What accountants should know about carbon offsetting

How companies – including accounting practices – deal with carbon is starting to affect how they win work. So how does carbon offsetting fit in?

Businesses will have a big part to play in delivering the commitments made by Governments under the Paris Agreement, namely to cut emissions of CO2 by roughly 50% by 2030 to limit an increase in global temperature to 1.5ºC.

Directly reducing emissions from their activities is the obvious way to do this. Where this cannot be done, offsetting carbon emissions is another strategy to neutralise the amount of carbon dioxide emitted by their activities.  

“Carbon offsetting is the action of neutralising the amount of carbon dioxide (CO2) emissions admitted by a person, company or organisation when carrying out an activity. Both emissions reduction and offsetting are the way forward to achieving the goals set in the Paris Agreement and to becoming climate neutral,” says René Toet, managing director of Climate Neutral Group, a part of Anthesis Group.

The process

In principle, the process for carbon offsetting is straightforward. The company first needs to calculate its carbon emissions, then choose an offsetting project, while at the same time seeing where it can reduce its direct footprint.

“Assessing a company’s footprint is the first step in gaining insight into their emissions and moving towards net zero. Digging into each part of the CO2 footprint − energy usage, transport, business travel (flying), paper usage, emissions within the value chain − is the best start for effective reduction,” says Toet.

There are online carbon calculators for businesses, such as this from the Carbon Trust: https://www.carbontrust.com/resources/sme-carbon-footprint-calculator or the government’s MacKay carbon calculator: https://www.gov.uk/guidance/carbon-calculator.

“Companies can invest economically in offsetting carbon footprint projects that combat climate change and compensate for their organisation’s impact. Projects might include reforestation, renewable energy, methane capture and combustion, and focusing on removing or avoiding carbon emissions.”

The sweet spot: reduction and offsetting

Carbon offsetting is not without its critics, Greenpeace for example, who say the only real solution to global warming is to focus on reducing emissions, and that while offsetting is not a bad thing per se, it should not be viewed in isolation as an alternative to reduction.

Toet recommends seeking ways in which to reduce your business’s emissions come before offsetting. “As innovations and solutions for reducing CO2 will help towards net zero in the long term, purchasing carbon credits to only offset what a company cannot yet reduce can provide climate neutrality in the short term, following the highest quality criteria. Offsetting is a vital instrument in the climate change’ toolbox’. Apart from delivering externally verified emission reductions, carbon offset projects drive capital and low-carbon technology to local economies, create jobs, provide education, and support indigenous communities. This flow of finance is urgently needed and should be both recognised and encouraged.”

Value makes the investment worthwhile

Offset projects deliver verified social, economic and environmental benefits (e.g. air quality, water resources, education and employment creation). Making efforts to reduce emissions directly plays into a more sustainable long-term way of operating.

From a business perspective, the non-tangible value can be significant. Making the transition to net zero ensures businesses are being innovative and can enhance their competitive position. Customers and stakeholders increasingly prefer to do business with future-oriented organisations that are addressing sustainability.

Many companies are pursuing the status of being carbon neutral – a good short term step on the way to the ultimate goal of achieving net zero emissions (see glossary).

Accountancy practice Kreston Reeves understands well the value to the business of a carbon neutral story. “There is evidence from many businesses, including Kreston Reeves, that by becoming carbon neutral (or aiming for net zero) can be hugely beneficial. For example, this can be a big attraction for new candidates/employees to join the business. In addition, it can help improve retention rates of staff if an employer can demonstrate strong social responsibility practices,” said Corporate Partner James Peach and audit senior Dan Firmager.

“If done well, becoming carbon neutral can also have substantial marketing/brand benefits, especially if it helps you to stand out in a crowd. Ultimately, if successful, it is possible a business may find that its top line (let alone bottom line) will grow as it will generate a wider range of new customers that are keen to support business with a similar ethos and approach to climate action as them.”

An accountancy practice’s client base is a great audience with which to share a net zero story, in the hope that it will resonate with some and may lead to action from others to help support climate action. Internally, it can be galvanising tool that strengthens and enforces company culture.

And in terms of cons associated with offsetting, there are very few, said Peach and Frimager, with the main one being the amount of time it can take to make decisions about who to partner with. “There are a lot of businesses out there that can assist with this and care also needs to be taken with any potential greenwashing that may be going on around you.”

Government incentives: keep an eye out

There are government grants and schemes available for entities that invest directly in green products. However, this does not cover investing directly in carbon credits, nor towards the consultancy costs of calculating a carbon footprint. So in the case of Kreston Reeves, as it will be for many SMEs and SMPs, incentives might not be currently available, but watch this space.

“We anticipate further incentives to be made available in years to come as the Government looks to meet their target of becoming net zero by 2050 and they cascade down their objectives to large organisations, and perhaps smaller organisations soon afterwards,” said Peach and Firmager.

Case study: Kreston Reeves’ journey to cut carbon

In 2021, Kreston Reeves offset a total of 1,616t of carbon emissions by way of purchasing carbon credits. This has helped it to achieve the milestone of carbon neutrality to coincide with the firm’s 200th anniversary.

Carbon neutrality – not to be confused with net zero – is achieved when a person, company or entity balances the carbon dioxide they release into the atmosphere through their everyday activities with the amount absorbed or removed from the atmosphere by them or on their behalf.

“We teamed up with global sustainability experts Anthesis to have our carbon footprint for the financial year independently reviewed and calculated,” said Peach and Firmager.

“We have worked with Anthesis for a number of years as they have previously assisted with our Energy Savings Opportunity Scheme (ESOS) and Streamlined Energy and Carbon Reporting (SECR). We provide data to Anthesis relating to our Scope 1, 2 and 3 emissions, which is used to calculate the overall CO2 output of the firm.”

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Scope 1, 2 & 3 emissions?

  • Scope 1 covers direct emissions from owned or controlled sources.
  • Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company.
  • Scope 3 includes all other indirect emissions that occur in a company’s value chain.

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Finding a partner

From here, Kreston Reeves explored partners to support its offset ambitions and landed on B Corp-certified Ecologi.

“We were keen to partner with Ecologi, a B Corp certified company to arrange for trees to be planted using world renowned tree planting experts Eden Reforestation Projects. In addition, we knew we were able to acquire Gold Standard certified carbon credits via Ecologi to ensure that projects that could be invested in were genuine, quantifiable schemes that featured the highest levels of environmental integrity and contributed towards sustainable development,” said Peach and Firmager.

Carbon credits are an emission reduction mechanism that work by providing companies with a set number of credits that decline over time. A carbon credit is a permit to emit one tonne of CO2 or other greenhouse gases. Companies are incentivised to reduce emissions by avoiding spending on extra credits when they exceed their emissions cap, while also being able to sell to other companies any excess allowance left from reducing emissions to below their cap.

“The money used to purchase a carbon credit is invested into Gold Standard initiatives that reduce or remove carbon from the atmosphere. Examples of this are reforestation projects, wind turbine constructions, biomass energy creation, solar power or even hydroelectric projects. We work closely with Ecologi in relation to our carbon credits to ensure that they are being used for bona fide sustainable projects,” said Peach and Firmager.

“Ecologi publish the certifications to evidence that they have used our funds to purchase carbon credits and plant trees and also share their financial information with all stakeholders. From the planting of trees we have now created a ‘Kreston Reeves forest’, which can be seen via our profile on Ecologi — in 2021 we planted a tree for every client and committed to doing this every year.”

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B Lab and B Corp

A ‘B Corp’ company is one that has been independently verified by B Lab to meet the highest standards of social and environmental performance, transparency and accountability. Some well known B Corp companies are Patagonia, The Body Shop, Ethique, Prose, Allbirds and Leesa.

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Kreston Reeves was aware of bigger more established players in the carbon offsetting market, but viewed Ecologi as a good fit for the ongoing journey. “We considered if we wanted to focus primarily on providers that operated solely in the UK in terms of planting trees and investing in UK based energy projects. However, we were very impressed with the growth and development of Ecologi and what they were able to offer in terms of a visual online platform to celebrate our achievements, and to share and learn from the success of other business. We undertook independent checks to ensure they were a reputable business that were able to offer bona-fide carbon neutral solutions.”

Kreston Reeves continues to focus on reducing carbon to work towards the more stringent goal of net zero.

“We are very keen to focus more on our carbon output and to minimise this as far as possible. This is part of our assessment of net zero and how we can achieve this. It is important that every business or individual does not become complacent and simply rely on the ability to offset whatever CO2 is emitted. The more than can be done to reduce emissions, the better result for the environment and for our future generations,” said corporate partner James Peach and audit senior Dan Firmager. zero.

Long term goal: net zero

Like carbon neutrality, net zero begins with calculating the carbon footprint. However, rather than balancing emissions, net zero then requires companies to put a plan in place to reduce emissions  sharply from a baseline year.

The Science Based Targets initiative (SBTi), the recognised leader in the field, says CO2 emissions typically need to be reduced by 90% or more from 2020 levels. This is a considerable challenge. For example, in the manufacturing sector, it could require companies to completely rethink production.

SBTi says some residual emissions are inescapable even with this kind of re-engineering. This means carbon offsetting will continue to have a place over the long term.

Glossary

  • Carbon neutral – this is a good first step for companies.Itmeans that any CO2 released into the atmosphere from their activities is balanced by an equivalent amount being removed. It doesn’t necessarily mean the company is taking steps to reduce its CO2 emissions, just that another entity is offsetting them.
  • Climate positive (or carbon negative) means an entity goews beyond carbon neutrality by saving more emissions than it generates. It may be used in marketing.
  • Net Zero carbon emissions is a much tougher goal than being carbon neutral, requiring cuts of up to 90% in CO2 compared to a baseline of 2020. Net zero is tied to the goal of keeping the global temperature rise to 1.5 degrees.
  • Net Zero emissions refers to all greenhouse gas (GHG) emissions, not just CO2.

Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.

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