at bmo.com/sustainabilityleaders. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, thanks for listening and have a great week.

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