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A primer on GHG emissions reporting · PwC's accounting podcast

• 0:00
  SPEAKER_00: Flip leadership from PwC's national office.
• 0:06
  SPEAKER_02: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_02: I'm Heather Horn.
• 0:10
  SPEAKER_02: Thousands of companies are gearing up to prepare mandatory greenhouse gas emissions reporting both in the U.S.
• 0:17
  SPEAKER_02: and worldwide.
• 0:18
  SPEAKER_02: This is in addition to the many companies that have already been reporting this information on a voluntary basis.
• 0:25
  SPEAKER_02: Given the dynamic state of the sustainability reporting landscape, we thought it was a great time for discussion on the judgments and practical challenges in calculating GHG emissions, especially when some of the detailed requirements differ across reporting frameworks.
• 0:41
  SPEAKER_02: And if you're tuning in to learn about the SEC's new climate rule, stay tuned next week for an entire episode on that topic.
• 1:06
  SPEAKER_01: And then it's followed with establishing proper kind of supervision controls and so on and so forth.
• 1:33
  SPEAKER_02: He has a wealth of perspective on the topic of GHG emissions, and stay tuned for our very insightful conversation.
• 1:41
  SPEAKER_02: Marcham, welcome to the podcast today.
• 1:43
  SPEAKER_02: So nice to have you on to talk about a topic that basically anywhere you go with sustainability reporting is top of mind.
• 1:50
  SPEAKER_02: And that would be greenhouse gas emissions, because it is part of the major frameworks as well as the SEC rule.
• 1:58
  SPEAKER_02: So, as many of our listeners know, a lot of companies are reporting that voluntarily now.
• 2:03
  SPEAKER_02: But I think there is a different level of attention they are starting to pay as they start to uh adopt these mandatory frameworks.
• 2:10
  SPEAKER_02: So perhaps, you know, we've talked about this before on the podcast, but I think it'd be helpful to kind of take a step back and just remind people some of the background and why this is such an important topic.
• 2:21
  SPEAKER_01: Hello, Heather.
• 2:22
  SPEAKER_01: Nice to be here again.
• 2:23
  SPEAKER_01: Uh, thanks for inviting me.
• 2:24
  SPEAKER_01: Yes, you're right.
• 2:25
  SPEAKER_01: I mean, um, what we've seen before, historically, the GEG emissions were reported for two reasons.
• 2:31
  SPEAKER_01: First, voluntarily, we've seen that trend on the market that a lot of companies are being either pressured by uh activists, their investors, or generally want to be uh good corporate citizens and reporting this in uh data voluntarily, or in center in certain countries, you might have various environmental requirements that some industry might be subject to reporting these emissions.
• 2:53
  SPEAKER_01: Like the best example in the United States, some industries have to report those emissions to EPA, the similar kind of reporting framework, like Clean Air Uh Act rules, might be in place in Europe.
• 3:05
  SPEAKER_01: So we've seen that historically the reporting was for different reasons.
• 3:10
  SPEAKER_01: However, it was never done alongside the financial statements or financial information.
• 3:15
  SPEAKER_01: So now we see that the trend is changing, the requirements are changing.
• 3:19
  SPEAKER_01: Um, across the globe, those new uh either proposed or already um past uh uh uh sustainability frameworks will require companies to publish that information alongside the financial statements.
• 3:32
  SPEAKER_01: And that also drives the very interesting trend because historically we've seen this information being uh you know managed by environmental teams, investor relations, EHS teams, or ESG, broadly uh understood ESG teams.
• 3:46
  SPEAKER_01: Now, because this information might be showing up next to the financial statements, we see way more financial reporting or accounting professionals getting, you know, really interested in the topic and needing to learn more about that.
• 4:00
  SPEAKER_02: Well, and I think that's sort of the theme of our entire podcast series is this greater involvement of financial professionals in GHC reporting.
• 4:10
  SPEAKER_02: And so later in the podcast, I definitely will ask you if I was of you know from financial reporting backgrounds, some of the things to focus on.
• 4:18
  SPEAKER_02: But maybe before we get into that, I think it would be helpful to kind of set the stage and talk about some of the sort of underlying definitions that you need to know to even start to understand this conversation.
• 4:29
  SPEAKER_02: And for listeners who do know some of these very first terms, it's definitely going to get more complicated pretty quickly.
• 4:36
  SPEAKER_01: So yes, I would agree.
• 4:37
  SPEAKER_01: And obviously, when you think about GHG emissions and terms, the first, you know, most important term that comes into mind is scopes.
• 4:46
  SPEAKER_01: So emission scopes.
• 4:47
  SPEAKER_01: A lot of uh, you know, my clients and my background is financial uh reporting and auditing.
• 4:52
  SPEAKER_01: A lot of my clients are asking a lot of questions about what is the difference between the scopes?
• 4:56
  SPEAKER_01: What is this whole thing with scopes?
• 4:59
  SPEAKER_01: So um, so just to set the stage up, currently the GEG emission reporting is being done done based on rules and guidance set out by GEG protocol, right?
• 5:09
  SPEAKER_01: So that's the uh I would say framework that a lot of companies are using.
• 5:13
  SPEAKER_01: Uh, and that framework defines or categorizes emissions between three different scopes, right?
• 5:20
  SPEAKER_01: So uh scope one, scope two, scope three.
• 5:22
  SPEAKER_01: And it's very important to understand that you know what these definitions mean, what's the distinction between the three, and why, because various regulatory frameworks require, may require reporting some of those emissions, but not all of them.
• 5:37
  SPEAKER_01: So let's start with with scope one.
• 5:38
  SPEAKER_01: So scope one are direct GHG emissions that occur from sources that are owned or controlled by the company.
• 5:45
  SPEAKER_01: So basically, we're talking about emissions generated by assets that the company owns on controls.
• 5:50
  SPEAKER_01: What are the examples?
• 5:51
  SPEAKER_01: Um, let's say stationary combustion.
• 5:54
  SPEAKER_01: So if a company owns uh a fossil fuel-powered natural gas or diesel uh boilers, furnaces, compressors, right?
• 6:03
  SPEAKER_01: They all, when they burn the fossil fuel, they generate emissions, right?
• 6:07
  SPEAKER_01: So, and if those this equipment is owned or controlled by the company, all these emissions are going to be classified as scope one.
• 6:14
  SPEAKER_01: Scope two are indirect emissions associated with generation of purchase electricity, steam, heating, and cooling.
• 6:20
  SPEAKER_01: It is very interesting category because uh, as I mentioned before, those are indirect emissions.
• 6:25
  SPEAKER_01: So emissions do not happen at the company, they happen at the company that generates the power, the heating, the cooling.
• 6:32
  SPEAKER_01: So power generator company is actually, you know, during the production of power or generation of power from fossil fuel from non-renewable sources.
• 6:42
  SPEAKER_01: Generally, uh the company who generates this power is generating those emissions.
• 6:46
  SPEAKER_02: I'm using generate too much, but uh well, and also to be fair, some companies do own their own generation, but this is the much more normal case is that you're buying it from a source.
• 6:56
  SPEAKER_01: Exactly.
• 6:56
  SPEAKER_01: So this is the the the this source is about the purchasing power.
• 7:00
  SPEAKER_01: So we the companies that purchase this electricity, steam, or cooling have to report emissions associated with generating of this.
• 7:07
  SPEAKER_01: And then the last category is scope three, and those are all other indirect emissions that occur within the value chain of a company, upstream and then downstream.
• 7:17
  SPEAKER_01: So, for example, emissions uh associated with uh manufacturing of any any goods that we purchase, like capital goods or consumables that we purchase for our company, right?
• 7:28
  SPEAKER_01: Or transportation of those goods.
• 7:30
  SPEAKER_01: This is the example of upstream emissions.
• 7:32
  SPEAKER_01: Uh, downstream emissions, for example, all the emissions associated with use of our our own goods that we sell to the customers, or transportation of those costs.
• 7:42
  SPEAKER_01: So uh that one is the most broad category or scope of emissions.
• 7:46
  SPEAKER_01: There's like 15 categories with within the scope three itself.
• 7:50
  SPEAKER_01: As of now, um, when you look at this, um the level of sophistication or uh or you know, reporting of scope three, we're not there yet.
• 7:58
  SPEAKER_01: So a lot of companies, we see a lot of companies reporting scope one and scope two, but scope three, uh, because companies do not own data needed to uh report those emissions, we don't see you know so much application of this concept in practice.
• 8:14
  SPEAKER_01: But it's important to understand this concept because some of the uh these mandatory reporting frameworks will require companies to report emissions.
• 8:21
  SPEAKER_02: So yeah, I think Marchant's a good point.
• 8:24
  SPEAKER_02: Two points I wanted to pick up on there.
• 8:26
  SPEAKER_02: One is, as you mentioned, it's all based on the greenhouse gas protocol and the major frameworks.
• 8:32
  SPEAKER_02: So if we think about the reporting in the EU under CSRD and the European sustainability reporting standards, as well as the IFRS sustainability disclosure standards, and then as well, if we think about reporting in California, all of them are at least based on the GHG protocol to various levels.
• 8:51
  SPEAKER_02: And so I think understanding the GHG protocol is important.
• 8:55
  SPEAKER_02: We'll talk about a few differences here, but I think going into the differences from those frameworks is is another episode.
• 9:02
  SPEAKER_02: But again, I think the sort of the baseline is the GHG protocol.
• 9:07
  SPEAKER_02: So just, you know, to point that out.
• 9:09
  SPEAKER_02: And then I also think from a scope perspective, I'm gonna go against what I just said and say that those frameworks that I just mentioned all do require reporting scope three.
• 9:21
  SPEAKER_02: And I think to your point about the transition from voluntary to mandatory reporting, it's really important for companies that previously haven't reported scope three or maybe just needed this in general to really start to dig in and understand that.
• 9:35
  SPEAKER_01: Yeah, and I think fully agree.
• 9:36
  SPEAKER_01: It's it's it's very important.
• 9:37
  SPEAKER_01: And it's important that the companies start early because as I mentioned, scope three has a 15 different categories.
• 9:43
  SPEAKER_01: All these 15 categories that may or may not be material for reporters, because not all of them will have to be material, but you know, they may.
• 9:51
  SPEAKER_01: So what it requires is companies to really dig into it and understand first which of these categories are material to them.
• 9:58
  SPEAKER_01: Second, what is the underlying data needed to calculate and report?
• 10:03
  SPEAKER_01: And a third, how am I going to get this underlying data?
• 10:07
  SPEAKER_01: Because by definition, those uh emissions occur outside of my organizational boundary um within my value chain.
• 10:14
  SPEAKER_01: And when you look at a um GHG protocol, it uh provides multiple ways to calculate this emission.
• 10:21
  SPEAKER_01: So some of that could happen using our own data, but that's the groundwork that companies have to be doing right now to make those decisions, right?
• 10:29
  SPEAKER_01: Do I have an access to third-party data?
• 10:32
  SPEAKER_01: Can I validate this data, right?
• 10:34
  SPEAKER_01: How good, uh, how good a quality of this data it is?
• 10:37
  SPEAKER_01: If I don't, what is my alternative?
• 10:38
  SPEAKER_01: How am I gonna calculate that?
• 10:40
  SPEAKER_01: And and that's not small undertaking, right?
• 10:43
  SPEAKER_01: Especially when you talk about larger multinational corporations.
• 10:46
  SPEAKER_01: You're talking about operations in different parts of the world, and you know, that's a lot of data gathering if you haven't done so.
• 10:52
  SPEAKER_01: And I can tell you when you look at uh you know what occurs right now on a market, we have clients who report full 15 categories of scope three emissions, right?
• 11:03
  SPEAKER_01: But there's a lot of companies that either did not start at all or maybe report one or two most material or easy.
• 11:10
  SPEAKER_01: I would say easiest.
• 11:11
  SPEAKER_01: I probably use the you use the of the word easiest, it's it's a little bit misleading because none of that is easy.
• 11:16
  SPEAKER_02: Yes, exactly.
• 11:17
  SPEAKER_01: Uh, but like you know, you we see a lot of companies maybe picking and choosing and reporting some, not all or not all that are material.
• 11:24
  SPEAKER_01: So that's why I think there's a lot of work to be done for for companies to meet the requirements of those of those uh regulatory frameworks.
• 11:31
  SPEAKER_01: The good thing is some of them give a little bit more time for scope three, but um yeah, you know, yeah, another thing, and I don't want to go there, but some of them require this data to be audited, so which is another thing, just companies need to be thinking also about what evidence am I gonna retain.
• 11:45
  SPEAKER_01: Would it, would it, will it be auditable for my attestation provider or how to really navigate that?
• 11:50
  SPEAKER_01: So all these things they have to be companies have to start thinking about it now because uh, you know, you have to really plan the whole approach pretty well.
• 11:58
  SPEAKER_02: I know, and and we're just on our first three terms.
• 12:00
  SPEAKER_02: We haven't even gotten deeply into GHG reporting and already so much to think about.
• 12:05
  SPEAKER_02: But why don't we I think we again could have a whole episode on what to think about as you're calculating these numbers, but just to keep going from the level setting, a couple more key terms we probably need to talk about before we get in deeper.
• 12:18
  SPEAKER_01: Okay.
• 12:18
  SPEAKER_01: Um, so another two important definitions and boundaries, organization and operational boundary.
• 12:24
  SPEAKER_01: Um, you're gonna see those terms a lot, and they're really foundational to reporting of GEG emissions.
• 12:29
  SPEAKER_01: So let me explain what what are these two terms and why they're important.
• 12:33
  SPEAKER_01: So you're starting with organizational boundary.
• 12:36
  SPEAKER_01: In simple terms, like that a lot of accountants can understand, this is basically, I would say, consolidation method.
• 12:43
  SPEAKER_01: So determination of organization boundary helps to uh decide which operations or subsidiaries need to be included in reporting of GHG emissions.
• 12:54
  SPEAKER_01: So that's why I I think the easiest term for accountants is to use this is the consolidation method, right?
• 12:59
  SPEAKER_01: And a GHG protocol provides three ways how the emissions could be, you know, how the organization boundaries could be determined: equity approach and two control approaches, financial and operational.
• 13:12
  SPEAKER_01: Why it is important because your emission profile under each of these methods could be even drastically different.
• 13:20
  SPEAKER_01: It can be the same, but it can be different.
• 13:21
  SPEAKER_01: So it's really important to understand, you know, uh, what each approach means, how to really calculate emissions, because the outcome of your reporting could be different.
• 13:30
  SPEAKER_01: And uh in few simple terms, equity approach is basically the companies report emissions from uh subsidiaries and operations based on equity share that they have.
• 13:42
  SPEAKER_01: So let's say I have a subsidiary and I own 20%, I'm gonna report 20% of emissions of these operations.
• 13:49
  SPEAKER_01: If I have a wholly owned subsidiary, I'm gonna operate 100% of emissions, which is different from control approach because the control approaches uh require companies to report 100% of emissions, irrespective of equity share that they have, from operations that they control.
• 14:06
  SPEAKER_01: And there's two ways operational control or financial control.
• 14:09
  SPEAKER_01: I'm not gonna go too deep into those concepts, but the most important thing is you know, you report those irrespective of your uh equity holdings, right?
• 14:18
  SPEAKER_01: So that's why you can have a different outcome.
• 14:20
  SPEAKER_02: Right.
• 14:20
  SPEAKER_02: So it's basically all or nothing under those approaches.
• 14:23
  SPEAKER_01: Exactly.
• 14:23
  SPEAKER_01: And um the one thing which is important, financial control is very similar to what we are used to in consolidation in in financial reporting.
• 14:32
  SPEAKER_01: So a lot of accountants would be fairly familiar, and that's how the concept was designed.
• 14:38
  SPEAKER_01: Operational control, which is slightly different, right?
• 14:40
  SPEAKER_01: So it's important people understand because if they claim that they're using operational control approach, they want to make sure they understand the concept and apply it correctly.
• 14:48
  SPEAKER_01: And uh second concept, a second type of boundary is operational boundary.
• 14:54
  SPEAKER_01: So basically, determination of operational boundary involves identification of emission sources, categorizing them into direct and indirect, and then reporting as a scopes one, two, and three.
• 15:06
  SPEAKER_01: So uh, for example, when you when you go into this, you first establish your organizational boundary, so all the operations or subsidiaries that you need to collect the emissions data from and report it.
• 15:17
  SPEAKER_01: Then you go into each of these operations or subsidiaries, and you have to identify emission sources, for example, um, you know, mobile combustion, so all the vehicles that you have, stationary combustion, so all different types of um combustion equipment that you own or any processes that generate emissions.
• 15:34
  SPEAKER_01: And then you have to determine which ones of these are direct or indirect emissions and categorize them into scope one, two, and three and report accordingly.
• 15:42
  SPEAKER_02: Well, and I think, Marchin, this is one of the concepts that people get so I'll use the word confused about, because a lot of people will say, okay, well, I figured out my organizational boundary, so why do I need this operational boundary?
• 15:56
  SPEAKER_02: And I know you have spent endless amount of time explaining this to different people, but you know, from your perspective, why is that operational boundary so important?
• 16:08
  SPEAKER_01: Because are you really telling yourselves this determination of direct and indirect sources is is really crucial.
• 16:14
  SPEAKER_01: And it's slightly, I would say, foreign concepts to financial reporting folks, right?
• 16:19
  SPEAKER_01: Because you not only have to identify which sources you own and control and gather the data, but also you have to determine what is your value chain, right?
• 16:28
  SPEAKER_01: What are those indirect emissions you know associated with with uh subsidiaries and operations that you own and control, that you have to start gathering the data.
• 16:37
  SPEAKER_01: So I think it's really, really critical.
• 16:40
  SPEAKER_01: And depending on how you do this analysis, the outcome is gonna you know result in reporting different levels of scope one, two, and three emissions.
• 16:48
  SPEAKER_01: And we see the people are getting confused about this all the time, especially between scope one and two and scope three.
• 16:55
  SPEAKER_01: Making those determinations, one of the more uh common areas when we see these problems, least asset.
• 17:01
  SPEAKER_01: Least assets is kind of a you know the classification between the scopes is really important.
• 17:07
  SPEAKER_01: And depending on, you know, what organizational boundary you select, it's gonna also impact, you know, how you think about your operational uh boundary, right?
• 17:17
  SPEAKER_01: And how you classify those emissions because between the scope one, two, and three.
• 17:21
  SPEAKER_02: Yeah, and it's basically almost like the detail within your organizational boundary.
• 17:25
  SPEAKER_02: You set your organizational boundary, and then within it, what are the sources?
• 17:29
  SPEAKER_02: And then those are scope one and two, and what's outside is scope three.
• 17:34
  SPEAKER_02: Although I know people don't like those terms inside and outside, but simplistically, yes, that is helpful.
• 17:40
  SPEAKER_02: So I know Marchin, I said earlier we're not really gonna talk about the different frameworks.
• 17:47
  SPEAKER_02: I mean, we've mentioned them some, but I do think it is important here to highlight that organizational boundaries is one of the places where there are significant differences between the different frameworks.
• 17:57
  SPEAKER_02: Did you just want to hit that at least quickly?
• 18:00
  SPEAKER_01: And again, why it's important because it's gonna, you know, you might be subject to multiple reporting requirements.
• 18:05
  SPEAKER_01: You might be required to report different levels of emissions, right?
• 18:09
  SPEAKER_01: Which is key.
• 18:09
  SPEAKER_01: So, yes, depending on which uh regulations, they have a different approach to organization boundary.
• 18:14
  SPEAKER_01: Let me start with um uh California bills and ISSB, because those two have a, you know, basically rely on GHG protocol for determination of boundary, which means the companies have, you know, an option, right, uh to decide which approach they're gonna select.
• 18:31
  SPEAKER_01: And as long as they apply it correctly and consistently, those standards allow that optionality, right?
• 18:36
  SPEAKER_01: So, which is not bad um solution, like if company already reports voluntarily, they have a certain approach to the boundary, it would allow them to continue that approach, right, under those two rules.
• 18:47
  SPEAKER_01: But then in a contrast to that, proposed SEC rule, for example.
• 18:51
  SPEAKER_01: That rule kind of uh requires companies to report using the financial statement consolidation, uh, which is totally different, right?
• 18:59
  SPEAKER_01: Could be similar to GEG protocol, some of those, uh one of those solutions, but it could be totally different, right?
• 19:05
  SPEAKER_01: Which basically you report 100% of emissions for all the entities that you consolidate, and your percentage share of uh of emissions from equity method investment and proportionally consolidated consolidated JVs, right?
• 19:17
  SPEAKER_01: And then you move to ESRSs.
• 19:19
  SPEAKER_01: And that has also kind of a totally different approach.
• 19:22
  SPEAKER_01: It requires the companies to report 100% of emissions from uh wholly consolidated uh subsidiaries, and for unconsolidated subsidiaries like joint ventures, you know, other unconsolidated subsidiaries, it requires reporting emissions from those subsidiaries that company has operational control over.
• 19:42
  SPEAKER_01: So it's kind of a mixture of two approaches from uh from GEGG protocol.
• 19:46
  SPEAKER_01: So it is important, especially if you you have to report in California or potentially when SEC implements the rule, and in Europe, you might have a totally different answer.
• 19:57
  SPEAKER_01: So you have to be planning or thinking about this ahead of time because it is going to require companies to properly establish their processes, controls, and system to gather this information, right?
• 20:08
  SPEAKER_01: And and report different on different bases of consolidation.
• 20:11
  SPEAKER_01: It's almost like for people in in energy industry, it's like FERC to gap, right?
• 20:16
  SPEAKER_01: Like people who report, you know, based on a gap uh accounting standard and FERC reporting standards.
• 20:21
  SPEAKER_01: You have to keep two sets of books almost, uh, if you're subject to this these two different uh reporting requirements.
• 20:27
  SPEAKER_02: So, Martin, as you're talking to clients then that are dealing with potentially more than one framework, what do you say is a starting point?
• 20:34
  SPEAKER_01: Well, starting point is first you have to understand which framework applies to the code.
• 20:38
  SPEAKER_01: Okay, fair enough.
• 20:38
  SPEAKER_01: Fair enough.
• 20:39
  SPEAKER_02: Sorry.
• 20:39
  SPEAKER_02: Okay, you figured that out.
• 20:41
  SPEAKER_02: So now what do you do?
• 20:42
  SPEAKER_01: Well, then you have to figure out the organization boundary, right?
• 20:45
  SPEAKER_01: So because it's not very small task to do.
• 20:48
  SPEAKER_01: You have to understand which standard requires, and then you have to go through, you know, your almost consolidation book and decide which subsidiaries and operations need to be included and what emissions are going to be reported for from.
• 21:00
  SPEAKER_01: So for uh, for example, you might let's say you you you're potentially subject to future SEC uh rule and ESRS.
• 21:08
  SPEAKER_01: Fully consolidated entities, you're gonna practically say, you know, uh I have the same outcome there.
• 21:13
  SPEAKER_01: But then you have to do the detailed analysis of equity method investments or other joint ventures, because this is when you might have a difference, right?
• 21:21
  SPEAKER_01: You might you're gonna have certain joint ventures and equity method investments, or all of them that you're gonna be reporting for SE's future uh potential SEC rule under ESRS, right?
• 21:31
  SPEAKER_01: There are some that you will will not have to, right?
• 21:34
  SPEAKER_01: Because you might determine I do not have operational control.
• 21:37
  SPEAKER_01: Hence going back, that that full understanding of different organization boundary and control approaches is really crucial because the outcome, you know, application of this might result in a quite different uh outcome and significant difference between the the both levels of reporting.
• 21:51
  SPEAKER_02: Yeah, so I think then the key under any of them is really that underlying data and making sure you have good records, good flexibility of.
• 22:00
  SPEAKER_02: data and otherwise.
• 22:01
  SPEAKER_02: But I think one of the questions then that's really difficult that people struggle with just as a starting point is just completeness and accuracy of that data.
• 22:12
  SPEAKER_02: And so I know that's a whole huge topic, but what are some thoughts on that then?
• 22:17
  SPEAKER_01: Well, yes, that irrespective of which framework you have to report on, that's one of the key and underlying kind of a concepts that you have to make sure.
• 22:26
  SPEAKER_01: Well let me step back, right?
• 22:27
  SPEAKER_01: So like I divide companies in two groups.
• 22:29
  SPEAKER_01: The companies that never reported this data before and companies that reported this voluntarily.
• 22:34
  SPEAKER_01: I still think both groups of those companies we have some work to do, right?
• 22:38
  SPEAKER_01: Obviously the companies that haven't started or haven't been reporting this, they have a long journey ahead of them, right?
• 22:44
  SPEAKER_01: Determination of first, do one have a data?
• 22:46
  SPEAKER_01: Where does it come from?
• 22:48
  SPEAKER_01: Designing of the processes to exactly make sure this data is complete and accurate, right?
• 22:53
  SPEAKER_01: Then the companies, even companies that historically reported, you still have to go through the same task.
• 22:59
  SPEAKER_01: First of all, your historically organizational boundary could be different.
• 23:02
  SPEAKER_01: So you might be might not be reporting from parts of your organization.
• 23:06
  SPEAKER_01: So you have to now figure out where do I get the data.
• 23:08
  SPEAKER_01: And second of all from practical experience in voluntary market a lot of this data and reporting when I work with clients was not really subject to good process and control.
• 23:19
  SPEAKER_01: So this is the most commonly asked questions that I'm getting from my clients what do I do to improve the processes and controls of this data?
• 23:26
  SPEAKER_01: Now you know executives who have to be certifying this data it's going to be really subject to regulatory oversight.
• 23:33
  SPEAKER_01: So there's a lot of kind of a there's a trend of of um of kind of a worrying about the quality of the of this data.
• 23:39
  SPEAKER_01: And why is it report uh you know important?
• 23:42
  SPEAKER_01: Because we see these kind of issues of completeness of accuracy of the data you know quite often right and some of those issues might be benign right um simple errors in uh in activity data entry right so the people who are gathering and entering this data to calculation spreadsheets on tools they might not be control minded folks so historically we're not subject to any you know uh control design so they just simply are not wired that way and we see a lot of times we we have gaps in in this data so companies are trying to design the controls and processes to make sure that there's oversight that the simple entry errors are caught timely right they're not missed.
• 24:21
  SPEAKER_01: So that's one um second thing is the way the data is captured right now from within the organization but also from value chain oftentimes you imagine the multinational company that has you know 10 different locations across the globe right so how the process is scheduled these locations are responsible for gathering this data and reporting this usually up to the to the parent oftentimes what we see in practice folks at locations might not be fully aware what is the data used for right they might not be fully aware you know that it's being used to calculate emissions and what it means they might not be gathering this data properly right if they think that um the data is just simply to analyze the energy consumption right they might be making different materiality choices right they might be omitting certain level of certain part types of equipment because the simple fact that they might not fully understand what's the purpose of of of gathering and reporting this data.
• 25:19
  SPEAKER_01: So we see a lot of these application issues on the on the ground and therefore we're not the only one seeing this management is sees that and therefore they there's a lot of kind of this we see the trend of companies trying to beef up their process and then they usually start with policies like if you have good policy and instructions and this policy is generally known to everybody in an organization that people know why they are reporting and gathering this data.
• 25:42
  SPEAKER_01: They better understand how to do it right and then it's followed with establishing proper kind of a supervision controls and and and so on and so forth.
• 25:50
  SPEAKER_02: So all right so definitely a lot to think about but if I could summarize that it's basically you need to bring effectively a controls or socks mindset to this data no different than your financial data.
• 26:03
  SPEAKER_01: Well um I'm very careful every time I talk to the clients we've used the word socks um but I rather say controls right there's a judgment that people like with everything else there's a judgment that management has to be done to what level of you know where they design these controls or what level of you know strength um but the controls are needed right um in general and and a lot of managements recog recognize that whether this is fully soxified as we say or slightly maybe summary you know at less intense level that's a basically the decision for management to to be done and that you know it depends on their need to how much kind of assurance and quality they want they want in their data and when they're going to place their reliance right so uh but I have a lot of clients who just using this you know uh this term let's soxify this data right uh but um I mean again this is this is also materiality call which is another thing you know we talk about policies controls and procedures where we see the understand understanding of materiality concept in within this process might not fully be there and why it's important uh identification of all material sources right now we see more and more financial professionals getting involved and kind of translating the concept of materiality to emissions reporting because historically those concepts might be sort of understood differently so we see companies omitting some you know um sources that maybe individually they're not material but the in aggregation you start seeing things accumulate so that's another concept that we see a lot of inquiries how to really think uh about the materiality comes concept within the you know GG reporting well and I think one thing Martin we focused a lot here on voluntary reporting required reporting but for a lot of companies they have set targets and they've communicated that they are going to get to net zero or they're going to reduce their emissions by 25% or whatever it is that they're telling the market are their objectives and goals.
• 28:05
  SPEAKER_02: But if you don't have good data to say how much your emissions are, then your your demonstration of progress against your goals is inherently may not be accurate and that is going to cause other types of issues.
• 28:20
  SPEAKER_01: Well and I would even do that one step back and say without good policies and why it's important consistency, right?
• 28:25
  SPEAKER_01: Right.
• 28:26
  SPEAKER_01: Having good policies especially right you when you look at you know setting the baseline or target years uh baseline years for for for the target setting right and measurement of progress there's a lot of things that could go wrong right that companies could change you know how they account for certain things because it's such a new so it's really starting process that we have to have a consistent policy so apply an application of those policies consistent year over year over year.
• 28:51
  SPEAKER_01: So the progress measurement is meaningful and and factual right and it doesn't result from like changing the policies year over year.
• 28:58
  SPEAKER_01: And then you go to the completeness and accuracy of data.
• 29:02
  SPEAKER_01: And why I mentioned that the policies are important especially now when we're gonna see this new you know reporting requirements being um implemented which changes the way people set organizational boundaries it's really important to figure out how it's gonna impact your targets how it's gonna impact your base baseline year how because it's a big I don't want to use the word disruption but it's a change, potential change and the companies need to figure it out how they're gonna apply that in practice.
• 29:29
  SPEAKER_01: In order to fully capture those differences, you have to have good policies and you have to have good data.
• 29:35
  SPEAKER_02: All right that's very helpful.
• 29:37
  SPEAKER_02: So then Martin what other types of issues are you seeing when you think about either calculation or classification?
• 29:44
  SPEAKER_01: The first I already kind of hinted on that is inputs, right?
• 29:47
  SPEAKER_01: So we see a lot of issues with inputs into activity data so energy consumption data it might be you know um recalculation of measurement units it might be data entry issues also on emission factors right um we see in a market might be inconsistent application of emission factors uh for example using inconsistent data sources for emission factors not updating the the emission factor data sources year over year so like you know that's the first area like you know inconsistent or outdated inputs right and remember vast majority of uh GG emissions right now they're does a calculated based on your you know activity data and emission factors right so um so it's really important to have both of them correctly the next second area is misclassification of emission sources right so um like good example would be scope two is a purchase electricity where do you get the data from usually from utility invoices right so you have utility provider uh but what we see happens uh on a market oftentimes is those utility providers not only you know believe for um electricity but also you know my believe for you know natural gas right which combustion of natural gas is a scope one but we see companies sort of mixing the two together and could be you know could be including this activity data in calculation of scope two the other area is also like how people think think about on-site generation right because oftentimes people kind of mix oh it's electricity if those companies who might have on-site generation of electricity might be thinking well it's electricity it's scope two but let's remember scope two is only purchased electricity self-generated electricity it's scope one it's just normal combustion of natural gas biofuels or whatever yeah you know natural uh uh type of generation we have right another thing is what we mentioned before is a base year right though so base year calculations we see um some issues with that inconsistent kind of application of policy between the base year and the and the following years um not reporting base year which is let's remember it's one of the requirements of GEG protocol is companies should set a and report a base year but a lot of companies are are not uh apply inconsistent data for um let's say emissions factors or on so on or different calculation methodologies.
• 32:10
  SPEAKER_01: Oftentimes we also see companies that they don't have really specified policies for recalculations of base share, right?
• 32:16
  SPEAKER_01: So GEG protocol requires that if company undergoes through some structure change material structure change or changes their calculation methodologies the base year should be recalculated as well.
• 32:28
  SPEAKER_01: So we see that not being it not happening very you know consistently across there.
• 32:33
  SPEAKER_01: So there's a lot of this if you grow up in the financial you know uh statement world it you just usually see it's a startup company issue right the companies that are just beginning the journey they might not have good processes and controls we see a lot of this I would say issues that are fixable if you really step back and start with your policies, procedures and controls.
• 32:55
  SPEAKER_01: So um you can fix those issues pretty uh pretty quickly.
• 32:59
  SPEAKER_01: But it's it still needs to be done.
• 33:02
  SPEAKER_02: So Martin maybe bringing this together and I know we've only skimmed the surface on some of the issues but as you are talking to clients and particularly let's say it is a company where they have some processes in place, financial reporting people or maybe the sustainability people are starting to dig in more because either they are subject to a framework or they are wanting to start to report against the goal or otherwise where do you really start in terms of how can I improve this data quality?
• 33:34
  SPEAKER_02: Because again if you you're getting data in your example you had there was 10 locations all over the world and then if you think about each of those locations probably has hundred or more sources probably more and again the the amount of data multiplies very very quickly.
• 33:53
  SPEAKER_02: So how do people sort of start to think about this and again which which thing do you tackle first?
• 33:59
  SPEAKER_01: So um I'm gonna go back to the good old accounting and auditing reference.
• 34:04
  SPEAKER_01: Yes you really have to understand and document your process you'd be surprised how many things kind of pop up really quickly once you start documenting on paper what is my process what you start seeing there might be differences between different locations you might see different application and calculation methodologies and different levels of source gathering source data gathering so I always advise clients start with mapping your process so put it on paper if you want to do it in flowchart narrative whatever just kind of a make sure that it's documented if you st once you start digging into that it's very easy to spot inconsistencies missing data.
• 34:43
  SPEAKER_01: I give you example of two similar locations and suddenly you see then one location has like three material sources the other has four natural questions like why I have this difference if they have similar nature of operations what am I missing there might be a reason and justification but that drives the question right uh for you and for you know from you to people who are involved in gathering and calculating these data and you know they have to step back and think about it right so the usually what we see as a starting point is inconsistencies right so that's the easiest the best way to to identify those so once you you know really map the process right the next step you have to you know decide you know obviously during the mapping process you can identify some gaps right whether this is data gaps calculation differences inconsistencies inconsistent uh emission factors inconsistent calculations or simply missing some you know some sources once you identify this then you have to obviously go and and figure out how to how to fix it but then after you kind of apply those gaps then the decision you have to make is how do I set money controls and that's also a pretty big decision to make because you could either do it at the level when the emissions are calculated so at each location you can also alternatively establish some high level you know um analytical reviews of uh corporate office so there's a multiple ways it could be done but having everything you know mapped out and gaps identified and potentially addressed allows you to make those decisions and I can tell you I was working with a client who um the first year we identified some gaps they improved those gaps and they made a decision to push the controls down to the locations where data is actually gathered right historically they kind of rely on corporate oversight but their business model was pretty complex they had a lot of locations so it's really to be fair it wasn't that easy to to do the effective oversight on that such high level so they made a decision to push it down and they also they turned them to analytical reviews right so they didn't do like what we call process level controls uh or transaction level controls they just basically continue relying on analytics they just asked people who are responsible for data and who know the data who know the data yeah the following year when we came back the difference was tremendous right they identify a lot of inconsistencies themselves they got some multiple errors in the calculations in scope one and and scope three so having that task done or this this this uh analysis done and mapping the process and making the decision you know what I'm gonna push it down to the people who know the data they've seen the return practically you know within a year.
• 37:19
  SPEAKER_02: Yeah and I guess Martin it's a really interesting point that now is the time to make these decisions, to make these changes because I do think there is still some recognition that people are still getting their hands around this, that numbers there could be changes from year to year as more information is identified and otherwise but if you fast forward three four five years from now you don't want to be the company that's saying oh well we changed our process and we identified all these additional sources so we're you know restating prior year information.
• 37:51
  SPEAKER_01: Yeah I think I I would fully agree I mean I'm not saying it's uh unconsequential now but it's much better to do it now versus later when you have all this scrutiny oversight and you know I'm always thinking like you're gonna find things right by definition.
• 38:06
  SPEAKER_01: You're always gonna find things they don't have to be material but you're gonna find a multiple ways to improve and and and some ways you can you can you know bulletproof your data it's better to do it now than under the you know scrutiny of regulatory regime.
• 38:20
  SPEAKER_02: So all right well that's probably a good note to end on then March and so definitely appreciate all the insight and thanks so much for joining me today.
• 38:28
  SPEAKER_02: Thank you Heather That's our show for today tune in next week for more fresh episodes so that you never miss any of our audio content follow the PWC Accounting podcast wherever you listen to your podcasts.
• 38:43
  SPEAKER_02: And to stay up to date on all our latest accounting and reporting news sign up for our newsletter at viewpoint.pwccom from thought leadership at PwC I'm Heather Horn thanks for tuning in This podcast is brought to you by PwC All Rights Reserved PwC refers to the U.S.
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