We open on a typical company scene… Jack is a chartered accountant in the finance department, where his team has just inherited responsibility for reporting carbon emissions numbers. Jill from the sustainability team, who managed the reporting last year, has advised they need to re-state the baseline year numbers. Sure, Jack says – was it a rounding error? Did the accounting rules change slightly? No, Jill says - the headline figure is now 13% lower than previous and almost every category has changed. Jack looks bewildered. What do you mean he says? The figures were audited.

Sound familiar? We’ve seen flavours of this scenario regularly play out across clients and sectors. Read on to find out how to help your organisation embed sustainability into your existing processes and governance through effective transition planning. 
 

Sustainability compliance has become serious business 

The global accounting and audit business is worth around £180 billion. The risk of fines and negative implications for valuation mean that large companies tend to have big departments dedicated to compliance. Sustainability reporting is now also evolving from ‘voluntary’ to ‘mandatory.’  As examples, in January 2023 the EU introduced the Corporate Sustainability Reporting Directive (CSRD) codifying a comprehensive set of disclosure requirements, followed by the Carbon Border Adjustment Mechanism (CBAM). The reporting frameworks are also evolving with the Transition Plan Taskforce (TPT) and Taskforce on Climate-related Financial Disclosures (TCFD) being consolidated under the remit of the International Financial Reporting Standards (IFRS). 

It's therefore unsurprising that we are seeing many companies move responsibility for this mandatory reporting from traditional sustainability teams to existing risk and compliance teams. These teams are - in theory - professionally and institutionally well equipped for the role, as they have the skillsets and established systems and processes to meet compliance obligations efficiently and with minimal risk. 
 

The data quality challenge 

Carbon accounting however, is not the same as financial accounting. As anyone who has worked in the sector is aware, emissions estimates are always that: estimates. Particularly for Scope 3 emissions, where most companies use spend as a proxy for real/actual supplier emissions, using a set of factors to ‘convert’ pounds, dollars or euros into tonnes of CO₂e. For some suppliers, sectors, and markets this approach may be a reasonable proxy for actual emissions. For others, it’s wildly inaccurate as companies discover when they engage with suppliers to obtain better quality data – for example, CO₂e numbers based on life cycle analysis of a product. We have seen emissions estimates for suppliers go both up and down significantly, depending on the company, category and emissions factors used.

This is well known and problematic in its own right. As a result, sustainability professionals have become well-versed in the need to re-state carbon footprint numbers and baselines on a regular basis, after improvements are made to data quality. 
 

What can go wrong with shifting reporting responsibility

When reporting responsibility shifts from sustainability teams, who are used to working with fluctuating numbers, to finance/compliance teams, whose professional sense of pride is underpinned by accuracy and completeness, it’s imperative that this move is well thought through. Without a clear plan potential impacts can include: 

• A breakdown of understanding and respect between the two teams 
• Stalled progress on improving data quality due to an inappropriate concern about ‘stability’ in reported numbers
• Finance/compliance teams becoming sceptical of sustainability initiatives, negatively impacting C-suite commitment to climate action and achieving Net Zero for the organisation
   

Don’t leave it to chance – bring all teams on board 

Moving sustainability reporting and compliance to the finance/compliance function within a business often makes sense. Getting the numbers right is important, but the skillsets and energy of sustainability teams are best deployed in identifying and executing opportunities to reduce those numbers; helping a business conceive and execute a Net Zero transition plan. So how to avoid the pitfalls? 

In our experience, there are a number of success factors:

1. Training: ensure finance teams are fully trained on sustainability and compliance reporting in person, in-depth and on a regular basis as data quality, reporting frameworks and the regulatory landscape continues to evolve. 
2. Senior buy-in: moving this requirement to finance teams is reflective of the importance of climate action and compliance within an organisation. This will play out in new things being asked of all parts of the organisation, from R&D to procurement. For this to be successful, visible senior sponsorship is critical, ensuring all teams understand the fundamental climate science and implications to your business and their roles. 
3. Phased handover: anticipate sustainability teams to be significantly involved in at least the first reporting cycle to ensure a seamless transition. 
4. Data quality improvements: is a collaborative team effort. Actively work with procurement teams and suppliers to enable this.
5. Roadmap to impact: show how this work fits into and underpins Net Zero transition planning as well as meeting compliance requirements. Success here is a group endeavour as demonstrating climate impact and minimising transition risks requires close partnership across teams.
   
    

For further information on how you can drive down Scope 3 emissions, please see our Scope 3 guide, video and our approach to supplier engagement. You can also contact us here. To stay informed of our latest insights, guides and events please subscribe to our newsletter.