Stefan Schaltegger · Dimitar Zvezdov

Igor Alvarez Etxeberria · Maria Csutora

Edeltraud Günther Editors

Corporate
Carbon and
Climate
Accounting
Corporate Carbon and Climate Accounting
Stefan Schaltegger Dimitar Zvezdov
•

Igor Alvarez Etxeberria Maria Csutora

•

Edeltraud Günther
Editors

Corporate Carbon
and Climate Accounting

123
Editors
Stefan Schaltegger Maria Csutora
Centre for Sustainability Management Corvinus University of Budapest
Leuphana University Lüneburg Budapest
Lüneburg Hungary
Germany
Edeltraud Günther
Dimitar Zvezdov TU Dresden
Friedrich-Alexander University Dresden
Erlangen-Nürnberg Germany
Germany

Igor Alvarez Etxeberria

University of Basque Country
San Sebastian
Spain

ISBN 978-3-319-27716-5 ISBN 978-3-319-27718-9 (eBook)

DOI 10.1007/978-3-319-27718-9

Library of Congress Control Number: 2015957791

© Springer International Publishing Switzerland 2015

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The registered company is Springer International Publishing AG Switzerland
Contents

Corporate Carbon and Climate Change Accounting:

Application, Developments and Issues . . . . . . . . . . . . . . . . . . . . . . . . . 1
S. Schaltegger, D. Zvezdov, E. Günther, M. Csutora and I. Alvarez
Decision Support Through Carbon Management
Accounting—A Framework-Based Literature Review . . . . . . . . . . . . . . 27
Dimitar Zvezdov and Stefan Schaltegger
Corporate Sustainability Footprints—A Review of Current
Practices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Gábor Harangozó, Anna Széchy and Gyula Zilahy
Carbon Accounting: A Review of the Existing Models, Principles
and Practical Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Eduardo Ortas, Isabel Gallego-Álvarez, Igor Álvarez and José M. Moneva
The Attributional-Consequential Distinction and Its Applicability
to Corporate Carbon Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Matthew Brander and Francisco Ascui
Implementing an EMA Innovation: The Case of Carbon
Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Delphine Gibassier
Carbon Accounting in Long Supply Chain Industries . . . . . . . . . . . . . . 143
Zsófia Vetőné Mózner
Voluntary Greenhouse Gas Reporting: A Matter of Timing? . . . . . . . . 163
Nele Glienke
Carbon Emissions and Corporate Financial Performance:
A Systematic Literature Review and Options for Methodological
Enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Stefan Lewandowski

v
vi Contents

Organizational Climate Accounting—Financial Consequences

of Climate Change Impacts and Climate Change Adaptation . . . . . . . . 217
Kristin Stechemesser, Anne Bergmann and Edeltraud Guenther
Carbon Emission Accounting Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Shamima Haque and Muhammad Azizul Islam
Editors and Contributors

About the Editors

Prof. Dr. Stefan Schaltegger is a professor of Management and head of the Centre
for Sustainability Management (CSM), head of the MBA Sustainability
Management at Leuphana University Lüneburg, Germany, and chairman of the
Environmental and Sustainability Management Accounting Network (EMAN). His
research area includes corporate sustainability management, particularly environ-
mental and sustainability accounting and reporting, operative and strategic sus-
tainability management, sustainable entrepreneurship, and strategic and stakeholder
management. Stefan Schaltegger is a member of the editorial board of fourteen
scientific journals, has more than 400 publications, including 100 refereed papers
and 40 books, and has served as member of the steering committees and boards of
various research programmes of the German Federal Ministry for Science and
Education and the Swiss National Science Foundation: www.leuphana.de/csm.
Dimitar Zvezdov Dr. rer. pol. is a research and teaching associate at the chair
of Corporate Sustainability Management, Friedrich-Alexander-University
Erlangen-Nürnberg and a research fellow at the Centre for Sustainability
Management at Leuphana University Lüneburg. Dimitar’s research focuses on
investigating the corporate practice of sustainability accounting and carbon
accounting in general and their contribution to improved decision-making and
performance control in particular. Before being awarded a Ph.D. degree, he
received a master’s degree in Environmental Management. Dimitar has collected
experience in the environmental consulting sector, focusing on environmental
management systems and auditing. He is also a certified environmental product
broker (Energy Exchange Vienna) and has been trained in cleaner production
(United Nations Industrial Development Organisation).
Igor Alvarez Etxeberria Ph.D. is an assistant professor of accounting, vice dean
of Summer University of the University of Basque Country and member of the
steering committee of the Environmental and Sustainability Management

vii
viii Editors and Contributors

Accounting Network Europe (EMAN). His research area includes environmental

and sustainability accounting and reporting, social and environmental performance,
and consolidation accounting. Igor Alvarez Etxeberria is a member of the editorial
board of two scientific journals, and reviewer of ten indexed scientific journals, has
more than thirty publications, including eighteen refereed papers and 4 books, and
has served as a member of the steering committee of the Basque Economists
Association in Guipuzcoa and member of the technical jury the of the Spanish Prize
of the best sustainability reporting.
Maria Csutora Ph.D. is a professor of Sustainability Management and director
of the Sustainability Indicators Research Center in Corvinus University of
Budapest. She is a steering committee member of the EMAN-EU and standards
committee member of the Global Footprint Network. Formally he served as affiliate
faculty member teaching EHS Accounting for the Rochester Institute of
Technology and was member of the UNDSD expert working group on environ-
mental accounting. Her research interests include ecological footprint and carbon
accounting. Her co-authored article on Climate Accounting in Journal of Cleaner
Production was among the top downloaded ones according to ScienceDirect. Her
latest publications were published in Journal of Cleaner Production, Climate Policy,
Ecological Indicators and Journal of Consumer Policy.
Prof. Dr. Edeltraud Günther received her doctorate in Environmental
Management Control from the Universitaet Augsburg and holds the chair in
Environmental Management and Accounting at the Technische Universitaet
Dresden since 1996. Since 2005, she has held a joint appointment as visiting
professor at the University of Virginia’s McIntire School of Commerce. Professor
Guenther teaches and researches extensively in the fields of sustainability man-
agement and environmental performance measurement and analyses the barriers
involved. In the field of climate change mitigation and adaptation, she was involved
in research projects such as www.business-climatechange.com. Since 2010, she has
been an expert reviewer for the IPCC Special Reports “Renewable Energy Sources
and Climate Change Mitigation”, “Managing the Risks of Extreme Events and
Disasters to Advance Climate Change Adaption” and the Assessment Report 5.

Contributors

Francisco Ascui is a senior lecturer at the University of Edinburgh Business

School, where he has established a global centre of expertise in business and
climate change, and developed the world’s first M.Sc. in Carbon Finance. His
research focuses on carbon accounting and the implications of carbon market
design for private sector investment. He has a Ph.D. in carbon accounting, and an
MBA and an M.Sc. in environmental management. He is also an independent
consultant, with experience of working on energy and climate change-related
projects in over 20 different countries. He is a registered UN Clean Development
Mechanism (CDM) and Joint Implementation (JI) expert, a director of the
Editors and Contributors ix

Association of Carbon Professionals and a member of the Climate Disclosure

Standards Board (CDSB) Technical Working Group.
Anne Bergmann Dipl.-Wi.-Ing. studied Industrial Engineering and Management
at the Technische Universitaet Dresden and École Supérieure de Commerce
Rennes. Since 2012, she works as a research associate at the chair of Environmental
Management and Accounting, Technische Universitaet Dresden. Her main research
fields are the impacts of the natural environment, particularly climate change and
resource scarcity, on corporate financial performance. Moreover, Anne Bergmann
considers corporate responses to those impacts, such as increasing resilience and
resource efficiency. Together with Prof. Dr. Edeltraud Günther, she works in
research projects on climate change adaptation and corporate resource efficiency.
Her guest doctoral stay at the Sustainable Manufacturing and Life Cycle
Engineering Research Group, University of New South Wales, Sydney, shows the
interdisciplinary nature of her research.
Matthew Brander is a senior research fellow at the University of Edinburgh
Business School. Matthew’s research focuses on physical greenhouse gas
accounting, and the development of methods for quantifying the effects of decisions
and actions aimed at climate change mitigation. Matthew has been involved in the
development of a number of Greenhouse Gas Protocol standards and in the revision
of the ISO standards for greenhouse gas accounting. He also teaches on the spe-
cialist M.Sc. in Carbon Finance. He previously gained experience in the environ-
mental consulting sector, including a number of research projects for the UK’s
Department of Energy and Climate Change and the Department of Transport, as
well as a five-year evaluation of the Norwegian International Climate and Forest
Initiative.
Isabel Gallego-Álvarez is an associate professor of Accounting at the University
of Salamanca. Although she has carried out work related to costs and management
accounting, her line of research is focused on financial accounting and specifically
on the relationship between accounting and taxation. Up until now, her publications
have dealt with the development of different aspects in this subject, such as the
application of accounting norms and principles, theoretical–practical aspects of
different operations and analysis of the situation of the firm. Other research subjects
have been those related to intangible assets and corporate social responsibility. She
has published a book (Suppositions of Financial Accounting and Tax Accounting)
and papers in several national and international journals, such as Managerial
Auditing Journal, Journal of Intellectual Capital, Corporate Social Responsibility
and Environmental Management, Polish Journal of Environmental Studies, Journal
of Business Ethics, Management Decision, Online Information Review, Journal of
Cleaner Production, Business Strategy and the Environment, Ecological Indicators,
Sustainable Development, Spanish Journal of Finance and Accounting,
Sustainability, European Journal of Law and Economics, Accounting, Auditing and
Accountability Journal, among others.
x Editors and Contributors

Delphine Gibassier is a professor of Management Accounting and Management

Control at Toulouse Business School since September 2013 Her Ph.D. at HEC
Paris, entitled “Environmental Management Accounting Development:
Institutionalization, Adoption and Practice” obtained the Highly Commended
Award of the 2014 Emerald/EFMD Outstanding Doctoral Research Award. Her
main research interests are environmental management accounting, innovations in
social and environmental accounting and more specifically carbon accounting,
water accounting and biodiversity accounting creation and practices. She has taught
carbon accounting and environmental accounting since 2011 and published in
several academic journals and books. She is a former professional management
accountant in multinationals (GE, Syngenta, Danone).
Nele Glienke received her doctorate in Environmental Management from the
Technische Universitaet Dresden and is senior consultant on energy efficiency in
the industrial team of the German utility EWE. Before, she was analyst on energy
commodities at Unicredit Bank AG and worked as a research assistant at the
Fraunhofer Institute Systems and Innovation Research (ISI) and at the chair of
Corporate Environmental Management (CSM) of the University of Lueneburg
where she graduated with a degree in Economics in 2006.
Dr. Shamima Haque is a lecturer of Accounting at QUT. She is teaching
Introductory Accounting and Financial Accounting Issues. She has completed her
Ph.D. at RMIT University in 2012. Shamima’s thesis, entitled “Climate
change-related corporate governance disclosure practices: evidence from
Australia”. Since completing her Ph.D., Shamima has maintained her research focus
on corporate social responsibility, building on her work on climate change issues,
but extending it to corporate attitudes and practices related to bribery and human
rights issues.
Gabor Harangozo Ph.D. is an associate professor at the Faculty of Business
Administration, Corvinus University of Budapest. He has obtained his doctoral
degree at 2008 in the field of corporate environmental performance management.
Since then, he had been active in projects and research in the field of corporate
sustainability, stakeholder management related to sustainability, sustainability
indicators and corporate social responsibility. He also teaches courses at the CUB
related to sustainability management, environmental economics and policy. He
gained international experience as being a faculty staff member in 2011 for a year at
the Kwangwoon University, Seoul, South Korea.
Dr. M. Azizul Islam is an associate professor of Accounting at QUT. He is a
member of CPA Australia. He has more than 15 years of teaching experience in
Accounting in different universities. Dr. Azizul Islam’s research interests include
social and environmental disclosure and accountability. His work in the area of
social and environmental disclosure appears in Accounting, Auditing and
Accountability Journal (AAAJ), Accounting and Business Research Journal (ABR),
Editors and Contributors xi

The British Accounting Review, Critical Perspective on Accounting Journal (CPA),

and Australian Accounting Review (AAR).
Stefan Lewandowski is a research assistant and Ph.D. student at the chair of
Management and Sustainability, University of Hamburg, Germany. His research
focuses on investigating the relationship between corporate carbon and financial
performance. He graduated from the University of Hamburg with a BA in
Economics and holds a MA in Sustainability Economics and Management from the
University of Oldenburg. Prior to his current position, Stefan worked as Finance
and Contract Manager for the German Corporation for International Cooperation
(Gesellschaft für Internationale Zusammenarbeit, GIZ) in Eschborn, Germany.
Jose M. Moneva is a full professor at the University of Zaragoza and dean at the
Faculty of Economics and Business. He also is currently director of the Bosch
Siemens Home (BSHappliances), chair of Innovation, coordinator of the Corporate
Social Responsibility Committee of AECA (Spanish Association on Accounting
and Business Administration), former Member of the Management Committee
of the European Sustainability Reporting Association (ESRA) and member of the
Group on Social Responsibility for Universities (Ministry on Education). His areas
of specializing are related to social and environmental accounting and finance,
sustainability reporting, corporate social responsibility involvement and social
innovation. Professor Moneva research has been published both in academic and
practitioner journals including European Accounting Review, Accounting Forum,
Business, Strategy and the Environment, Journal of Cleaner Production or
Accounting, Auditing and Accountability Journal. Furthermore, he is a member
of the editorial board and referee of a number of specialized journals and has signed
different contracts with companies such as KPMG Sustainability Services and
GAMESA (Ibex 35 company listed) to implement environmental/sustainability
reporting initiatives.
Zsófia Vetőné Mózner Ph.D. is a research assistant at the Faculty of
Environmental Economics and Technology, Corvinus University of Budapest. She
graduated at the Corvinus University of Budapest in 2009 as an economist and
completed her Ph.D. in 2013 specialized in Environmental Economics and
Management at the Corvinus University of Budapest. In her Ph.D. dissertation, she
examined the ecological footprint of food consumption in Hungary. Her research
area includes carbon footprinting, embodied carbon emissions, input–output anal-
ysis, sustainable consumption, ecological footprint, and its trade-related aspects.
Zsófia Vetőné Mózner has international publications, and she is a reviewer for
international journals as well.
Eduardo Ortas is an associate professor of Finance at the Faculty of Business and
Public Management of the University of Zaragoza. He holds a Ph.D. in Accounting
and Finance from University of Zaragoza. He has participated in many national
and international research projects related with sustainability, corporate social
responsibility and ethical investment. His research focus on corporate social,
xii Editors and Contributors

environmental and financial performance, sustainable supply chain management,

socially responsible investment and other topics related with corporate sustain-
ability. His publications include textbooks and research papers in international
journals.
Dr. Kristin Stechemesser studied Business Administration at the University of
Leipzig. From 2007 to 2014, she worked as a research associate at the chair of
Environmental Management and Accounting, Technische Universitaet Dresden. In
2014, she defended her dissertation focusing on the interdependence between the
natural environment and organizations. Her main research fields are corporate risks
and opportunities of climate change and the related response options climate change
mitigation and adaptation. Moreover, her research focuses on the interrelation of
climate change impacts and adaptation measures to financial performance.
Additionally, she is interested in green procurement.
Anna Szechy Ph.D. is an assistant professor at the Faculty of Business
Administration, Corvinus University of Budapest. She defended her Ph.D., dealing
with the topic of environmental innovations in small- and medium-sized companies,
in 2012. She teaches environmental management and environmental economics and
was involved in several research projects surrounding corporate sustainability
issues, such as resource efficiency and sustainable supply chain management. She is
also interested EU environmental policy, having worked alongside a member of the
Environmental Committee of the European Parliament during 2005–2006.
Gyula Zilahy Ph.D. is an associate professor at the Faculty of Business
Administration, Corvinus University of Budapest. His research areas include dif-
ferent topics within the business and sustainability field such as the cooperation
between different social groups towards sustainability, emerging sustainable busi-
ness models, regional sustainability initiatives and the greening of business higher
education. He has been a Fulbright fellow at the University of Tennessee studying
the role of universities in promoting sustainable development. He is a member
of the editorial board of the Journal of Cleaner Production and has been leading
several projects promoting green business practices in the Central and Eastern
European region. He is the director of the Hungarian Cleaner Production Centre for
more than ten years.
Corporate Carbon and Climate Change
Accounting: Application, Developments
and Issues

S. Schaltegger, D. Zvezdov, E. Günther, M. Csutora and I. Alvarez

Abstract While climate change policies and negotiations are developing and sci-
entist are urging for more action, in most countries progress remains on a low level
and the macro figures indicate that climate change becomes even more critical. As a
reaction to this, some advanced business leaders have initiated various actions and
projects with their companies, and various regulations have been introduced by
governments with varying levels of effectiveness. In this context of a mix of
international initiatives, media attention, customer irritation, diverse regulatory
changes and partial political lethargy, ever more companies are challenged to
identify and reduce their exposure to climate change issues. Whereas the reduction
of climate change emissions is an important topic, it has also become obvious that
climate change is not just a future risk but is already happening. This invokes
adaptation activities in addition to mitigation strategies and measures. A basic
requirement to design the corporate climate strategy is the knowledge about the
company’s exposure as well as about options, effects and costs of emission

S. Schaltegger (&)
D. Zvezdov

Centre for Sustainability Management (CSM), Leuphana University Lüneburg,
Lüneburg, Germany
e-mail: [email protected]
D. Zvezdov
Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany
e-mail: [email protected]
E. Günther
TU Dresden, Dresden, Germany
e-mail: [email protected]
M. Csutora
Corvinus University of Budapest, Budapest, Hungary
e-mail: [email protected]
I. Alvarez
University of Basque Country, San Sebastian, Spain
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 1

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_1
2 S. Schaltegger et al.

reductions and adaptation measures. This is where climate change accounting as a

specific kind of environmental management accounting comes into play. This
introductory section outlines core questions and approaches.

1 Climate Change and Business

The natural boundaries of global prosperity are rendered visible as they are
approached. One of the boundaries that have drawn broader public, political and
corporate attention is climate change (EC 2007; EEA 2010; IPCC 2007;
Schnellnhuber et al.2006; SwissRe 2011). It poses an eminent threat to the lives and
properties of hundreds of millions of people. The negative effects of climate change
are virtually everywhere: from Pacific islands like Tuvalu, where the rising sea level
endangers the continued existence of whole nations, to the Alps, where the economy
is hit by fewer tourists as a result of melting glaciers and a lack of snow. When
nations and whole industries are confronted with a phenomenon of un-sustainability
it is not astonishing that many industries, markets and companies are affected by
climate change induced problems of water scarcity, soil erosion, devastatingly large
fires, decreasing fish populations, floods, etc. Given the interconnectedness of
industries and global trade, an impact of climate change to global social and eco-
nomic systems is also likely to have an impact on those who are not directly affected.
Mankind’s influence on climate and the resulting climate change have been on
the political agenda since the 1970s. Numerous climate summits later,
policy-makers have been unable to develop and adopt effective measures to
counteract climate change (e.g. EC 2007). At the same time, the role of individuals
and companies in combating climate change has become apparent. Yet, many
incentives and prohibitions to regulate individual behaviour pertaining to climate
impact have been deemed inefficient. Therefore, a large share of effort has been
focused on business activities and the mitigation and compensation of their con-
tribution to climate change. Mitigation refers to activities to reduce greenhouse gas
emissions. Reducing emissions has become increasingly important because gov-
ernments around the world have begun to put a price on greenhouse gas emissions:
some governments have instituted carbon taxes; some have established emission
reduction targets or emission caps; some have introduced emission trading systems.
Even though the current price for climate change emissions is at a low level, the
signal is clear for economic actors that climate issues are expected to be taken into
account. At the same time, we cannot ignore another important process, the
adaptation, concretely for those companies that are not large emitters of greenhouse
gas emissions, and therefore would be mistaken in thinking that they do not need to
assess climate change impacts (CPA 2004). Adaptation refers to activities reacting
on the effects of climate change as it is happening.
Despite businesses’ initial hesitation to tackle climate change, both the impact of
companies on climate change and the effects of climate change on doing business
Corporate Carbon and Climate Change Accounting … 3

are changing the game rules. Climate-relevant emissions have now been allotted a
market price in some countries and economic regions, thereby rendering the direct
costs of emission more tangible (e.g. Ratnatunga 2008). Increasing cost of climate
change emissions can be expected. Also public attention has been raised, so that
private and public purchasing decisions with regard to products and services have
started to factor in climate change aspects in some industries and countries. Hence,
in addition to the threats of not considering climate change factors sufficiently, an
increasing number of businesses have recognised the benefits and opportunities of
engaging with the topic. Some companies have even become leading drivers of
combatting climate change and industry transformation. Their organisational
change furthermore contributes to a changing competitive business environment
which affects laggards, too. As a consequence ever more companies, whether
proactive or lagging behind in climate management are affected and thus challenged
to create a good information basis on their direct and indirect carbon emissions, but
also on the impact of climate change on their business.

2 The Role of Companies in Climate Change

This section discusses the role, strategies and approaches of climate change man-
agement to outline the necessity and information requirements for climate change
management accounting (also called ‘carbon accounting’).

2.1 Company Perceptions of Their Contribution to Climate

Change

No matter what push or pull factors motivate a company to consider its options of
contributing to combating climate change, corporate climate combating options can
be perceived as broad or focused, depending on the perspective:
– From a production perspective, the company’s position in the value chain
determines the objectives of emissions management activities. Some authors
focus on measures within a company’s production processes (e.g. Schultz and
Williamson 2005; von Weizsäcker et al.2009).
– Yet, a company’s emissions are determined not only by its production processes
but also by product design. Jeswani et al. (2008) describe product change and
product development as possible measures to reduce emissions.
– Furthermore, supply chain measures, as highlighted by Kolk and Pinkse
(2005) and Lee K. H (2012), can help in including indirect emissions that occur
upstream and downstream in a company’s value chain.
– Related to supply chains and production is the choice of resources which can
have a substantial effect on how much CO2 is emitted (IEA 2011). Whereas
4 S. Schaltegger et al.

timber from sustainable forestry can contribute to a CO2 reduction in the

atmosphere oil extraction and burning always increases atmospheric CO2
concentrations.
– The influence of company locations is a further climate management perspective
as locations determine commuting activities of employees and delivery dis-
tances of suppliers and distribution (Schaltegger and Csutora 2012).
– Distributions channels also play a role for the climate effects of distributions
logistics and customer travelling (e.g. GHG 2011c). Sales locations can be close
to the customer, on the “green field” or substituted with carbon intensive online
shopping and distance retailing.
– Business models which support shared use or re-use of products, the substitution
of products through services, the implementation of closed-loop systems, etc.
can have a substantial effect on decreasing direct and indirectly induced CO2
emissions of company (e.g. Bocken et al. 2014; Schaltegger et al. 2012).
In view of the extent to which companies depend on carbon resources, some
companies emphasize measures that rely on the future use of carbon (e.g. Dunn
2002), while others suggest measures that are directed at the (total) substitution of
carbon resources (e.g. Conference Board 2007). These two approaches reflect
different mitigation strategies of climate management, whereas adaptation strategies
focus on the management of the impact of climate elements, such as average
temperature and precipitation, but also extreme weather events.

2.2 Corporate Climate Change Strategies: Mitigation

and Adaptation

The selection of climate management measures is largely influenced by the cor-

porate strategy, either as an adaptation or as a mitigation strategy, or a combination
of both (Kolk and Pinkse 2005; Kolk et al.2008).
So far adaptation measures have predominated corporate practice (CDP 2012).
Many companies report that they have started to consider climate change in their
business strategy. However, only a small share of companies mentions a specific
and systematic adaptation strategy (CDP 2012). If the perspective of dynamic
capabilities is taken, three dimensions can be differentiated for an adaptation
strategy (Busch 2010): climate knowledge absorption, climate related operational
flexibility, and strategic climate integration. For specific industries these dimensions
can be broken down further. For the insurance industry Mills distinguished for
example seven dimensions of climate change adaptation:
– understanding the climate change problem
– building awareness and participating in public policy
– aligning terms and conditions with risk-reducing behaviour
– risk transfer mechanism/risk reducing mechanism
– new insurance products and services
Corporate Carbon and Climate Change Accounting … 5

– (Re)investments in climate change solutions

– financing customer improvements
The alternative response to climate change is referred to as climate change
mitigation (cf. IPCC 2015). At the core of the mitigation mechanism are efforts to
avoid greenhouse gas (GHG) emissions. Furthermore, the removal of these gases
from the atmosphere by means of carbon sinks (e.g. by carbon capture and
sequestering) can be subsumed to mitigation. Corporate climate change mitigation
can be differentiated along the management circle (e.g. Glienke and Guenther
2015): Corporate policy defines the purpose of the mitigation activity. Corporate
planning involves the identification and assessment of climate change impacts, the
setting of targets, and the formulation of measures. Implementation and operation
focuses on the related organisational structure and process organisation. Checking
and corrective action aims at continuously monitoring and improving climate
change mitigation. Finally, management reviews support top management to
evaluate mitigation efforts. Interestingly enough there seems to be lack of research
publications focusing on the review of the climate mitigation strategy. This could be
a sign for a research gap and/or only superficially introduced climate change
strategies in corporate practice and a lack of awareness in management control.
The need for a combination of mitigation and adaptation is stressed by the fact
that even the most effective emission reductions would be unable to prevent further
climate change impacts.

2.3 Corporate Climate Measures

The variety of perspectives results in five categories of climate impact mitigation

measures for companies: technical, financial, market-related, fuel switch and
emissions trading (Weinhofer and Hoffmann 2010).
Technical measures in the context of carbon management are those activities that
aim at achieving emissions reduction by means of technical improvement. More
often than not, these improvements are of incremental, as opposed to radical,
nature. The relatively lengthy catalogue of related actions options is discussed
below.
Financial measures are all measures that improve the carbon performance of
company by engaging in a form of a financial transaction. Measures can be grouped
in three categories: (i) acquisition of assets that balance a company’s production
facilities portfolio, (ii) divestment from business activities with too much current or
potential carbon exposure, and (iii) investment in clean technologies, liabilities and
provisions related with risk that company could have in the future, for example
legal penalties witch you could incur as a consequence of noncompliance with
future laws.
6 S. Schaltegger et al.

Market-related carbon management measures comprise activities with a

potentially radical innovation character (as opposed to the mostly incremental
improvements associated with developments in technology). One outcome of
radical innovation can be new products which are not only substitutes for existing
ones but typically change consumer behaviour and replace product purchase with
the consumption of (product based) services (e.g. Hansen et al. 2009).
Switching from carbon-intensive to less carbon-intensive, carbon-neutral or even
carbon-positive energy sources are a further category of measures. The catalogue of
measures in this category is rather limited, although different possibilities exist.
Sourcing of renewable energy is typically considered more expensive due to the
higher market price of carbon-friendly energy sources compared to conventional
ones (e.g. von Weizsäcker et al.2009).
The last group of measures comprises those activities that seek to either reduce
absolute carbon emission output or reduce the cost of resulting
emissions (Ratnatunga et al. 2011). A combination of the two objectives may also
result in reducing overall emissions while also decreasing the relative costs of the
remaining emissions.
For climate change adaptation four categories of measures can be differentiated
(Fig. 1): avoid or insure, anticipate, increase flexibility, and substitute.
These measures are categorized along two dimensions (Fig. 1): one dimension is
the type of climate change that could be differentiated in a first order change
(changing averages) and in a second order change (change in extreme weather
events). The other dimension differentiates measures along responsiveness (or
inversely capital employed, time horizon, research and development time) in high
and low:

Fig. 1 Categories of climate change adaptation measures (Stechemesser et al. 2015, 132)
Corporate Carbon and Climate Change Accounting … 7

– Avoidance and insurance measures focus on business activities that allow

resilience towards extreme weather events: e.g. buildings could be constructed
in a way that flood or storm events will not harm the building. Alternatively
future damages can be insured.
– Anticipation measures focus on the integration of future changes in decision
making, such as the use of different roof material that will resist higher radiation.
– But also flexible production conditions should be considered: companies can
change working hours or use the basement for storage and produce in the first
floor, because machines are more difficult to be transported in case of a flood.
– Finally substitution measures focus on alternative raw materials, such as tem-
perature resistant seed or different types of concrete that can tolerate higher or
lower temperatures.
Depending on how broad the company management perceives its climate
management responsibilities and what strategy is pursued different scopes of cli-
mate change accounting and different kinds and amounts of information are
required to support implementation (Burritt and Schaltegger 2010). The identifi-
cation, analysis, and evaluation of climate management activities require diverse
pieces of information such as information on how climate strategy affects climate
performance and financial indicators. At the same time, carbon activities also
generate information. Information on carbon mitigation and adaptation activities is
typically managed with accounting methods, too. However, the question how cli-
mate change accounting could be designed and developed has so far remained
largely experimental and underdeveloped in the literature.

3 Scoping of Climate Change Accounting

3.1 Levels and Purposes of Climate Accounts

Corporate climate accounting is related to climate accounts at different institutional

and geographical levels. Figure 2 shows that climate change issues are addressed on
scientific, political-economic and corporate levels as well as on
global/multinational, national and local levels (Schaltegger and Csutora 2012).
Multinational, national and regional scientific climate accounts relate climate
change data to political and economic levels, thus providing reference points and
orientation for corporate climate accounting.

3.1.1 Corporate Carbon Accounts

Corporate climate accounting collects information relevant for the organization and
its links to society and the natural environment in the context of climate. Climate
accounting thus includes greenhouse gas and carbon accounts which document the
8 S. Schaltegger et al.

Fig. 2 Information from different levels of accounting for climate change can provide reference
points for accounts (further developed based on Schaltegger and Csutora 2012, p. 4)

extent of the effects and problems, help to create awareness and provide reference
points for political, economic and corporate accounts. In this view companies can
take account of their climate change impacts (i.e. of the ‘bad’ effects contributing to
un-sustainability), which provide direction for improvement measures and for
planning, implementing and accounting for how effective their mitigation measures
are (accounts for sustainability contributions). The interplay of corporate accounts
for un-sustainability and accounts for sustainability improvements can support
organizational learning processes. Corporate climate accounting can either be
introduced as a means to create information for reporting to various public stake-
holders or customers. Another purpose can be to initiate company internal processes
of reducing the carbon footprint of the organisation and to support organizational
learning processes.
The enabling function of carbon accounting (for the enabling role of accounting,
see Ahrens and Chapman 2004) can thus be twofold, first, to increase transparency
in the external stakeholder environment of the business (e.g. Gray 2010), and
second, to identify reduction potentials, evaluate measures and support imple-
mentation (e.g. Schaltegger and Burritt 2010).
Corporate Carbon and Climate Change Accounting … 9

3.1.2 Climate Change Accounting

Whereas carbon accounting focuses on the impacts of companies through anthro-

pocentric emissions measured in CO2-equivalents, climate change accounting
analyses the impacts of climate change and adaptation measures on the company.
Impacts of climate change can influence costs and revenues on different levels
(Bergmann et al. 2015): material losses can result from extreme weathers or not yet
adapted storage conditions, employees could be less productive and thus need more
work hours to finalize their tasks, depreciation can increase if climate conditions
change or maintenance costs could increase in order to avoid faster depreciation.
Besides these impacts on the profit and loss statement, changes in the balance sheet
might occur: land might loose value, buildings might need additional investments to
allow the production to continue, but also credit and insurance conditions might
change due to increasing risks resulting from climate change. Economically posi-
tive effects could result from new markets for products and services.
Table 1 provides a characterization of different core functions of climate change
accounting (see also bottom boxes in Fig. 1).
Depending on the relevance of the own climate change impacts some companies
may focus on some accounts or establish climate accounting with all three types of
accounts. Furthermore, depending on the perspective taken, a company will con-
sider different scopes for its climate accounting.

3.2 Scopes of Climate Management Accounting

The Greenhouse Gas Protocol distinguishes three scopes of carbon accounting

boundaries (GHG Protocol 2004, 2011a, b, c), that can be transferred to climate
accounting, too.
– Scope 1 reflects the production and locational view as it deals with emissions
directly released by the company such as originating from production, logistics
and service processes owned or controlled by the company or impacts on these
processes.
– Scope 2 includes indirectly caused emissions for the generation of purchased
electricity. This category cannot be mirrored directly for climate accounting,
even if impacts of climate change on the delivery of energy could be calculated.
– Scope 3 extends the accounting scope upstream to emissions indirectly caused
through supply chains, the purchase of goods and services, and downstream, the
use and waste disposal of products (e.g. EC 2003). Climate change has huge
impacts on upstream and downstream activities and thus this scope can be
transferred to climate change adaptation.
Figure 3 displays carbon management accounting scopes according to the GHG
Protocol and in addition shows the additional scope of sustainable supply chain
accounting extending the perspective over the whole supply chain (tier 1, 2, 3, etc.).
10 S. Schaltegger et al.

Table 1 Climate management accounting for transparency and improvement

Carbon accounting Carbon accounting for Accounting for
of un-sustainability sustainability climate change
improvements adaptations
Core functions of Creating Identification of reduction Identification of
carbon transparency about potentials most efficient
management past and current adaptation projects
accounting operations Evaluation of reduction Measurement of
measures adaptation costs
Forecasting future Support of the
impacts implementation of
reduction measures
Kind of prevailing Physical Physical and monetary Monetary (and
acc. information partially physical)
Physical or
monetary
Time frame Past oriented Present and future Future and present
(mostly), little future oriented (mostly), little oriented information
oriented information past oriented information
Frequency of Continuously Ad hoc generated project Ad hoc generated
information generated related project related
Project management information
control supporting Project cost
measures management control
supporting measures
Length of time Long-term Short-term and long-term Mid and long-term
Further developed based on Schaltegger and Csutora (2012, p. 7)

Fig. 3 Different scopes of carbon accounting address the different perspectives (based on
Schaltegger and Csutora 2012, p. 11)
Corporate Carbon and Climate Change Accounting … 11

The allocation of emissions (in the case of accounts of un-sustainability and for
sustainability improvements) resp. climate change impacts (in the case of adaptation
related accounting) to scopes is a tricky issue (Wiedmann et al.2006) and depends
on how corporate boundaries are defined and may also depend on whether the
company applies a financial control or an operational control approach. Identifying
what kind of control a company has over its operations (Emmanuel and Otley
1985)can be important in allocating emissions to scopes Table 2 provides an
example for illustration.
Scope 3 emissions include induced emissions of purchased goods and services,
capital goods, upstream transportation and distribution, business travels, employee
commuting, upstream leased assets, transportation, use of sold products, end-of-life
treatment of products, etc. An estimation of Huang et al. (2009) suggests that
supply chain-related emissions could account for even as much as 75 % of the total
GHG emissions induced by the company. Thus significant carbon mitigation
strategies cannot be revealed if scope 3 emissions are neglected (Matthews et al.
2008). The climate change impact of downstream industries, e.g. service industries,
can be as big as the impact of manufacturing sectors, if indirect impacts are
accounted for (Rosenblum et al. 2000).
While scope 1 and scope 2 emissions can usually be calculated or estimated
using company data, calculating full range of scope 3 emissions require upstream or
downstream data not directly available to the reporting company. Hybrid
accounting, also called environmentally extended input-output analysis provides
estimation for Scope 3 carbon emissions by approximating upstream supplier
emission data with economic sector average and by approximating carbon emission
flows among economic actors with the associated monetary flows (Crawford 2008;
Lenzen et al. 2009; Suh et al. 2004). Total embedded carbon emission is gained by
combining sector carbon emission data and monetary symmetric input-output tables
and applying the procedure developed by Leontief, and proposed by Bicknell et al.
(1998), Ferng (2001), Lenzen (2009) and Wiedmann et al. (2006, 2009).

Table 2 Accounting for truck emissions depending on the management control approach applied
Cases Financial control approach Operational control approach
Fleet is Fleet is not Operation of the Operation of the fleet is not
owned by owned by the fleet is directed managed by the company
the company by the company (operated by a subcontractor)
company (leased)
Emissions of Scope 1 Scope 3 Scope 1 Scope 3
a petrol
fuelled
forklift
Indirect Scope 2 Scope 3 Scope 2 Scope 3
emissions of
an electric
forklift
12 S. Schaltegger et al.

Controlling scope 3 emissions is possible by changing the product design for

reducing downstream consumer impacts, green procurement of intermediate prod-
ucts and raw materials or by better auditing suppliers (Kral et al. 2009). The high
proportion of scope 3 emissions and the high potential for controlling them spotlight
the importance of green supply chain management (Sarkis 2003; Lee K. H 2012) as
well as hybrid accounting techniques. The results of hybrid input-output and LCA
analysis can be used to inform companies on which activities they should focus their
emissions reduction strategies regarding the aspects of external relationship with
suppliers and consumers (Lenzen et al. 2009).
Hybrid accounting is able to capture the embedded emission of purchased
products and services of upstream suppliers and less frequently downstream
impacts, too. Input-output assisted life-cycle cost accounting (IO-LCA) or hybrid
accounting of products also has been gaining attention in the field of material flow
cost accounting (FEE2002; Jasch 2009). It combines the traditional inventory
analysis methods with input-output analysis in order to mitigate the limitations of
available data sources and the assessment methods (Crawford 2008).
These limitations of hybrid accounting have been discussed by several authors
who argue that the results are based on statistical average and that they depend on
how typical the studied product or company is in relation to the sector where it
appears (Finnveden et al. 2009; Suh and Huppes 2002, 2005). Double accounting
of Scope 3 impacts in tiered inventories by different actors is likely and needs be
managed explicitly (Lenzen 2009). Hybrid accounting should not be used for
convenience reasons when physical emission data is available at reasonable cost.
Thus, hybrid accounting can be seen as an auxiliary method to conventional MFCA
or LCA studies and should be used when making a rough estimation is more
rewarding than making no estimation at all (Lee S. 2012).
Corporate carbon management accounting (i.e. accounting for un-sustainability
and accounting for sustainability solutions) may support all functions and man-
agerial decision-making situations with specialized accounting tools. For climate
change accounting the procedures could be similar: in scope 1 the company anal-
yses the impacts of the changes of different climate change issues on core business;
in scope 2 the resilience of the energy supply can be analysed, and in scope 3 all
upstream and downstream activities can be examined systematically for potential
impacts of climate change. Table 3 provides an example how such a climate change
adaptation oriented accounting could be supported with an assessment of climate
change impacts on scope 1–3 accounts.

4 Information Requirements for Decision-Making

in the Context of Climate Strategies

To develop and implement suitable measures for improving their carbon perfor-
mance resp. climate change adaptation performance, companies need information.
The complexity of the issue requires diversified information: starting from
Corporate Carbon and Climate Change Accounting … 13

Table 3 Assessment of a climate change impacts to support adaptation oriented accounting

Climate change element Impact on Impact on Impact on
scope 1 scope 2 scope 3
Average temperature per year in °C
Temperature in summer in °C, April–September
Temperature in winter in °C, October–March
Number of summer days, max. temperature 25 °C
and more
Number of hot days, max. temperature 30 °C and
more
Number of tropical nights, min. temperature 20 °C
and more
Number of ice days, max. temperature below 0 °C
Number of frost days, min. temperature below 0 °C
Heating degree days, K d/a, measure for heating
energy demand during heating period
Cooling degree days, K d/a, measure for cooling
energy demand
Average precipitation in mm
Average precipitation in summer in mm, April–
September
Average precipitation in winter in mm, October–
March
Number of dry day in summer, precipitation below
1 mm
Number of days with heavy precipitation in
summer, precipitation above 20 mm
Potential evaporation, mm, potential maximum
Climatic water balance (mm, precipitation minus
potential evaporation)
global radiation in kWh/m2
Duration of vegetation period (number of days)
Flood
Heat waves
Cold waves
Drought
Storm

information to assess carbon exposure down to meeting the various information

demands of different—internal and external—information addressees.
The diversity of decisions, as described in the previous section, requires diverse
carbon information in terms of granularity, function, relevance, etc. An important
information requirement is the granularity of information (Fig. 4). In addition to the
aggregated information a carbon and climate change accounting system should be
14 S. Schaltegger et al.

Fig. 4 Level of detail of climate accounting information (translated from Hufschlag 2010)

able to provide, detailed information on quantities and costs is also important. This
could help avoid the need to refer to the original data source for obtaining
carbon-related information. Bennett et al. (2013) conclude that sustainability (and
thus climate-related) information often lacks granularity, which indicates a gap in
communications between information providers and users. This can be interpreted
as providers being unaware of the importance of granularity and therefore reporting
only what is requested. At the same time information users may be unaware that the
information could be provided in this granularity and therefore do not request it. As
a result, climate change management may be carried out based on only a limited set
of information.
The granularity property also applies to information in the context of providing
top management with aggregated information for designing and fulfilling strategic
objectives whereas operational management would typically need much more detail
information with regard to processes, products (e.g. Carbon Trust 2008) and sites.

5 Difficulties and Methods in Accounting for Tracking

and Tracing Climate Performance

5.1 Difficulties

Managing climate-related information has remained largely under-researched to

date. Yet, indication of various difficulties can be obtained from extant literature.
Table 4 summarises important challenges in terms of information quality based on
Corporate Carbon and Climate Change Accounting … 15

Table 4 The five principles of GHG accounting and reporting and their implications for corporate
decision-makers
Difficulty Explanation What it means for internal and
external decision-makers
Relevance Ensure the GHG inventory The information produced should be
appropriately reflects the GHG such drives climate performance (as
emissions and the climate change opposed to purely diagnostic
impacts of the company are recorded purposes)
properly to serve the decision-making
needs of users—both internal and
external to the company
Completeness Account for and report on all GHG Comprehensive climate information
emission sources and activities and all on a large number of various products
climate change impacts within the and processes
chosen inventory boundary. Disclose
and justify any specific exclusions
Consistency Use consistent methodologies to The various products and processes
allow for meaningful comparisons of are based on the same data and
emissions and impacts over time. calculation methods to enable
Transparently document any changes comparisons
to the data, inventory boundary,
methods, or any other relevant factors
in the time series
Transparency Address all relevant issues in a factual The assumptions based upon which
and coherent manner, based on a clear information is collected are clearly
audit trail. Disclose any relevant disclosed to decision-makers, and,
assumptions and make appropriate ideally, accord with established
references to the accounting and standards
calculation methodologies and data
sources used
Accuracy Ensure that the quantification of GHG Climate information accuracy is
emissions is systematically neither achieved by using measured (as
over nor under actual emissions, as far opposed to calculated or estimated)
as can be judged, and that data
uncertainties are reduced as far as
practicable. Record climate change
impacts in a traceable manner.
Achieve sufficient accuracy to enable
users to make decisions with
reasonable assurance as to the
integrity of the reported information
Based on WBSCD and WRI (2004, p. 7)

five principles of GHG accounting and reporting proposed by the World Business
Council for Sustainable Development and the World Resource Institute (WBSCD
and WRI 2004). The five principles—relevance, completeness, consistency,
transparency and accuracy—have been discussed for the last two decades in the
environmental and sustainability management accounting and reporting research
16 S. Schaltegger et al.

(e.g. Burritt et al. 2002; Schaltegger and Burritt 2000; GRI 2011) and can be
considered as commonly accepted.
Information relevance is an issue in the context of a complex topic in particular.
Extant research identifies that climate information is collected in organisation also
for reasons beyond decision-making (Bennett et al. 2013; Burritt et al. 2011a, b).
Due to the uncertainty inherent to the future relevance of the topic, using climate
information is not a straightforward task. Scenarios regarding the issue in the future
vary from “carbon emissions have a clear-cut price on the market” to “national
policy will change with the next government”. The issue is amplified by the
spectrum between the former two extremes, for example: carbon taxation may
remain in place, yet society’s attention will be diverted from it. For climate change
impacts regional scenarios can be used, because international data does not reflect
the specific situation a company faces. Some stakeholders, including shareholders,
perceive environmental issues to be material to their decision‐making processes,
and they seek information on these climate change related activities (Deegan and
Rankin 1997). However, the creation and consideration of this information is more
complex than the preparation of financial statements, for various reasons (FEE
2006, 2002): (i) The report is not prepared from just one viewpoint (in financial
accounting traditionally that of the shareholders) but is relevant to a broad range of
different stakeholders; (ii) the report may include less quantitative and more
non-financial, qualitative information; and (iii) the criteria are less developed than
regulations and standards that determine financial reporting. In this context,
Lamberton (2005) states that monetary units are relevant for assessing economic
performance, but are not appropriate for assessing social or environmental perfor-
mance, as consequence the accountant’s tradition to monetise social and ecological
impacts seriously misrepresenting and understating the significance of these issues.
Completeness in the context of climate information can be considered particu-
larly challenging. The complexity of the climate challenge is a key factor for
climate accounting as pointed out in previous research (Oppewal and Klabbers
2003) as conflicts between information completeness and task simplicity often
exist. One aspect that complicates the completeness of climate information is the
probability related to a risk. Disclosure of a risk with a low probability rate but
potential high impact should also be carefully considered (CPA 2014) as this sit-
uation is very relevant for various environmental issues where some actions could
cause large environmental and economic impacts although the probability is low.
O’Dwyer and Owen (2005) conclude that completeness is very rarely considered in
sustainability reports and that it remains unclear whether enough information is
provided to support users in their decision making process. For Gray (2000, p. 248)
auditors rarely, if ever, comment on the degree of completeness. He concludes that
readers could easily be fooled and believe that attestation of auditors and verifiers
means that the report is a complete, true and fair representation of the climate
impacts of the organization. While this analysis has its merits, in practice the
problem is to oversee all direct and indirect effects and scopes with regard to
climate change impacts. Thus, even when managers are highly motivated and
willing to create a complete account of the climate impacts, creating completeness
Corporate Carbon and Climate Change Accounting … 17

is also a considerable practical challenge of mere information quantity and

complexity.
Climate information consistency is a further challenge if climate change related
information is to provide support for informed decisions. Consistency in the
recognition, measurement and presentation of environmental information is
essential to track developments over time and to make comparisons between
products, processes, sites, companies, etc. Consistency should first of all be
established internally, determined by the information needs of the enterprise’s
users (CICA 2008). Caution is needed when seeking to benchmark between
enterprises within the same sector as even apparently minor differences in pro-
cesses, products or locations can be significant in terms of environmental effect
(FEE 2000). The diversity of climate information may have manifold influences on
the conclusions drawn from it. On the one hand, future implications of CO2
emissions for example in terms of economic risk can vary on a micro and macro
level over time. On the other hand, the scope of information is also a challenge to
secure consistency as some subsidiaries or companies may want to inform about all
production sites in their perimeter of consolidation while others may refrain from
this (for an in-depth discussion of this issue see Schaltegger and Burritt 2000, 347),
or some companies would inform about the impacts of all companies in their supply
chains while others would not consider the supply chain at all. Finally, the methods
and scope to forecast greenhouse gas effects need to be considered. While it has
become common to consider a one hundred year period, other time periods are also
possible and may have a substantial impact on assessments. This problem has been
raised for example by CPA Australia (2004) who states that questions of scope and
time are typically answered by managers without consulting stakeholders, while
often no clear indication of restrictions in scope is provided in sustainability reports.
While such information can be provided in climate and sustainability reporting it
remains uncertain whether and to what extent such scoping issues are understood
and considered by which stakeholders. The guidelines provided by the GHG
Protocol may help to reduce problems of consistency, although uncertainties and
value decisions are still required and cannot be eliminated completely.
Transparency is a key factor, especially for the decision making of the external
stakeholders. Moneva et al. (2006) considers transparency the core issue of
accountability. Transparency refers to the ability of an informed observer to
understand the system with a reasonable amount of effort and in a reasonable
amount of time. This view has been transferred from financial accounting standards
where standards have developed for many decades (CDSB 2010). A similarly
comprehensive standardisation process and system does not exist for climate
accounting (for environmental accounting in general see Schaltegger 1997;
Schaltegger and Burritt 2000). As a result, still various different calculation
methods and data sources exist and are used in climate accounting and reporting.
Companies which have already established carbon and climate change accounting
systems may face the problem to link or converge them with emerging standards
such as the GHG Protocol (see e.g. Gibassier and Schaltegger 2015). Apart from
company-internal accounting challenges the lack of standardised calculations
18 S. Schaltegger et al.

complicates audit processes and at the same time reduces comparability and
transparency. It also makes it difficult to understand the information with a rea-
sonable amount of effort in a reasonable amount of time. Similar to the GRI
guidelines, the GHG Protocol provides a first step towards more standardized
accounting and reporting for climate change issues.
Accuracy requires that the reported information is sufficiently precise, repre-
sentative and detailed for users to assess the organization’s performance. The
characteristics that determine accuracy vary according to the nature of the infor-
mation and the user. This complicates the management of information accuracy in
climate accounting, firstly, because of the complexity and the invariable needed
value assessments of information creation, and secondly, because of the differences
between the information requirements of users.
Another challenge is related to the assurance practices. Sustainability assurance
practices have been characterised by inconsistencies (Owen 2007, 178) and are only
converging slowly. Report users may face uncertainties in understanding how the
assurance providers reviewed the reports and what the meaning of their conclusions
is. The development of assurance standards is thus of high relevance to effectively
deal with the challenges mentioned above.

5.2 Methods: Climate Management Accounting

To reflect the discussed challenges, various methods in climate accounting can be

considered in decision-making. Based on the Environmental Management
Accounting framework, Burritt et al. (2011a, b, 2002) propose a taxonomy for
climate management accounting decision situations which identifies four key
attributes of climate management information. These attributes help to define the
information needs of company-internal decision makers and external stakeholders:
– monetary or non-monetary information
– the time frame—past or future
– the length of time frame—short or long-term
– the routineness of information provision—regular or ad hoc (one-off)
The framework thus provides the foundation for a systematic analysis of the
scope, range and potential variability of climate accounting structures and
processes.

6 Outlook

Despite the high relevance of climate change for companies, corporate practices to
counteract and adapt to climate change have so far been documented as scarce.
Probably the major question that arises from this is what factors inhibit corporate
Corporate Carbon and Climate Change Accounting … 19

managers to actively establish climate accounting and to effectively combat climate

change. Furthermore, the large spectrum of climate accounting tools and mecha-
nisms described in this publication appears to be applied only by few very proactive
companies, so far. Therefore, key issues remain to be resolved include:
– Gaining a better understanding of what companies consider to be their climate
performance. There may be a discrepancy between what is perceived to be
corporate climate performance by researchers and what companies try to
achieve. Previous attempts to understand this issue, such as analysing reports,
investigating performance indicators or discussing single case studies have so
far not been able to address the topic adequately.
– The above discussion also shows that producing a more vivid, in-depth account
of how businesses consider climate information in their operations is needed.
The available research seems to fall short of revealing decisive details that help
understand business requirements and manager attitudes towards climate
accounting practice.
– The complexity of climate accounting as presented in Sect. 3.2 reveals critical
interdependencies in the network of economic actors. Therefore, the under-
standing of inter-organisational, climate change related efforts needs to be
improved. Examples of such an inter-organisational focus include supply-chains
and the interactions between the actors involved in economic networks.
– The development of standards of climate accounting, auditing and assurance has
only started recently and needs further improvement. While standards seem to
be inevitably needed, the challenge will include ensuring that standardisation
does not get overcomplicated and bureaucratic. Financial reporting standards
and related auditing and assurance processes have in spite of a large number of
specific standards and regulation not been able to prevent fraud and financial
disasters. Similarly, for climate accounting, the expectations should not be set
too high, as the transparency and accountability function of climate accounting
and reporting may be more difficult to achieve and less important for sustainable
development than often hoped for.
– If the role and potential effect of climate management accounting to help
decision makers in gaining motivation, information and support to improve the
corporate climate performance is larger than assumed so far then research and
practice are challenged to develop climate accounting methods and processes
which create effective outcomes in corporate practice.
Despite the growing momentum of the on-going discussion on climate change
and climate accounting, there is still a substantial distance to walk. The following
section gives an overview of how this volume contributes to shedding some light on
the issues and thus may help in propelling corporate climate accounting.
20 S. Schaltegger et al.

7 Book Structure

This section draws the attention to various challenges in applying existing climate
accounting approaches and developing new ones. The following chapters focus on
individual aspects of these issues and are organised in three sections.
Section I provides an overview of literature and practices of corporate climate
accounting. A literature review on carbon management accounting conducted by
Dimitar Zvezdov and Stefan Schaltegger investigates documented corporate prac-
tices. In view of the observation that methods for managing information on cor-
porate carbon performance have hardly been discussed, the question arises as to
what decision situations a performance oriented carbon management accounting
could support. The analysis conducted shows that the existing contributions on
carbon management accounting (CMA) methods only support few decision situa-
tions, still leaving many areas open for future research and practice. This chapter
highlights the need for decision-oriented research that enables CMA to fulfil its
objective, i.e. to contribute to the efficient and effective reduction of carbon
emissions.
Chapter “Decision Support Through Carbon Management Accounting—A
Framework-Based Literature Review” by Gábor Harangozó, Anna Széchy and
Gyula Zilahy reviews the literature on corporate footprint indicators. Current
practices in the area follow different approaches to organizational level footprint
concepts. This contribution therefore takes the discussion a step further by con-
ceptualising less used footprints and their integration into sustainability manage-
ment accounting.
Section II highlights principles and applications of climate accounting. The
contribution by Eduardo Ortas, Isabel Gallego-Álvarez, Igor Álvarez and José M.
Moneva analyses on the one hand the different carbon accounting regulations
existing on the international level. On the other hand from a corporate perspective
the chapter draws an account of the main practical carbon accounting principles
and applications in different industries.
Francisco Ascui and Matthew Brander identify in Chap. “Corporate
Sustainability Footprints—A Review of Current Practices” a gap in research by
distinguishing between attributional and consequential carbon accounting meth-
ods. The authors therefore explore the nature of the attributional-consequential
distinction and its applicability to corporate climate accounting. In addition, the
concept of framing is used to help explain how the distinction has developed within
the field of LCA.
Despite its tradition, environmental management accounting has hardly been
researched as an innovation. Delphine Gibassier focuses on the implementation
phase of the innovation cycle in the pursuit of an answer to the question of how a
radically new EMA innovation can be implemented in a company. Consequently,
this chapter develops a case study of the implementation of carbon accounting in a
French multinational, and explores the different factors that led to the successful
implementation of the innovation.
Corporate Carbon and Climate Change Accounting … 21

Section III comprises contributions that extend climate accounting practices.

Against a backdrop of increasingly globalised supply chains, Zsófia Vetőné Mózner
discusses accounting for indirect carbon emissions embodied in different stages of
the supply chain. The chapter examines the relevance of using hybrid input-output
analysis to reveal the indirect impacts in the supply chains of different economic
sectors.
Chapter “Carbon Accounting in Long Supply Chain Industries” investigates the
timing of voluntary greenhouse gas (GHG) reporting and corporate stakeholder
orientations. For this, Nele Glienke analyses corporate participation in the best
known voluntary initiative on climate accounting and reporting, the Carbon
Disclosure Project (CDP), at two points in time.
Section IV highlights the financial implications and carbon accounting. The
literature review Stefan Lewandowski conducts focuses on how carbon emission
levels affect corporate financial performance. The chapter finds that modelling the
relationship between carbon emission levels and CFP is a complex task. This
complexity can be illustrated by methodological differences between the studies
included in the review which, in turn, may systematically influence the results.
Therefore, a set options for methodological enhancements is suggested which may
guide further inquiries into the relationship between carbon emission levels and
CFP.
Anne Stechemesser, Kristin Bergmann and Edeltraud Günther conduct a content
analysis based on 57 in-depth expert interviews with CEOs of different industry
sectors in one distinct region of Western Europe. The chapter contributes to
accounting field by conducting the first comprehensive study on how climate
change impacts and related climate change adaptation measures influence con-
ventional financial accounting.
The concluding chapter explores the motivation behind potential carbon emis-
sion accounting fraud by corporations. Shamima Haque and Aziz Islam identify
several different possible risks of carbon emission accounting fraud which have
remained mostly overlooked by researchers to date, despite the fact that such frauds
have a negative impact on a country’s economy as well as the real purpose of
mitigating carbon emissions. The chapter offers discussion of some potential risks
of carbon emission accounting fraud as well as related prevention policy.
An edited volume can always just reflect a certain stage of research and practice.
It provides a flashlight into some areas which are currently examined in more depth.
We hope that this edited volume does not just provide an account of current
research activities but will also spurt and contribute to the further development of
corporate climate accounting research and practice. The contributions show clearly
that the walk towards combatting climate change is still a long one.

Acknowledgments Maria Csutora is grateful for the personal support provided by the
TÁMOP-4.2.4.A/2-11/1-2012-0001 program.
22 S. Schaltegger et al.

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Decision Support Through Carbon
Management Accounting—A
Framework-Based Literature Review

Dimitar Zvezdov and Stefan Schaltegger

Abstract Purpose: Managing corporate carbon performance has seen a rapid

development as a topic for the past decade. To effectively reduce corporate climate
change impacts requires decisions on tracking and tracing of carbon emissions in a
systematic manner. Yet, methods to manage information on corporate carbon per-
formance have hardly been discussed in the extant literature. Whilst the global
greenhouse gas emissions are further increasing, the total amount of corporate emis-
sions has only decreased in some advanced companies. This raises the question of
what decision situations a performance oriented carbon management accounting could
support and in which areas research could be further developed to support carbon
management efficiently and effectively. Method: A literature review was conducted to
identify the current state of development of CMA. Relevant publications were anal-
ysed by means of taxonomic analysis. Findings: The analysis of academic CMA
publications shows that the existing contributions on CMA methods only support few
decision situations, still leaving many areas open for future research and practice.
Implications: This chapter highlights the need for decision oriented research that
enables CMA to fulfil its objective, i.e. to contribute to the efficient and effective
reduction of carbon emissions.

1 Highly Topical, Yet Under-Researched

For the last couple of years, carbon management has seen a notable uptake as a
topic in corporate practice (Bennett et al. 2013). To effectively manage carbon
performance, accurate carbon information and thus its management with carbon

D. Zvezdov (&)
Friedrich-Alexander Universität, Erlangen-Nürnberg, Germany
e-mail: [email protected]
S. Schaltegger
Centre for Sustainability Management (CSM), Leuphana University Lüneburg, Lüneburg,
Germany
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 27

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_2
28 D. Zvezdov and S. Schaltegger

accounting methods play an important role (Burritt et al. 2011). This necessitates a
review of the current corporate carbon management accounting (CMA) literature
and its contributions to supporting management decisions.
Many environmental accounting publications mention carbon management
accounting as an exemplary (Ascui 2014; Ascui and Lovell 2012; Lohmann 2009;
Schaltegger et al. 2013). In a review of over 800 publications on environmental
management accounting, carbon accounting has even been identified as one of the
most discussed themes (Schaltegger et al. 2013). Two reviews on the wider area of
carbon accounting (Ascui 2014; Stechemesser and Günther 2012) provide a broad
overview of the literature, including macro-economic accounting approaches.
Extant literature is dominated by case studies and shows that various companies
have discovered (at least some of) the potential benefits of carbon accounting
(Ascui and Lovell 2012). Whereas these two existing reviews shed light on the
extent to which the topic is of relevance to society in general and businesses in
particular, they both reveal that carbon management accounting has remained lar-
gely under-researched. Ascui (2014) classifies most carbon accounting publications
(56 out of 89 in total) as part of “carbon management accounting”. Yet, only four
publications are seen to belong to carbon management accounting at the organi-
sational level with the remaining 52 approaches focusing on economies or the
global level.
Despite the considerable attention climate change has gained for the past decade,
no overview exists of what management decision situations are particularly sup-
ported with academic and professional literature on carbon accounting.
This chapter approaches the gap by reviewing the carbon management
accounting literature in view of a decision-oriented framework (Burritt et al. 2002,
2011) and by bringing together diverging perspectives discussed in the extant
literature. The chapter thus investigates what decision situations have been docu-
mented in carbon management accounting practice and research. The result is an
overview that allows identifying areas of carbon accounting application that have
not been scrutinised yet. Comparing the corporate carbon accounting literature and
documentation on company cases (e.g. Lee 2011) with the range of possible carbon
accounting applications unveils ‘blind spots’. Neglected, yet important decision
situations are uncovered and discussed with regard to future research. This review
thus supports developing these research areas and enables companies to manage
their carbon performance more efficiently and effectively. This chapter also
develops several propositions that can serve as the basis for building hypotheses to
further advance research on the application of CMA.
This chapter proceeds as follows. Section 2 frames the issue in the context of the
extant CMA literature. Section 3 describes the methodology adopted in conducting
the empirical part of the research. Section 4 presents the results of the literature
review and discusses key findings. Section 5 discusses CMA in the context of
efficiency and provides several implications for further research. The concluding
section sketches a path to enabling CMA to contribute to its original purpose.
Decision Support Through Carbon Management Accounting … 29

2 What We Know About CMA—A Literature Review

2.1 The Role of Accounting in Managing Carbon

Performance

Despite its relatively short history, carbon management has been of concern to
various domains in organisations. No matter whether production (Bunse et al.
2011), procurement (Vickers et al. 2009), logistics (McKinnon 2010; Lee 2011) or
risk management, all departments and business units can benefit from information
on the existing amount of carbon emissions, their sources and drivers, and the
assessment of options to reduce carbon impacts (Burritt et al. 2011). Managing
carbon issues and performance is thus strongly linked to accounting for carbon
information.

2.2 Purposes of CMA

On the one hand, carbon management comprises activities related to the coordi-
nation of activities to achieve a resource-efficient (i.e. under consideration of time
and resources spent) and effective reduction of carbon emissions. On the other
hand, carbon management can be defined as those activities that aim to secure the
success of an organisation by managing carbon emissions (efficiently and effec-
tively). CMA therefore aims to support managing carbon performance with regard
to both perspectives, environmental effectiveness and economic efficiency (cf.
Schaltegger and Csutora 2012; Stechemesser and Günther 2012).
Okereke (2007) identifies five groups of motivations to deal with carbon man-
agement. Legitimacy Credibility has been seen as an important motivation under-
pinning a given company’s carbon management endeavours. Furthermore, cost
reduction has been identified as another reason. More recent developments in the
ethical discourse place ethical considerations as another relevant factor for
managing carbon performance. Furthermore, chief executives have increasingly
considered climate change as a matter of fiduciary concern (e.g. Hoffman 2006).
Last but not least, a number of the FTSE companies have begun to emphasise the
need to move away from seeing climate change only as a risk towards viewing it as
also presenting business opportunities (e.g. Okereke 2007).
Creating carbon information by means of accounting techniques and systems
enables managers to gain a relative advantage in performing their managerial tasks
and attaining the corporate objectives. The purpose of CMA, in particular, should
therefore be providing managers with information that assists corporate
decision-making related to carbon emissions. In view of the above incentives for
carbon management, Schaltegger and Csutora (2012) describe CMA as having the
following objectives:
30 D. Zvezdov and S. Schaltegger

• Creating transparency and taking account of “un-sustainability” of the past and

current operations.
• Forecasting future greenhouse gas emissions
• Identifying reduction potentials and evaluation of reduction measures:
• Providing support of the implementation of carbon management measures

2.3 The CMA Framework

To systematise the analysis of the carbon management literature and its contribution
to support different management decision situations, this research is framed within
the CMA framework (Table 1) proposed by Burritt et al. (2011). Based on the more
general environmental management accounting framework proposed by Burritt
et al. (2002), this framework breaks carbon management information down into
four dimension: i) the nature of the information—physical or monetary; ii) the time
frame of decision-making—past, present and future; iii) the length of time frame,
that is, short-term or long-term; and vi) the routineness of the information supplied
—regular or ad hoc.

Table 1 The CMA Framework (Burritt et al. 2011, 82)

Carbon management accounting (CMA) Framework
Monetary carbon accounting Physical carbon accounting
Short term Long term Short term Long term
Past Routinely 1. Carbon cost 2. Carbon 3. Carbon 4. Carbon
oriented generated accounting capital flow capital impact
expenditure accounting accounting
accounting
Ad hoc 5. Ex post 6. Ex post 7. Ex post 8. Ex post
assessment of assessment assessment assessment of
short of carbon of short physical
term/relevant reducing term carbon
carbon costing investments carbon investment
decisions impacts appraisal
Future Routinely 9. Monetary 10. Carbon 11. 12. Long term
oriented generated carbon long term Physical physical
operational financial carbon carbon
budgeting planning budgeting planning
Ad hoc 13. Relevant 14. 15. Carbon 16. Physical
carbon costing Monetary impact environmental
carbon budgeting investment
project appraisal
investment
appraisal
Decision Support Through Carbon Management Accounting … 31

2.4 Carbon Accounting for Eco-Efficiency

For an environmentally friendly change to be economically viable, it needs to be

more efficient than the practice that it substitutes (Andrews 2006). This problem has
been among the central research themes in environmental management accounting
literature for the past two decades (e.g. Bennett et al. 2013; Schaltegger et al. 2013).
Probably the most relevant term and concept in this context is eco-efficiency
(Schaltegger and Sturm 1990; Schmidheiny 1992; WBCSD 2000).
The concept of eco-efficiency was introduced into (environmental) management
to extend the basic concept of efficiency (Schaltegger and Sturm 1990;
Schmidheiny and BCSD 1992; Schmidt-Bleek 1994; von Weizsäcker et al. 1997,
2009; Hawken et al. 1999). Although defining eco-efficiency and finding a way to
measure it has been considered “difficult” (Britt et al. 2011) since its introduction,
several different definitions and methods have been proposed (e.g. Schaltegger
1998). Generally, efficiency refers to producing the maximum number of output
with the least input. Eco-efficiency, in the context of carbon management, has a
slightly different meaning.
With few exceptions, the production of goods and services (as well as their use
and disposal) inevitably generates carbon emissions. These carbon emissions are
undesired outputs. Therefore, eco-efficiency, or more specifically carbon efficiency,
refers to the value created by a product or service measured against the amount of
carbon emissions caused. Carbon efficiency thus serves as a score to enable com-
panies track and make progress in being carbon efficient.
Several authors have discussed eco-efficiency and what it entails. Derwall et al.
(2005) interpret it “as the economic value a company creates relative to the waste it
generates”. For Huppes and Ishikawa (2005) eco-efficiency pursues the “general
goal of creating value while decreasing environmental impact”. These definitions are
very similar and revolve around the basic idea that being eco-efficient means ben-
efitting the environment while being economically successful (Schaltegger 1997).
Based on the CMA framework this paper examines what decision situations the
existing carbon management accounting literature covers and deals with.

3 Research Methodology

To develop a research synthesis of the existing CMA literature (e.g. Onwuegbuzie

et al. 2012), we conducted a literature review of all publications that explicitly refer
to organisational CMA activities. Analysed publications include articles in aca-
demic journals as well as related professional literature such as reports of
accounting bodies and consulting companies.
32 D. Zvezdov and S. Schaltegger

The data collection consisted of two complementary search strategies. Firstly,

searches were executed in the academic search engine “google scholar”. In addi-
tion, searches were run in the academic publication databases EBSCO, JSTOR and
Thomson Reuters Web of Science. The search terms used are shown in Table 1. The
search was conducted for every possible combination of the left and the right side of
the table (Table 2).
Subsequently, further publications were identified by means of snowball sam-
pling (Biernacki and Waldorf 1981). We adopted both forward and backward
snowball sampling. In the latter approach, the references of already identified
publications were scanned manually to identify referenced further relevant publi-
cations. Forward sampling was used to identify papers that have cited the identified
publications.
The list of identified publications was then manually screened to sort out those
publications that fall outside the scope of this literature review. Given the focus on
carbon management accounting at the organisation level, several decision with
regard to the publication scope were made. Excluded were:
• publications not related to managerial or corporate activities, such as on carbon
accounting for buildings (e.g. Shao et al. 2014)
• publications in the domain of natural sciences (e.g. Cacho et al. 2003)
• publications strictly related to carbon footprinting for communication purposes
(e.g. Scipioni et al. 2012)
• assurance- and verification-related publications (e.g. Martinov-Bennie 2012)
• publications related to the larger field of sustainability and environmental
accounting which do not specifically deal with CMA in depth (e.g. Burritt and
Schaltegger 2012)
• publications focused on carbon management (rather than carbon management
accounting; e.g. Bradley et al. 2013)
• pedagogical discussions of carbon accounting (e.g. De Aguiar and Fearfull
2010)
This approach to data collection resulted in 31 publications, presented in
Table 3.
Subsequent data analysis was conducted by means of taxonomic analysis. The
primary purpose of this method is creating a classification system that categorizes
the domains in a discipline or a research field to help the literature reviewer
understand the relationships among the domains (Onwuegbuzie et al. 2012). Thus, a

Table 2 Search terms Carbon Accounting

Climate Management
Emission Footprint
Greenhouse gas Allowance
GHG
CO2
Decision Support Through Carbon Management Accounting … 33

Table 3 Identified CMA publications

Title Authors Journal
Carbon reporting: does it matter? Haigh and Shapiro AAAJ
(2012)
CO2 emission reduction for Japanese Gielen et al. (2002) JCP
petrochemicals
Climate change performance measurement, Cooper and Pearce AAAJ
control and accountability in English local (2011)
authority areas
Commercial local area resource and emissions Bradley et al. (2013) JCP
modelling—navigating towards new
perspectives and applications
Carbon trading: accounting and reporting issues Bebbington and EAR
Larrinaga-González
(2008)
Carbon accounting Negotiating accuracy, Bowen and Wittneben AAAJ
consistency and certainty across organisational (2011)
fields
Carbon management accounting: explaining Burritt et al. (2011) AAR
practice in leading German companies
The European emissions trading scheme: an Engels (2009) AOS
exploratory study of how companies learn to
account for carbon
Carbon Footprint as a Basis for a Cleaner Güereca et al. (2013) JCP
Research Institute in Mexico
Carbon accounting for supply chain Lee (2012) JCP
management in the automobile industry
Carbon accounting and carbon footprint—more Schmidt (2009) IJCCSM
than just diced results?
Research on the carbon footprint of beer; BIER (2013) Report
beverage industry environmental roundtable
Uncertainty and variability in carbon Weber (2011) Report
footprinting for electronics case study of an
IBM rack-mount server
A supply chain view of product carbon Craig et al. (2013) Working Paper
footprints: results from the banana supply chain
Product carbon footprint developments and gaps Jensen (2012) IJPDLM
Carbon-optimal and carbon-neutral supply Caro et al. (2011) Working paper
chains
Input-output analysis and carbon footprinting: Minx et al. (2009) Economic
an overview of applications Systems Research
Setting targets for reducing carbon emissions McKinnon and Piecyk Carbon
from logistics: current practice and guiding (2012) Management
principles
Product-level carbon auditing of supply chains: McKinnon (2010) IJPDLM
environmental imperative or wasteful
distraction?
(continued)
34 D. Zvezdov and S. Schaltegger

Table 3 (continued)
Title Authors Journal
Connecting the environmental activities of firms Oshika et al. (2012) JoMA
with the return on carbon
Use of internal carbon price by companies as CDP (2013) Report
incentive and strategic planning tool
Integrating information about the cost of carbon Tsai et al. (2012) JCP
through activity-based costing
Making advances in carbon management. Best CDP and IBM (2008) Report
practice from the carbon information leaders
Measuring carbon efficiency Britt et al. (2011) UCLA working
paper
Managing carbon footprints in inventory Hua et al. (2011) Int. J. Production
management Economics
Monitoring the carbon footprint of products: a Scipioni et al. (2012) JCP
methodological proposal
Are there effective accounting ways to Almihoub et al. (2013) JSD
determining accurate accounting tools and
methods to reporting emissions reduction?
Drivers of tight carbon control Bui and Truong (2013) PMA Australasia
Conference 2013
Proceedings
The role of input–output analysis for the Huang et al. (2009) Economic
screening of corporate carbon footprints Systems
Corporate carbon performance indicators Hoffmann and Busch JIE
(2008)
Measuring a carbon footprint and Lee and Cheong (2011) Industrial
environmental practice: the case of Hyundai Management &
Motors Co. (HMC) Data Systems
AAR Australian accounting review, AAAJ Accounting, Auditing and Accountability Journal, AOS
Accounting, Organizations and Society, EAR European accounting review, IJPDLM International
Journal of Physical Distribution and Logistics Management, JCP Journal of Cleaner Production,
JIE Journal of Industrial Ecology, JoMA Journal of Management; JSD Journal of Sustainable
Development, UCLA University of California, Los Angeles

taxonomic analysis can be described as building a set of categories that are orga-
nized on the basis of a single semantic relationship (Spradley 1997).
The analysis sought to identify what CMA practices have been documented in
view of decision situations in which CMA information is used to inform decisions.
The collected publications were therefore analysed based on their focus to identify
dominant and under-represented decision situations supported by carbon informa-
tion. The framework for this analysis was the CMA developed by Burritt et al.
(2011) and presented in Sect. 2.
About two thirds of the sample of 31 publications were journal articles (23),
whereas other publications comprised the remaining 8 articles (Table 3).
Particularly notable is the observation that although most publications were
Decision Support Through Carbon Management Accounting … 35

Table 4 Distribution of Medium Number of publications

CMA literature by medium
AAAJ 3
JCP 6
Other journals 14
Grey literature 4
Non-academic literature 4
Total 31

published in accounting journals, apart from Accounting, Auditing and

Accountabilit Journal (AAAJ) with three and the Journal of Cleaner Production
(JCP) with six papers, each journal only features a single publication on the issue
(Table 4).

4 Emission Management Merely a Means to an End

4.1 Diversity in Research and Practice

Despite the low number of identified publications, the analysis reveals a consid-
erable diversity of CMA practices. Whereas only one of the reviewed publications
explicitly considers the CMA framework presented earlier, a reference to its
dimensions is made in virtually all of these publications. Nevertheless, only few
publications discuss several of these dimensions (e.g. time frame of the information
and generation routineness) at the same time (Table 4). Even fewer publications
discuss a combination of the properties within one dimension (e.g. linking physical
and monetary carbon information). The latter observation combined with the low
overall number of publications does not allow a meaningful quantitative analysis of
the collected data such as a correlation analysis (Neuman and Robson 2004).
Hence, the following analysis draws on a qualitative analysis of the collected data,
framed in the context of the EMA framework (Table 5).
The juxtaposition between monetary and physical carbon information was
analysed in the researched publication sample. The number of publications focusing
on physical carbon accounting was twice as high as the number of publications
focusing on monetary aspects. Only four publications link the two dimensions and
refer to the eco-efficiency concept (Sect. 5).
In these publications (e.g. Minx et al. 2009; Tsai et al. 2012), physical infor-
mation is used to support the identification of relevant emission sources where
potential for reduction is available. The advantages of physical information are
emphasised particularly in situations where such information allows or requires
acting regardless of the monetary implications of such actions (which may be
negligible from a cost-benefit perspective, e.g. Bennett et al. 2013).
36 D. Zvezdov and S. Schaltegger

Table 5 Analysis of the publications in view of the CMA framework

Dimension Property Number of papers
Nature of the information Physical 16
Monetary 8
Time frame Past 16
Future 5
Length of time frame Short-term 6
Long-term 7
Routineness of information supply Regular 7
Ad hoc 15
The numbers in each dimension do not add up to 31 (number of publications) in each dimension
since some publications do not identify an explicit decision situation

The literature that focuses on improving carbon performance has documented

corporate interest on collecting and using physical information for purposes beyond
the short-term (e.g. Engels 2009; Tsai et al. 2012; Lee 2012).
The low number of publications related to the monetary significance of carbon
information could suggest that the benefit of using monetary carbon information is
limited to a small number of decision situations and companies. Therefore, it can be
expected that developments in this area are likely to be expected as monetary
significance grows and (e.g. saving) potentials are explored more profoundly.
Last but not least, the observed lack of simultaneous attention to both the
physical and the monetary dimensions of carbon information reveals a gap in the
literature. Nevertheless, some co-occurrence of “monetary and short-term” and
“physical and long-term” information was observed. This observation is further
discussed in Sect. 5.
The time frame of carbon information—whether past or future-oriented—has
been discussed from different views in the identified literature. A clear focus on past
information was observed. This can be explained with the number of publications
on carbon footprinting (e.g. Schmidt 2009; BIER 2011).
Six publications identify the advantages of using both past and future carbon
information (e.g. Hua et al. 2011; Haigh and Shapiro 2012). For instance, building
(future) emission scenarios are proposed as a subsequent action to estimating (past)
emissions (Murthy and Parisi 2013).
Particularly prominent is the short-term/long-term dipole. Among the 31 pub-
lications, a focus on either type of information was not observed. Whereas about the
same number of publications on short term (6, e.g. Green and Li 2012; Haigh and
Shapiro 2012) and long term (7) carbon information was observed, 9 publications
actually highlight the significance of both decision situations and the related
information demand (e.g. Britt et al. 2011; Tsai et al. 2012). The focus on long-term
information similarly assumes a high significance of carbon emissions on business
operations, regardless of the ongoing political discussion.
Those publications that discuss carbon accounting in the context of long-term
decisions (e.g. Haigh and Shapiro 2012) typically refer to the legitimising effects of
Decision Support Through Carbon Management Accounting … 37

carbon management. Such effects can also be achieved for organisations which do
not emit considerable carbon emissions. Therefore, carbon accounting does not
necessarily contribute in every case to reducing carbon emissions to the atmosphere
but sometimes also help documenting that the company is not affected substantially
by climate change issues.
In view of the fourth dimension of the carbon management accounting frame-
work—regularity of data collection—the project-driven information collection
dominated the sample (15). This emphasis is achieved due to the attention to carbon
footprinting, which is often carried out on a one-off basis and requires detailed
information to be collected specifically for a single project purpose. Jawjit et al.
(2010) for example show that the ad hoc data collection in the case of greenhouse
gas emissions from the rubber industry in Thailand allows for flexibility related to
the goal of the analysis, its system boundary, and its functional unit (e.g. by
including certain gases). Gielen et al. (2002), on the other hand, demonstrate a
carbon emission reduction approach for a Japanese petrochemical company by
means of information collected on a regular basis.
Only three publications identify situations in which information needs to be
collected both on a regular basis and ad hoc.

4.2 Carbon Management Accounting—Emission

Management or Emission Reduction?

The dominant features of CMA as documented in the literature sample indicate that
CMA gravitates around management accounting rather than around carbon
reduction accounting. In other words, carbon is seen as another resource or con-
straint; therefore it needs to be managed in order to safeguard the success of
organisations. Managing carbon emissions, however, was revealed to not be limited
to reducing emissions (which is the overarching purpose of carbon efforts in a
national and supranational context). In fact, reducing carbon emissions (mitigation)
is the less common argument discussed in the extant CMA literature (Table 6).
As the analysis reveals, extant research focuses carbon accounting attention on
information generation for adapting to the changing environment. This is done for
example to secure the legitimacy of the company (e.g. Pellegrino and Lodhia 2012;
Sullivan and Gouldson 2012) or to estimate the future price of operations (e.g.

Table 6 Adaptation as the dominating motivation for CMA

Motivation Adaptation Mitigation Both
Number of papers 20 4 3
Four publications do not make a clear statement as to the motivation for CMA
38 D. Zvezdov and S. Schaltegger

Cooper and Pearce 2011). Furthermore, carbon information related to corporate

activities increasingly influences investment decisions (e.g. CDP 2013).
The above observation is in line with the previous observations pertaining to the
CMA framework dimensions. The previously identified focus of publications
referring to past information supports this view, as such information does appar-
ently not focus on improving climate-related impacts. The under-represented
monetary information demand—albeit seemingly counterintuitive—may in fact
support the view that carbon is not perceived to be of considerable monetary
importance for many researchers and companies, therefore it is not tracked, anal-
ysed and reported.
As the literature review reveals, extant research in the area of CMA assume that
companies have largely used carbon management accounting for adapting to a
changing and more constrained business environment without necessarily con-
tributing to reducing their emissions. This finding largely reflects the assumptions
and prepositions of the authors dealing with the topic and is in most cases not
supported well with a balanced empirical analysis. Sustainable development and
corporate sustainability require improvements with regard to carbon impacts.
Research thus needs to develop more useful approaches to CMA which are
empirically tested and can support corporate practices effectively.
The following section discusses how CMA can be developed to efficiently
contribute to effectively reducing the total amount of emissions stemming from
business activities.

5 Discussion

Summarizing the observations made in the previous section renders an important

observation visible. CMA has been documented to be used either for producing an
account of the carbon performance of a company (e.g. product carbon footprinting;
typically in physical units) or, less frequently, for identifying important strategic
and operational business issues (typically in monetary units). A connection between
the two dimensions was observed in only 4 of the 31 papers (Burritt et al. 2011; Lee
2011; Britt et al. 2011; Hoffmann and Busch 2008). Yes, linking the two dimen-
sions may enable a win-win situation, i.e. improving corporate financial perfor-
mance by means of improved carbon performance (i.e. reducing carbon emissions).
The following sub-section discusses implications for improving carbon efficiency.

5.1 Eco-efficiency Beyond an Improved Carbon Footprint

One particular challenge for accounting for eco-efficiency is that it cannot always be
represented by hard data since a number of difficulties arise when attempting to
measure it (Britt et al. 2011). This literature review reveals that the views and
Decision Support Through Carbon Management Accounting … 39

definitions of carbon efficiency may vary widely between companies. Furthermore,

as discussed in Sect. 4, a benefit of carbon management may be gaining societal
legitimacy or gaining power to influence future carbon legislation irrespective
whether emissions are reduced or not. This assumption guides a number of pub-
lications that motivate carbon management with benefits other than improving
product or process eco-efficiency. As a result, different representations of
eco-efficiency have been discussed in the existing CMA literature.
Originally, eco-efficiency was defined as minimizing negative outputs while
keeping or increasing economic success. In the case of carbon management, pricing
of the environmental performance does not necessarily constitute a challenge.
Typically all outputs can be in expressed monetary terms, and carbon emissions
have market prices.
Eco-efficiency can also be applied in defining target outputs by the quantity
produced from a given level of input. Carbon emissions, the undesirable output in
this case, is mostly measured by the physical quantity that was generated, rather
than attempting to monetize these factors (Färe et al. 1989). Examples of
eco-efficiency indicators thus include value added (in monetary terms) per tonne of
emitted CO2 or the contribution margin of a product relative to its contribution to
the greenhouse effect (in CO2 equivalents).
A discussion of value creation in view of eco-efficiency has been virtually
non-existent. Among the most prominent issues has been the lack of clarity when it
comes to defining the constituents of eco-efficiency improvements through carbon
emission reduction on one hand, or of creating carbon emission and eco-efficiency
information on the other hand. As discussed in Sect. 2, (i) profit has been assumed
as one motivation underpinning a given company’s carbon management endeav-
ours. In addition, (ii) credibility and leverage in climate policy development
(iii) ethical considerations, (iv) fiduciary concern and (v) business opportunities
have been discussed as motivation for managing carbon.
A closer inspection of these five motivations reveals a picture that carbon
management accounting can create value and competitive advantages irrespective
of whether carbon efficiency is improved or not. Profit or legitimacy can in some
cases be boosted by offering products whose carbon footprint is known. This may
provide some competitive advantage, at least until competitors offer similar infor-
mation. A notable illustration of generating such a competitive advantage through
superior carbon management accounting is DHL, who was the only company to
offer a product whose carbon footprint could be established. Since competitors were
not prepared to offer such information, DHL won a contract with the UK
Government’s Department of Health worth 2.3 billion Euro revenue over 10 years.

5.2 Implications for Developing Eco-Efficiency Indicators

The implications for the above discussion may influence the design of carbon
management indicators. Whereas carbon indicators discussed in the existing CMA
40 D. Zvezdov and S. Schaltegger

literature focus on physical benefits of reducing emissions (Wilson and

Dowlatabadi 2007; Yang et al. 2009), the goal of improving corporate sustainability
raises concern about developing more adequate carbon-efficiency indicators. Such
indicators need to enable companies to create performance benchmarks in view of
overarching objectives and to rethink carbon indicators from an eco-efficiency and
corporate carbon management perspective.
Carbon performance from an eco-efficiency perspective can be measured by
linking the economic (monetary) value created by carbon management activities
with the (monetary) carbon management effort invested or the (physical) carbon
emission reduction achieved. For example, the value created can be expressed as
the ratio of market share increase due to carbon management to the resources
invested in carbon management.
In summary, the future developments in measuring carbon efficiency should aim
at providing a balanced set of environmental performance indicators that link
overarching corporate objectives with carbon emission targets.

6 Conclusion and Outlook

Despite the multitude of publications emphasizing the sustainability relevance of

carbon management and carbon accounting, the majority of the publications
explicitly dealing with CMA discusses aspects not related to the management rel-
evance of improved carbon performance. Most of the explicit CMA literature deals
with past oriented and ad hoc information while focusing on decision support to
secure legitimacy or profits. Sustainable development and corporate sustainability,
however, would—in addition—require considering future-oriented decision situa-
tions and the generation of routinely generated carbon information to create con-
tinuous management attention and to support management decisions for improved
carbon performance.
As the analysis conducted reveals, research in the area has mostly assumed and
considered carbon accounting for the purpose of securing the success of the
company rather than for emission reduction. While this assumption underlying a
large part of the literature can also be observed in the general context of sustain-
ability accounting (e.g. Bozzolan et al. 2013), our literature review may imply that
pursuing one single perspective in an isolated manner could be too one-sided as
neither the legitimacy based motivation of reducing carbon emissions nor the profit
or cost oriented view may provide a sufficient incentive for carbon emission
reduction, the broader introduction of CMA and the achievement of substantial
carbon emission reductions.
The identified discrepancy between the motivations behind carbon accounting as
assumed in many CMA publications—to increase profits and/or to secure legiti-
macy—and the sustainability objectives of carbon management—to reduce carbon
emissions—supports the view that there is a considerable potential to develop
CMA, particularly to better support future oriented management decisions and
Decision Support Through Carbon Management Accounting … 41

continued management attention leading to reduced carbon emissions and improved

carbon efficiency. From a pragmatic perspective accounting and sustainability
management researchers are challenged to propose and test new CMA approaches
which effectively contribute to sustainable development and corporate sustainability
by improving both corporate carbon and economic performance through carbon
management accounting support and innovative CMA methods for better informed
decisions.
Subsequent research is challenged to look into possibilities to harness the
potential of CMA to actually reduce carbon emissions in view of an eminent
ecological crisis (IPCC 2007). Expanding the currently limited set of carbon
accounting tools at a management’s disposal thus constitutes a central challenge.

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Corporate Sustainability Footprints—A
Review of Current Practices

Gábor Harangozó, Anna Széchy and Gyula Zilahy

Abstract This paper aims to contribute to the footprint debate by providing a

systematic review of footprint concepts that can be used on the corporate or
organizational level. This may take us one step further towards the conceptual-
ization of lesser used footprints and their integration into sustainability management
accounting. Based on the systematic review process seven different footprint con-
cepts emerged that can be used at the organizational level (ecological, carbon,
environmental, water, nitrogen, ethical and social footprints). These concepts are
very diverse regarding scope and methodological explicitness, however, they offer
an opportunity for organizations to tackle, monitor and communicate their sus-
tainability performance on the organizational level. Five of the reviewed organi-
zational footprint concepts are related to the environmental while two to the social
domain of sustainability. As highlighted by the review, there seems to be no
footprint concept going beyond one single dimension of sustainable development.
This means that the interrelationships between the environmental, social and eco-
nomic performance are not grasped by any of the introduced concepts, making them
unsuitable for a comprehensive sustainability assessment. For this reason, inte-
grating different corporate footprint concepts may be one important field of future
research.

1 Introduction

Measuring our contribution towards sustainable development has been a focus of

both policymaking and academia since the publishing of the Brundtland report
(Brundtland 1987). Currently most approaches try to tackle sustainability by

G. Harangozó (&)
A. Széchy
G. Zilahy

Faculty of Business Administration, Corvinus University of Budapest,
8 Fovam Ter, 1093 Budapest, Hungary
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 45

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_3
46 G. Harangozó et al.

focusing on one or more of the environmental, social and economic domains,

commonly referred to as the ‘triple bottom line’ (Elkington, 1998).
Beyond global or national level concepts and metrics—such as the OECD
environmental performance measurement framework (OECD 1993), alternative
welfare indicators like the ISEW (Daly and Cobb 1989), GPI (Cobb et al. 1995), the
simpler HDI (UNDP 2004) or subjective welfare metrics in relation to sustain-
ability, like the Happy Planet Index (HPI, Marks et al. 2006)—there is a wide range
of research on measuring sustainability at the corporate level.
Corporate sustainability (Dyllick and Hockerts 2002; Salzmann et al. 2005) can
be assessed by sustainability performance indicators (SPIs, Cunha Callado and
Fensterseifer 2011; Ramos and Caeiro 2010; Searcy 2012; Bourlakis et al. 2014).
While many different performance evaluation frameworks and concepts exist at the
corporate level, this paper intends to contribute to the corporate management
accounting literature by reviewing and conceptualizing the relatively specific field
of corporate sustainability footprints.
Footprints are quantitative measurements trying to systematically quantify one
or more dimensions of human impacts on sustainability (UNEP/SETAC 2009, De
Benedetto and Klemes 2009), forming the ‘footprint family’ (Giljum et al. 2008 or
Galli et al. 2012).
There are extensive reviews of numerous environmental, social and economic
footprints (Cucek et al. 2012) and comparisons of the key members of the footprint
family also exist (Fang et al. 2014), however, these studies do not address the
organizational level. Corporate level footprint studies mainly focus on the most
widespread footprint concepts such as the carbon footprint (e.g. Rugani et al. 2013).
Therefore, it seems there is no clear picture on which footprint concepts are suitable
for use at the corporate level.
This paper aims to contribute to the footprint debate by providing a systematic
review (see Fink 1998; Tranfield et al. 2003) of literature on footprint concepts that
can be used on the corporate or organizational level. Up to date no such (sys-
tematic) review has been prepared focusing on corporate level footprints, so this
may take us one step further towards the conceptualization of lesser used footprints
and their integration into sustainability management accounting.
This study is structured as follows: Sect. 2 provides terminology and the con-
ceptual framework for the analysis of corporate footprints in the context of cor-
porate sustainability and sustainability performance evaluation. Section 3
introduces the method of the systematic review process applied. Section 4 presents
the results both in a descriptive and a thematic manner, while discussion of the
results follows in Sect. 5. Suggestions and limitations are covered in the concluding
section.
Corporate Sustainability Footprints … 47

2 Corporate Sustainability Footprints—A Conceptual

Framework

2.1 Measuring Sustainability Performance

It is possible to grasp sustainable development at many different levels (see for

example Schaltegger and Csutora 2012). Whiteman et al. (2013) regard corporate
sustainability as a company’s activity in relationship to the planetary boundaries.
From a more pragmatic perspective, corporate or organizational level sustainability
can be understood as strategic and comprehensive management efforts to increase
the economic, social and environmental capital base (Dyllick and Hockerts 2002;
Salzmann et al. 2005; Schneider and Meins 2012) and thus improve corporate
performance along the ‘triple bottom line’ (Elkington 1998). The emerging concept
of corporate sustainability—regarded by some authors as a synonym of corporate
social responsibility (CSR, van Marrewijk 2003)—resulted in different corporate
guidelines on how to cover sustainability (see for example the EU Green Paper on
CSR, COM 2001 or the UN Global Compact (2013) albeit without exactly speci-
fying how to measure it.
While some argue that sustainability is a system level concept and cannot be
understood within the boundaries of a company (e.g. Gray 2010) it is obvious that
sustainable development cannot be achieved without the joint effort of all major
groups of society. This, in turn requires that progress on all levels is continuously
measured along the way and suitable metrics are developed for the purpose.
The scientific literature describing the efforts and results in the field of sus-
tainability indicators has been continuously growing during the last decades.
Questions remaining circle around the right set of indicators, the complexity and
methodology of quantification and the reporting of results.
The Bellagio Principles developed by an international group of measurement
practitioners and researchers as early as 1996 aimed at establishing principles to
measure progress toward sustainable development. Ramos and Caeiro (2010)
review the Bellaggio Principles and come to the conclusion that ‘according to these
principles, assessment of progress toward sustainable development should be gui-
ded by a clear vision of sustainable development and goals that define that vision.
The assessment should reflect a holistic view of the linkage between social, envi-
ronmental and economic considerations and it should have the appropriate scope
while still offering a practical application’ (Ramos and Caeiro 2010, p. 158).
Hardi and Zand, the developers of the original Bellagio Principles argue that the
process of indicator development should be’open and inclusive’ with effective
communication and broad participation and it should be a continuous, iterative and
adaptive process that provides ongoing support in the decision-making process
(Hardi and Zand 1997).
Kuik and Verbruggen (1991) identify a number of criteria for operational
indicators of sustainable development:
48 G. Harangozó et al.

• the calculation procedure should be objective and scientifically sound;

• indicators should relate to clear policy objectives;
• indicators should have a clear interpretation and be understandable to
non-scientists;
• indicators should cover the functioning of a system as a whole and
• indicators should be based on parameter values that are stable over a long period
of time (Kuik and Verbruggen 1991 in: van den Bergh 1999).
When assessing a number of different evaluation methods of the environmental
impacts of a certain economic sector, namely agriculture, van der Werf (2002)
argues that the researcher has to identify which environmental problems are con-
sidered by the evaluation method, what types of indicators are used and what is the
validity and feasibility of the method. Also, the trade-off between simplicity and
complexity of the evaluation method should be considered (van der Werf 2002).
Corporate sustainability performance is measured by sustainability performance
indicators (SPIs) (Cunha Callado and Fensterseifer 2011; Searcy 2012; Bourlakis
et al. 2014). SPIs can be used at the action level (Herva et al. 2011) as tools to
measure progress towards targets (Roca and Searcy 2012). Tahir and Darton (2010)
group SPIs into two categories: resource efficiency measures how effectively nat-
ural, economic, human and social resources are converted, while fairness in benefit
describes how fairly the benefits (or losses) of changes in the three domains are
distributed amongst stakeholders of a certain activity. Sustainability performance
can be measured at different levels relating to an organization: corporate, product,
supply chain (see for example Bourlakis et al. 2014).
Keeble et al. (2003, p. 151.) argue that ‘indicators should reflect the business
realities, values and culture of the organization, and as such their development
should not be constrained to prescribed methodologies or standards.’ They also
assert, however, that ‘internationally recognized standards can play a role in
informing the development of appropriate indicators’. According to their view,
indicator sets should be balanced and should reflect the concerns of the stakeholders
of the organization.
In order to facilitate the choice of indicators which meet the specific needs of an
organization they suggest the use of ‘screening’ and ‘ranking’ criteria. Screening
criteria help to identify indicators that meet the specific needs of the organization.
According to the screening criteria corporate sustainability indicators should be able
to measure progress over time; should be measurable and verifiable; relevant to key
internal/external concerns; potentially benchmarkable; critically related to the core
activities of the business and meaningful at the group level.
On the other hand, ranking criteria help the selection of indicators most
appropriate for the organization. According to the ranking criteria corporate sus-
tainability metrics should be leading rather than lagging; motivational; within the
control of those accountable; practical to measure; likely to provide new, useful
information; validated by engagement and help differentiate from competitors
(Keeble et al. 2003).
Corporate Sustainability Footprints … 49

Lagging indicators (outcome indicators or key performance indicators) refer to

past performance and often do not provide enough information to facilitate deci-
sions about future actions. In contrast with lagging indicators, leading indicators
can foster a preventive approach to sustainability by providing information that
helps respond to changing circumstances (Pojasek 2009). Leading indicators can
help promote a positive culture and according to Pojasek (2009, p.89.) they ‘should
be (i) objective and easy to measure; (ii) relevant to the organization whose per-
formance is being measured; (iii) able to provide immediate and reliable indications
of the level of performance; (iv) cost-efficient in terms of information collection and
(v) understood and “owned” by the group whose performance is being monitored’
Sustainability indicators may take various forms: they may be absolute or rel-
ative (BMU-UBA 1997), past or future oriented, expressed in physical or monetary
terms (Burritt et al. 2011).
Indicators may refer to the operation of the organization only, or can be
extended to at least a part of the supply chain that includes the given company
(Schaltegger and Csutora 2012). Indicators can be quantified using a LCA-based
bottom-up approach (collecting every single emission or other values related to a
certain activity) or an input-output approach, where the mapping of direct and
indirect material flows is following a top-down approach (Virtanen et al. 2011).
Hybrid approaches mix bottom-up and top-down methods (Ozawa et al. 2013).
Based on the principles articulated in the literature a number of practical metrics
have been developed to account for corporate sustainability performance, providing
input to related organizational activities. Without attempting to provide a full
account, some of the most widely used include:
• Strategy implementation: Sustainability Balanced Scorecards (SBSCs) offer
companies a tool to integrate sustainability aspects into their strategic decision
making process (Schaltegger and Dyllick 2002 or Epstein and Wisner 2001),
while the eco-efficiency framework developed by the World Business Council
for Sustainable Development (WBCSD 1996) measures the ratio of economic
performance and environmental impacts with a set of indicators.
• Process management: indicators used within the frameworks of ISO 14031
(1998) or the German Ministry for Environment (BMU-UBA 1997) focus on the
environmental domain, covering aspects like environmental load, environmental
management or environmental condition.
• Disclosure and reporting: the Global Reporting Initiative (GRI 2002; Jasch and
Lavicka 2006) provides guidance for companies to measure and communicate
their environmental, social and economic performance. Organizations active in
accounting standardization have also realized the importance of measuring and
reporting sustainability performance (e.g. the International Accounting
Standards Board, IASB, has published a recommendation regarding the prin-
ciples and elements of management commentary, which is becoming more and
more important for non-financial company information such as sustainability
metrics (IASB 2010).
50 G. Harangozó et al.

• Rating: sustainability indices provide industrial benchmarks for investors or

other stakeholders, the Dow Jones Sustainability Indices (DJSI 2013) follow a
best-in-class approach, meaning that companies can only be included and
remain in the indices if they perform better than their peers along the different
domains of corporate sustainability.

2.2 Corporate Footprint Concepts

Footprints are quantitative metrics addressing the natural resource use of humans
(Hoekstra 2008) usually measured in terms of real or symbolic land area units,
offering a demonstrative and easy-to-understand interpretation to these indicators
(and thus chances for misinterpretation as well, see Lenzen 2006). Beyond natural
resource use and area indicators, many other kinds of footprints exist—referred as
the ‘footprint family’ by Giljum et al. 2008 or Galli et al. 2012—, trying to quantify
one or more dimensions of human impacts on sustainability (UNEP/SETAC 2009;
De Benedetto and Klemes 2009).
Footprints measured at the global or national level are more or less standardized,
widely researched and used in practice. However, definitions and methodologies in
the field of corporate (or organizational) level footprint indicators are surprisingly
vague in some cases compared to the fast increase in the use of this concept
recently. Corporate level footprints are single or multi-criteria full life-cycle based
indicators describing the environmental or sustainability performance of business
organizations providing goods and/or services (UNEP/SETAC 2009). Through the
life cycle approach the different stages of the supply chain (raw material extraction,
transportation, production, usage, waste management etc.) are taken into account.
Corporate level footprints can be applied to other types of organizations as well,
such as public bodies, non-governmental organizations (NGOs), etc.
In this paper corporate footprints are defined as systematic and structured metrics
regarding any domains of sustainability in a life cycle concept. Recently the term
‘footprint’ has also gained popularity in a more general meaning as a buzzword (a
synonym for ‘impact’) with no reference to the use of indicators. In this study, this
meaning of ‘footprints’ is not considered.
Cucek et al. (2012) provide an extensive literature review of environmental,
social, economic footprints by presenting numerous individual and composite
footprint examples. Additionally, Fang et al. (2014) review and compare four key
members of the footprint family (ecological, energy, carbon and water). Both
studies offer a comprehensive analysis of their subject, however, they do not
address the organizational level.
Rugani et al. (2013) analyze carbon footprinting methods in the wine sector,
reviewing 35 life-cycle based studies in order to assess current practices of
conceptualizing and measuring carbon footprints in the wine making industry.
Corporate Sustainability Footprints … 51

This study gives a deep understanding of corporate carbon footprinting in one

industry, but according to the best knowledge of the authors as yet there is no
review aiming at assessing corporate footprint concepts in general.

2.3 Assessment Criteria

This article aims at providing a meta-analysis of footprint indicators aiming at the

measurement of the sustainability performance of business organizations.
According to Ramos and Caeiro (2010) a meta-evaluation is a ‘critical assessment
of the strengths and weaknesses of an evaluation, and draws conclusions about its
overall utility, accuracy, validity, feasibility and propriety’.
For the purposes of this assessment of corporate sustainability footprints a set of
criteria is proposed based on the literature presented above. The identified criteria
have an internal (i.e. linked to internal organizational processes) or an external
focus (i.e. linked to relationships with external stakeholders) and relate to the
different steps of corporate performance evaluation (for example as described by the
widely used ISO14031 international standard, see Jasch 2000).
The internal and external assessment criteria considered during this assessment
are shown in Table 1.
System boundaries, scope of footprint concepts. The setting of system bound-
aries raises the question what impacts to take into consideration and what should be

Table 1 Suggested criteria for assessing corporate sustainability footprint concepts

Steps of performance evaluation Criteria with an internal Criteria with an external
focus focus
Planning environmental System boundaries, scope Simplicity of
performance evaluation: of footprint concepts interpretation,
– Selecting metrics Validity (relationship to
sustainability)
Developing and using data and Simplicity and Usability for external
information: methodology of communication
compilation
– Collecting data Usability for internal
communication
– Analyzing and converting data
– Assessing information
– Reporting and communication
Reviewing and improving Comparability across Comparability across
environmental performance different time periods different organizations
evaluation Control over factors Potential for
determining performance standardization
Relationship to policy
objectives
52 G. Harangozó et al.

excluded from the analysis. If corporate footprints aim to provide an overview of

the contribution to sustainability, not only direct but also indirect impacts should be
covered.
Beyond the level of the whole organization, corporate footprints may focus on a
product, a process or the whole supply chain (or a certain part of it) making the
selection of system boundaries an issue during the design and calculation of the
specific metrics. However, assessment of the indirect impacts is also the most
challenging aspect of footprint calculations concerning methodology and data
requirements.
Simplicity of interpretation. Simplicity of interpretation refers to the meaning-
fulness of the indicator to the different stakeholders receiving such information
from a corporation. Often there is a trade-off between simplicity and the amount and
quality of information carried by an indicator/set of indicators making the issue one
of the most important to consider during the design phase. Corporate footprints may
take the form of a single indicator or a set of indicators also influencing how easily
stakeholders can interpret them.
Validity (relationship to sustainability). Validity, on the other hand, refers to
whether a certain indicator brings us closer to understanding a corporation’s sus-
tainability performance. One question is, whether existing footprint indicators
concentrate on only one single domain of sustainable development (i.e. the envi-
ronment or society) or a certain part of these; or if they address the interrelationship
between these domains as well (Kerekes 2011).
Another important issue is whether—similarly to their national or regional
varieties—they are able to provide information regarding organizational perfor-
mance in relation to sustainability (by considering the carrying or assimilative
capacity of their environment).
Simplicity and methodology of compilation. The setting up and running of a sus-
tainability performance evaluation system requires considerable time and resources.
Footprint indicators, while trying to provide a simple to understand measure of
corporate sustainability emerge as a result of complex data compilation and analysis
processes.
Usability for internal and external communication. One of the most important
purpose of developing sustainability metrics is communication towards internal and
external stakeholders. The appeal of footprint indicators is based on their inherently
expressive nature, which makes communication easier, although the amount of
information communicated may be limited in some cases.
Comparability across different time periods. Measuring progress along the way to a
more sustainable society is one of the most important purpose of sustainability
metrics. Corporate footprints thus should be comparable across different time
periods to inform decision makers about tendencies and to draw their attention to
critical areas and potentials for improvement.
Control over factors determining performance. While it may be useful to observe
indicators that fall beyond (or partially beyond) the control of an organization (e.g.
Corporate Sustainability Footprints … 53

indicators relating to the state of the environment) the design and implementation of
an indicator/set of indicators becomes more conducive if decision makers have the
willingness and means to intervene in order to improve the situation characterized
by the indicator.
Comparability across different organizations. In order to measure their progress
towards a more sustainable operation, corporations should benchmark their activ-
ities with similar organizations of their own sector and other relevant industries.
Apart from gaining useful insight into their own performance, such comparison is
also important because it can become an important tool for internal or external
communication.
Potential for standardization. There is extensive discussion on the need for stan-
dardizing indicators (see for example Roca and Searcy 2012). Standardization offers
comparability over time and within the industry or economy (Young 1996), but it
may also lead to information loss considering the different characteristics of
organizations.
The clarity of the methodology used during the design and implementation of
indicators is an important factor in designing useful metrics. Standardized perfor-
mance measurement makes it possible to aggregate data at the industry and/or
regional and national levels, which in turn helps policy making at these different
levels. The use of indicators calculated on a voluntary basis may lack standardized
content and procedures and thus lend themselves less well to such aggregation
efforts. Regulatory bodies should consider the standardization of voluntary indi-
cators so that they can benefit from their use.
In the case of footprints the most important challenge relating to standardization
is the definition of organizational boundaries as noted earlier.
Relationship to policy objectives. Organizational footprints offer an opportunity
for companies to tackle, monitor and communicate their impacts along the whole
supply chain. If sustainability of the footprint can also be measured, authorities may
have new tools to measure corporate performance and plan policies.

3 Method

This study is based on a systematic review of the literature (Fink, 1998; Tranfield
et al. 2003; Klewitz and Hansen 2014). It differs from conventional or narrative
reviews in that it aims to’synthetize research in a systematic, transparent and
reproducible manner’ (Tranfield et al. 2003).
The aim of using the systematic review method was to structure the research on
the organizational footprint concepts and to cover the different concepts in orga-
nizational management accounting in a systematic way. A systematic review
consists of both a descriptive, bibliographical analysis and a thematic analysis of the
field (Tranfield et al. 2003).
The research process consisted of five steps as described as follows.
54 G. Harangozó et al.

Step 1 Collecting search terms: The search terms (keywords) for the systematic
analysis on corporate sustainability footprints were deduced from Sect. 2
and arranged into three clouds (see e.g. Klewitz and Hansen 2014), such as:

• ‘corporate’ (including also company, enterprise, organization, firm1),

• ‘sustainability’ (including also environmental, social, economic,
responsible) and
• ‘footprint’.

Target publications needed to match one keyword per cloud at least, thus
footprint concepts addressing at least one dimension of sustainability that
can be used on the corporate or organizational level. In line with the
objectives of this paper, the review does not aim to cover all records
dealing with footprints or corporate sustainability management in general,
only the intersection of the three clouds.
Step 2 Scope of the review: A systematic review can cover very different types of
papers. To be able to manage the amount of records found and still
maintaining quality, focus was put on peer-reviewed, academic papers in
English language. Concerning the timeframe of the review, the analysis
covered publications from 1992—when the concept of ecological footprint
(Rees 1992) was developed—until 2013.
Step 3 Data sources: The systematic review covered the most important scientific
databases (EBSCO, Emerald, ScienceDirect, Scopus, SpringerLink and
Web of Science) that were appropriate to the interdisciplinary research
field of this review (corporate sustainability management). Different
databases applied different search syntax so search terms and search strings
had to be adjusted accordingly. Based on the search terms a preliminary
list (list C) of 2067 publications emerged. This number is large, as the
search terms are common, and they are likely to occur somewhere in the
full text of the records; but was sharply reduced by a title abstract and
keyword analysis to 109 records (list B). The publications on list B were
analyzed manually in-depth (abstract and full text) and a further 48 records
were eliminated. The major reasons for eliminating articles from list B
included (i) the use of the term ‘footprint’ in a very general sense and not
as a performance evaluation tool, (ii) the focus was on the quantification of
footprints with no focus on the use and applicability as a management
accounting tool and (iii) where the keywords were present but not con-
nected to each other at all. Additionally, 13 other publications found
elsewhere and considered as important contributions to the field of
research were manually added to the list by narrative inclusion. Thus, a

1
In practice, much more keywords emerged, such as organisation, organisational, organization,
organizational where strings—for example organi*atio*—were used depending on the syntax used
by different research databases/engines (see step 3).
Corporate Sustainability Footprints … 55

final list of 74 relevant publications emerged (list A) that are presented in

the descriptive and thematic analysis. To improve the reliability of the
analysis, three researchers (the co-authors of this paper) were involved in
the research process.
Step 4 Descriptive analysis: a bibliographical analysis is provided on the occur-
rence of different footprint concepts, the temporal distribution of publi-
cations and journals covered by the records of list A.
Step 5 Thematic analysis: this step of the research aimed to identify the different
corporate footprint concepts on an inductive basis emerging from the
systematic review. The aim of this step was to systematically analyze the
different concepts and analyze relationships.
The results of the systematic review are presented in the next section.

4 Results

The presentation of the results is structured in two subsections. First, a descriptive

bibliographical analysis is provided to get an overview of the different organiza-
tional footprint concepts and their presence in academic literature. Then, a thematic
analysis is provided on the organizational sustainability footprints uncovered by the
systematic review, including their definition, applicability in organizational man-
agement accounting, scopes, system boundaries and data collection process.

4.1 Descriptive Analysis—Bibliographical Overview

of the Literature

The 74 papers included in the review are distributed as follows. By footprint type
(see Fig. 1), publications related to the carbon footprint found to be the most
prevalent (35 papers). This is followed by the ecological (13) and the water foot-
print (8). The environmental footprint is the focus of 6 papers, the nitrogen (2),
social (2) and ethical footprints (1) are the least used constructs; 7 papers discuss
more footprint types. It should be noted that, as the review focuses on the appli-
cation of the various footprints on the organizational level, papers not addressing
this level were excluded from the review. The results therefore show that, although
the concept of the ecological footprint predates carbon footprint, to date the latter
has been more widely discussed on the organizational/company level.
Analysis according to publication date (Fig. 2) shows that, after initial studies
from around the turn of the millennium, academic interest in the application of
footprint type indicators in the assessment of organizational/corporate sustainability
has increased markedly in the past 5–6 years. The largest number of publications
(20 papers) are from 2012—it is too early to tell whether the reduction in 2013
represents a breaking point in the trend.
56 G. Harangozó et al.

40
35
35
30
25
20
15 13
8
10 6 7
5 2 2 1
0

Fig. 1 Distribution of papers by footprint type

25

20
20

15
15 14

10
7
6
5 4
3
1 1 1 1 1
0
1999 2001 2002 2003 2004 2006 2008 2009 2010 2011 2012 2013

Fig. 2 Distribution of papers by year of publication

The distribution of papers by source can be seen in Table 2. The Journal of

Cleaner Production stands out with 14 papers, followed by Ecological Indicators
with 5 papers. 7 other journals contain 2–3 papers, and there is a large number of
titles with 1 hit. This shows that the range of scientific journals dealing with
Corporate Sustainability Footprints … 57

Table 2 Distribution of publications by source

Source Number of publications
Journal of Cleaner Production 14
Ecological Indicators 5
European Business Review 3
Journal of Hazardous Materials 3
Journal of Industrial Ecology 3
Corporate Social Responsibility & Environmental Management 2
Environmental Science & Technology 2
Journal of Environmental Planning And Management 2
Sustainability 2
Other 38
Total 74

organizational footprint issues is very diverse—most of them are focusing on

environmental management, but the topic has also made its way to journals without
a primary focus on sustainability.

4.2 Thematic Analysis—Types of Corporate Level Footprint

Concepts

Different corporate footprint concepts are structured in this section on an inductive

basis emerging from the systematic review introduced earlier. The presentation of
seven different concepts in this subsection follows the order of their occurrence in
the literature (see Fig. 1): carbon footprint, ecological footprint, water footprint,
environmental footprint, nitrogen footprint, social footprint and ethical footprint. At
the end of this subsection a comparison of the different footprints is provided
according to the aspects of organizational sustainability they cover.

4.2.1 Carbon Footprint

Parallel to the increasing concern about climate change also in the corporate sphere,
many companies and other organizations tend to account and control their carbon
emissions. The Carbon Footprint (CF) measures the total amount of greenhouse gas
(GHG) emissions that are directly and indirectly caused by an activity (Wiedmann
et al. 2009; Jungbluth et al. 2012) or are accumulated over the life stages of a
product (Galli et al. 2012). Organizational CF in this sense can be approached as the
amount of carbon or GHG emissions that are directly or indirectly caused by the
organization’s processes or emerge over the full life-cycle of the products or ser-
vices of this organization (Jensen 2012; Townsend and Barrett 2013).
58 G. Harangozó et al.

CF may only refer to CO2 only or to a further set of GHGs. CCAR (2008) and
OPEN:EU (2010) consider six different GHG groups (covered by the Kyoto
Protocol), such as carbon-dioxide (CO2), nitrous oxide (N2O), methane (CH4),
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6).
In this latter case the name of CF is somewhat misleading as other non
carbon-based GHGs are covered as well. In this sense Greenhouse Gas Footprint
(GHGF), suggested by Downie and Stubbs (2013); Northey et al. (2013) or even
Global Warming Potential Footprint (GWPF) see for instance Meisterling et al.
(2009) or Svensson and Wagner (2011a) may be a more appropriate term to use.
CF is usually expressed in terms of mass units (g, kg or t) of CO2 (WBCSD/WRI
2004; Vázquez-Rowe et al. 2013). If further GHG-emissions are covered as well,
CO2-equivalents are calculated (Panela et al. 2009).
CF is also used as an element of the Ecological Footprint (see for example
Wackernagel et al. 1999). In this case CF is measured in land units. However, when
converting emissions into land areas based on the carbon uptake capacity of
ecosystems, a variety of assumptions are applied, which increases uncertainty (Galli
et al. 2012). For this reason, mass units (kgs or tons) are preferred on the organi-
zational level.
Different protocols provide reasonably exact methodology for calculating CF.
A European Commission review (2010) considers 11 methodologies and 11
implementation policies as more or less appropriate for accounting carbon
emissions.
On the organizational level, carbon emissions are usually grouped into different
‘scopes’ or ‘tiers’. The Greenhouse Gas Protocol (WBCSD/WRI 2004) protocol
suggests three different scopes:
• Scope 1: Direct GHG emissions including sources that are owned or controlled
by the company (e.g. emissions from own boilers, vehicles etc.)
• Scope 2: Electricity indirect GHG emissions from the generation of purchased
electricity consumed by the company. (The protocol considers here solely
electricity, but other purchased energy—heat or steam—should also be con-
sidered here.)
• Scope 3: Other indirect GHG emissions based on activities such as external
transportation or the use of sold products. Scope 3 is an optional accounting
category that allows for the inclusion of all other indirect emissions. The Scope
3 standard of the GHG Protocol (WBCSD/WRI 2011) provides detailed guid-
ance for organizations how to include their carbon impacts along the value
chain. Beyond upstream emissions, Lenzen and Murray (2010) stress the
importance of covering downstream impacts in organizational carbon footprint
accounts as well.
Although Scope 3 emissions account for a significant part of organizational
emissions (Stein and Khare 2009 or Downie and Stubbs 2012), indirect CF ele-
ments (other than Scopes 1 or 2) are usually underestimated by companies.
Matthews et al. (2008) claim that only 14 % of the total CF is covered by Scope 1
and only 26 % by Scopes 1 and 2 among US companies. However, Matthews et al.
Corporate Sustainability Footprints … 59

(2008) consider Scope 3 as too vaguely defined and suggest instead Scope 3
(indirect emissions for production) and Scope 4 (indirect emissions for the total life
cycle including delivery, use, and end-of-life).
The WBCSD/WRI protocol also sets as a minimum requirement that companies
should separately account for and report on scopes 1 and 2 (WBCSD/WRI, 2004).
Measurement of the organizational CF is usually happening based on the LCA
approach as suggested by the GHG Protocol, (WBCSD/WRI 2004, 2011), but it can
also be accounted based on an environmentally extended input-output analysis
(EEIOA) see e.g. (Cagiao 2011, Townsend and Barrett 2013) or a hybrid approach
by combining the two (Chakraborty and Roy 2012).
In corporate carbon footprint accounts, the question of system boundaries is an
important issue. Focus can be put on the organizational (Høgevold 2011; Elmualim
et al. 2012), product (Baldo et al. 2009), process (Chakraborty and Roy 2012, Caro
et al. 2013) or supply chain (Lee and Cheong 2011; Babin and Nicholson 2011; Lee
2011) level, or a combination of the above (Lenzen and Murray 2010,
Carballo-Panela et al. 2012).
For accounting the carbon emissions within different system boundaries related
to organizational activity, standardization is an important issue (Diaz et al. 2012;
Caro et al. 2013), and compared to other organizational footprint concepts, stan-
dards like the GHG Protocol (WBCSD/WRI 2004, 2011) foster the process of
applying common practices in corporate carbon accounting.
In this context carbon footprinting is considered as a management accounting
tool, but it can also be used for other purposes, such as product labelling, improving
eco-efficiency or reporting (Baldo et al. 2009; Velásquez et al. 2009; Pattara et al.
2012; Trappey et al. 2012).

4.2.2 Ecological Footprint

The Ecological Footprint (EF) in general tracks the human demand for, and compares
it against nature’s supply of biocapacity (Rees 1992; GFN 2012; Csutora and Zsoka
2014, Toth and Szigeti 2016). The EF originally measures human pressure onto the
ecosystem in terms of global hectares regarding the following fields (for a detailed
methodology see GFN 2005; Mozner et al. 2012’ Borucke et al. 2013; Kocsis 2014):
cropland, grazing land, fishing grounds, forests, carbon uptaking areas,2 built-up land.
On an organizational level, EF means the land area necessary to cover resource
consumption and waste generation of an organization (Maltin and Starke 2002), an
accounting tool to measure biological capacity needed to support organizational
activity (Holland 2003).
Unlike the other footprint concepts covered in this analysis, corporate EF is
expressed in area units (Herva et al. 2011; Diaz et al. 2012), in most cases in global

2
This element of EF is also called carbon footprint. However, it is not the same as the Carbon
Footprint discussed earlier (which is expressed in mass units—kg or t).
60 G. Harangozó et al.

hectares (Bagliani and Martini 2012). Lenzen (2003) differentiates four categories
of organizational land use: consumed, degraded, replaced and disturbed areas.
Contrary to EF on the global or national level, where, as mentioned earlier, the
components are more or less commonly accepted, the concept of organizational EF
lacks a widely accepted framework and methodology. Beyond the core resource use
components (GFN 2005, 2012), further elements are covered by some authors, such
as wastes (Herva et al. 2008; Bagliani and Martini 2012), water (Gondran 2012;
Herva et al. 2012) or pollutants and toxic wastes (Herva et al. 2010). Although there
are some attempts to include the impacts of pollution, corporate EF remains rather a
metrics of resource use. Furthermore, it does not include risks and uncertainties
(Holland 2003).
The scope of EF in the organizational accounting system can be the organization
itself (Maltin and Starke 2002; Lenzen 2003), its products (Kitzes et al. 2009) or
can be extended to the supply chain (van Hoek 1999). The organizational EF can
also be regarded as the combination of individual product footprints. Kitzes et al.
(2009) stresses the need for carefully and explicitly defining system boundaries and
thus the scope of the analysis (products, processes etc.). It should also be indicated
whether the analysis is based on mutually-exclusive EFs of different organizations
(that can be summed) or the different organizational EFs overlap with each other.
For quantifying organizational EF—similarly to the calculation of organizational
CF—there are both LCA- and IO-based approaches (Lencen 2003; Herva and Roca
2013).
As it can be seen, corporate EF is not a standardized tool as there is no common
practice on what to include in it, but it provides aggregated information for the
organizational management accounting system. Beyond an internal management
accounting tool (Holland 2003) that can also be linked with ABC-accounting
(Bagliani and Martini 2012), it can be used for strategic planning and decision
making (Gondran 2012), reporting and communication.
On a global or national level EF can be regarded as an absolute sustainability
indicator (compared to the available biocapacity). On the organizational level,
however, available biocapacity is not defined (Herva et al. 2011).

4.2.3 Water Footprint

The water footprint (WF) evolved from attempts to capture the flow of ‘virtual
water’ between nations embodied in traded products (Allan 1998; Hoekstra and
Hung 2002; Marjaine Szerenyi and Kocsis 2012). It measures the amount of
freshwater used to produce the goods and services consumed by the individual or
community or produced by the business (Hoekstra et al. 2011). The WF is normally
expressed in terms of water volume (litres or cubic meter) and is composed of three
elements: the ‘blue WF’ referring to the consumption of surface and groundwater
(this does not include non-consumptive water use, where the water withdrawn is
returned to the source); the ‘green WF’ referring to the consumption of rainwater
(insofar as it does not become runoff); and the ‘grey WF’ which measures water
Corporate Sustainability Footprints … 61

pollution, defined as the amount of water necessary to dilute pollution to the levels
required by ambient water quality standards (however, insufficient standards—or
the lack of such standards—may make this definition somewhat problematic).
A widely accepted methodology for the calculation of the WF is provided in the
Water Footprint Assessment Manual published by the Water Footprint Network
(Hoekstra et al. 2011).
For a company, the WF can be measured as the sum of the WFs of the products
delivered by the company and the ‘overhead’, referring to water use which cannot
be attributed to particular products (e.g. water use in cleaning, toilets, kitchens etc.).
(Hoekstra et al. 2011) To this date, several companies—mainly from the food and
beverage sector—have published studies on their water footprint, including
Coca-Cola (2011), SABMiller (2010), Dole Food Company (Sikirica 2011),
Unilever (2013) and Finnish wood, paper and bioenergy company UPM (2011).
Regarding the system boundaries, there is broad consensus that organizational
WF should include indirect (supply chain) water consumption—indeed, existing
studies indicate that this component (especially where agricultural inputs are used)
is typically much larger than the direct component of the WF (e.g. Coca-Cola 2011;
Ene et al. 2013; Lambooy 2011, Ruini et al. 2013). The studies are more diverse
when it comes to the inclusion of water consumption associated with the use phase
of the company’s products. This is usually not calculated, except in cases where it is
likely to be important. For example, Ruini et al. (2013) include the water used for
cooking in their study on the WF of Barilla pasta, and in case of Unilever (2013),
the use of their cleaning and personal care products is found to be the most
important component of the company’s WF. In general, it is the recommendation of
the WF’s creators that factors which are expected to play a minor role (i.e. con-
tribute less than 10 % to the overall WF) can be excluded. Hence, it is recom-
mended that energy and transport should only be included in the analysis if it
involves the use of hydropower or biomass. The water use related to labor (water
and food consumption etc.) should be excluded to prevent double accounting (as
these water uses will normally be included in the water footprint of workers as
consumers). (Gerbens-Leenes and Hoekstra 2008; Hoekstra et al. 2011)
Significant obstacles related to the use of the WF for the measurement of cor-
porate sustainability include the difficulty to obtain data from the supply chain as
well as issues related to the interpretation of the results. While the former problems
are being addressed by improving databases, e.g. the WaterStat database provided
by the Water Footprint Network which includes data on various crops taking into
account soil and climate conditions in locations across the globe), the latter issues
have led some to call into question the usefulness of the WF as a whole (Chapagain
and Tickner 2012). At the core of the interpretation difficulties lies the fact that—
opposed to other footprint-type measures, notably the CF—in case of the WF, the
geographical dimension (such as water scarcity and overall pressure on the given
water system) plays a crucial role. In practice this means that the WF itself does not
provide information about the potential environmental damage associated with the
water use—indeed, a smaller WF may be less sustainable than a larger one,
depending on where the water is sourced (Riddout and Pfister 2010). The
62 G. Harangozó et al.

recommendation for sustainability assessment put forward by the Water Footprint

Assessment Manual (Hoekstra et al. 2011) is that the WF of a process is unsus-
tainable if it occurs at a time and place where the overall WF is considered
unsustainable; and/or if it can be reduced at an acceptable social cost.
In order to address the problem of interpretation and comparability arising from
geographical differences, weighted WFs have been created using water stress fac-
tors to standardize footprint components from different locations (Riddout and
Pfister 2010). However, according to Chapagain and Tickner (2012), such weighted
WFs are also problematic because they fail to take into account temporal variability
in water availability, as well as the socio-economic context (such as the opportunity
costs of water use) which may also affect the sustainability of WFs.
Consequently, Chapagain and Tickner (2012) emphasize that great care needs to
be taken when interpreting WF data, and the focus of organizations should be on
addressing the adverse impacts of WF rather than simply aiming for its reduction.
They describe the WF as a powerful communication tool with important
awareness-raising potential, but stress the need to avoid overly simplistic applica-
tions such as volumetric WF labelling schemes for consumer goods. In a business
context, they see the main value of WF as a tool to assess strategic risks related to
water and to create motivation to address these risks. The WF may also help to
foster communication and cooperation between different stakeholders relying on the
same water base.

4.2.4 Environmental Footprint

While organizational EF aimed to provide compact information on some selected

aspects of environmental sustainability, the organizational environmental footprint
(EnvF) intends to provide a multidimensional environmental assessment (Gaussin
et al. 2013) covering the full scope of environmental impacts of organizational
activity (Northey et al. 2013).
In the Europe 2020 Strategy—‘Roadmap to a Resource Efficient Europe’ (COM
2011)—organizational EnvF is described as a multi-criteria indicator for measuring
the environmental performance of organizations as a management accounting tool.
EnvF follows a life-cycle approach and its main aim is to decrease negative
environmental impacts concerning organizational activities, taking into account the
whole supply chain (from raw material extraction to waste management).
Organizations may be businesses, non-profit organizations or public bodies (COM
2013a).
The organizational EnvF can be calculated by accounting resource and waste
flows crossing organizational boundaries. Different sources cover different elements
of EnvF, but a common characteristic is that they are all multidimensional metrics.
Organizational boundaries for calculating EnvF are set to cover all facilities and
associated processes that are owned or operated by the organization. The envi-
ronmental impacts that emerge within the organizational boundaries are defined as
direct impacts. Indirect impacts are impacts emerging upstream or downstream
Corporate Sustainability Footprints … 63

along the supply chains linked to organizational activities, but falling outside of the
organizational boundaries.3 GHG offsets are not included in EnvF.
Product-level EnvF covers the environmental impacts of products or services of
the organization (Gaussin et al. 2013; COM 2013b). Theoretically the sum of
product EnvFs accounts for the total organizational EnvF for a certain period.
Although Pearce and Miller (2006) uses corporate EnvF and EF as synonyms, in
this analysis they are clearly differentiated as EnvF is a multidimensional metric and
aims to cover all environmental aspects of organizational activity. The quantifica-
tion of EnvF can add further information to the organizational management
accounting systems. Laurent et al. (2012) found that organizational EnvFs do not
necessarily correlate with CFs.
As a similar concept, corporate E-footprint (Earth-footprint, EarthF) is a com-
pany’s impact on Earth’s life- and ecosystems (Svensson and Wagner 2012)
measured by the material and energy flows impacting them (Svensson and Wagner
2011b). As EarthF is a very analogous concept to EnvF, it is regarded as a synonym
in this analysis.

4.2.5 Nitrogen Footprint

One of the newest members of the ‘footprint family’ is the nitrogen footprint (NF),
developed by Leach et al. (2012). Release of reactive nitrogen to the environment
caused by human activity results in a series of disruptive effects including smog,
acidification, eutrophication and increase of the greenhouse effect. The authors
emphasize that the magnitude of human disruption to the nitrogen-cycle is actually
much greater than in the case of carbon: anthropogenic release of nitrogen is
approximately double the amount resulting from natural processes, while for CO2
emissions it is only 5–10 %. This means that there is a great need for tools to better
track and communicate our impacts on the nitrogen cycle.
The NF was first developed at the level of individuals and defined as the total
amount of N (expressed in weight units) that is released to the environment due to
an individual’s consumption of food and energy (including the indirect impacts
such as the energy needed to produce goods consumed). The method of calculation
is based on country level average per capita data, which was used to calculate the

3
The EU framework (COM 2013a) provides a reasonably exact method for calculating the 14
default EnvF impact categories using indicators with natural measurement units in the fields of:
climate change, ozone depletion, ecotoxicity–freshwater, human toxicity–cancer effects, human
toxicity–noncancer effects, particulate matter/respiratory inorganics, ionizing radiation–human
health effects, photochemical ozone formation, acidification, eutrophication–terrestrial, eutrophi-
cation–aquatic, resource depletion–water, resource depletion–mineral/fossil, land use. It is possible
to narrow the scope of indicators with proper reason or there is also an option for including further
indicators.
64 G. Harangozó et al.

total NF of two countries: the United States and the Netherlands; as well as to create
an individual NF calculator, where the average amounts are scaled up or down
depending on lifestyle factors (Leach et al. 2012). As a next step, Leach et al.
(2013) have developed the methodology to calculate NF on the organizational level
and applied it for the University of Virginia (to date, this is the only organizational
NF assessment). The methodology includes the calculation of direct impacts as well
as upstream components (the amount of N associated with the production of energy
and food consumed at the University), and can potentially be applied across a wide
range of other organizations.

4.2.6 Social Footprint

Together with the increasing interest in various environmental footprints, ideas

have also been put forward to express the social aspect of sustainability through
similar indicators. However, most of these are at an early stage of operationalization
and are little more than metaphors at present. One such attempt which is specifically
intended to assess the social sustainability performance of organizations is the
social footprint (SF) developed by McElroy et al. (2008). Rooted in the
capital-based understanding of sustainability, the SF measures organizational
impacts on human, social and constructed capital compared to previously defined
standards. Contrary to environmental footprints, the impacts measured here are
positive ones, that is, how much an organization contributes to producing its share
of social capital. The greatest difficulty with this approach is to determine the level
of social capital production that can be considered sustainable, and to determine the
contribution of the organization.
McElroy et al. (2008) use the example of the UN millennium development goals
(United Nations 2000)—such as the eradication of extreme poverty or the pro-
motion of gender equality—for which the UN has set partial quantitative targets for
2015 and has drawn up the necessary budgets for their achievement. These budgets
can be broken down to a national and then a personal level, and compared to the
financial contributions (per employee) that a company makes to the UN (which
includes any direct payments as well as indirect contribution through taxes paid and
partially forwarded to the UN by the national governments). Based on this example
one may question the validity of the approach proposed by the creators of the SP, as
payments to the UN are hardly the best way to assess a company’s contribution to
the eradication of poverty or to gender equality—providing employment and fair
wages, or equal treatment of women may clearly be more important but cannot be
captured in this model. It is also clear that there are many forms of social capital and
organizational contributions to the creation of this capital—for all of these, a dif-
ferent kind of SF would need to be calculated. Therefore, in its current form, the SF
cannot be considered as an indicator. Rather, it is a concept for creating indicators
along similar lines.
Corporate Sustainability Footprints … 65

4.2.7 Ethical Footprint

Similarly to SF footprint, corporate ethical footprint (EthF) is also an emerging

concept, covering mainly the social aspects of corporate sustainability performance.
Although it lacks a methodological rigor compared to the different environmental
footprint concepts, Baden and Harwood (2013) highlights its importance to provide
a normative, positive sounding and easily understandable framework for accounting
social aspects of a company. Beyond the scope of academic discussion, the concept
of EthF also emerges in the NGO field (Ethical Footprint, 2010).

4.2.8 Comparison of the Different Footprint Concepts

Different footprints presented in the thematic analysis cover different dimensions of

the sustainability performance of companies and other organizations. Figure 3 aims
to provide an overview of the relationship of the different concepts.
As the systematic analysis shows, footprint concepts are mostly related to the
environmental domain of sustainability. EnvFs cover the broadest domain, with a
multidimensional metrics, they can provide information on virtually all environ-
mentally related aspects of an organization. EnvFs use natural measurement units in
the different fields.
The further footprint concepts in the environmental field provide only a partial
coverage of the organizational environmental aspects, thus deliver compact input to
the management accounting system on some selected key areas. Corporate EF
originally focused on resource use and carbon emissions resulting from energy use.

ENVIRONMENTAL SOCIAL ECONOMIC

EnvF (EarthF)

SF
EF

WF EthF

NF
CF
(GHGF)

Fig. 3 Relationship of the different corporate sustainability footprint concepts

66 G. Harangozó et al.

Although there are many attempts to include other output aspects (wastes or even
other emissions), organizational EFs usually cover a much narrower area than
EnvFs, but provide results in aggregate measurement units of ghas.
The further corporate footprints in the environmental domain provide informa-
tion on a specific field in natural measurement units. CF (and GHGF) provide
detailed information on organizational carbon emissions. CF is also included in EF
accounts, although in the latter case emissions are converted to area units. The
systematic review showed attempts to include WF into the EF accounts, but this
was not a general practice. The review did not show any evidence on the coverage
of NF within organizational EFs, although it is an important element of EnvF.
Regarding the social domain of sustainability, SF and EthF are attempts to cover
the contribution of an organization to the social capital in a systematic way.
Although a multidimensional metrics is suggested in the literature, it is much less
operationalized compared to footprints in the environmental domain.
Based on the present review, no evidence of organizational economic footprints
emerged. Of course, the notion is widely used, but rather as a buzzword and in an
ad hoc sense (see elimination criteria in the method section), not as a concept to
systemize the organizational impacts in a structured way.
Further discussion on the different footprint concepts follows in the next section.

5 Discussion

In this section the different organizational footprints are discussed according to the
assessment criteria presented in subsection 2.3.
System boundaries, scope of footprints. In theory, all of the different organiza-
tional footprints cover both direct and indirect impacts of the organization. For
example in the field of CF methodologies three different layers of impacts can be
quantified: Scope 1 covers direct emissions, Scope 2 relates to emissions emerging
from purchased energy and Scope 3 concerns all other indirect emissions, such as
production of purchased materials or transportation by external vehicles. The
inclusion of indirect impacts is the area where footprint indicators can provide
valuable additional information to assess organizational sustainability over simple
resource use or pollution data. In case of the WF or CF for example, a company’s
direct water consumption or CO2 emissions can be measured without footprint
calculations, but will not include important portions of the company’s overall
impact in these areas.
Beyond the general consensus that indirect impacts should be included in
footprint calculations, the precise setting of the boundaries of the analysis remains a
key issue. For example, upstream impacts are considered more often, while there is
a greater variation regarding the inclusion of downstream impacts. Another open
question is whether personal impacts generated by internal stakeholders (employ-
ees, managers, owners etc.) should be included in corporate footprint accounts (and
if yes, to what extent—considering also the principle of additionality). Furthermore,
Corporate Sustainability Footprints … 67

the practical difficulty of assessment of the indirect impacts concerning method-

ology and data requirements often leads to the omission of these impacts, especially
in the case of CF and EF. In WF and NF accounts, however, the inclusion of supply
chain impacts is standard.
The building blocks of organizational footprints are typically product and pro-
cess level footprints. In some cases, accounting and reporting focuses mainly on the
footprint of the company’s products rather than the whole organization itself (for
example in case of CF or WF).
Validity (measurement of sustainability). This aspect refers to the issue whether
footprints provide a comprehensive and relevant picture of the contribution of
organizations to sustainability.
One point is the coverage of the concepts. As it was summarized by Fig. 3, most
footprints address the environmental field, but there are differences in the range of
impacts they cover, with EnvF being the broadest, followed by EF, while others—
CF, WF, NF—address specific areas. SF and EthF relate to the social dimension of
sustainability. There are currently no footprint concepts addressing different
dimensions of sustainability simultaneously.
Another important aspect is whether the footprints are suitable for measuring
organizational sustainability in the area they address. In case of CF, EF and EnvF, a
higher footprint indicates higher impact, but there is no clear benchmark on whether
a certain level of the footprints can be considered sustainable (compare for example
to national or global EF where the respective biocapacity sets a basis of the
assessment of sustainability). However, in case of the WF, the importance of the
spatial and temporal dimension (considering local and seasonal water scarcity)
means that there is not even a clear link between the size of the footprint and its
impacts. Although not addressed in existing publications, this problem may also
affect the NF (the same amounts of N can have different impacts in different
environments).
In case of SF and EthF there is an attempt to compare the indicator to an external
standard but in this case the validity of the indicator itself is questionable.
Simplicity of compilation, methodology of quantification, standardization. In
general, it can be noted that the comprehensive and rigorous quantification of
organizational footprints is a complex and time consuming exercise with substantial
data requirements. The calculation of CF and WF is more or less standardized. The
most important future challenge is the definition of organizational boundaries. EF
and CF are fairly well standardized as a global or national concept but on the
organizational level it is not yet clear enough what to include. There are different
frameworks for EnvF even though it aims to cover all relevant environmental
aspects of an organization. The methodology put forward for the NF is relatively
clear, but as it is in an early stage of development, practical applications are as yet
limited. SF and EthF are rather concepts than exact indicators, thus are not
appropriate to provide standardized outcomes in their current formats.
The method of data collection is another important point. The bottom-up or
LCA-based approach—trying to take every single impact into account—is usually
used for accounting the direct impacts or summing the different product-level
68 G. Harangozó et al.

footprints in order to calculate the organizational footprint. The top down or

IO-based approach—using certain standard emission factors or input-output
matrix-based methodologies—are mainly applied for calculating indirect impacts.
Simplicity of interpretation and usability for internal and external communi-
cation. Some of the reviewed footprints—CF, WF, NF or even the EF—can be
measured with one single and easy-to-communicate indicator (with further
sub-indicators). Others—EnvF, SF and EthF—consist of a set of indicators, for
example EnvF provides comprehensive and detailed information on organizational
environmental performance but cannot be communicated and interpreted easily.
The simplicity of single indicator footprints create a good chance for easy
communication and provide good opportunities for raising awareness among
non-expert audiences (‘out-of-the-box’ communication). However, this feature may
also lead to oversimplified or misleading interpretation. Multi indicator footprints,
such as EnvF may provide a more complex perspective on sustainability perfor-
mance but their interpretation and communication may be challenging.
Control over factors determining performance. Organizations usually have
higher control on direct impacts compared to indirect ones emerging somewhere
else along the supply chain—this applies to all footprint concepts covered in this
review. Supply chain impacts may also be influenced by setting supplier require-
ments or by procurement decisions (upstream), and informing customers or product
design (downstream). However, such improvements may not always be reflected in
the calculated footprint values, due to methodological issues (e.g. resource savings
by a specific supplier may not be reflected in the CF, WF, NF and EF if upstream
data are collected by an IO method.)
Comparability across different time periods and organizations. Footprints pro-
vide a good framework for temporal comparison at a certain organization. If the
method of footprinting is well defined, data for different periods may reflect actual
organizational progress towards sustainability. Of course, comparisons on a relative
basis (taking into account changes in turnover, size etc.) may provide more
meaningful information.
This latter aspect also arises when attempting to compare different organizations,
as they have very diverse characteristics. Comparisons within industrial sectors or
industry specific benchmarks would be the most useful information to one orga-
nization’s management accounting. However, in practice this is scarce due to the
lack of application of the footprint concepts in organizational accounting, different
methods of calculation and the lack of information on peer companies. An
exception may be CF, where there is an increasing trend regarding calculating and
publishing organizational footprints. Product level comparisons may play an even
more important role in the future in case of CF, WF (especially in agriculture, food
industry), NF and EF.
Relationship to policy objectives. Areas covered by sustainability footprints may
strongly overlap with policy focus. In this case, footprint information from orga-
nizational accounts may demonstrate commitment and progress along policy
objectives. For example, the disclosure and management of organizational CFs are
in line with national climate strategies or in case of the availability of corporate or
Corporate Sustainability Footprints … 69

product level WFs, river basin authorities may have better information on organi-
zational water consumption patterns. However, the lack of officially accepted
methodologies currently makes it impossible to create national accounts or to
regulate companies based on organizational footprints.

6 Conclusions

This paper intended to contribute to the footprint discussion by providing a sys-

tematic review of footprint concepts as management accounting tools that can be
used on the corporate or organizational level. To achieve this goal, a systematic
review has been performed to provide an overview of the organizational footprints.
According to the best knowledge of the authors, no previous systematic review
exists focusing on organizational sustainability footprints. This paper may therefore
take the scientific discussion one step further to the conceptualization of less used
footprints and their integration into sustainability management accounting.
The review was focusing on peer-reviewed academic publications in English by
using scientific databases, but was also supplemented with some other records
based on a narrative inclusion. A possible limitation is that not all related publi-
cations were covered with such a method, however, the transparent, structured and
reproducible manner of the systematic review intended to increase reliability of the
process.
Based on the systematic review process seven different footprint concepts
emerged that can be used at the organizational level. These concepts are very
diverse regarding their scopes and methodological explicitness. A common feature
is that they offer an opportunity for companies and other organizations to tackle,
monitor and communicate their sustainability performance on the organizational
level. As these concepts may provide information on direct as well as indirect
impacts, they may play a key role as organizational sustainability performance
metrics.
Five of the reviewed organizational footprint concepts emerged during the
systematic review are related to the environmental domain of sustainability, while
two (substantially less developed) concepts cover the social aspects. An interesting
point highlighted by the review is that there seems to be no footprint concept going
beyond one single dimension of sustainable development. This means that the
interrelationships between the environmental, social and economic performance of
the corporations are not grasped by any of the introduced indicators making them
unsuitable for a comprehensive sustainability assessment. For this reason, inte-
grating different corporate footprint concepts may be one important field of future
research.
This paper focused on the analysis of different organizational level footprint
concepts and not exact indicators. A further direction for future analysis might be to
broaden and deepen the scope of the comparison to address exact calculation
methods for quantifying the different types of organizational footprints.
70 G. Harangozó et al.

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Carbon Accounting: A Review
of the Existing Models, Principles
and Practical Applications

Eduardo Ortas, Isabel Gallego-Álvarez, Igor Álvarez

and José M. Moneva

Abstract The Kyoto Protocol has opened up an international debate about the
appearance of different regulations which focus on carbon accounting and report-
ing. Specifically, the Kyoto Protocol established that the Conference of the Parties
shall define the relevant principles, models, rules and guidelines, in particular for
verification, reporting and accountability for carbon allowances. As a consequence,
many companies remain confused as to the appropriate carbon accounting model.
Due to the existing controversies on the topic, the aim of the present work is
twofold. Firstly, and from a macroeconomic point of view, this work attempts to
analyse the different carbon accounting regulations existing at the international
level. Secondly, and from a firm level, describe the main practical carbon
accounting principles and applications in different industries. Main results reveal
the existence of different approaches at the corporate level in the international
context about carbon accounting and reporting. This has several implications from a
company point of view, being one of the most important the impact of the carbon
accounting model choice on companies’ financial performance.

E. Ortas (&)
J.M. Moneva

University of Zaragoza, Zaragoza, Spain
e-mail: [email protected]
J.M. Moneva
e-mail: [email protected]
I. Gallego-Álvarez
University of Salamanca, Salamanca, Spain
e-mail: [email protected]
I. Álvarez
Basque Country University, Leioa, Spain
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 77

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_4
78 E. Ortas et al.

1 Introduction

The significant increase in the emission of greenhouse gas (GHG), especially

carbon dioxide (CO2), to the atmosphere has dramatically given rise its temperature.
In 1997, to deal with this problem the Kyoto Protocol (KP) which is an international
agreement linked to the United Nations Framework Convention on Climate Change
(UNFCCC) was signed. This protocol aimed at lowering GHG emissions and
redistributing the costs associated with climate change policy, by moving them
from citizens of less developed countries, that are not producers of GHG emissions,
to the companies which are the true responsible for the emissions and, moreover,
they get profits from them. Nevertheless, climate change international agreements,
such as the KP, mainly focus on quantitative targets which are generally focused on
computing GHG emissions in each country (Ascui and Lovell 2012). The KP has
been ratified by different countries/regions among them the European Union
(EU) which will have to adapt to the new regulations contained in the KP as well as
those developed in the EU and in other specific countries. However, some of the
120 countries committed to the KP in its first phase, such as Japan, Canada and
New Zealand, have announced that they will not continue under the KP scope
during its second phase (up to 2020). This announcement seems to be a serious
problem because of the committed countries/regions to the second phase of the KP,
such as the EU, Australia and Norway, only represent about 15 % of the total GHG
emissions worldwide. It is worth mentioning that EEUU did not sign the first phase
of the KP and will continue with this attitude in its second phase.
Examining the KP leads us to deduce, among others, some relevant aspects
included within it and which are the following: (a) all parties shall formulate,
implement, publish and regularly update national and regional programs including
measures to mitigate and to facilitate an adequate adaptation to climate change;
(b) these programs involve economics sectors such as energy, transport, agriculture,
forestry and waste management; and, finally, (c) the Conference of the Parties shall
define the relevant principles, models, rules and guidelines for reporting, verification
and accountability of carbon allowances. At this point, Schaltegger and Csutora
(2012) consider that “carbon accounting has played a crucial role on the scientific
and political level to inform societal and political institutions and to support
decision-makers in designing regulations and international agreements”. Due to the
growing importance of this topic on political, societal and company-specific
dimensions, this work aims to contribute to the existing literature in several ways.
First, from a macroeconomic point of view, a complete review of the different
regulations related with carbon accounting and reporting at an international level is
provided. Secondly, we examine the annual reports of different international com-
panies belonging to different industries in order to show the different principles and
practical applications of the different carbon accounting models. The results obtained
show that many companies remain mislead about the appropriate carbon accounting
model proposed by different organisations such as: (a) the International Financial
Reporting Interpretation Committee (IFRIC) of the International Accounting
Carbon Accounting: A Review of the Existing Models … 79

Standard Board (IASB); (b) the Financial Accounting Standards Board (FASB) in
the United States (US); and (c) other national-focused regulations. Considering that
there is currently no globally accepted regulation or a best practices code related with
carbon accounting, it is deemed important to analyse the way that companies
account and report on that issue. Thus, the implications of this work will not only
help companies, shareholders and other stakeholders about the impact of the carbon
accounting model on firms’ financial performance but also for regulators to continue
get a consensus about the most appropriate model of carbon accounting.
The rest of the work is organised as follows. In the next section general features
of the KP are studied. In Sect. 3 the carbon accounting principles and the proposals
of international institutions and those provided by previous research are analysed.
Section 4 focuses on analysing several carbon accounting practical applications of
companies operating in different industries is provided. This will allow obtaining an
overview of the practical considerations regarding carbon accounting worldwide.
Finally, the last section comprises the main conclusions and highlights the impli-
cations of the research.

2 Kyoto Protocol: Main Features

Although the KP was approved on 11 December, 1997, when the industrialized

countries promised to put into effect a set of measures to reduce GHG emissions, it
did not go into force until 16 February 2005. The KP was gradually ratified with the
exception of the most important country in the world economy: the US. The
non-commitment of the US with the KP was motivated by the following reasons:
(a) the KP did not include the participation of developing countries; and, (b) the
costs of compliance would damage the US economy (Hoffman 2005). Ocaña (2003)
indicates that the refusal of the US to ratify the KP has meant a sharp decline in the
price of carbon allowances and therefore an equivalent reduction in costs for the
committed economies. This can be explained by the fact that the US would have
been one of the main buyers of carbon allowances, since it is the main world
polluter (Ocaña 2003). Under the KP, countries should, individually or jointly,
ensure that their aggregate anthropogenic CO2 emissions do not exceed their
assigned amounts, calculated pursuant to their quantified emission limitation and
reduction commitments, with the objective to reducing their overall emissions by at
least 5 % below 1990 levels in the commitment period 2008–2012 (McKenzie
2009). The KP establishes that some countries will have to reduce their emissions
and others might be able to increase their emissions targets in the 2008–2012
period. According to the KP, countries will have a certain degree of flexibility in
how they make and measure their emissions reductions. In particular, an interna-
tional emissions trading regime will be established allowing industrialized countries
to buy and sell carbon allowances amongst themselves. They will also be able to
acquire emission reduction units by financing certain kinds of projects in other
developed countries through a mechanism known as Joint Implementation. In
80 E. Ortas et al.

addition, a Clean Development Mechanism will enable industrialized countries to

finance emissions-reduction projects in developing countries and receive credit for
doing so (European Commission 2005). Other interesting feature of the KP refer
that all parties shall formulate, implement, publish and regularly update national
and regional programmes containing measures to mitigate climate change and
measures to facilitate adequate adaptation to climate change. These programs would
concern the energy, transport, industry, agriculture, forestry and waste management
industries.
It is worth mentioning that 194 countries approved in 2012 at the UNFCCC in
Doha a deferral of the KP commitment period until 2020. However, some countries
such as Japan, Russia, Canada and New Zealand decided not to continue under the
KP scope during this phase. Another interesting feature of this phase of the KP is
that the carbon allowances allocation procedure introduces some important changes
(European Commission 2013). In a first stage, the carbon allowances are allocated
to the obligated plant operators. This initial allocation will be valid for temporary
trade periods. While within the first two trading periods (2005–2007 and 2008–
2012) carbon allowances were allocated mostly for free, in some industries such as
power production, there will be no free allocation any more. Definitely, these new
rules have important consequences on carbon allowances accounting methods to be
applied.

3 Carbon Accounting

One of the aspects that still must be solved is how companies should account for
carbon allowances in their financial reports. In fact, the lack of an internationally
accepted regulation about carbon accounting has motivated the appearance of some
national-focused initiatives.
However, this situation seems not to be an acceptable scheme if we think that the
impact of GHG emissions is of a global nature. In this section we focus firstly on
analysing the accounting principles on which carbon allowances accounting are
based, and secondly on the accounting models proposed at the international level by
the Federal Energy Regulatory
Commission (FERC), the FASB, the IASB and the Resolution 8 February 2006
of the Spanish Accounting Standard Setting Board (ICAC) in Spain.

3.1 Carbon Accounting Principles

The generally accepted accounting principles (GAAP) try to ensure that the
information supplied by firms regarding carbon allowances should present fairly
relevant information. Thus, the World Business Council for Sustainable
Development (WBCSD 2003, pp. 23–24) has released a series of principles that are
Carbon Accounting: A Review of the Existing Models … 81

derived in part from accepted financial accounting and reporting principles.

Specifically, these are relevance, completeness, consistency, transparency, accuracy
and conservativeness.
According to the relevance principle, the quantification and reporting of carbon
allowances should include only information that users need for their
decision-making. Data, methods, criteria and assumptions that are misleading or
that do not conform to project protocol requirements are not relevant and should not
be included.
The completeness principle considers all relevant information that may affect
the accounting and quantification of carbon allowances meets all requirements. This
means that all the carbon allowances effects of a project should be considered and
assessed, all relevant technologies or practices should be considered as baseline
candidates and all requirements within relevant chapters should be completed to
quantify and report carbon allowances.
Consistency requires that methods and procedures are always applied to carbon
allowances and their components in the same manner and the same criteria and
assumptions are used to evaluate significance and relevance, and that any data
collected and reported will be compatible enough to allow meaningful comparisons
over time.
Transparency is critical for quantifying carbon allowances, and the information
should be compiled, analysed and documented clearly and coherently, so that
reviewers may evaluate its credibility. A transparent report will provide a clear
understanding of all assessments, supporting GHG emissions reduction accounting
and quantification. This should be supported by comprehensive documentation of
any underlying evidence to confirm and substantiate the data, methods, criteria and
assumptions used.
Accuracy will generally ensure greater credibility for carbon allowances and
reduce uncertainties as far as practical. Greater accuracy will generally ensure
greater credibility for any GHG emissions reduction claim.
Conservativeness refers to the use of conservative assumptions, values and
procedures when uncertainty is high; accordingly, these conservative values and
assumptions are those that are more likely to underestimate than overestimate GHG
emissions reductions.

3.2 Carbon Accounting Approaches

This section focus on analysing different carbon allowances accounting models

proposed by several authors and by different international institutions. This should
be useful because of there is not an international agreement on a normative
approach to for carbon allowances accounting and reporting. This review will allow
obtaining an up to date and global overview about the carbon allowances
accounting approaches. Likewise, this section also focus on highlighting and further
82 E. Ortas et al.

discussing some specific aspects of emission trading programs such as impairment,

cost allocation, allowances that have been previously analyzed in the field
(Johnston et al. 2008; Burritt and Schaltegger 2010; Ebrahim 2013).

3.2.1 Proposals from International Institutions

The FASB considers that most firms account for carbon allowances in a similar way
to regulations of Federal Regulatory Energy Commission (FERC) in the US. FERC
requires firms to recognize carbon allowances on an historical cost basis. However,
some companies follow an intangible asset model for carbon allowances. Thus, in
relation to what carbon allowance represents, Engels (2009) poses the following
question: “Does an allowance represent an expense or an asset?” The FASB is
aware of diversity in practice and proposes three alternatives for carbon allowances
accounting: (1) the characteristics of carbon allowances and the nature of the asset
are delimited; (2) more extensive, which could include different aspects such as
asset recognition, measurement and impairment, revenue recognition, cost alloca-
tion, liability recognition, presentation and disclosure; and, (3) consisting of not
issuing any guidelines on the carbon allowances accounting for the moment.
The proponents of alternative (1) consider that “guidance on the nature of carbon
allowances would eliminate diversity in practice and improve comparability of
financial statements” (FASB 2007, p. 3). The proponents of alternative (2) consider
that diversity in accounting for carbon allowances can only be eliminated if all
aspects of emission trading programs are addressed, with the need to add a series of
aspects such as: initial measurement and recognition, gain recognition and deferral,
impact of the reporting entity’s intended use, measurement and recognition of
purchased allowances, related parties, impairment, expense recognition and costing
methods, classification, presentation, disclosures and liability recognition and
measurement. The proponents of alternative (3) observe that guidance issued by the
FASB could create convergence issues that might need to be addressed in the future
when the IASB resumes work on its emissions project (FASB 2007, p. 4).
Another proposal is that developed by the International Financial Reporting
Interpretation Committee (IFRIC) of the IASB. The IASB issued its first draft
interpretation (D1), called Emission Rights, about the accounting for carbon
allowances. Under the D1, companies should account for the carbon allowances
received from governments as intangible assets, and recorded initially at fair value
(Cook 2009). GHG emissions would then give rise to a liability for the obligation to
deliver carbon allowances to cover those emissions. The IFRIC and IASB tried to
eliminate the risk that divergent accounting practices will develop in this new area.
The main proposals of D1 are:
• Carbon allowances are intangible assets that should be recognised in the
financial statements in accordance with the IAS 38.
Carbon Accounting: A Review of the Existing Models … 83

• When carbon allowances are allocated to a participant by a government (or

government agency) for less than their fair value, the difference between the
amount paid and their fair value is a government grant that is accounted for
under the IAS 20.
• As a participant emits pollutants, it recognises a provision for its obligation to
deliver allowances or pay a penalty in accordance with IAS 37. This provision is
normally measured at the market value of the allowances needed to settle it
(IASB 2004).
This initial proposal made in 2003 by the IFRIC (which in 2004 became known
as IFRIC 3) has been further analysed by different international bodies such as: the
Institute of Chartered Accountants in England and Wales, the Accounting Standards
Board of Japan, the Canadian Institute of Chartered Accountants, the Conseil
National de la Comptabilité (France), and the European Financial Reporting
Advisory Group (EFRAG), among others. Comments were mainly concerned on
relevance and fair representation of economic reality.
After analysing all the comments made by the different bodies, the IASB decided
to withdraw IFRIC 3 at its June 2005 meeting. Although the IFRIC 3 was not
finally approved, we can refer broadly through an example to certain proposals
made on the accounting process of the carbon allowances because they are of high
interest at the international level. Furthermore, it will allow bettering explaining
some aspects analyzed in this work. To that aim, the carbon accounting structure
model proposed by Ratnatunga et al. (2011) is used.
• Example: Company “EMC” is a participant in an emissions trading scheme. On
the first day of the period 2008 the company is allocated free of charge
allowances for the year to emit 20,000 tonnes of CO2. The market price of the
allowances on that day is 10 € per tonne.
Company “EMC” recognises the allocation of allowances at their fair value or
market price (20,000 tonnes at 10 € per tonne):

Accounting entries Dr Cr
Allowances (intangible assets) 200,000
Deferred income 200,000

At the end of the year, company “EMC” measures its carbon allowances for the
year at 30,000 tonnes. On the last day of the year, it buys 10,000 carbon allowances
to cover the emissions in excess of the initially received. The market price of carbon
allowances at the end of the year is 9 € per tonne. Based on IAS 36 there should be
some testing for impairment, since, the fair value is 9 now overall 180,000.
84 E. Ortas et al.

– The company recognises the purchase of the additional allowances at 9€ per

tonne.
Accounting entries Dr Cr
Allowances (intangible assets) 90,000
Cash 90,000

To conclude, the recent progress made by the accounting standard setters is not
complete. Both FASB and IASB “tentatively” decided that purchased and allocated
allowances should be recognized as assets. Moreover, a liability exists when the
allowances are allocated because the definition of a liability is met. The obligating
event in this case is the allocation of allowances. However a very long road lies
ahead of the official accounting bodies as they plan to discuss a vast number of
questions starting with the issues of measurement and presentation (including
netting) and whether a right to future allocations can be recognized as an asset.
Therefore, the issue of carbon allowances accounting is still on the IASB current
agenda. Nonetheless, the EFRAG is currently working on the accounting stan-
dardization of carbon allowances based on a paper issued by French Standard Setter
Autorité des Normes Comptables (ANC 2012) ‘Accounting of GHG Emissions
Rights Reflecting Companies’ Business Models,’ which is intended to inspire the
international debate and, as soon as possible, the development of an international
accounting standard by the IASB. Furthermore, the EFRAG (2013) issued a
comment paper to discuss recognition and measurement of carbon allowances and
liabilities under an Emission Trading Scheme (ETS) with the view to stimulate
debate in Europe and beyond.
In the absence of authoritative guidance by the IASB, several approaches have
developed that IFRS preparers apply to account for the effects of ETS. A survey by
PriceWaterhouseCoopers (PwC) and the International Emissions Trading
Association (IETA) (2007) identified as many as fifteen variations to account for
the effects of EU ETS. Table 1 highlights three main approaches1 chosen from the
initial fifteen because of their better applicability for the companies such as sug-
gested by Sergiyenco (2010).
The issue of how to manage carbon allowances in accounting is also a concern in
Spain, and in this sense the ICAC, the most important body issuing accounting
regulations in that country, released in 2006 a Resolution to establish general norms
for the recognition, valuation, and information to be supplied in the financial annual
reports concerning carbon allowances. In 2002, the ICAC also released a previous
Resolution which makes Spanish firms to develop and disclose an environmental
report in the annual financial statements. The 2006 Resolution indicated that carbon
allowances must be accounted in the balance sheet as an intangible asset, giving rise
to the corresponding entry of the income to be distributed over several associated

1
There is evidence that the largest European emitters primarily rely on Approach 3 (see Table 1).
Carbon Accounting: A Review of the Existing Models … 85

Table 1 Carbon accounting approaches in practice

Approach 1 Approach 2 Approach 3
Initial Recognise and Recognise and Recognise and
recognition— measure at market measure at market measure at cost,
Allocated value at date of issue; value at date of issue; which for granted
allowances corresponding entry corresponding entry offsets is equal to
to government grant to government grant zero
Initial Recognise and Recognise and Recognise and
recognition— measure at cost measure at cost measure at cost
Purchased
allowances
Subsequent Allowances are Allowances are Allowances are
treatment of subsequently subsequently subsequently
allowances measured at cost or measured at cost or measured at cost,
market value, market value, subject to review for
subject to review for subject to review for impairment
impairment impairment
Subsequent Government grant Government grant Not applicable
treatment of amortised on a amortised on a
government systematic and systematic and
grant rational basis over rational basis over
compliance period compliance period
Recognition of Recognise liability Recognise liability Recognise liability
liability when incurred (i.e. when incurred (i.e., when incurred (i.e.,
when emissions are when emissions are when emissions are
produced) produced) produced). However,
the way in which the
liability is measured
(see below) means
that often no liability
is shown in the
statement of financial
position until
emissions produced
exceed the offsets
allocated to the
participant
Measurement of Liability is measured Liability is measured Liability is measured
liability based on the market based on: the based on: the
value of allowances carrying amount of carrying amount of
at each period end offsets on hand at offsets on hand at
that would be each period end to be each period end to be
required to cover used to cover actual used to cover actual
actual emissions, emissions (i.e. market emissions (nil or cost)
regardless of whether value at date of on a FIFO or
the offsets are on recognition if cost weighted average
hand or would be model is used; market basis; plus the
purchased from the value at date of market value of
market revaluation if offsets at each period
revaluation model is end that would be
used) on either a FIFO required to cover any
or weighted average excess emissions
(continued)
86 E. Ortas et al.

Table 1 (continued)
Approach 1 Approach 2 Approach 3
basis; plus the market (i.e., actual emissions
value of offsets at in excess of offsets on
each period end that hand)
would be required to
cover any excess
emissions (i.e., actual
emissions in excess of
offsets on hand)
Source PriceWaterhouseCoopers (PwC) and the International Emissions Trading Association
(IETA) (2007)

accounting periods, under the consideration that the transfer of carbon allowances
to firms without a balancing entry is equivalent to a government subsidy to com-
panies. The valuation proposed is that of the general principle of the purchase price.
Moreover, considering that this intangible asset is not subject to a process of
systematic depreciation, its non-depreciable nature is established. According to this
Resolution, carbon allowances must figure among the intangible assets with the
creation of a specific account called “GHG emission rights”. They are initially
recognised at cost (purchase or production), and then after recognition they should
be assessed either at cost-subject to impairment.
A very important issue is that the different ETS in several countries have resulted
in the appearance of different approaches to regulate carbon allowances, which has
led to potential differences in their accountability. For example, the French Standard
Setter Autorité des Normes Comptables (ANC 2012) in France released the report:
“Accounting of GHG Emissions Rights Reflecting Companies’ Business Models,”
which is intended to inspire the international debate and, as soon as possible, the
development of an international accounting standard by the IASB. Furthermore,
EFRAG (2013) issued a comment paper to discuss recognition and measurement of
carbon allowances and liabilities under an ETS with the aim of stimulating the
debate in Europe and beyond. Specifically, French regulation about carbon
accounting model consider carbon allowances as assets (resources controlled as a
result of past events and from which future economic benefits are expected to flow
to the entity). With respect to the measurement of carbon allowances at cost is
appropriate for companies which are forced to buy carbon allowances owing to
their manufacturing activity. However, it does not accurately reflect the risks taken
by using carbon allowances as a market instrument. On the contrary, measurement
of carbon allowances at market value is appropriate within a financial approach, but
it induces unjustified volatility for companies which are forced to buy carbon
allowances. Others issues to be considered of this regulation refer to buying carbon
allowances before/after GHG emissions.
After the appearance of French regulation on carbon accounting, the EFRAG
(2013) in collaboration with some international institutions has tried to further
Carbon Accounting: A Review of the Existing Models … 87

clarify and explain some important aspects regarding carbon accounting, being the
most relevant: (a) free allocations should be initially recognized at fair value at the
date they are received by the entity, with the credit being posted to deferred income
or other comprehensive income; (b) a liability and a production cost should be
recognized as the entity produces emissions; (c) carbon allowances held and the
liability should be presented separately, and the liability should be further recog-
nized when the allowances are surrendered to the authority; and, (d) the ‘own use’
exemption is granted for derivatives entered for compliance purposes in accordance
with IAS 39 requirements.

3.2.2 Proposals from Different Authors

This section focus on reviewing the main works in the field of carbon accounting to
identify the main models applied in practice. It is worth mentioning that although
carbon accounting and reporting has gained more relevance during the last ten years,
we focus on a complete overview including earlier works. This will allow bettering
understanding the efforts made and gained steps in this field since its origins.
Furthermore, this issue is important if we think that to the most of our knowledge,
there is no a broad review on the topic in the academic literature. It is further
interesting to consider a complete scope of the existing works in the field if we think
that there is no an international agreement about the most appropriate carbon
accounting model, an issue that makes this field completely different from other
accounting issues such as provisions, income taxes, intangibles, assets regulated by
some IFRS. This is of special importance when we think in a similar way that Deegan
(2008), who indicated that new accounting standards will help financial users as well
as employees to analyze the carbon credit as a net position or gross position.
A concise review of existing carbon accounting standards and necessary treat-
ments were suggested by Ewer et al. (1992). Based on the accounting standards of
FASB the authors proposed and discussed positive and negative aspects of the three
approaches. That is, considering carbon allowances as: (a) inventories; (b) mar-
ketable securities; or, (c) intangibles. They also reinforced that carbon allowances
should be measured at their fair value for internal planning and control purposes,
whereas for external needs they supported the historical cost valuation model.
Wambsganss and Sanford (1996) proposed another model of carbon accounting.
These authors recommended that carbon allowances should be treated as donated
assets, which are valued at market price when received, with a “corresponding
increase in contributed capital”. They suggested that the book value of the allow-
ances to be considered as a part of the cost of production, when they are used to
compensate for pollution. Finally, they proposed that such treatment allows
recognition of the allowances, which helps in more effective estimation of the cost
of pollution in the financial statements.
In a more recent work, Schaltegger and Burritt (2000) opened a discussion of
proposed methods of carbon accounting with a review of current practices by
international standard setters. They concluded that the most popular view was
88 E. Ortas et al.

advocated to be the intangible asset treatment model. Starbatty (2010), representing

IASB, provides a brief description of the joint project on ETS (between IASB and
FASB) as well as discusses the scope of the current IASB’s ETS’s project.
Other authors have also indicated concerns associated with IFRIC3. Cook (2009)
outlines the discussions and debates about carbon accounting that take place among
the IASB. Those discussions are still ongoing, pointing to both the politics and
lobbying that surround the issue as well as the conceptual and technical issues
involved. At the same time, MacKenzie (2009) also concentrates on the official
recommendation and its failure, attributing the opposition of businesses to the fact
that companies oppose accounting treatments that increase earnings volatility and
IFRIC 3 was perceived to be a serious threat. Bebbington and Larrinaga-Gonzalez
(2008) consider the view of the standard setters on “the valuation of granted
allowances” and further decline the interpretation.
Meanwhile, several academics emphasized practical aspects of carbon
accounting. Engels (2009) surveyed a number of companies across Europe on the
question of whether and how they account for participation in carbon markets. The
results of the survey showed that even though a relatively high number of surveyed
businesses have employed different approaches to set question, there is “…a level
of ignorance among some of the companies showing that they have not used the
Phase 1 of the EU-ETS to develop a perspective”.
Johnston et al. (2008) found that the market assigns a positive value to carbon
allowances interpreting this positive reaction as an anticipation of asset recognition.
In addition, they report positive reaction associated with carbon allowances pur-
chase, interpreting that as information release over risk management.
Zhang-Debreceny et al. (2009) argue that problems related to the IASB actions
are associated to the complicated nature of carbon allowances—so it is an
unprecedented issue for the accountants. The traditional accounting, according to
the authors, of assigning asset/liability status can only worsen the situation with
GHG abatement.
Finally, Burritt et al. (2011, p. 80) indicate that “accounting for carbon man-
agement can be seen as an approach and as a set of new information management
and accounting methods that aim to create and provide high quality information to
support a corporation in its movement at least towards carbon neutrality”.

4 Practical Applications of Carbon Accounting

Considering that there is currently no regulation or a best practices code related to

carbon accounting, it is deemed important to analyse the way that companies report
on that issue. This section focuses on analysing how companies of different
industries and countries account for carbon allowances. To do that, we selected
companies from different countries worldwide (developed countries: the USA,
Australia, Canada and the EU, etc., and developing countries: China, India, Brazil,
Mexico, etc.), and sought to represent both countries that have not ratified,
Carbon Accounting: A Review of the Existing Models … 89

approved, adhered to or accepted the KP, and countries that have. Firms from the
USA belong to the former situation, while organizations from Canada, Europe,
Australia, China, India, etc., have evolved towards the latter situation. The activity
sectors selected are consistent with those established in the Green Paper on
Greenhouse Gas Emissions Trading within the EU (Commission of the European
Communities 2000) and in the KP (i.e. Aerospace and Defence; Airlines;
Chemicals; Energy; Forest and Paper Products; Industrial and Farm Equipment;
Metals; Mining, Crude-Oil Production; Motor Vehicles and Parts; Petroleum
Refining and Utilities). These sectors are considered as the most sensitive to GHG
emissions and therefore are those that should consider the importance to somehow
reflect the carbon allowances in their financial annual reports.
Following the structure proposed by Ratnatunga et al. (2011), we first analyzed
the financial annual reports of the companies belonging to the specified industries to
deduce how carbon allowances are accounted for. It is interesting to note that some
companies belonging to specific industries do not present this information in their
financial annual reports. Due to that issue, we finally selected those industries which
comprise the companies disclosing this type of information in a more complete
manner. Specifically, we focus on petroleum, utilities, energy and metal industries.

4.1 Petroleum Industry

After examining some leading petroleum firms form an international perspective we

can deduce the following principles related with carbon accounting:
• Carbon allowances granted free of charge are accounted for at zero carrying
amount.
• Liabilities resulting from potential differences between available quotas and
quotas to be delivered at the end of the compliance period are accounted as
liabilities and measured at their fair market value.
• Spot market transactions are recognized as an income at their cost.
• Forward transactions are recognized at their fair market value on the face of the
balance sheet.
• Changes in the fair value of such forward transactions are recognized as an
income.
It is worth mentioning that other firms comprised in the petroleum industry
consider carbon allowances as an intangible asset and they are measured at
acquisition cost.
• Allowances received for no consideration under the National Emission
Allowance Assignment Plan, are initially recognised at the market price pre-
vailing at the beginning of the year in which they are issued, and a balancing
item is recognised as a grant for the same amount under deferred income, which
is charged against income as the corresponding tons of CO2 are consumed.
90 E. Ortas et al.

• These allowances are not depreciated as their book value equals the residual
value and, therefore, their depreciable basis is zero, as they keep their value until
delivery; meanwhile they may be sold at anytime. Carbon allowances are
subject to an annual analysis on impairment. The market value of the allowances
is measured according to the average price of the stock market of the EU carbon
allowances provided by the European Climate Exchange (ECX).
• As the emissions are released into the atmosphere, the company records an
expense on the heading “Other operating Expenses” in the consolidated income
statement acknowledging a provision whose amount is based on the CO2 tones
emitted, measured, (i) at book value, (ii) or by the quotation price at the closing
when the firm analysed does not have enough emission allowances available for
the period.
• When carbon allowances for the CO2 tons emitted are delivered to the
authorities, the intangible assets as well as their corresponding provision are
derecognised from the balance sheet without any effect on the income statement.
• CO2 emitted by the companies’ industrial plants and the “CO2 emission licen-
ces” attributed to it under the National CO2 Licence Allotment Plan do not give
rise to any financial statement recognition provided that: (a) it is not estimated
that there will probably be a need for costs to be incurred by the company to
acquire emission licences in the market, which would be recognised by the
recording of a provision; or, (b) such licences are not sold in the event that they
are excessive, in which case income would be recognised.
• The companies have not recognised in its financial statements the possible
valuation or devaluation of these licences. If they acquire or sell licences it will
record them. However, if an insufficiency of licences occurs the appropriate
provisions will be recorded, if that becomes appropriate.
• The licences allocated are for less than the volume of CO2 emitted for a quantity
considered to be insignificant for purposes of the financial statements. The
licences allocated to the company exceed the volume of CO2 emitted and so no
provision was recorded for the year.

4.2 Utilities Industry

After the corresponding analysis, it seems that utilities companies follow 4 different
carbon accounting approaches that lead us to define the following practical
applications:
First approach:
• Carbon allowances are recorded as an intangible asset within current assets and
are initially recorded at cost and subsequently at the lower of cost and net
realisable value.
Carbon Accounting: A Review of the Existing Models … 91

• For allocations of carbon allowances granted by the relevant authorities, cost is

deemed to be equal to the fair value at the date of allocation.
• Receipts of such grants are treated as deferred income and are recognised in the
income statement over the period to which they relate.
• A provision is recorded in respect of the obligation to deliver carbon allowances
and charges are recognised in the income statement in the period in which CO2
emissions are made.
• Income from carbon allowances which are sold is reported as part of other
operating income.

Second approach:
• GHG emission quotas appear in the section for other intangible assets together
with research and development expenses.
• Emission quotas purchased are recorded as intangible assets at acquisition cost.
• When the carbon allowances have been granted for zero they are not shown in
the balance sheet.
When the companies’ actual or forecast emissions are higher than the quotas
allocated by the State and still held under the relevant period of the National
Allocation Plan (NAP), a provision is recorded to cover the excess allowances.
• The aforementioned provision is equivalent to the acquisition cost up to the
amount acquired on the spot or forward markets, and based on market prices for
the balance.
• The provision is cancelled when quotas are surrendered to the State. Forward
purchases and sales of quotas carried out as part of trading activities are
recorded in compliance with IAS 39 and stated at fair value on the balance sheet
date. Changes in fair value are taken to the income statement.

Third approach:
• Carbon allowances granted are considered as a current intangible asset and
recognised at their fair value at the date of grant and as deferred income and
does not subsequently re-value the intangible asset.
• Carbon allowances liabilities incurred are recorded as a current liability.
• Purchased emission allowances are reported as intangible assets under current
assets at cost less accumulated impairment losses, while carbon allowances that
have been received free of charge from the respective countries’ authorities are
stated at a value of SEK nil. As CO2 is emitted, an obligation arises to deliver
carbon allowances to the authorities in the respective countries.
• When carbon allowances liabilities exceed the carbon allowances held, the net
liability is measured at the market price of allowances.
92 E. Ortas et al.

• Forward carbon contracts are measured at fair value with gains or losses arising
on remeasurement being recognised in the income statement. The intangible
asset is surrendered at the end of the compliance period reflecting the con-
sumption of the economic benefit and is de-recognised at its original value. As a
result, no amortisation is booked but an impairment charge may be recognised
should the arriving value exceed market value.
• An expense and a liability are booked only in cases where the emission
allowances that were received free of charge do not cover this obligation. This
liability is valued in the amount at which it is expected to be settled.

Fourth approach:
• Carbon allowances which are allocated to the company without charge in
application of NAP’s are recognised on the asset side of the Consolidated
Balance Sheet at their fair value with a credit to “deferred income”.
• This deferred income is taken to “other operating income” on the Consolidated
Income Statement as the CO2 emissions for which the allowances were granted
are actually emitted.
• Allowances acquired from third parties are measured at acquisition cost. These
assets are measured at cost and are analysed at each balance sheet date for
impairment.
• Carbon allowances are derecognised when they are sold to third parties, have
been delivered or expire. When the allowances are delivered, they are dere-
cognised with a charge to the provisions made when the CO2 emissions were
produced. The company records a provision for contingencies and expenses in
order to recognise the obligation to deliver carbon allowances in accordance
with the methods provided for in the NAP’s.
• The amount of the provision is determined on the assumption that the obligation
will be settled: through the emission allowances transferred for no consideration
to the companies under the NAP or through other emission allowances in the
Consolidated Balance Sheet that were acquired subsequently.
For the portion of emissions covered by the allowances granted under these
plans or by allowances acquired by the group, the provision is accounted in the
value at which these allowances were initially recognised on the balance sheet.
If it is estimated that it will be necessary to deliver more carbon allowances than
recorded on the balance sheet, the provision for this shortfall is calculated based
on the market price of the allowances at the balance sheet date.
Carbon Accounting: A Review of the Existing Models … 93

4.3 Energy Industry

Under the European Directive 2003/87/EC establishing the EU-ETS, several energy
companies were granted carbon allowances free of charge. Under the Directive,
each year the sites concerned have to surrender a number of allowances equal to the
total emissions from the installations during the previous calendar year. Therefore,
the company may have to purchase carbon allowances on pollution rights markets
in order to cover any shortfall in the allowances required for surrender. As there are
no specific rules under IFRS dealing with the accounting treatment of carbon
allowances, the companies in the energy industry decided to apply the following
carbon accounting principles:
• Carbon allowances are classified as inventories, as they are applied in the
production process.
• Carbon emissions granted free of charge are recorded in the balance sheet at
zero value.
• Emission rights purchased in the market are recognized at acquisition cost.
• The company records a liability at year-end in the event that it does not have
enough carbon allowances to cover its GHG emissions during the period.
• That liability is measured at the market value of the allowances required to meet
its obligations at year-end.
However, we have identified other companies in the energy industry that account
for carbon allowances as intangible assets and reported under other assets. Under
this alternative approach, allowances which are purchased and allowances allocated
free of charge are both stated at cost and are not amortized. A provision is rec-
ognized to cover the obligation to deliver carbon allowances to the competent
authorities. That provision is measured at the book value of the CO2 allowances
capitalized for this purpose. If a portion of the obligation is not covered with the
available allowances, the provision for this portion is measured using the market
price of the allowances on the reporting date.

4.4 Metal Industry

After analysing the carbon accounting models applied by the companies belonging
to the metal industry we can state that different approaches are mainly implemented.
Based on these, we can draw the following carbon accounting principles for this
industry.
First approach:
• It refers to a company under the European Directive 2003/87/EC. In this case,
carbon allowances allocated to the company on a no-charge basis pursuant to the
annual NAP are recorded on the balance sheet at zero value.
94 E. Ortas et al.

• Carbon allowances purchased are accounted at their cost.

• Gains and losses from the sale of excess allowance are recognized in the income
statement.
• If on the balance sheet date the company is short of allowances it will record a
provision through the income statement.

Second approach:
• In an alternative approach, accounting for government granted and purchased
carbon allowances is made at nominal value (cost) as an intangible asset.
Carbon emissions are not amortized as they are either settled on an annual basis
before year-end (matched specifically against actual CO2 emissions) or rolled
over to cover the next year’s emissions; impairment testing is done on an annual
basis.
• Actual CO2 emissions over the level granted by the government are recognized
as a liability at the point in time when emissions exceed the level granted.
• Any sale of government granted carbon allowances is recognized at the time of
sale at the transaction price.

Third approach:
Finally, we appreciated a third model implemented by one company in which
carbon allowances are recognised as intangible assets and stated at the cost of
acquisition.
• Moreover, carbon allowances acquired free of charge under the NAP by virtue
of Law 1 of 9 March 2007 are initially measured at replacement cost, which is
generally the market value of the allowances at the time of their receipt.
• A capital grant is recognised for the same amount and included under deferred
income.
• Carbon allowances are not amortised but expensed when used.
• Valuation adjustments are made as appropriate to reflect any reduction in market
value at the end of each year providing that the carrying amount is not con-
sidered to be recoverable against future income or expected to be realised
through the cancellation of the provision for GHG emissions.
• Provisions are released when the factors leading to the valuation adjustment
have ceased to exist.
• A provision for liabilities and charges is created for expenses related to GHG
emissions. This provision is maintained until the company is required to settle
the liability by surrendering the corresponding allowances. These expenses are
accrued as GHG is emitted.
• When an expense is recorded for rights acquired free of charge, the corre-
sponding deferred income is taken to operating income.
Carbon Accounting: A Review of the Existing Models … 95

Table 2 Carbon allowances account variations

Carbon allowances number Valuation (in thousands of €)
Balance at 31/12/07 295,772 2296
Allocation for the year 278,698 6251
Disposals −295,772 −2296
Balance at 31/12/08 278,698 6251
Allocation for the year 278,698 4431
Disposals −207,268 −4649
Balance at 31/12/09 350,128 6033
Source Own elaboration

For this company, and according to the 2008–2012 NAP, 1,393,490 free of
charge carbon allowances were allocated, representing 278,698 allowances for each
year of the five-year plan. This company consumed 142,329 carbon allowances in
2009, and therefore it was not necessary to acquire any additional allowances in the
market. The company has not sold the surplus rights. The Company consumed
207,268 carbon allowances in 2008, and therefore it was also not necessary to
acquire any additional allowances in the market. Finally, the company obtained
lower emissions in 2010 than the allowances allocated for the year. Table 2 shows
the movements in carbon allowances account during the last years for that
company.
After a comprehensive review of the existing carbon accounting models from an
international scope, Table 3 summarizes the main trends of carbon accounting
principles applied by the different industries analyzed.

5 Conclusions

A series of conclusions can be drawn considering certain limitations due to the short
time that has passed since countries began implementing the contents of the KP. It
appears that the most firms belonging to sectors that are internationally recognized as
polluters report accounting policies on GHG emissions in their financial annual
reports. However, a small percentage indicates that they do not recognize the
allowances since there is no guidance from regulators. In relation to this consider-
ation, firms in developed countries offer better information regarding carbon
accounting than firms operating in emerging markets. Another consequence of the
variety of acceptable carbon accounting models is that the differential effect on
financial statements depends on which model is adopted. This has significant
implications not only for companies’ financial performance reported in the profit or
loss account, but also on how a company may decide to manage their participation in
the ETS. In the majority of the firms analysed, carbon allowances are recognized as
an intangible asset within current assets and are initially recorded at cost and sub-
sequently at the lower of cost and net realisable value. For allocations of emission
96 E. Ortas et al.

Table 3 Trends in carbon accounting principles among industries

Petroleum Utilities Energy Metal
Initial Carbon Carbon Carbon Carbon
recognition— allowances are allowances are allowances allowances are
Allocated recognised as recognised as granted free of recorded on the
allowances an intangible an intangible charge are balance sheet at
asset an are asset within recognised in zero value
measured at current assets the balance
acquisition cost and are initially sheet at a value
recorded at cost of zero
and
subsequently at
the lower of
cost and net
realisable value
Initial Carbon Carbon Allowances
recognition— allowances allowances purchased are
Purchased purchased are purchased in recorded at cost
allowances recorded as the market are
intangible recognized at
assets at acquisition cost
acquisition cost
Recognition The potential The company Actual CO2
of liability difference records a emissions over
between liability at the level
available year-end in the granted by the
quotas and event that it government are
quotas to be does not have recognized as a
delivered at the enough liability at the
end of the allowances to point in time
compliance cover its GHG when emissions
period are emissions exceed the level
accounted for during the granted
as liabilities and period
measured at fair
market value
Measurement Liability is
of liability measured at the
market value of
the allowances
required to
meet its
obligations at
year-end

allowances granted by the relevant authorities, cost is deemed to be equal to the fair
value at the date of allocation. Receipts of such grants are treated as deferred income
and are recognised in the income statement over the period to which they relate.
Companies will therefore need to disclose their carbon accounting policy to the
market to ensure that its impact on financial performance is understood. Market
Carbon Accounting: A Review of the Existing Models … 97

participants may expect a comparable carbon accounting model across industries.

However, as emphasized by this work, a company’s carbon accounting policy choice
may affect its profits quite differently, particularly where it is not only an emitter but
also a carbon trader. Thus, it is essential for the companies that such differences and
the reasons for them are intelligible for investors and other stakeholders.
Although GHG emissions, ETS’s and other related mechanisms and issues have
been developing in different countries, there are still many issues pending. One of
them is how to manage carbon allowances in accounting. Although there was a first
initiative known as IFRIC 3, it was subsequently not approved because of the
modifications proposed by different institutions. However, the IFRIC is reconsid-
ering the different interpretations to improve the accounting quality of the financial
information resulting from IFRIC 3 (IASB 2008).
Another important aspect is the information concerning GHG emissions that
firms all around the world should include in their annual reports, environmental
reports and websites. Thus, Freedman and Jaggi (2005), in a study to evaluate
disclosures on pollution and GHG by firms domiciled in countries that have ratified
the KP compared to others, consider current costs to reduce the GHG emissions and
information on the extent of GHG emissions, among others.

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The Attributional-Consequential
Distinction and Its Applicability
to Corporate Carbon Accounting

Matthew Brander and Francisco Ascui

Abstract Methods of carbon accounting have developed in a number of

semi-isolated fields of practice, such as national inventory accounting, corporate
carbon accounting, project level accounting, and product life cycle assessment, and
there appears to be considerable potential for learning across these different fields.
One methodological distinction that has emerged within the field of life cycle
assessment (LCA), and which has been highly useful there, is that between attri-
butional and consequential methods. However, this distinction has not been fully
developed or explored within the field of corporate carbon accounting. Attributional
methods provide static inventories of emissions allocated or attributed to a defined
scope of responsibility, while consequential methods attempt to measure the total
system-wide change in emissions that occurs as the result of a decision or action,
such as the decision to produce one extra unit of a given product. Numerous LCA
studies show that attributional inventories can ignore important indirect or
market-mediated effects that occur outside the scope of the analysis, and thus
decisions based on attributional information can result in unintended consequences.
Given that the most widely recognised form of corporate carbon accounting (the
organisation-level greenhouse gas inventory) is attributional in nature, it is probable
that decisions based on such inventories may also result in unintended conse-
quences. This paper explores the nature of the attributional-consequential distinc-
tion and its applicability to corporate carbon accounting. In addition, the concept of
framing is used to help explain how the distinction developed within the field of
LCA, and to highlight the conceptual work required to achieve a degree of con-
sensus around the distinction within that community, which in turn may be helpful
when considering its applicability beyond the field of life cycle assessment.

M. Brander (&)
F. Ascui

University of Edinburgh Business School, University of Edinburgh, Edinburgh, UK
e-mail: [email protected]
F. Ascui
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 99

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_5
100 M. Brander and F. Ascui

1 Introduction

Methods of carbon accounting (used here as shorthand for all forms of greenhouse
gas related accounting) have developed in a number of semi-isolated fields of prac-
tice, such as national inventory accounting, corporate carbon accounting, project
level accounting, and product life cycle assessment, and there appears to be con-
siderable potential for learning across these different fields (Ascui and Lovell 2011).
One methodological distinction that has emerged within the field of life cycle
assessment (LCA), and which has been highly useful there, is the distinction between
attributional and consequential methods (Finnveden et al. 2009). However, this
distinction has not yet been widely appreciated or explored within the field of cor-
porate carbon accounting. Attributional methods provide static inventories of emis-
sions allocated or attributed to a defined scope of responsibility, while consequential
methods attempt to measure the total system-wide change in emissions that occurs as
the result of a decision or action, such as the decision to produce one extra unit of a
given product (Ekvall and Weidema 2004; Curran et al. 2005). Numerous LCA
studies show that attributional inventories can ignore important indirect or
market-mediated effects that occur outside the scope of the analysis, and thus deci-
sions based on attributional information can result in unintended consequences
(Searchinger et al. 2008; Hertel et al. 2010). While organisations collect many dif-
ferent types of both monetary and physical carbon-related information (Burritt et al.
2011), the most widely recognised form of corporate carbon account is the
organisation-level inventory of physical greenhouse gas emissions, typically pro-
duced for the purposes of voluntary carbon disclosure (but which may also be pro-
duced for mandatory reporting, participation in emissions trading schemes or internal
management purposes), following standards such as the GHG Protocol
(WBCSD/WRI 2004), Defra reporting guidance (Defra 2009, 2013) or ISO14064-1
(ISO 2006c). These standards guide the production of corporate carbon accounts that
are attributional in nature (CDP 2013; Brander and Wylie 2011) and thus it is
probable that decisions based on such inventories may, like attributional LCAs, result
in unintended consequences. Applying the attributional-consequential distinction to
corporate carbon accounting may therefore be useful for choosing appropriate
methods to inform decision-making, and for understanding the nature and limitations
of mainstream (attributional) corporate carbon accounting more generally.
This chapter is structured in two parts. The first part provides an introduction to
the attributional-consequential distinction, including a chronology of the develop-
ment of the distinction, an analysis of the core features of attributional and con-
sequential approaches, examples of the results obtained from each method, and an
overview of the critical discussion in the literature concerning the distinction. The
second part of the chapter then considers the applicability of the distinction to
corporate level accounting, and discusses the utility of the distinction for designing
coherent corporate carbon accounting methods, the implications for corporate-level
accounting, and the potential usefulness of the distinction for academic research on
social and environmental accounting.
The Attributional-Consequential Distinction … 101

The existence of the attributional-consequential distinction in one field

(LCA) and its absence in a cognate field (corporate carbon accounting) begs the
broader question of why this should be the case. While we cannot offer a definitive
answer to this question, we believe that the history of the emergence of the dis-
tinction in LCA demonstrates that thinking in terms of the systemic consequences
of a decision or action, rather than in terms of attributing responsibility for a given
situation, involves a conceptual shift—a subtle change of emphasis with
far-reaching implications—that is challenging and difficult to introduce when the
dominant thinking is attributional. The change of emphasis has different disci-
plinary roots and is clearly self-evident in one tradition and not in another. This
suggests that attributional and consequential methods are not equally available
methodological alternatives, but rather that they are bound up with a broader set of
preconceptions about how the world works, what matters and how we should
respond to a given situation, or what scholars across a range of disciplines would
call ‘framing’. Framing refers to “the processes by which people construct inter-
pretations of problematic situations, making them coherent from various perspec-
tives and providing users with evaluative frameworks within which to judge how to
act. …Framing is problematic because it leads to different views of the world and
creates multiple social realities.” (Rein and Schon 1993, p. 147). This does not
mean that differences in framing, such as the difference between attributional and
consequential accounting methods, are irreconcilable; rather, recognition of frames
facilitates the more effective use of different approaches in their appropriate con-
texts. The concept of framing is an additional explanatory thread that we return to in
a number of places in the chapter. In particular, we believe this level of analysis
helps to explain the observed pattern of resistance and recognition in the devel-
opment of the distinction in the field of LCA, which in turn suggests that recog-
nising its implications for corporate-level carbon accounting may be similarly
challenging, yet ultimately highly beneficial for both academic research and prac-
tice in this area.

2 The Attributional-Consequential Distinction

2.1 Chronology of the Distinction

In order to understand the development of the attributional-consequential distinc-

tion it is useful to first look briefly at the development of LCA more generally, as it
is in LCA that the distinction first developed and is still primarily employed.
LCA can be defined as the “compilation and evaluation of the inputs and outputs
and the potential environmental impacts of a product system throughout its life cycle”
(ISO 2006b). One of the motivations for the development of LCA was the recognition
that for a complete account of a product’s environmental impact it is necessary to look
at all its life cycle stages (i.e. material extraction, manufacturing, transportation, use
102 M. Brander and F. Ascui

phase, and end-of-life disposal), rather than only individual stages, such as the use
phase (Guinee et al. 2011). LCA typically includes a number of environmental impact
categories, such as human toxicity, resource deletion, eutrophication, greenhouse gas
emissions etc., and therefore has a broader scope than carbon accounting. However,
the development of the attributional-consequential distinction relates equally to the
carbon impact category, as to any other impact category, and the multi-impact nature
of LCA does not seem to pose any fundamental limitation on the lessons that can be
transposed from this field of practice to ‘pure’ carbon accounting.
LCA emerged in the 1960s and 1970s, and initially focused on resource use,
energy, and waste (Guinee et al. 2011). Following a number of initial studies, which
were primarily undertaken by companies (Hunt and Franklin 1996; Jensen et al.
1997), the practice of LCA was formalised in a number of guidance documents, for
example, the Hand-book of Industrial Energy Analysis (Boustead and Hancock
1979); and later, the Manual for the Environmental Life Cycle Analysis of Products
(Guinee et al. 1991); the Environmental Life Cycle Assessment of Products: Guide
and Backgrounds (Heijungs et al. 1992), and the Life Cycle Assessment: Inventory
Guidelines and Principles (Vigon et al. 1993).
In 1993 Weidema noted that none of the recently published guidance or manuals
“adequately reflects the importance that market aspects and the economic disci-
plines may have in life cycle inventory methodology” (Weidema 1993, p. 161).
Weidema suggested that “the use of environmental data on the marginal production
reflects most correctly the actual environmental impact” (Weidema 1993, p. 163),
and that inventories should reflect “to the largest extent possible, the actual con-
sequences of implementing the results of the investigation” (Weidema 1993,
p. 166). This emphasis on quantifying the consequences of a decision or action, as
distinct from quantifying the total environmental burdens associated with the pro-
cesses directly used by or connected with the entity studied, is the essence of the
‘consequential’ approach.
The fact that the attributional-consequential distinction did not appear until some
30 years into the development of LCA demonstrates that it was not initially
self-evident to those involved. A full examination of the communities involved in
LCA is beyond the scope of this chapter, but Weidema’s mention of “market
aspects and the economic disciplines” strongly suggests a new recognition of a
different framing of the world (by economists) within a field previously dominated
by engineers and natural scientists: as Earles and Halog (2011, p. 445) put it:
“CLCA [consequential LCA] represents the convergence of LCA and economic
modelling methods”. In fact, Weidema (2003, p. 166) explicitly calls for “an
interdisciplinary approach… where technical experts, market experts and econo-
mists join forces”.
After this call to action, it still took time for this elucidation of an alternative
framing to be adopted by other members of the LCA community. During the 1990s
a small number of studies began to identify and model the processes that change as
a result of a decision (the so called “marginal processes”—terminology explicitly
borrowed from economics). For example, Ekvall et al. (1998) used marginal data to
study the environmental impact of different forms of packaging for beer and soft
The Attributional-Consequential Distinction … 103

drinks, and Frischknecht states that to “reflect the consequences of decisions,

models capable of representing changes within the economic system shall consist of
processes represented by marginal technologies, the technologies put in or out of
operation next” (Frischknecht 1998, p. 67).
The formalisation of both the consequential and attributional methods has
developed since the late 1990s through the publication of further standards, guid-
ance, and a number of key journal articles on methodological issues. On the con-
sequential side, the key publications include: Weidema (1999) which proposes a
5-step process for identifying the marginal technologies that change as a result of a
decision; Weidema (2003) which is a detailed report for the Danish Environmental
Protection Agency on the use of market information in life cycle assessment; Ekvall
and Weidema (2004) which brings together guidance from various sources on how
to determine which technological processes to study and how to identify marginal
data; and Schmidt (2008) on system delimitation for agricultural products.
Nevertheless, despite the work represented by this proliferation of guidance, the
distinction has not always been clear to different members of the LCA community.
Even at the level of basic terminology, convergence on the terms “attributional” and
“consequential” required a process of deliberate consensus-building. These terms
were adopted in 2001 at an international multi-stakeholder workshop on electricity
data (Ekvall and Weidema 2004; Curran et al. 2005), but prior to that, and in fact
until as recently as 2009 (see Nielsen and Høier 2009), authors had used a variety of
terms to refer to essentially the same distinction. Attributional methods have been
variously denoted by the terms “retrospective”, “accounting”, “descriptive”,
“book-keeping” and “traditional”, while consequential methods have been denoted
by the terms “prospective”, “market-based”, “decision-based”, “change-oriented”
or “marginal” (European Commission et al. 2010).
In addition to confusion created by the use of different terms, awareness of the
attributional-consequential distinction has also not been helped by the existence of
influential standards which do not mention the distinction (ISO 2006a, b), fail to
clarify whether the standards are intended to cover attributional or consequential
approaches, or both (Geyer 2008; Ekvall and Finnveden 2001; Ekvall 1999;
Tillman 2000; Brander and Wylie 2011). The International Reference Life Cycle
Database System (ILCD) handbook (European Commission et al. 2010) is another
internationally recognised source of guidance on LCA, which has contributed to the
confusion in a slightly different way. The handbook clearly acknowledges and
discusses the attributional-consequential distinction, but it also identifies four dis-
tinct application contexts, and structures the guidance on methods accordingly.
Unfortunately, it is not always transparent which of the distinct application contexts
correspond to attributional or consequential methods, or whether a mixture of
methods is at play in the different application contexts.
At this point in time in the LCA community there appears to be growing con-
sensus; Finnveden et al. (2008, p. 365) state that there “is today a general agreement
within the life cycle assessment (LCA) community that there are two types of
LCA… These are often called attributional and consequential LCA”. However,
even with this “general agreement” and the increasing usage of the distinction in the
104 M. Brander and F. Ascui

50
45
40
Number of papers

35
30
25
20
15
10
5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig. 1 Number of papers referring to the attributional-consequential distinction by year of

publication.

academic literature (as shown in Fig. 1),1 there is still a continuing and lively debate
on a number of issues, such as the correct purpose of each method, and the relative
advantages of each (as will be discussed later in the chapter).
In summary, this brief history of the development of the attributional-
consequential distinction within the field of LCA shows that the distinction was
not initially self-evident to those involved (only emerging some 30 years into the
development of the field) and that acceptance of the distinction since the early
1990s has been gradual, uneven and contested, all the way from the level of basic
terminology up to fully developed international standards and guidance manuals.
The alternatives have different disciplinary origins, with the consequential approach
bringing concepts borrowed from economics to a field previously dominated by
engineers and natural scientists. Deliberate consensus-building efforts have led to
convergence on the terms ‘attributional’ and ‘consequential’, but there is still a lack
of coherence on the distinction in various international standards and guidance
manuals. These features all suggest that attributional and consequential methods

1
(Word searches for the terms “attributional” and “consequential” were conducted on the web sites
for the journals listed below. Articles that used the terms in ways other than to refer to the
attributional-consequential distinction were excluded. The journals included in the search were:
International Journal of Life Cycle Assessment; Journal of Industrial Ecology; Journal of Cleaner
Production; Energy Policy; Environmental Science and Technology; Waste Management
Resources, Conservation and Recycling; Environmental Research Letters; Ecological Economics;
Environmental Science & Policy; Climatic Change; Agriculture, Ecosystems and Environment;
Waste Management Research; Nature Climate Change; Greenhouse Gas Measurement and
Management; Social and Environmental Accountability Journal; Science; European Accounting
Review; Critical Perspectives on Accounting; Climate Policy; Accounting, Organisations and
Society; Accounting, Auditing and Accountability; Accounting Forum.)
The Attributional-Consequential Distinction … 105

are not simply two equally available methodological alternatives, but rather
two different ways of framing an accounting problem. Nevertheless, a process of
reframing, that is still underway, has led to wider appreciation of the distinction and
hence to a better understanding of the applicability of each of the alternatives in
different contexts.

2.2 Key Characteristics of Attributional and Consequential

Approaches

Many authors (Ekvall 2002; Ekvall and Weidema 2004; Curran et al. 2005; Ekvall
et al. 2005; Schmidt 2008; Earles and Halog 2011) have proposed definitions or
descriptions of attributional and consequential forms of life cycle assessment.
Two key characteristics can be drawn from these various descriptions:
1. Firstly, consequential assessments are concerned with describing change, whereas
attributional assessments are a description of a static state. The results from a
consequential assessment represent the amount by which emissions change
between one state or scenario and another, while the results from an attributional
assessment are for absolute quantities of environmental impacts, for a single given
state or scenario (Ekvall 2002; Curran et al. 2005; Ekvall et al. 2005).
2. Secondly, consequential assessments are concerned with total changes wherever
they occur, whereas attributional assessments are only concerned with the
environmental impacts physically used by or produced by the life cycle under
analysis (Ekvall and Weidema 2004; Earles and Halog 2011).
A number of other subsidiary features that distinguish consequential from
attributional methods can also be identified in the definitions in the literature, but
these can be understood as methodological techniques for fulfilling the two key
characteristics identified, rather than being essential characteristics in their own
right. These subsidiary features include:
1. Use of economic modelling. Economic modelling methods are often a charac-
teristic of consequential LCA and are used to identify the processes affected by
changes in demand and supply. For example, in Ekvall and Andræ (2006),
reduced demand for lead due to the promotion of lead-free solder reduces the
price of lead and increases its use elsewhere—and this additional usage is then
included in the analysis. Most consequential assessments model market-
mediated effects, but with varying degrees of sophistication, ranging from
simple identification of market trends and the most/least competitive tech-
nologies (e.g. Weidema et al. 1999) to the use of sophisticated computable
general equilibrium models (Searchinger et al. 2008; Hertel et al. 2010).
Attributional LCA, in contrast to consequential LCA, only considers the
physical flow of resources to, and impacts from, the physical processes used
during the life cycle of the product, and does not model market-mediated effects.
106 M. Brander and F. Ascui

2. System expansion. System expansion (or “substitution”) is a method for dealing

with co-products (or other forms of multi-functionality) whereby credit is given
to the product studied for the environmental impacts that are avoided due to its
co-products replacing alternative forms of production (Heijungs and Guinée
2007). For example, beef co-products from the dairy industry replace dedicated
beef and pork production, and the avoided impacts due to the avoided pro-
duction are credited to the production of milk (Thomassen et al. 2008).
In contrast, attributional LCA tends to allocate emissions between co-products,
on the basis of physical characteristics such as mass or energy content, or
alternatively economic value (Thomassen et al. 2008; Schmidt 2008). There is
continuing debate within the LCA community as to whether attributional LCA
can also use system expansion, with some standards allowing its use
(WBCSD/WRI 2011b; European Commission et al. 2010). However, Brander
and Wylie (2011) suggest that doing so introduces values for avoided emissions
into what should only be an inventory of actual physical emissions or removals.
3. Source of data. Attributional LCA uses either data for the specific physical
processes used in the life cycle of the product, or average data, such as average
emissions from grid electricity (Curran et al. 2005). Consequential LCA only
considers marginal data, which provide information on the processes that
change, rather than the processes that are physically used in the life cycle of the
product studied (Schmidt 2008). For example, if there is an additional unit of
demand for electricity then the generation technology that is deployed to meet
that demand is the marginal process. Similarly, if there is one less unit of
demand then the generation technology that is reduced is the marginal process
(Curran et al. 2005).
A summary of the key and subsidiary characteristics of the attributional-
consequential distinction is presented in Table 1 (modified from a similar table in
Thomassen et al. 2008).

2.3 Significance of the Difference Between the Methods

An important question is whether using an attributional method rather than a

consequential method produces materially different results, to the extent that dif-
ferent decisions would be taken had the alternative method been used. If the
methods tend to produce similar results then there is little practical significance to
the attributional-consequential distinction. However, if the methods produce very
different results, then there is at least a possibility that different decisions would be
made if information from the other method was available.
A number of papers have applied both attributional and consequential LCA
methods to the same product in order to understand the difference in results gen-
erated. Ekvall and Andræ (2006) found very little difference between the attribu-
tional and consequential results for lead-free solder, and the assessment by
The Attributional-Consequential Distinction … 107

Table 1 Key characteristics of the attributional-consequential distinction

Attributional Consequential
Key What is described or Static inventory of Change in emissions
characteristics modelled? absolute emissions or removals caused
and removals by a specific
decision/action
System boundary Physical processes Any process that
used in life cycle changes as a result
under analysis of the decision
studied
Subsidiary Economic modelling Not used Often used
characteristics Treatment of Disagreement on System expansion
co-products/multi-functionality whether system (substitution) used
expansion
(substitution) should
be used
Data Process-specific or Marginal
average

Dalgaard et al. (2008) of soybean meal found that the results from using the
consequential method (721 gCO2e/kg of soy meal) were only trivially different to
the attributional results (726 gCO2e/kg of soy meal). However a number of key
impacts were not included in the latter study, such as the avoided emissions from
deforestation due to the soy oil co-product replacing palm oil, which could have
lowered the consequential results considerably (see Schmidt 2010 for the signifi-
cance of land use change on the emissions from palm oil).
Thomassen et al. (2008) found that the consequential results for milk production
(901 gCO2e/kg of milk) were significantly lower than the attributional results
(1560 gCO2e/kg of milk) due to beef co-products from the dairy industry replacing
dedicated beef and pork production, and thereby avoiding large quantities of
emissions. Similarly, Viera and Horvath (2008) found that the attributional results
for concrete were higher than the consequential results, but that the decision sup-
ported by the information would be the same, i.e. recycling concrete is shown to
reduce emissions in both cases.
However, there are cases where the decision supported by an attributional
account is markedly different from that supported by a consequential assessment.
A seminal paper for consequential LCA is a study by Searchinger et al. (2008) on
indirect land use change caused by increased demand for biofuel crops. US gov-
ernment biofuel policy was predicated on the fact that attributional LCAs show corn
ethanol to have lower emissions than conventional gasoline (74 gCO2e/MJ of corn
ethanol compared to 92 gCO2e/MJ of gasoline). However, using cropland for
biofuels displaces food production elsewhere in the world, and some of the new
cropland is likely to be converted from ecosystems such as forests or grasslands,
resulting in high losses of stored carbon. Searchinger et al. showed that if the
emissions from indirect land use change are taken into account the emissions for
108 M. Brander and F. Ascui

corn ethanol are in the region of 177 gCO2e/MJ of fuel, or 93 % higher than
gasoline. Other studies, such as Hertel et al. (2010) have since replicated this work
and produced lower emission estimates, but still found that US biofuel policy is
likely to increase greenhouse gas emissions.
The magnitude of difference between attributional and consequential LCA
results clearly depends on the specific product that is studied. However, it is also
clear that in some cases the difference can be very large, and using a single method
for a given purpose (such as using attributional methods to inform policy-making)
can result in unintended or negative outcomes, as with US biofuel policy. The
appropriate uses for each method is one of the main contentions in the literature,
and this is discussed next.

2.4 Contentions in the Literature

A long-running debate in the LCA literature is over whether there is any purpose for
which an attributional approach is more appropriate than a consequential one (and if
the distinction can be transposed to corporate-level accounting, the question is
whether there is any purpose for mainstream attributional corporate carbon
accounting that could not be better served by an alternative consequential method).
Wenzel (1998) suggests that the only purpose of an LCA is to inform
decision-making, which implies that the only appropriate method is a consequential
approach, as it is this approach that explicitly aims to quantify the total conse-
quences of decisions. There does appear to be a strong case for favouring conse-
quential over attributional LCAs in most application contexts, such as those listed
in ISO 14044 (ISO 2006b):
(a) identifying opportunities to improve environmental performance;
(b) informing decision-makers for priority setting and process design;
(c) selecting indicators of environmental performance; and
(d) marketing
Each of these application contexts either implicitly or explicitly involves
decision-making, and therefore warrants a consequential approach. For example
“marketing” suggests that consumers may use the information to make decisions
about which product to buy, and if consumers want to choose a product that causes
the lowest environmental impact, then they will need a consequential assessment.
Similar considerations apply to the other application contexts as well.
Tillman (2000) agrees that all LCA is either directly or indirectly concerned with
change, but argues that there is still a role for attributional accounts, for instance, in
identifying emissions ‘hot spots’ that can be targeted with abatement actions.
However, this appears to beg the question, “How do we know that our actions to
manage hot spots don’t have unintended consequences?” which suggests that a
consequential assessment is still needed to operationalize the attributional
information.
The Attributional-Consequential Distinction … 109

An alternative attempt to carve out a role for attributional LCA is made by

Ekvall et al. (2005). They give the example of a Swedish energy user that could be
incentivised to isolate its hydropower plant from the electricity grid in order to
avoid having to account for electricity consumption using the emission factor for
the marginal technology in the Nordic electricity grid, which is coal. Doing so
would increase emissions at the system level, as excess hydropower from the plant
would no longer be supplied to the grid. Attributional accounting would not
incentivise this behaviour, as the energy user could report the low emissions from
its hydropower. However, it is not clear that consequential accounting would truly
incentivise an increase in emissions. If a consequential approach were applied to the
question, “What will happen if the energy user isolates its hydropower from the
grid?” the answer would be “It will increase emissions”, and decision-making based
on minimising total system emissions would lead the energy user to maintain the
connection of its hydropower plant to the grid.
Arguments about ease of application are often intermingled with arguments
about the purpose of attributional and consequential approaches. For instance, many
of the arguments in favour of attributional accounting in Tillman (2000) centre on
the difficulties in identifying marginal processes or in undertaking system expansion
(rather than arguing that attributional methods are conceptually more appropriate).
Advocates of consequential LCA, particularly Weidema (2003), have argued that
the consequential approach is actually simpler, as only those processes that change
need to be modelled, and once the marginal product for a sector has been identified,
this can be used for all other assessments that involve that sector. For instance, all
consequential assessments involving changes in demand for vegetable oil only need
to consider palm oil, as this is the marginal form of vegetable oil (Schmidt and
Weidema 2008).
However, the claim that consequential accounting is simpler is not borne out by
the take-up of the approach. Despite the apparent superiority of a consequential
approach in most application contexts, attributional LCA continues to have greater
levels of usage. For instance, the Carbon Trust’s Carbon Footprint Label (Carbon
Trust 2013) is based on the PAS 2050 (British Standards Institute 2011) and GHG
Protocol (WBCSD/WRI 2011b) methodologies, both of which are attributional in
nature. The main reason for the continued preference for attributional accounting
appears to be the complexity of consequential modelling, and the difficulty in
sourcing marginal data (which was the experience reported by Ekvall and Andræ
(2006) in their case study for lead-free solder). Another suggested reason is the
greater comprehensibility of attributional results, as users may struggle with con-
ceptualising market-mediated or system wide impacts (Thomassen et al. 2008).
There is one application context for LCA where an attributional approach could
genuinely be more appropriate (and not just easier to apply), and that is in mea-
suring absolute environmental burdens, such as the total emissions associated with
consumption (Zamagni et al. 2012). The results from attributional LCAs are
additive and do not double-count the impacts included in other product life cycles,
thus the sum of attributional results should approximate total actual impacts
(Tillman 2000). In contrast, the results from consequential assessments are
110 M. Brander and F. Ascui

non-additive, and reflect changes in emissions rather than absolute emissions.

Attributional accounts could therefore be used for setting consumption ‘budgets’ in
order to meet normative targets for absolute total emissions (such as 450 ppm
atmospheric CO2 concentrations), whereas consequential accounts cannot be used
in this way. However, as with the ‘hot spot’ application context discussed above,
consequential methods would still be needed to inform decisions on changes in
consumption practices, product design etc., to avoid unintended consequences
outside of individual attributional budgets.
These ongoing debates illustrate that even after a process of what Rein and
Schon (1993, p. 159) call “frame-reflective discourse” leading to a degree of shared
understanding within a given community, disagreements can remain, either
between different sub-groups within the community, or between the community and
others, as illustrated by the problem of making consequential results as easily
comprehensible as attributional results, to users of this information. Again, this does
not imply irreducible conflict, but rather highlights the fact that frame-reflective
discourse needs to be iterative and responsive to changing situations. After all,
eternal consensus may be just as undesirable as eternal conflict or
misunderstanding.

3 Application of the Attributional-Consequential

Distinction to Corporate Carbon Accounting

We now turn to the question of whether the attributional-consequential distinction,

which has developed within the LCA literature, may also be useful within the field
of corporate-level carbon accounting. A first point to make is that the characteristics
of attributional accounting identified in Table 1 (i.e. providing an inventory of
actual emissions and removals; and the inventory boundary defined in terms of the
processes physically or directly connected with the reporting entity) match the
characteristics of corporate level carbon accounting, as prescribed by accounting
standards such as the GHG Protocol Corporate Standard (WBCSD/WRI 2004) or
ISO 14064-1 (ISO 2006c). In other words, these standards provide guidance for the
production of accounts which can be described as being attributional in nature
(Brander and Wylie 2011; CDP 2013).
To the best of our knowledge, no direct equivalent to consequential (vs. attri-
butional) LCA exists as a methodology or standard for corporate-level carbon
accounting, in the sense of guiding the production of a consequential version of the
typical organisational greenhouse gas inventory. Indeed, it may be impossible to
hope to capture all of the possible consequences of a company’s actions or to define
baselines against which change can be measured in a meaningful way, particularly
for companies operating in competitive markets, within cap-and-trade schemes, or
dealing in relatively uniform commodities. Decisions to create, re-design or cease
manufacturing a single product are routinely made and offer relatively clearly
The Attributional-Consequential Distinction … 111

defined alternatives for comparison, whereas change at a corporate level is rarely so

simple. Nevertheless, clearly companies do also routinely make decisions or
choices between different alternatives—at a range of levels from strategic to tactical
and operational—which may have different greenhouse gas implications, even if
these alternatives may be more complex and difficult to define than alternatives at a
product level. Therefore, in principle, there is no reason why a consequential
assessment could not be undertaken to evaluate the systemic consequences of any
particular action or choice made by an organisation, rather than relying solely on
attributional information to make the same evaluation. Differences in the unit of
analysis might help to explain the earlier and wider acceptance of the distinction in
LCA, but this does not seem sufficient to explain its near total absence in corporate
carbon accounting.
This section identifies a number of areas where greater awareness of the dis-
tinction may be beneficial to corporate level accounting: promoting coherence in
corporate carbon accounting standards; clarifying the most appropriate choice of
accounting method to answer specific types of question; and informing carbon
accounting research more generally.

3.1 Issues with Coherence in Corporate Carbon Accounting

Standards

Although the literature on the attributional-consequential distinction focuses almost

exclusively on LCA, there are some instances in standards or guidance documents
where the distinction is recognised in relation to corporate carbon accounting. One
example is in the CDP’s guidance note on corporate reporting of emissions from
electricity consumption:
The attributional approach is the approach adopted by the GHG Protocol Corporate
Standard for corporate inventories. A consequential approach, on the other hand, tries to
answer the question “What are the systemic consequences (changes) in total (system)
emissions from given policy decisions at product/entity level?” (CDP 2013, pp. 12–13).

Here the distinction is applied to corporate carbon accounting rather than product
LCA, and the context of its use is to ensure that consequential methods are not
confused with, or introduced into, attributional accounts. A similar provision is
made in the GHG Protocol Corporate Standard itself, though without explicit ref-
erence to the attributional-consequential distinction:
These reductions [i.e. reductions in emission sources not included in the inventory
boundary] may be separately quantified, for example using the GHG Protocol Project
Quantification Standard, and reported in a company’s public GHG report under optional
information… (WBCSD/WRI 2004).

Despite these instances where the attributional-consequential distinction has

been used to ensure the methodological coherence of greenhouse gas accounting
112 M. Brander and F. Ascui

practice, there are also cases where greater awareness of the distinction would have
been useful. Although the European Commission’s Organisation Environmental
Footprint method (European Commission 2013) is a multi-impact method rather
than being solely focused on carbon accounting, it nevertheless provides an
example of a standard that mixes attributional and consequential elements as it
includes credits for avoided emissions (or other environmental burdens) within
what would otherwise be an attributional inventory (see Pelletier et al. 2013).
Organisational inventories based on this method will be neither an account of
absolute emissions and removals (or other environmental burdens), nor an account
of the total consequences from the reporting company’s activities. A more thorough
understanding of the attributional-consequential distinction could help to avoid
such methodological mix-ups. While perhaps the European Commission’s method
represents an attempt to merge or reconcile the attributional and consequential
approaches, we suggest a conceptually more coherent approach would explicitly
recognise, rather than try to remove, their differences.
A further example of confusion is provided by the GHG Protocol’s recently
proposed guidance on reporting emissions associated with electricity generation,
known as ‘scope 2’ emissions (WBCSD/WRI 2014a). As shown in Table 1, the
processes included in attributional accounts are based on a physical relationship
with the reporting entity in question. However, the GHG Protocol guidance allows
the use of contractual emission factors that do not reflect any physical relationship
between the reporting company and the contracted emissions rate. In addition, the
suggested justification for using contractual emission factors for scope 2 reporting is
to promote a change in the total amount of renewable generation (although the
guidance also allows the use of contractual emission factors even if there is no
evidence of change in the amount of renewable electricity generated). If change in
renewable generation is the desired outcome then this could be better supported and
accounted for separately using a change-oriented method (i.e. a consequential
method), such as project level accounting, rather than mixing this into what would
otherwise be purely attributional accounts.

3.2 Clarifying the Most Appropriate Choice of Accounting

Method

In addition to promoting conceptually coherent carbon accounting standards, the

attributional-consequential distinction could be useful in choosing the appropriate
method for a given application. As was shown in the field of life cycle assessment,
consequential methods appear to be the most appropriate for decision-making
contexts (such as comparing two alternatives with respect to a desired outcome) as
they explicitly aim to quantify the total consequences of decisions. In the
Searchinger et al. (2008) example, decisions based on attributional methods can
result in system-level outcomes that are the exact opposite to those intended. Given
The Attributional-Consequential Distinction … 113

that corporate level carbon accounting is attributional in nature (CDP 2013; Brander
and Wylie 2011), it is probable that such accounts will be similarly unreliable for
good decision making. This fundamental shortcoming, which is due to the fact that
attributional accounts do not capture the full system-level impacts of a given
alternative, should be understood as distinct from other limitations on comparability
which have to do with a lack of consistency in accounting and reporting, as
observed by many authors (Kolk et al. 2008; Solomon et al. 2011; Andrew and
Cortese 2011; Dragomir 2012; Sullivan and Gouldson 2012). A greater apprecia-
tion of the attributional-consequential distinction could encourage the use of con-
sequential methods, such as project level accounting or consequential LCA, to
inform or appraise corporate decision making.
One possible application context for attributional corporate level accounting is to
provide information on exposure to regulatory risk. Given that many regulatory
measures such as carbon taxes and emissions trading schemes impose responsi-
bilities on emitters based on attributional accounting methods, one reason for
companies reporting such information might be to indicate the risk of such liabil-
ities in future. Attributional accounts will then be decision-useful for investors
interested in the financial impacts of such impositions on the valuation of corporate
assets (Hassel et al. 2005; Kolk et al. 2008). However, questions would remain
about the efficacy of regulation based on attributional methods, precisely for the
reason that they do not show the total consequences of a corporation’s activities,
nor the impact of regulating those activities. Out-sourcing of emissions-intensive
activity to a country not covered by such regulation might be an example of a
perverse outcome that would only be recognised with a consequential assessment.
Companies and investors relying on attributional accounting should therefore also
consider the risk that policy-makers could change the emphasis of regulation to
capture more non-attributional impacts in future, if these consequences are material
at a systemic level.
A common explanation for the different application contexts for attributional and
consequential methods is the scope of the decision under analysis. It may be
assumed that consequential methods are only necessary if whole markets or
industries are affected by the decision in question, and where this is not the case
then attributional methods are sufficient. However, it is possible to conceive of
micro-level decision scenarios that do not affect whole markets, but nevertheless
require a consequential approach to capture systemic impacts. For example, if a
farmer purchases straw from a neighbour to use as a fuel, the neighbour may have
to use more fertiliser as they are no longer ploughing the straw back into the soil.
A conventional corporate level inventory for the farmer would not capture the
indirect effect of the neighbour’s increased fertiliser use, and, moreover, it would
only be through undertaking a consequential assessment and comparing it with an
attributional assessment that the systemic adequacy of using an attributional
approach could be known.
It could also be suggested that expanding the scope of attributional corporate
inventories will help to capture more of the consequences of corporate activities,
thereby mitigating the problem of missing system-level impacts. Indeed, this
114 M. Brander and F. Ascui

appears to be part of the rationale for the provision of guidance on including all
scope 3 sources (i.e. sources of emissions not controlled by the reporting company,
but occurring either upstream or downstream in their value chain) in corporate
accounts (WBCSD/WRI 2011a). However, emission consequences, especially
where they are mediated by markets, can occur well beyond the value-chain of the
reporting entity in question, and so will not necessarily be captured even by whole
value-chain inventories. For example, consuming an additional unit of a product in
one country may affect production of the marginal unit in another country;
value-chain analysis will only capture the upstream and downstream impacts from
the former unit and not the latter. In contrast, a consequential approach will attempt
to provide ‘complete’ information, as it specifically aims to identify all the emission
sources that are affected by a decision or action.
In some sectors, there is already some awareness of this limitation to attribu-
tional corporate accounting. For instance, the telecommunications industry makes
the case that although its own value chain emissions may be increasing, the
industry’s services reduce emissions in other sectors, such as transportation (e.g. by
video conferencing replacing business travel). A recent report commissioned by the
telecommunications industry calculates the abatement potential from telecommu-
nications to be approximately seven times larger than emissions from the sector
(Global e-Sustainability Initiative 2012). Similar consequential impacts, which
would not be captured in a conventional attributional inventory, are reported by
BASF who claim a 246 million tonne reduction in CO2e emissions due to their
sustainable building products (BASF 2014). Awareness of the limitations with
value-chain attributional accounting is also evidenced by the GHG Protocol’s
proposal to develop a standard specifically focused on product-enabled reductions
(WBCSD/WRI 2014b). It is interesting (but not surprising, given the self-regulatory
nature of most such initiatives in corporate carbon accounting) to note that the
current focus of these initiatives is on the beneficial reductions caused by company
activities, with little interest yet shown in understanding the possible increases in
emissions that may occur outside conventional attributional inventory boundaries.
It is possible that companies may be using consequential methods to support
internal decision-making, but not public reporting, and therefore their use is not
evident. However, a more likely possibility is that companies are using attributional
methods to inform their internal decision-making, as it is on the basis of these
accounts that companies will be judged by their external stakeholders, because the
attributional approach currently dominates public reporting. In addition, attribu-
tional corporate accounting standards, such as the widely used GHG Protocol
Corporate Standard, state that the information provided by such inventories should
be relevant to decision making (WBCSD/WRI 2004, pp 7–8), which clearly sug-
gests that attributional accounts will be used in this way. The question of whether
companies are using attributional or consequential methods to support their internal
decision-making is a subject for further empirical research, but it is worth noting
that such research is only likely to take place if the attributional-consequential
distinction becomes more widely recognised within the carbon accounting research
The Attributional-Consequential Distinction … 115

community, which in turn requires the sort of frame-reflective dialogue and

consensus-building that previously occurred within the LCA community.
Despite the limitations with attributional corporate accounting, one feature of
attributional accounting which appears to be lacking with consequential methods is
the sense of ‘ownership’ conferred on emissions within a company’s attributional
inventory. Conventional attributional accounts provide a starting point for com-
panies to recognise a set of emissions as ‘theirs’, which they can then seek to
manage over time. In contrast, with consequential accounting, it is more difficult to
identify which emission sources the company ‘owns’. What may be needed is a
combination of both approaches, with attributional accounts used to establish a set
of emission sources to be managed, and consequential assessments used to inform
decisions on how to reduce those emissions without causing unintended conse-
quences elsewhere in the system.
A next step for companies interested in understanding and managing the total
system-level greenhouse gas impacts of their decisions would be to utilise or
develop consequential methods that capture both reductions and increases in
emissions resulting from specific actions or choices. A number of methods already
exist that can be used for this purpose. Consequential LCA can be used where the
decision concerns the production or design of a specific product. Although there are
no published standards dedicated to consequential LCA, helpful guidance is
available in Ekvall and Weidema (2004) and in Weidema (2003). Project level
accounting can be used where the decision concerns a discrete activity, e.g. the
development of on-site renewables (see WRI and WBCSD 2005 or ISO 14064-2
2006d for guidance). Finally, policy-level accounting can be used for assessing
company policies, e.g. economy-class only business travel, or making payments for
employee-owned car mileage (see the GHG Protocol’s Policy and Action Standard
(WBCSD/WRI 2013) for guidance).

3.3 Utility of the Distinction to Academic Understanding

of Carbon Accounting

A final area where a greater awareness of the attributional-consequential distinction

may be fruitful is to academic research on corporate carbon accounting. As men-
tioned earlier, despite its widespread use within the field of life cycle assessment,
there appears to be very limited use or awareness of the attributional-consequential
distinction in the academic literature for other areas of carbon accounting. The only
journal article identified (based on the literature review illustrated in Fig. 1) that
uses the attributional-consequential distinction to categorise different fields of
greenhouse gas accounting practice is Brander and Wylie (2011), which suggests
that national inventories and corporate greenhouse gas accounting are attributional
in nature, and that project and policy-level accounting are consequential. The lack
of other literature suggests that utilising the distinction to understand the different
116 M. Brander and F. Ascui

forms of greenhouse gas accounting is relatively underdeveloped at present.

Likewise, the attributional-consequential distinction only appears in one of the eight
journals covered by Ascui’s (2014) review of the ‘social and environmental
accounting’ (SEA) literature on carbon accounting (the exception being the Journal
of Cleaner Production, which has a strong focus on LCA). Ascui (2014) distin-
guishes between critical/normative discussions about carbon accounting, and
empirical studies of carbon accounting. It appears likely that the
attributional-consequential distinction could be pertinent to both these areas of
research.
It is worth noting that the attributional-consequential distinction is not equivalent
to the distinction between financial accounting (external reporting) and manage-
ment accounting (internal decision-making) (Ratnatunga 2008; Burritt et al. 2011;
Stechemesser and Guenther 2012). Internal decision-making may or may not be
based on attributional accounts, and external reporting may provide either attri-
butional or consequential information. As previously observed, an important area
for further research is the extent to which current corporate level decision-making is
based on attributional information, and whether this leads to sub-optimal outcomes
at the system level.

4 Conclusions

There appears to be considerable potential for wider learning from the conceptual
and methodological development of the attributional-consequential distinction in
the LCA literature. With respect to corporate carbon accounting, the potential
benefits include the development of more coherent carbon accounting standards,
and a better understanding of the appropriateness of relying on attributional versus
consequential accounts to answer different kinds of query. In short, attributional
accounts provide a snapshot of a particular scope of assumed responsibility, which
may be relevant to corporations concerned only with regulatory liabilities based on
attributional accounting. However, given the global, systemic nature of climate
change as a problem, consequential accounts are appropriate for informing
decision-making where the objective is genuine mitigation of the problem (i.e.
based on a much wider sense of responsibility). Attributional accounts may also be
useful for managing absolute carbon budgets, and for creating a sense of ‘owner-
ship’ for a specific set of emissions. However, if actions aimed at reducing emis-
sions within an attributional budget or inventory are not informed by a
consequential assessment, it will be impossible to know whether the actions also
cause unintended consequences elsewhere in the system. Further research is
required to develop heuristics or simplified methods to understand when such
consequences may be material or not. The use of consequential assessment for
corporate level decision-making could also be greatly facilitated by a standardised
methodology, potentially bringing together aspects of consequential LCA,
The Attributional-Consequential Distinction … 117

project-level accounting, and policy-level accounting. The challenges of developing

such a methodology, however, should not be underestimated.
Despite superficial similarities (e.g. presenting results in the same metric, such as
carbon dioxide equivalents), attributional and consequential accounts are not
alternative methods for answering the same question, but rather, methods suitable
for answering fundamentally different questions, informed by different disciplinary
perspectives and conceptual frames. “[H]ow you account for CO2 emissions and the
answer you get depend on the questions you ask, the framework of the query”
(Marland et al. 2013). Problems arise, however, when this distinction is not
appreciated. It is hoped that this chapter provides an initial contribution to further
frame-reflective debate on the nature and utility of the attributional-consequential
distinction for corporate carbon accounting, which may facilitate more rapid
adoption of common terminology, standards and associated conceptual under-
standing than was the case with its earlier emergence in the field of LCA.
Finally, this chapter has focussed on the potential application of the distinction to
corporate carbon accounting, but there is considerable scope for further research to
explore the application of the concept and methods to other forms of carbon
accounting. It may be helpful, for example, to understand that national inventories
are also generally attributional in nature, while project and policy-level carbon
accounting are consequential (Brander and Wylie 2011). Policies aimed at
managing national emissions may well create effects that are not captured in
attributional national inventories, and alternatives such as consumption-based
accounting (Barrett et al. 2013), while including more consequences, will not
necessarily be sufficient to fully capture system-wide marginal impacts. Beyond
this, the distinction may prove fruitful to other forms of social and environmental
accounting: we suspect that similar issues would be raised in accounting for water,
biodiversity, health or employment impacts, for example. In each case, appreciating
the distinction may support a better understanding of possible alternatives and the
appropriateness of using different alternatives to answer different questions.

Acknowledgements The authors would like to thank the two anonymous reviewers of this
chapter for their helpful comments.Matthew Brander would like to acknowledge the UK’s
Economic and Social Research Council (ESRC), in partnership with the Society for the
Advancement of Management Studies (SAMS) and the UK Commission for Employment and
Skills (UKCES), for their support through the Management and Business Development Fellowship
Scheme.

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Implementing an EMA Innovation:
The Case of Carbon Accounting

Delphine Gibassier

Abstract Environmental management accounting (EMA) has only been resear-

ched as an innovation on rare occasions. This research focuses on EMA as an
innovation for several reasons. First, environmental deterioration is clearly visible,
widespread and deep-rooted, and many scientists are warning that urgent action is
required to remedy the situation. Second, the way that the accounting profession
tackles the environmental issue will indicate its capacity to evolve with the rest of
society. Third, it is of importance and relevance to organizations, because according
to an Accenture/Global Compact 2010 survey, 96 % of CEOs agree that sustain-
ability issues should be integrated in company strategy and operations. This
research focuses solely on the implementation phase of the innovation cycle.
Indeed, implementation is an uncertain exercise and may prove complex and
problematic. Accounting innovations often fail to be successfully implemented or
disseminated throughout the organization. Therefore, this research seeks to answer
the question of how a radically new EMA innovation can be implemented in a
company. Consequently, this research develops a case study of the implementation
of carbon accounting in a French multinational, and explores the different factors
that led to the successful implementation of the innovation.

1 Introduction

Environmental management accounting (EMA) has only been researched as an

innovation on rare occasions. For example, Rikhardsson et al. (2005) explored the
question of whether EMA could be a fad or fashion, wondering under what con-
ditions EMA could endure. Lafontaine (2003) also tried to characterize environ-
mental accounting as a managerial innovation or an accounting innovation,

D. Gibassier (&)
Toulouse University, Toulouse Business School,
20 Boulevard Lascrosses, 31068 Toulouse, France
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 121

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_6
122 D. Gibassier

deciding that EMA could not be defined as an accounting innovation because of the
accounting profession’s lack of involvement in this definition. EMA is herein
referred to as one type of management accounting innovation (MAI). MAIs refer to
“newer” or modern forms of management accounting and control systems (Zawawi
and Hoque 2010). Environmental uncertainties, recent global issues such as climate
change or the scarcity of natural resources can affect MAIs (Zawawi and Hoque
2010). Interaction between these issues and MAIs therefore needs further investi-
gation (Zawawi and Hoque 2010). This research focuses on the EMA innovation
for several reasons. First, environmental deterioration is clearly visible, widespread
and deep-rooted, and many scientists are warning that urgent action is required to
remedy the situation (Costanza et al. 2013). Second, as Medley (1997) stated, the
way that the accounting profession tackles the environmental issue will indicate its
capacity to evolve with the rest of society. Third, it is of importance and relevance
to organizations, because according to an Accenture/Global Compact 2010 survey,
96 % of CEOs agree that sustainability issues should be integrated in company
strategy and operations.
This research focuses solely on the implementation phase of the innovation
cycle. Indeed, implementation is an uncertain exercise and may prove complex and
problematic (Rogers 2003). Accounting innovations often fail to be successfully
implemented or disseminated throughout the organization (Abernethy and Bouwens
2005). Therefore, this study seeks to answer the question of how a radically new
EMA innovation may be implemented in a company and consequently develops a
case study of the implementation of carbon accounting in a French multinational,
exploring the different factors that led to the innovation’s successful
implementation.
The paper is organized as follows: Sect. (2) presents the literature on imple-
menting EMA. Section (3) introduces the subject of this research. Section (4)
introduces the qualitative research method and describes the case study company.
Section (5) presents our findings and describes the implementation of carbon
accounting within the organization studied. Finally, Sect. (6) discusses case study
findings and draws subsequent conclusions.

2 Literature Review: Implementing Environmental

Management Accounting Innovations

Implementing innovation within an organization can be defined as the process of

obtaining targeted employees’ appropriate and committed use of this innovation
(Klein and Sorra 1996). The implementation period is when the tensions between
the organization and innovation are revealed, tensions created by the uncertainties
that innovations bring with them and the rationalization of the current organiza-
tional model (Alter 1993). Often, new management accounting techniques are
adopted while older systems are maintained, suggesting that there is a transitional
Implementing an EMA Innovation: The Case of Carbon Accounting 123

stage in the implementation of management accounting innovations (Zawawi and

Hoque 2010). Moreover, MAIs can have consequences not only through the new
visibility and calculability it provides the organization, but can also drive the
organization to reorganize itself. Hoque and Alam (1999) observed that the man-
agement accounting system implemented in their case study motivated a change in
the organization, which became more decentralized and project-oriented in keeping
with Total Quality Management (TQM) ideals. Implementation also relates to
issues of organization knowledge. Fiol (1996) invites us to think of organizations as
sponges, some of which have a greater capacity to absorb new knowledge than
others. “Depending on their absorptive capacity and on their ability to reconfigure
what they have absorbed, organizations also have more or less potential to generate
outcomes” (Fiol 1996). In their development of “absorptive capacity”, Cohen and
Levinthal (1990) emphasize prior experience with related knowledge as a key
determinant. Others have focused on the importance of an internal “champion” to
carry the innovation forward (Daft 1978; Brown et al. 2004; Emsley et al. 2006).
The very complex, uncertain and problematic exercise of implementing inno-
vations breeds tensions between role-players, and causes realignments as new
practices, roles and systems appear, redefining existing ones. Many studies in
accounting literature have investigated accounting changes and failures, empha-
sizing how the fate of an innovation is determined by the action of others (Preston
et al. 1992) and concluding that the bundling of innovations needs to be recon-
ceptualised to incorporate managerial and organizational learning processes
(Modell 2009). The literature on implementing innovations has emphasized the
potential barriers to successful implementation (Kasurinen 2002). Some are struc-
tural barriers, such as organizational culture. Another cause of resistance is the
inability to secure legitimacy for the accounting innovation when it does not speak
the same language as daily ongoing operations (Scapens and Roberts 1993).
Finally, a failure in the change management process—such as the absence of a
sponsorship process and/or educational efforts—is also considered a potential
barrier to successful implementation (Kasurinen 2002).
What this research seeks to add to our understanding of implementation pro-
cesses is how a radically new EMA innovation was successfully implemented in a
multinational. This study responds to a call by Kasurinen (2002) to investigate the
factors and implementation approaches that make successful change possible. We
shall therefore describe the emergence of the new practices, roles and systems, and
how the employees appropriated the innovation. Indeed, appropriation of an
innovation lies in the realm of “doing”, i.e. in the creation of new practices (Gaglio
2011). Pantzar and Shove (2010a) believe that innovations in practices occur
through the connections between foundational elements such as material, image and
skills. In this research, we describe the development of material practices, new skills
and roles around the EMA innovation.
124 D. Gibassier

3 The Subject of Research: Carbon Accounting

as an EMA Innovation

Over the last ten years, greenhouse gas (GHG) emissions have emerged as the key
environmental indicator for organizations. Climate change has developed into the
most prominent and well-known environmental issue today (Giddens 2008). The
definition of carbon accounting in this research is:
The recognition, the non-monetary and monetary evaluation and the monitoring of
greenhouse gas emissions on all levels of the value chain and the recognition, evaluation
and monitoring of the effects of these emissions on the carbon cycle of ecosystems.
(Stechemesser and Guenther 2012)

Carbon accounting can be defined as a radical innovation, as it requires new and

different practices to complement a change in strategy (Emsley et al. 2006). Carbon
accounting is not a mere improvement of existing practices.
In this research, we are only concerned with the physical evaluation of GHG
emissions. Carbon accounting occurs at different scales. The first is national carbon
accounting, which was developed after the signing of the Kyoto Protocol so that
countries could account for their emissions. Carbon accounting has also been
developed for cities and regions (e.g. France’s “bilan carbone des territoires”
(carbon budget for sub-national entities), Global Protocol for Community-Scale
GHG Emissions).
The second carbon accounting scale is that of corporations. Three types of
carbon accounting concern corporations: by site, product or project. Project carbon
accounting is concerned with carbon-offset projects. This method of accounting is
specific to projects conducted in general after reductions have been made within a
corporation and therefore outside the scope of this research. We are thus concerned
by product and site carbon accounting. Both types are linked and results converge
theoretically, although very few organizations have tried to associate the two in
reality. Site accounting is based on the GHG Protocol Corporate Standard from
2001, revised in 2004. It focuses on how each site emits greenhouse gases. Its
results are therefore production-based. The GHG Protocol Corporate Standard is
closely linked to the responsibility framework from financial accounting and the
boundaries are based either on equity or financial control. One last possibility is to
base results on operational control, which is the most difficult to implement as it is
very different from existing data collection systems based on traditional financial
accounting. The second type is product accounting, which is mainly used for
companies that focus on certain products either for eco-design purposes or to
inform consumers of the CO2 impact of product consumption. Some companies
have tried to transform this accounting method into a large-scale method by
accounting for hundreds or even thousands of their products’ carbon footprints, but
to our knowledge, none has tried to devise a company-wide result using product
footprints (i.e. based on turnover rather than production) (Fig. 1).
Implementing an EMA Innovation: The Case of Carbon Accounting 125

Fig. 1 The link between corporate and product carbon accounting (GHG Protocol 2011)

Carbon accounting within organizations is still under-researched (Burritt et al.

2011; Schaltegger and Csutora 2012). A study of automobile manufacturers in
South Korea (Lee 2012) revealed that although many firms adopt a carbon
inventory in scopes 1 and 2 under the GHG Protocol and national South Korean
standards, indirect emissions from the total supply chain to the production gate
(Scope 3) are critical for automobile manufacturers. Therefore, Lee suggests that
automobile manufacturers should practice an eco-control approach “which includes
setting goals and implementing internal and external communication in a systematic
way”. Lee argues that for automobile manufacturers, it is vital to define a carbon
management strategy which engages key suppliers in a process through which they
gradually become part of a sustainable supply chain. However, this study does not
reveal how carbon accounting has actually been implemented and sustained within
the organizations investigated. Moreover, Burritt et al. (2011) have argued that
although their study revealed a wide range of carbon-related accounting activities
such as collecting monetary and physical carbon data for investment
decision-making or operational costs, companies need to consider a more sophis-
ticated organization and design of carbon management accounting. This is what our
research will explore in a single case study.

4 Research Design

The case study is a preferred method when examining contemporary events over
which the investigator has little or no control, and to answer “how” and “why”
questions (Yin 2009). Moreover, case studies allow an interpretation of the social
system being studied (Scapens 1990). A case study is “an exploration of a bounded
system over time through detailed, in-depth data collection involving multiple
sources of information rich in context” (Creswell 1998). In the social and envi-
ronmental accounting literature, it has also been argued that there is a need for more
126 D. Gibassier

approaches focusing on organizations that practise sustainability accounting, with

the “aim of drawing from the field the rationales that the actors use to construct
sustainability accounting and accountability and, directly or indirectly, enhancing
practice” (Adams and Larrinaga-Gonzalez 2007). Therefore, we believe case
studies with their major participant observation approach respond to the call for
more engaged approaches with organizations.
To study the implementation phase of an EMA innovation, a single case study
was conducted in a multinational company. Global multinational enterprises
(MNEs) currently represent an immense share of the global economy [if WalMart
were a country, for instance, it would be the 22nd largest in the world in terms of
GDP, as per Keys and Malnight (2010)] and are accused of being responsible for
much of the environmental damage (Gray and Bebbington 1998). In contrast,
Hawken (1993) says that business is the only mechanism powerful enough to
produce the changes necessary to reverse global environmental and social degra-
dation. MNEs therefore attempt to not only avoid being accused of causing the
damage but rather to be a driving force in remedying environmental damage
(Gunningham 2009). Consequently, this research concentrates on one MNE to seek
to understand its involvement in the environmental debate around sustainability
(Gray and Bebbington 1998) and to contribute to the understanding of this paradox.
The case study company is a medium-sized multinational in the food sector that,
while a leader in its market segments, does not represent a mastodon of the food
industry worldwide. Its corporate social responsibility (CSR) policy is based on a
“dual social and economic project” that dates back to 1972. The environmental
aspect of sustainable development has been present within the company since the
founder’s 1972 Marseille speech:
Corporate responsibility does not end at the factory gate (…). The energy and raw material
we consume change the face of our planet. Public opinion is there to remind us of our
responsibility (…) the energy resources of Earth are limited. (Company founder 1972)

In 2000, corporate objectives were set to limit water and energy consumption
and reduce waste and packaging. The objectives were achieved earlier than planned
and a new strategy was defined starting in 2008. The new strategy, based on four
core strategic priorities—Health, For All, Nature and People—was closely aligned
with the company’s 2006 mission, to “bring health through food to as many people
as possible”. The CEO clarified the four priorities as follow: “‘Health,’ that is to
say, the company’s contribution to public health through nutrition, ‘For All’, that is
to say, the creation of products and economic models accessible to population
groups with low purchasing power, ‘Nature’ to drastically reduce the environmental
impact of our activities throughout the lifecycle of our products, ‘People’ by giving
all of our employees the opportunity to develop, to anticipate the changes and to
give meaning to their work”. He added in the 2009 Sustainability Report, that each
of these core priorities must act like a “transformer”, a way to rethink the com-
pany’s methods and invent “new business and social responses”.
To coordinate the new ‘Nature’ environmental strategy, a new department was
created in 2009. This ‘Nature’ department replaced the previous ‘Environment’
Implementing an EMA Innovation: The Case of Carbon Accounting 127

department. The new ‘Nature’ team defined the following five priorities for envi-
ronmental action: “reducing the carbon footprint, protecting water resources,
stepping up packaging research to transform waste into a resource, promoting
sustainable agriculture, and supporting biodiversity”.
This research focuses on one of the company’s five priorities, namely “reducing
the carbon footprint”, and investigates how carbon accounting played a central role
in the development of this strategic objective.
The study dataset is based on the following approach. First, I conducted par-
ticipant observation for 12 months. Throughout this time, I was in charge of carbon
accounting standards, implementation of the accounting tools related to carbon,
reporting related to carbon, as well as the convergence project of two accounting
methodologies. I interacted daily with carbon masters around the world in relation
to carbon accounting topics. Moreover, I interacted with the consultant who created
the Excel carbon accounting tool. I also participated in the corporate life of the
‘Nature’ team at headquarters, including team meetings, lunches and informal
conversations. During the time in the ‘Nature’ team, I also participated in “green
days” in November 2010, aimed at considering past strategy on climate change and
nature in general, and at developing the future strategy. I also participated in further
meetings related to the future of climate change strategy in 2011. Moreover, I
witnessed a stakeholder meeting in November 2012 related to this future strategy.
To learn more within the baby division, I participated in a one-day meeting on
carbon accounting and strategy in February 2012. In all, I attended 149 meetings in
these 12 months. Moreover, semi-structured interviews were conducted to gain
knowledge of the early stages of the projects in 2007 to 2009, when there was no
participant observation. A total of 30 interviews were conducted in addition to four
exploratory interviews with the ‘Nature’ team at the end of 2010. Additionally,
meetings were recorded to gain insights into the information circulating and dis-
cussions linked to accounting and strategy-making. Finally, secondary documents
were collected and e-mails kept to add to my knowledge of organizational practices.
Qualitative researchers interpret data based on the whole of their own experi-
ences, training, social position etc., and there is a general acceptance of the sub-
jectivity of these methods (Bluhm et al. 2011). Moreover, participant observation is
said to have strong internal validity in the sense that researchers have time to “learn
the language” of participants, and because it is conducted in natural settings, it
reflects the reality of informant life experiences (Schensul et al. 1999).

5 Findings

The implementation of radically new management accounting innovations

(MAI) requires setting up a new infrastructure, including performance incentives,
new roles to be created, methodologies to choose and information system infras-
tructure to support the development. Moreover, an MAI is often implemented in
conjunction with a new business strategy. Finally, MAI implementation often
128 D. Gibassier

requires a support network to succeed. Therefore, this section describes the roles,
methodologies and infrastructure development for carbon accounting, how it was
closely integrated into business strategy, while emphasizing the support structure
cradling the innovation. New links were created around the innovation for it to be
successfully implemented.

5.1 Performance Monitoring, Incentive to Invest

and Sponsors

The context in which the environmental and carbon strategy was to be initiated in
2006 and 2007 was highly ambiguous for the food industry in terms of markets,
legal frameworks and technologies. Legally, the case study company was not bound
like some other corporations by the European Union’s Emissions Trading
Scheme (EU ETS). However, there was already talk of environmental labelling and
a potential carbon tax. The company’s water division had also come under
environment-related pressure because of campaigns against bottled water.
However, in the food industry, strategic issues related to the environment were very
vague and undefined at the time, and there were no legal or competitive pressures to
kick off a major carbon strategy, with reduction targets and company-wide carbon
accounting.
In 2008, the company officially announced the −30 % target and its integration
into bonuses. The target was to reduce the CO2 footprint by 30 % (in kg of CO2 per
kg of product) for all activities (industrial sites, packaging, transportation and both
product and packaging end-of-life cycle). The carbon footprint reduction objective
was integrated into the bonus system applicable to all general managers of country
business units and group directors (1400 people in all) from 2008 to 2012. The
bonus played a key role, because it is a sign to managers that this topic is taken
seriously by company heads. The inclusion of the reduction target into bonuses
motivated everyone in their commitment. However, in the country business units
(CBU), it was hard to grasp what it meant, and what kind of actions could lead to
that objective:
I think that at the time, the announcement was for me something I couldn’t really relate to.
It sounded very abstract, a long way from what we were used to doing in running a country
business unit. (General Manager, country business unit.)
In my opinion, on the one hand there was a strategy that everyone embraced. And on the
other hand, implementation where everyone implemented, but without necessarily being
perfectly aware that it contributed to reducing CO2. (General Manager, country business
unit.)

The implementation of the EMA carbon accounting innovation was a key factor
in transforming the abstract goal of reducing emissions by 30 % into the daily
operations performed by each business unit. In return, the full integration of carbon
Implementing an EMA Innovation: The Case of Carbon Accounting 129

accounting into the new strategy led to its successful implementation as an EMA
innovation. From 2008 to 2012, the case study company reduced its emissions by
35.2 % with respect to its intensity target.

5.2 Developing a New Role: The Carbon Master

Carbon accounting was supported through the inception of a new function, named
“carbon master,” and a new department in company headquarters known as ‘Nature
finance.’ The company created a community of 110 carbon masters, defined as
“facilitators and champions in each subsidiary of the Carbon Reduction Plan” in
2008. First named “carbon expert,” carbon masters were appointed in each sub-
sidiary to be responsible for measuring CO2 emissions and preparing a suitable
action plan for their reduction. There were no guidelines given on how the “carbon
master” should be chosen, and no indication that a new function should be created.
Most of the time, the first carbon masters were actually quality managers, research
and development managers, supply chain managers or other managers who simply
added this topic to their job description.
In 2012, most carbon masters worked full time on environmental issues. Those
that did not, had been able to create small teams, mostly comprising younger
employees responsible for carbon accounting, while the carbon master remained in
charge of strategy-related work, simulations, and projects with other CBU
departments.
At headquarters, the carbon control team is composed of two full-time
employees: a ‘Nature’ CFO, and a carbon controller. One is from an accounting
background, the other an engineering background. This scheme corresponds to the
current world of carbon accounting, which bridges different epistemic communities
(Ascui and Lovell 2012). The team is in charge of carbon accounting quality and
leads the process of automation through the project with the Enterprise Resource
Planning (ERP) global provider. Moreover, the team is tasked with answering for
sustainability ratings—including the Carbon Disclosure Project (CDP)—carrying
out the annual reporting on carbon, and strategic monitoring of the rapidly evolving
carbon accounting field.

5.3 Carbon Accounting Methodologies

The company uses two corporate accounting methods, one by product and the other
by site. Both are compiled into a company-wide result. The company aims to make
the results of both methodologies converge so as to be able to use both in reporting
and in-house management systems.
130 D. Gibassier

5.3.1 The Company’s Carbon Accounting Methodology by Product

The company’s carbon accounting methodology is primarily based on the life cycle
assessment (LCA) methodology, ISO 14044, and PAS 2050 from 2008. According
to the in-house “carbon accounting methodology guide” from 2010, a successful
carbon accounting system should have the following characteristics:
• Comprehensive (scopes 1, 2 and 3)
• Periodic: enables updates at regular intervals and comparison across reporting
periods
• Auditable: to trace transactions and enable independent reviews for compliance
• Flexible: incorporates data from multiple approaches to life cycle assessment
• Standard-based: accommodates current generally-accepted standards and
emerging standards
• Scalable: accommodates growing volume and complexity of business operations
• Efficient: delivers data in the timeframe required for decision-making.
The goals of the approach chosen according to the in-house accounting guide are
to:
• Be able to compare the main products of their portfolio based on their carbon
footprint
• Help identify action plans to reduce the carbon footprint
• Produce using an eco-design approach
• Communicate on product carbon footprints when possible.
The first step of the carbon accounting methodology consists in measuring the
emissions for representative products of a CBU in CO2 equivalents. The carbon
masters fill in data for at least ten product footprints, sometimes more depending on
the representativeness of the products in terms of turnover in their country.
Individual product footprints are defined in in-house guidelines as: “the total
emission of greenhouse gases (GHG) linked to a product across its life cycle, from
the production of raw materials to its end of life”. The carbon master fills in the
following tables: product data (including ingredients and packaging information),
logistics data (where the distribution scenario for each country is modelled),
manufacturing data, fruit data for dairy products, composite packaging data and
warehouse data. Emission factors by country are defined at corporate level and
integrated in the tool given to the carbon masters, except when they are calculated
based on country assumptions such as chilled storage in shops or at home, and fruit
emission factors.
The second step entails aggregating data country-wide, based on the ten most
representative product footprints or 80 % of the total turnover footprints (for the
water division). The company calculates the business footprint for each country by
allocating responsibility on a consumption basis and not on a production basis. For
example, a product unit for a yoghurt made in Belgium and sold in France has a
footprint partially calculated in Belgium, and the rest of the footprint is comple-
mented with carbon accounting data by the French carbon master for logistics,
Implementing an EMA Innovation: The Case of Carbon Accounting 131

Fig. 2 Company carbon

accounting

consumption and end of life based on the French market. The total carbon product
footprint is then allocated to the French business unit because it ordered the
manufactured product (in Belgium) and because the product was sold to the final
customer in France. Footprints are calculated for the CBU based on different
product category sales.
Finally, the total group footprint is the addition of all CBU footprints. The result
is both in millions of tons of CO2 equivalent and in the efficiency target of grams of
CO2 equivalent per kilogram of product sold (remembering that the accounting is
based on turnover and not on production). In all, more than 800 individual product
footprints are used to produce the total of the group’s yearly results (Fig. 2).

5.3.2 The GHG Protocol Corporate Standard

Since 2012, the company has also been measuring company-wide carbon emissions
using the GHG Protocol Corporate Standard (2004) on all its sites (not limited to
132 D. Gibassier

manufacturing sites). It was tested on four country business units in 2011, and
extended to all business units in 2012. It is a comprehensive annual calculation of
the company’s scope 1 and 2 carbon emissions.
The results are used to reply to the carbon disclosure project questionnaire once
a year, and to meet the French requirement to report GHG emissions for scopes 1
and 2 since the end of 2012.

5.3.3 The Convergence Project

Based on the need to bring together different stakeholder views of carbon perfor-
mance, the company decided in 2010 to initiate the “convergence” project. The aim
was to examine whether different accounting approaches could be linked such that
the resulting information corresponds to each other. To our knowledge, only one
attempt has been made to link corporate and product carbon accounting systems,
described in the Journal of Cleaner Production (Scipioni et al. 2012). Their
approach allows an organization to determine over time how organization-scale
decisions affect a product’s carbon footprint. They designed a model that integrates
“the life cycle approach of the ISO 14040 standards with ISO 14064 to model the
management and monitoring of emissions and to develop an inventory of GHG
emissions for products” (Scipioni et al. 2012). However, their study is not two-way
(corporate to product and back again), and has only been tested on two products of
Tetra Pack Italy.
The two accounting approaches in the convergence project discussed here are,
on the one hand, the company’s in-house accounting approach and on the other, the
GHG Protocol Corporate Standard used to respond to investors’ and external rating
agencies’ needs. The idea is to make sure that the result from the total products’
footprints and the result from the total sites’ footprint match, to give comprehensive
corporate results. The convergence project aims to develop a comprehensive cor-
porate carbon accounting approach which arrives at consistent figures, whether
carbon is accounted for with their own in-house management performance
accounting system or the externally driven accounting and reporting system com-
plying with international standards (Fig. 3).

5.4 Carbon Accounting Tool: From Excel to SAP

Carbon accounting is a radically new accounting approach for corporations and

therefore relies on innovative information systems. The company built a first tool
based on Excel technology, and has since 2010 transitioned to an ERP system,
jointly innovated with company SAP.
Implementing an EMA Innovation: The Case of Carbon Accounting 133

Fig. 3 Convergence of methodologies

5.4.1 Excel-Based Tool

Since 2007, an Excel tool has been used to collect data for individual product
footprints. It is applied by the carbon masters responsible for data collection in each
CBU to calculate carbon footprints once a year.
The tool provides tables with emission factors and calculation formulas so that
the carbon masters need only to fill in activity data for the specific year and some
intermediate data for emission factors (ingredients, kilometres, energy consump-
tion, etc.). The Excel tool is composed of four different parts1:

1
Source: in-house methodological guide for the Excel tool.
134 D. Gibassier

• An interface where the user enters primary data describing the product and the
main characteristics of its life cycle;
• A database on GHG emission factors (ingredients other than dairy ingredients
and fruit preparation, packaging materials) as well as average destination of
waste in a given country, used to calculate the total carbon footprint of a given
product based on the data entered by the user. This global database is
country-specific, insofar as country databases exist, otherwise factors are
common;
• A calculation engine, based on Excel formulas to calculate the results from the
primary data entered by the user, the GHG coefficients and other formulas used
to model the life cycle steps included in the system;
• An interface displaying the carbon footprint results of a product. Carbon foot-
prints are presented in two ways: per kg of product (e.g. g CO2e/kg of yoghurt)
and per product unit (e.g. g CO2e per cup or per bottle).
Following the methodology of two-step consolidation, the first Excel tool cal-
culates individual product footprints, the second extrapolates to the CBU’s sales
volume, and the third tool consolidates results at company scale.
There are three different versions of the individual footprint Excel tool for the
four divisions but each has the same framework with more or less complex func-
tionalities (for packaging, fruit or milk for example). The tool was constructed from
2007 to 2009 by an external consultant, based on an initial design by the company
Ecobilan in 2006. The tool was used to obtain certification of products in the United
Kingdom by the Carbon Trust in 2008 and subsequently revised and updated.
Additionally, it was submitted for analysis to an external auditor, the French
environmental agency, and went through two peer reviews in 2009 and 2010. The
tool is revised once a year for minor technical updates, and more major emission
factors updates (Table 1).
The individual footprint Excel tool is used for three different purposes: bud-
geting (once or twice a year depending on the division), reporting once a year, and
simulating a project’s impact on the footprint for planning purposes.
The consolidation tool at corporate level is used for reporting numbers annually
in the sustainability report, calculating progress towards the 30 % reduction target
of GHG emissions between 2008 and 2012, and to direct and understand the
progress through an analysis of reduction drivers. The internal carbon accounting
process is defined as follows in Fig. 4.

5.4.2 ERP-Based Too

The ERP-based tool mirrors the Excel tool and is composed of different emission
factor books (energy, ingredients, manufacturing and warehouse sites), a calculative
tool, and a link to the finance ERP for activity data. Some more complex emission
Implementing an EMA Innovation: The Case of Carbon Accounting 135

Table 1 Construction of the Excel tool

Date Event
2006 Interaction with Big 4 consultant, conceptualization of Excel tool “to
be”
June 2007 Construction of first Excel tool by external consultant
July 2007 Presentation of the Excel tool to water division environmental
managers
August/September Testing of the tool in four countries
2007
January 2008 Calculation of footprints for all water divisions for 2007
January–December Carbon Trust certification on UK products
2008
January–June 2008 Workshops to tailor the Excel tool to the dairy division
July 2008 Presentation of the Excel tool to dairy division environmental
managers
September 2008 Announcement of the −30 % target
2009 Medical and Baby divisions: expansion of the tool

Fig. 4 Yearly process of carbon accounting

factors such as fruit, milk and logistics are still calculated in Excel sheets outside
the ERP system and entered manually.
The ERP system allows live data to feed carbon accounting. Carbon accounts are
closed monthly so that the carbon master can see their results on a monthly basis
rather than Excel’s yearly basis. The other major difference is that all the products
produced or distributed are taken into account with no extrapolation, which is the
basis for the Excel-based calculations. However, contrary to the Excel tool that is
used by all CBUs around the world, ERP Carbon is only available where financial
ERP is already in operation, and will gradually be implemented in other CBUs as
the financial ERP is itself implemented.
136 D. Gibassier

ERP Carbon was co-constructed (as a joint innovation project) with the global
ERP supplier SAP in 2009. It was tested in two CBUs in 2010 and then rolled out in
over 30 countries in 2011 and 2012. A business intelligence tool with reports was
deployed in late 2012 to allow for strategic analysis of data.

5.4.3 Other Data Collection Systems and the Convergence of Systems

The GHG Protocol Corporate Standard is currently managed through an external

web system, unconnected to the Excel tool or the current ERP Carbon tool.
The GHG Protocol calculation tool is however linked to the environmental KPI
information system by a backload of energy and refrigerant data from the KPI
information system into the GHG Protocol web system.
Additionally, the company has a recently upgraded legacy system to collect key
environmental performance indicators, mainly related to regulatory demands. This
tool is deployed in all business units and updated once a year. It collects energy,
water, waste and other environmental performance indicators.
The company has decided to integrate all these tools and link them together to
avoid double entry loads and mistakes. It furthermore wishes to optimize reporting
through a consistent data set for regulatory demands, stakeholder reporting and
internal management (Fig. 5).

Fig. 5 Convergence of tools

Implementing an EMA Innovation: The Case of Carbon Accounting 137

5.5 Closely Integrated with GHG Emission Reduction

Strategy

5.5.1 Productivity Strategy

In the first phase, local teams looked for easily quantifiable areas where it would be
easy to measure reductions and therefore success. During the first year, business
units selected a number of driving forces that would lower carbon in products: one
was energy consumption and the second, packaging, which was also very easy to
measure. Other factors such as distribution, the in-store context, or the entire supply
chain and suppliers were all left for a later step. Therefore, the ease with which
carbon accounting could be applied to certain topics determined the first areas to
tackle with respect to the reduction of emissions.

5.5.2 Top-Line Strategy

Another strategy developed was to focus on the potential communicability of

certain reduction actions, to directly link the strategy of being able to calculate
emission reductions to the consumers. In Europe, consumers were informed of
several actions to reduce or change packaging. One was linked to the change from
traditional plastic to green HDPE for one yoghurt pack, another involved removing
packaging all together around yoghurts (the “nude” operation), and the last one was
linked to a change in the composition of a water bottle from 100 % traditional
plastic to some bio plastic and recycled plastic. For these projects, accounting was
sometimes lagging behind strategy, calculations being new or emission factors
non-existent. Therefore, in some cases, top-line strategy helped to enhance carbon
accounting.

5.5.3 Long-Term Strategy

Another tool was added to foster long-term environmental investment. The criteria
for “green” capital expenditure (capex) projects were modified to take into con-
sideration projects that would not fit traditional financial criteria. A new criterion
was added so that a project could be considered under the green capex scheme:
tonnes of CO2 saved per million Euros invested. The payback period was calculated
using a monetization of CO2 at about 15 Euros per tonne saved. The criterion for a
decision was still made on payback, but included the CO2 saving monetized.
138 D. Gibassier

Fig. 6 Support network surrounding carbon accounting

5.6 External Network

Carbon accounting was supported through three types of networks: a method-

ological network, an infrastructure network and a certification network. The
methodological network was composed of a consultant specializing in life cycle
assessment and a global environmental consultancy team for the GHG Protocol
methodology. The infrastructure network was composed of the global ERP firm
SAP, one consultant on the consolidation system in Excel, one consultant to
monitor all changes to both the Excel tool and emission factors, as well as a global
environmental consultancy team for the web-based tool used to collect the GHG
Protocol related data. The certification network was composed of peer review
academics, a big four firm and the French environmental agency (ADEME) as well
as the Carbon Trust, which performed a critical review when it certified specific
products for the UK in 2008 (Fig. 6).

6 Conclusion

Implementation is the critical gateway between the decision to adopt the innovation
and the routine use of the innovation within an organization (Klein and Sorra 1996),
as innovations are often only considered as such when they are “used” (Gaglio
2011). It is also a sensitive phase, as implementation can be only partial, leading to
a phenomenon known in institutional theory as “decoupling”, where the tool is
Implementing an EMA Innovation: The Case of Carbon Accounting 139

mere window dressing for actual practices, and where it never becomes part of daily
routine.
While recognising the factors of success mentioned in the literature (Argyris and
Kaplan 1994; Brown et al. 2004), including that the new tool be internally legiti-
mate and matched to organizational identity (Gibassier and Journeault 2013), this
research brings additional insights to the success factors influencing implementation
of an EMA innovation. The company’s strong commitment to creating new prac-
tices around the EMA innovations, such as a new role (carbon master), new
methodologies (carbon accounting based on product footprints), and a new
infrastructure (ERP system) was sustained by an innovative incentive system, a
high level of integration into the business strategy (cost, top line and long term) and
an external support network. As per Shove and Pantzar (2010b), a radical
accounting innovation must create the right “links” to become a committed practice
within the organization. Therefore, while both structural factors and change man-
agement factors are important in the successful implementation of an innovation,
the links made through actual practice of a new innovation lead to committed use
and results in implementation effectiveness (Klein and Sorra 1996). In this case
study, the innovation was closely linked to business strategy, existing financial
processes (budgeting, investment, financial ERP system) and external support
networks. The innovation is now practised daily as “regular” carbon accounting and
continuously enhanced via the development of the role of carbon master, the
continuous improvement of the infrastructure and the development of a formal
strategy for carbon reduction in the different business areas. This research also helps
enhance our knowledge of corporate practice in carbon management accounting
(Burritt et al. 2011; Schaltegger and Csutora 2012) with this single case study,
which sheds light on the complex structure built up around a radical EMA inno-
vation during its implementation to assure its success (Fig. 7).
Research limitations include the participant observer approach, as external
validity can be threatened by the creation of a researcher-informant relationship that
would seriously affect the setting or results (Schensul et al. 1999). This occurs when
the researcher develops close and trusting relationships with the informants within
the company. Relevant tactics are needed to avoid threatening the difficult equi-
librium between participation and observation as a researcher. One of the main
tactics the researcher used during participant observation was the “outsider” period
negotiated with the case study company. The research was conducted in two
full-time periods separated by an extensive period outside the company. This period
of separation allowed the researcher to consider the data collected and begin
thinking about theoretical frameworks. A second tactic used to avoid being affected
by the company under study was to discuss it several times per week with other
researchers, and to reflect upon the experience with another researcher who had
previously used a similar mode of data collection.
Future research on EMA innovations should focus on understanding why sus-
tainability innovations, of which EMA is part, are often institutionalized but poorly
disseminated and adopted (Burns and Vaivio 2001). Indeed, there is a need to
understand the potential support—or lack of support—from infrastructures,
140 D. Gibassier

Fig. 7 EMA innovation

integrated into business
strategy and accompanied by
relevant support networks

regulations or user demands (skills to be used) (Brown and Dillard 2013) for EMA
innovations. Additionally, Bell and Hoque (2012) challenge researchers to critically
assess the inertia created by existing accounting structures, processes and tech-
niques and mainstream those conversations that raise challenges to the status quo.
Looking at EMA as an innovation allows us to look at the spaces in which inno-
vations are constructed, the networks they create or could depend upon to develop,
and the technologies they must compete with in the current regime (Brown and
Dillard 2013). Secondly, future research should analyse how EMA as an innovation
contributes to our understanding of how accounting can or might contribute to
sustainability transitions. There is a need to understand how the way in which
accounting integrates the environment gradually attains the status of self-evidence;
or why it does not, and reciprocally, how it is that particular calculative tech-
nologies come to be seen as the appropriate way to solve these particular problems
(Miller 1991). Finally, studying EMA as an innovation is firmly entrenched in the
view that accounting can be changed (and should evolve), and therefore that we
cannot mistake “contingent accounting ideas, practices and institutions, local in
space and time, as self-evident, universal and necessary” (Gomes et al. 2011).
Implementing an EMA Innovation: The Case of Carbon Accounting 141

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Carbon Accounting in Long Supply Chain
Industries

Zsófia Vetőné Mózner

Abstract Accounting for indirect carbon emissions embodied in different stages of

the supply chain is increasingly important as supply chains become more and more
globalised. Embodied emissions are greater when the supply chains of economic
sectors are longer, when goods/services that are created in one sector demand
significant input from another sectors and when several industries are involved in
the supply chain. Simply monitoring and disclosing indirect emissions might not be
adequate if the goals of carbon reduction policies are to be met. The paper presents
first an overview of relevant literature on carbon accounting within supply chains. It
examines the relevance of using hybrid input-output analysis to reveal the indirect
impacts in the supply chains of different economic sectors. The paper presents the
empirical research with the example of China, a country where goods are often
produced to meet the demands of consumers in developed countries. Long supply
chain industries and key indirect emission sources which are responsible for a
significant proportion of total emissions are identified. A time-series analysis is
presented in which the embodied emissions in exported products are analysed from
1995. Results confirm that the use of input-output models is especially relevant for
accounting for indirect impacts in long supply chain industries. Corporations in
these economic sectors are strongly advised to monitor and keep track of their
indirect emissions.

1 Introduction

Concern about the carbon emissions embodied in supply chains is increasing.

Carbon emissions generated throughout the entire supply chain need to be
accounted for if companies’ environmental performance is to be properly evaluated

Z. Vetőné Mózner (&)

Department of Environmental Economics and Technology, Corvinus University of Budapest,
Institute for Environmental Science, Fővám tér 8, Budapest 1093, Hungary
e-mail: zsofi[email protected]

© Springer International Publishing Switzerland 2015 143

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_7
144 Z. Vetőné Mózner

(Buritt et al. 2011a, b). Burritt and Tingey-Holyoak (2012) have called for more
research to be undertaken into embedded carbon emissions and the opportunities for
their management by corporations. The authors state that a gap exists between
contemporary research into and knowledge of sustainability-related embedded
carbon accounting and the application of these techniques. They also provide a
review of carbon accounting research. The accounting methodology for indirect
impacts is not yet fully elaborated. Harmonised methodological tools are needed if
carbon management accounting (CMA)—which is a part of sustainability
accounting—is to further develop. A gap exists in accounting properly for
embodied carbon emissions and the responsibility of companies. The use of hybrid
input-output tables could help with combining physical and monetary data and
accounting for emissions which are not directly connected to a company’s activity.
The direct and indirect emissions of economic sectors are significantly different
depending on the lengths of their supply chains. The production of goods and
services has become decoupled in the sense that supply chains typically extend
beyond the borders of countries. Sustainable supply chain management and envi-
ronmental management accounting are closely interrelated and sustainable supply
chain management is of growing importance at companies. Trade barriers have
been reduced, allowing goods to be produced at lower cost but with greater effi-
ciency and across national borders (Burritt et al. 2011a, b). Supplying accurate
information to managers within economic sectors is essential. Burritt et al. (2011a,
b) observed that “only a limited amount of research has been conducted on the
practical implementation and use of sustainability management accounting and
even less is known about corporate practice on collecting, managing and com-
municating carbon-related information within companies” (p. 80).
Industrial sectors are interrelated but there are great differences in the volume
and value of inputs that some sectors demand from others. Long supply chain
industries are defined as being industries where outputs require inputs from many
other industries, or where industries provide inputs for many other industries. Long
supply chain industries may cause indirect environmental impacts in other eco-
nomic sectors.
The emission trade balances of countries have recently also become a focus of
scientific research (Barrett et al. 2013; Droege 2011; Lenzen et al. 2010). Trade is
an important factor in shaping a country’s economic structure, but it also con-
tributes to the movement of embodied emissions beyond a country’s borders. The
question of embodied emissions appear. This is proven by the fact that while the
manufacturing sector in Europe has indeed reduced its impact on the climate over
the last decade, the emissions increased globally due to the development of inter-
national trade and delocalisation of manufacturing industries (European
Environmental Agency 2010; Schaltegger and Csutora 2012). Logistics activities
may grow by 23 % between 2002 and 2020, representing 18 % of the
European GHG emissions in 2020 according to estimations (The Climate Group
2008). Decarbonizing supply chain networks and monitoring embodied emissions
is highly important.
Carbon Accounting in Long Supply Chain Industries 145

The focus of the paper is analysing carbon accounting of economic sectors along
their supply chains, especially focusing on indirect, embodied carbon impacts. This
paper describes the importance of accounting for embodied, indirect carbon
emissions at sectoral level using the example of some long supply chain industries.
Section 2 presents an overview of recent empirical findings that confirm the need to
account for indirect scope 3 emissions. Section 3 presents briefly carbon accounting
beyond country borders. In Sect. 4 the example of Chinese economic sector is
analysed and recommendations for sectoral carbon accounting are given.

2 Allocating Carbon Emissions Through the Supply

Chain

A company’s activity results in the generation of direct and indirect GHG emis-
sions. Emissions can be distinguished according to different ‘scopes’, depending on
how directly the emissions are associated with the company’s activities Direct
emissions (on-site, internal) are generated during the production and extraction of
raw materials and intermediate materials, during the production phase itself.. Direct
emissions are the so-called scope 1 emissions. Indirect emissions (off-site, external,
embodied, upstream, downstream), which are generated indirectly related to the
product, can be further differentiated to scope 2 and scope 3 emissions. Scope 2
emissions include indirect emissions from purchased energy that is used by the
company. Accounting for scope 2 emissions may motivate companies to be con-
scious of their energy demand, reduce the use of carbon intensive energy sources
and use increasing share of renewable energy. Upstream and downstream supply
chain activities can be accounted for as indirect emissions. Scope 3 emissions
include business trips, outsourcing activities, franchise activities, and the com-
muting of employees as well as indirect emissions from activities such as the
extraction and production of materials and fuels that have been purchased,
transport-related activities undertaken in vehicles not owned or controlled by the
reporting entity, electricity-related activities (e.g. transformation and distribution
losses) not covered in scope 2 and outsourced activities and waste disposal (Huang
et al. 2009b; Downie and Stubbs 2013). With many companies some scope 3
emissions are included in carbon disclosure reports but only those that arise from
the transportation of employees and business trips, while other potential sources of
scope 3 carbon emissions are left unaccounted for. To reliably evaluate company
performance in the future this should be changed so that all potential scope 3
emission sources are included in reporting. Emission reduction goals and strategies
should incorporate all relevant scope 3 emission sources. Figure 1 shows the dif-
ferent scopes of carbon accounting. Most corporations report only on scope 1 or
scope 2 carbon emissions when they account for the company’s environmental
impacts. The carbon emissions related to Tier 2 or 3 suppliers during the distri-
bution, transportation, use and disposal of a product remain unaccounted for. These
146 Z. Vetőné Mózner

Fig. 1 Scopes of corporate carbon accounting. Source Schaltegger and Csutora (2012)

indirect impacts are, however, highly significant, especially with long supply chain
industries. Research by Matthews et al. (2008) has confirmed that the most
cost-effective carbon mitigation strategies cannot be applied if scope 3 emissions
remain undisclosed and unmanaged. Estimates by Huang et al. (2009b) suggest that
scope 3 emissions could account for up to 75 % of the total GHG emissions of a
company. Dasaklis and Pappis (2013) provided an overview of the challenges
supply chain management has to face in the future and showed possible responses
from companies. This included accounting for indirect GHG emissions throughout
the supply chain.
Different accounting schemes exist to measure the emissions of companies. The
Greenhouse Gas Protocol Corporate Accounting and Reporting Standard is one of
the most widely-accepted and widely-used accounting systems that is applied to
companies’ greenhouse gas emissions (GHG).
The Greenhouse Gas Protocol is a market-based voluntary tool comprised of
three components: standards, guidelines and calculation tools. It assists companies
and other organizations in preparing a GHG emissions inventory and accounting for
scope 3 emissions (Gaussin et al. 2013). The aim is to convince the investors and
companies to account for their indirect emissions. The methodological guide of the
GHG Protocol includes a guidance for calculating scope 3 emissions. Default
emission factors are included based on extensive data sets and they are mostly
identical to the emission factors used by the IPCC. The GHG Protocol has become a
standard for physical carbon accounting for organisations and is both the basis for
the GRI (Global Reporting Initiative) and the CDP (Carbon Disclosure Project; see
later) (World Business Council for Sustainable Development and World Resources
Institute 2004). The CDP is designed to account for the energy use and GHG
emissions of companies to improve company management of greenhouse gas
emissions and to get reduction targets integrated into corporate strategy. The
standards of the CDP have been developed to provide transparency and
Carbon Accounting in Long Supply Chain Industries 147

comparability in accounting. The scheme provides information for institutional

investors as well.
Downie and Stubbs (2013) suggest that industrial sectors need more detailed and
comprehensive guidance about the relevant emissions that should be included in
scope 3. The GHG Protocol defines guidelines for industries like the oil industry,
power plants, the paper and pulp industry, etc., but for other economic sectors more
guidance is still needed. An exploratory study by Downie and Stubbs (2013)
showed that there is wide disparity in which emission sources are included in
accounting processes. The authors identified cases where from 2 to 13 emission
sources were included, and the accounting methodology varied from using national
or regional emission factors to CO2 per dollar equivalents. Using expenditure is also
a popular way to measure a company’s emission generating activity. However, the
authors concluded that sometimes even using an emission factor in combination
with reliable activity data does not necessarily result in reliable identification of the
source of emissions, thus there may well be cases when such emissions are not
included in accounting processes.
More and more companies have started to use the accounting scheme of the
GHG Protocol and empirical results confirm that there is a great need for
accounting for scope 3 emissions. The use of hybrid input-output tables is rec-
ommended in the methodological guide of the Protocol. In the section that now
follows, an overview of empirical findings connected to scope 3 accounting is
presented. Literature was selected with the aim to prove the importance of scope 3
accounting for companies.
Lenzen (2002) has already pointed out the need to include indirect impacts in
accounting when applying the hybrid lifecycle assessment approach to Australian
industrial sectors. Junnila (2006) used hybrid accounting to evaluate the impacts of
service sector based companies (e.g. banking and consulting) and the impact of
other office supplies (i.e., pencils, erasers, etc.) in Europe and the US. Results
indicate that including indirect impacts in an analysis allows the drawing of more
precise conclusions and makes scenarios for management options more complete.
The climate change impacts of companies from the service sector can be as great as
those of manufacturing companies if indirect impacts are accounted for (Rosenblum
et al. 2000). Structural interdependencies need to be taken into account, as research
by Settanni et al. (2011) confirms. These authors used input-output tables to
incorporate the environmental costs of manufacturing systems and used an
input-output model for life-cycle costing.
Research has been done to identify scope 3 emissions in industry GHG
accounting (Higgs et al. 2009; Hillman and Ramaswami 2010; Huang et al. 2009a;
Steuer 2010). Huang et al. (2009a) combined input-output and LCA methods to
investigate electronics manufacturing and computer services. Results showed that
scope 3 emissions should not be ignored; most emissions are not scope 1 but are
emissions embodied in materials and other components. One of the aims of the
analysis was to generate information for other companies in the same sector about
which activities they should focus their scope 3 emission reduction efforts on.
148 Z. Vetőné Mózner

Pellegrino and Lodhia (2012) examined the disclosure strategies for carbon
accounting at an industry level, presenting a case study of the Australian mining
industry. Their research suggests that disclosure can be a very useful tool for
communicating environmental targets. Presently, accounting systems do not pro-
vide enough motivation and targets are often not met. Sullivan and Gouldson
(2012) came to the conclusion that, despite the large number of companies that are
taking part in the CDP, investors still criticise companies for not providing enough
information about their investment decisions. Current reporting processes do not
meet the needs of investors who cannot fully assess the risks of emissions from the
supply chain, and cannot evaluate the financial costs and risks of reduction
strategies. The quality of reporting should thus be improved so that investors are
more motivated to take action to reduce emissions (Sullivan and Gouldson 2012).
Sanchez et al. (2010) claimed that a company’s GHG estimates may be distorted if
only scope 1 and scope 2 emissions are accounted for, as scope 3 emissions can
comprise a significant share of the total GHG emissions caused by the activity of a
company. A better carbon accounting methodology that is able to identify both
direct and indirect impacts which emerge through the supply chain is needed. By
identifying scope 3, indirect impacts a company could get a more complete picture
of its impacts. This would increase transparency for shareholders and help decrease
energy use. Moreover, full climate accounting information could be an important
criterion for choosing and evaluating a company’s suppliers. Ascui (2014) argued
that there is considerable potential to integrate and broaden the different types of
carbon accounting principles.
This section has proven that it is of utmost importance for companies to account
for their scope 3 emissions. Empirical results were reviewed which the magnitude
of direct and indirect emissions within the economic sectors. A proper methodology
is needed that is able to capture all scopes of indirect emissions and it can be easily
used by the companies at the same time. Accounting for direct and indirect emis-
sions may move beyond country borders as well, so the problem of accounting for
embodied indirect emissions is present.

3 Allocating Carbon Emissions Between Countries

Accounting for indirect carbon emissions between countries is also of increasing

importance. Current environmental policies and obligations (such as the Kyoto
Protocol) are framed in such a way that it is possible for Annex I (mostly indus-
trialised) countries to move towards meeting their domestic and international
carbon-related commitments by shifting their carbon-intensive industries overseas
and relying on growth in international trade to meet the expectations and demands
of their consumers. Annex I countries are countries of the OECD and economies in
transition who have commitment to reduce individually or jointly the GHG emis-
sions. According to the United Nations Framework Convention on Climate Change
(UNFCCC) and National Emission Inventories (NEI), countries must use
Carbon Accounting in Long Supply Chain Industries 149

production-based accounting techniques (Peters 2008). This means that only

domestically-produced carbon emissions and greenhouse gases (GHGs) need be
accounted for, while imported (demand-driven) GHGs must not be included in
national emission quotas and targets. Consequently, the production-related emis-
sions associated with a product that is consumed (for example) in a Western
European country but produced in an emerging country will be counted as part of
the total emissions of the emerging country which produces them, even though that
product was made to meet demand from outside its national borders. Similarly, the
emissions associated with products which are exported from Western industrialized
countries will appear in the national emission inventories of those countries,
although the exported product may be made to satisfy consumer demand in another
country. The drawback of this approach concerns the issue raised above:
production-based emissions are defined as being all the greenhouse gas that is
emitted within national borders.
Much scientific research has concluded that the emission allocation methodology
which is applied in climate policy should take indirect GHG emissions into account
(Barett et al. 2013; Bastianoni et al. 2004; Davis et al. 2011; Droege 2011; Ferng
2003; Gallego and Lenzen 2005; Rodrigues et al. 2006; Sinden et al. 2011;
Wiedmann et al. 2007; Wiedmann 2009). Indirect emissions are emissions that are
produced as a consequence of production-related activity, but which arise from
different sources (such as transport-related activities, production of purchased
materials, outsourced activities, waste disposal, etc.). The consumption-based
responsibility and allocation approach includes the emissions of imported products
(directly or indirectly) for final domestic demand. This is presumably why a
consumption-based approach has become more widespread both in science and in
policy. Embodied GHG emissions are often referred to as the carbon footprint of an
economic sector or country, though this term has various meanings in the climate
accounting literature (Stechemesser and Guenther 2012).
Peters (2008) has argued that a consumption-based approach is an important tool
for climate policy and mitigation, being consistent both with the current logic of
international trade and with national consumption. The use of consumption-based
inventories could have benefits such as including more global emissions with
limited participation, increasing mitigation options, encouraging cleaner production
(Peters 2008) and perhaps supporting the uptake of environmental policies such as
the Clean Development Mechanism (CDM) (Peters and Hertwich 2008). The dis-
advantages of a consumption-based allocation approach are that the emission cal-
culation process is more complex, which is why critics have claimed that it would
increase uncertainty (Barett et al. 2013; Lenzen et al. 2010). Furthermore, a sub-
stantive criticism is that it is not solely the final consumer who enjoys the benefits of
traded goods, but also the producer (and the producer country).
A consumption-based approach may overburden final consumers as they are allo-
cated full responsibility for product emissions. In parallel, the responsibility of
producing countries is mostly overlooked. For most European and North-American
countries, using a consumption-based approach to GHG emissions would result in
them having significantly greater emissions than if using a production-based
150 Z. Vetőné Mózner

approach. The opposite is true for China and for other emerging countries with
significant export activity.
This section has illustrated the problem of accounting for indirect emissions over
the country borders and was relevant to include in the present analysis as China as a
producer country is mainly based on export-oriented growth and accounting for
embodied emissions in exported products of companies’ is highly relevant. The
next section shows that case of China and the empirical results in detail.

4 Embodied Carbon Emissions in Chinese Sectors

4.1 The Example of China

The economy of China has developed rapidly over the last few years and the
country has become an influential player in the world economy. Labour costs are
relatively low and the economy is based on export-oriented growth. Exports are
responsible for an increasing share of Chinese GDP. Chinese products are exported
from almost all economic sectors. China is significant both in terms of its impact on
the world economy and its impact on the global environment. The EU is one of the
most important markets for China, and this orientation is gaining in importance.
Economic development and increasing levels of production have resulted in growth
is GHG emissions, China being responsible for a major part of such increases in
these past few years (World Resource Institute 2013). China’s national GHG
emissions almost doubled between 2002 and 2007, meaning that China has now
become the world’s biggest emitter of GHGs (Gregg et al. 2008).
Accounting for scope 3 emissions in China is getting more and more important.
Liu et al. (2012) presented an analysis of scope 1 and scope 2 emissions in four big
cities of China. GHG emissions were mainly generated from the energy use in
industrial sector and coal-burning thermal power plants, while scope 2 emissions
were from imported products and imported energy use, showing the growing
energy dependence of cities. All four cities together discharged about 700 million
tons of CO2 equivalents per year, more than the total emission amount of the UK’s
emissions. According to Wang et al. (2014) the carbon intensity of economic
sectors has dropped in case of many industries from 2002 to 2007, which is an
obvious declining trend for the manufacturing industries. As territorial differences
can be significant, Bai et al. (2014) concluded that responsibility for embodied
emissions in China should be applied on a regional basis. Chang (2014) identified
the key CO2 generating sectors which were not significant for the economy, thus the
expansion of those sectors (e.g. water production, non-metal mineral products,
petroleum processing) should be limited to achieve emission reduction targets. The
driving forces of growing carbon emissions is due to the goods and services con-
sumed by final consumers, thus scope 2 indirect emissions have to be accounted for.
Carbon Accounting in Long Supply Chain Industries 151

The analysis of exporting activity of Chinese industries and their carbon

intensity is highly important, as production for exports contributes to a great share
of total Chinese emissions. Several pieces of research have estimated the quantity of
emissions embodied in China’s international trade. Weber and Matthews (2007)
concluded that major contributions to total emissions are due to exports of elec-
tronics (22 % of total emissions), metal products (13 %), textiles (11 %), and
chemical products (10 %). The significant growth in export-related emissions is
increasingly due to the export of more advanced products (the figures for
export-related emissions were substantially different in 1995: 19 % textiles, 13 %
electronics, 12 % machinery, and 10 % chemicals, and 7 % metal products (Weber
and Matthews 2007).
Li and Hewitt (2008) studied the China–UK emission trade balance and found
that 4 % of China’s CO2 emissions in 2004 came from the production of goods for
the UK market. The quantity of CO2 this entails is greater than the 69 Mt of CO2
that would be required to manufacture the same goods in the UK, due to the greater
relative carbon intensity of Chinese industry. Shui and Harris (2006) raised three
interesting points about the environmental effects of US–China trading activities:
(1) US CO2 emissions would increase from 3 to 6 % if the goods imported from
China were produced in the US; (2) 7–14 % of China’s current CO2 emissions
result from producing exports to supply US consumers; and (3) US-China trade has
increased global CO2 emissions by an estimated 720 million metric tons. The
authors conclude that exporting US technology and expertise related to clean
production and energy efficiency to China could help in the future to moderate
environmental impacts that are created there. Peters and Hertwich (2008) examined
the emissions embodied in trade for 87 countries and regions and found that in 2001
China exported 24 % of its CO2 emissions and imported 7 % of its domestic
emissions. Wang and Watson (2008) confirmed these results by also finding that
24 % of Chinese emissions arose through the creation of exports (data refer to
2004). Su and Ang (2014) highlighted how economic growth-driven emissions are
increasing in China and pointed out some potential policy implications regarding
the impact of a potential consumption-based emission allocation and trading
system.
As for the carbon emission reporting activity of Chinese companies, most of the
companies report in some from their GHG emissions, though it is not mandatory for
them. Chu et al. (2013) found that more larger companies report than smaller ones,
as well as high carbon emission industries reported more often than low-impact
industries. This phenomenon can be justified by the legitimacy theory, as the more
impacted industries are more motivated to mitigate risk and lower the environ-
mental and policy pressure the industry faces. Though there are not so many
companies among listed companies in China who disclose their emission data
according to the CDP project. It remains fairly difficult to access the overall per-
formance and carbon risk of companies within the country.
The next section presents the methodology applied in the empirical research.
152 Z. Vetőné Mózner

4.2 Methodology

In the research described herein, hybrid input-output methodology is used to

account for embodied emissions in Chinese economic sectors and to identify long
supply chain industries at sectoral level. Leontief (1936) developed input-output
tables in the form of an industry-by-industry matrix and developed this model
(1970) in order to evaluate sectoral interdependencies and environmental impacts.
The methodology has been later developed to account for the indirect carbon
emissions on sectoral and national level (Bicknell 1998; Gallego and Lenzen 2005;
Wiedmann et al. 2007; Minx et al. 2011).
A great advantage of the input-output analysis is that it is able to track the
transformation of goods through an economy and show the impact of final use as
well as the impact of the use of raw materials. It can also capture the impact of
goods and services that are exchanged. Using the input-output tables we can
identify the embodied impacts along the supply chain, thus real, both direct and
indirect impacts caused by the production of economic sectors can be revealed. That
is why this method is appropriate to identify the long supply chain industries which
require inputs from many other industries and generate indirect impacts along the
supply chain. These indirect impacts have not been accounted for and allocated to
the ‘final consumer’ industries so far. Monetary production data of economic
sectors are combined with physical environmental accounts to estimate the
embodied flows of emissions which cannot be assessed directly. This framework
can provide a complete picture about the total emissions generated. The method is
able to capture the indirect emissions from intermediate consumption of economic
sectors. The input-output model provides a powerful and useful framework for
analysing and understanding the complex mechanism that links the economic
sectors from an environmental point of view.
The use of hybrid accounting is still not widespread. According to Wiedmann
(2009) this might be due to a lack of acceptance and awareness about input-output
analysis, though it may be useful for companies as acquiring real emission data
from scope 2 and scope 3 emitters may be costly for them.
In the empirical research symmetrical input-output tables from the OECD’s
STAN Database for Structural Analysis (OECD 2013) were used for the calcula-
tions. Structural changes in the Chinese economy have been taken into account. For
the period 1995–1999 the symmetrical input-output table from the mid 1990s, for
the period 2000–2004 the early 2000 input-output table and for 2005–2009 the mid
2000 input-output table for China were used.
GHG emission statistics published by Eurostat were used, along with data about
Chinese emissions taken from Zhang et al. (2011). It was assumed that no tech-
nological changes had taken place to affect the Chinese economy in the period
under study.
Carbon Accounting in Long Supply Chain Industries 153

The indirect emissions of economic sectors in China are calculated as the total
intensity vector (TIV):

TIV ¼ ðFÞðI  AÞ1

This vector shows both the direct and indirect impacts of each economic sector
in the Chinese economy. It is the ratio of direct and indirect GHG emissions per one
unit of national currency spent in China (expressed in this analysis in US dollars).
This calculation is the key to analyse the long supply chain industries within a
country. It can show the total embodied impact and the greater the value, the higher
the embodied impact. In case of long supply chain industries it is more difficult to
reduce emissions.
The embodied emissions of imported products were calculated using the fol-
lowing formula, as proposed by Peters (2008):

EMGHG ¼ ðF ÞðI  AÞ1 diagð yÞ

In this equation F stands for a vector, with each element representing the
embodied GHG emissions value per unit of industry output in China. F remained
constant during the period examined.
(I − A)−1 represents the direct and indirect requirement matrix calculated from
the symmetrical input-output (industry by industry) tables. This is the so-called
Leontief inverse matrix showing the input requirements for one additional unit of
output (where it exists). Finally, y is the vector for exports.
Another assumption of the methodology can be mentioned which is the sectoral
level of aggregation. The level of aggregation is determined by the input-output
tables published by the OECD, but there can be distortions because of the aggre-
gation level. For this Marin et al. (2012) gives a detailed review. This methodology
was applied to identify and analyse the long supply chain industries in China.

4.3 Results and Discussion

Both the direct and the indirect emission impacts of economic sectors need to be
quantified and analysed in order to assess the sectors’ contribution to climate
change. Figure 2 shows the total intensity vector of selected Chinese economic
sectors, showing direct and indirect GHG emissions per one unit of national cur-
rency. It can be seen that there is a great difference between the sectors, and without
quantifying indirect impacts the significance of the contributions of sectors would
completely change. Sectors with the highest total (direct and indirect) intensities
include the ‘Other non-metallic mineral products’, ‘Electricity, gas and water
supply’ and ‘Mining and quarrying’ sectors.
Indirect impacts per unit of national currency are highest for the: ‘Coke, refined
petroleum products and nuclear fuel’, ‘Rubber and plastics products’, ‘Electricity,
154 Z. Vetőné Mózner

GHG thousand tons/US dollars

0,02
0,018
0,016
0,014
0,012
0,01
0,008
0,006
0,004
0,002
0

products and nuclear fuel

Construction
Agriculture, hunting, forestry
Mining and quarrying
Electricity, gas and water
Other non-metallic mineral

Chemicals and chemical

Basic metals

Fabricated metal products

Rubber and plastics products
Coke, refined petroleum

except machinery and

equipment
products
and fishing
products

supply

direct intensity indirect intensity

Fig. 2 Direct and indirect GHG intensities of economic sectors in China (top 10 sectors)

gas and water supply’, ‘Basic metals’ and ‘Construction’ sectors. These sectors
require inputs from the mining and quarrying and electricity sectors and they also
contribute indirectly to GHG emissions.
The so-called long supply chain industries include: ‘Medical, precision and
optical instruments’, ‘Office, accounting and computing machinery’, ‘Electrical
machinery and apparatus n.e.c’. These are the industrial sectors in the Chinese
economy that have a relatively long supply chain. With these industries, indirect
GHG emission intensities are many times higher than direct emissions (although the
total GHG emission contribution of these sectors to the total is not that significant
on a national basis). The illustration indicates how accounting for only direct, scope
1 emissions can be misleading. Hybrid carbon accounting may reveal the indirect
carbon emissions that are embedded in the supply chains of specific industries. It
appears that accounting for indirect emissions in a company’s carbon management
practices is of utmost importance.
For certain economic sectors in China, indirect impacts contribute less to total
impact. The total intensity of embodied carbon is lowest for the economic sectors
‘Office, accounting and computing machinery’, ‘Radio, television and communi-
cation equipment’, ‘Finance and insurance’, ‘Wholesale and retail trade’ and ‘Real
estate activities’. This is no wonder, as most of these sectors require less material
input.
The share of direct impacts is the least in the following sectors: ‘Post and
telecommunications’, ‘Basic metals’, ‘Electricity, gas and water supply’ and ‘Other
non-metallic mineral products’. The reason for this is that the supply chains
between the different economic sectors are short. Identifying emissions embodied at
Carbon Accounting in Long Supply Chain Industries 155

different stages of the supply chain may help corporations to formulate achievable
reduction targets and meet their emission reduction goals. It is important that carbon
reduction strategies focus on reducing the emissions embodied in products which
are not consumed in the producer country.
These results are close to the findings of Schulz (2010). In Singapore industries
like mineral fuels, lubricants and related materials dominated indirect emissions
while recently machinery and transport equipment industries became a more
dominant category recently. It was confirmed that iron and steel, non-metallic
products, concrete and cement products have high emission intensity in terms of the
indirect impacts also in Thailand (Limmeechokchai and Suksuntornsiri 2007).
In the second part of the analysis GHG emissions embodied in products exported
from China to the EU-15 were calculated from 1995 to 2009. After this, a sectoral
analysis was carried out to reveal how the main export-producing economic sectors
contribute to generating direct and indirect emissions.
Figure 3 shows the GHG emissions embodied in exported products along with
the total value of exports. From 1995, both export value and embodied emissions in
exported products from China to the EU-15 increased significantly. The volume of
embodied emissions increased more than ten times. Embodied emissions are
accounted for according to the place they were generated, China, though they are
generated there due to the demand for products in Europe. According to the
production-based accounting approach, emissions within the EU-15 were fairly
stable between 1995 and 2005, while after 2005 they started to decrease (EEA
2012). The reason for this was not a decrease in the consumption of the EU-15
countries but rather the delocalisation of production to emerging countries. The
increase in number and value of imported products and imported embodied emis-
sions is confirmed by this analysis.
Economic sectors in China were analysed in the context of international trade, as
the production of goods for export contributes significantly to total Chinese
emissions. Embodied emissions were analysed at a sectoral level in order to reveal
the industries which contribute significantly to GHG emissions in China. Structural
changes have affected the level of carbon emissions during the last twenty years.

1,200,000 300
Thousand tons of CO2 eq.

1,000,000 250
Million US dollar

800,000 200

600,000 150

400,000 100

200,000 50

0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total GHG export Total export value

Fig. 3 Embodied GHG emissions in exports from China to the EU-15

156 Z. Vetőné Mózner

Table 1 Embodied emissions in Chinese exports

1995 Thousand tons of GHG
Textiles, textile products, leather and footwear 16,189
Chemicals and chemical products 9946
Other non-metallic mineral products 7029
Basic metals 5525
Manufacturing n.e.c; recycling 4812
2000 Thousand tons of GHG
Textiles, textile products, leather and footwear 23,797
Other non-metallic mineral products 12,661
Chemicals and chemical products 11,981
Machinery and equipment n.e.c 11,638
Office, accounting and computing machinery 8890
2005 Thousand tons of GHG
Textiles, textile products, leather and footwear 71,901
Office, accounting and computing machinery 65,984
Machinery and equipment n.e.c 42,750
Other non-metallic mineral products 39,318
Radio, television and communication equipment 37,385
2009 Thousand tons of GHG
Textiles, textile products, leather and footwear 132,167
Machinery and equipment n.e.c 79,443
Office, accounting and computing machinery 79,018
Other non-metallic mineral products 65,180
Radio, television and communication equipment 54,805
The five most significant economic sectors

Changes in the structure of exports (from China to the EU-15) and embodied GHG
emissions were analysed between 1995 and 2009. Table 1 illustrates the economic
sectors with the highest embodied emissions in 1995. The ‘Textile, textile products,
leather and footwear’ sector exported the highest share of total embodied emissions
from China to the EU-15. The supply chain of this sector is relatively long. This
sector is followed by the ‘Chemicals and chemical products’ sector and the ‘Other
non-metallic mineral products’ sectors, where indirect emissions are also significant
and where embodied emissions have grown significantly during the past years. The
textile industry also accounted for the highest share of total embodied emissions in
2009 as well, though the volume of emissions has increased more than ten times.
This underlines the importance of accounting for indirect impacts.
The ‘Chemicals and chemical products’ industry accounted for 13.2 % of total
embodied emissions, though in 2009 this figure was only 6.8 %, so it is not one of
the top five industries in terms of having the highest embodied GHG emissions
from exported products. The ‘Other non-metallic mineral products’ sector is
included in the analysed period in Table 2 where it can be seen that embodied
Carbon Accounting in Long Supply Chain Industries 157

Table 2 Growth of indirect embodied emissions in export-producing economic sectors in China

(1995 = 100 %)
Economic sectors 2000 (%) 2005 (%) 2009 (%)
Textiles, textile products, leather and footwear 147 444 816
Other non-metallic mineral products 180 559 927
Machinery and equipment n.e.c 281 1034 1921
Office, accounting and computing machinery 426 3159 3783
Radio, television and communication equipment 321 1383 2027

emissions grew more than nine times between 1995 and 2009. Table 2 shows the
growth of indirect emissions for the major economic sectors where production for
exported products is significant.
From 2005, industry sectors such as ‘Radio, television and communication
equipment’ and ‘Machinery and equipment n.e.c’ created a significant share of
embodied emissions. The former contributed 10.9 % of total embodied emissions in
2009, though in 1195 this was only 5.5 %.
These empirical results can be compared to other recent studies on Chinese
embodied emissions. Results of Yang and Chen (2014) stressed that, cement pro-
duction is one of the largest carbon emission sources in China. The electricity
industry is of course the largest emitter of direct carbon emissions. In China,
exporting sectors with high embodied carbon are the smelting and pressing of
metals, accounting for 25.19 % of the total emissions in exports, followed by sector
nonmetal mineral products, 15.07 %, and the chemical industry (15.07 %). Exports
concentrated mostly on primary energy intensive sectors. From a supply-chain
perspective, only a small part of the embodied CO2 emissions were captured by
these sectors. It is important to note that these results referred to all exports, while
data analysed in the present chapter focused on emissions embodied in exports to
the EU-15, so the structure of the exports may be different. Transforming the
current export structure of Chinese industries from energy intensive sectors to
high-tech manufactory industries (for example communication equipment, com-
puters and other electronic equipment) may be a possible way to decrease CO2
emissions embodied in exports.

5 Conclusions

As companies are part of supply chains they should be aware that their activities
may affect emissions in other economic sectors. The long supply chain industries
where it is highly important to reveal and account for scope 3 emissions need to be
identified.
The article has contributed to emission accounting literature as it reviewed the
key aspects in accounting for scope 3 emissions. The review of previous literature
158 Z. Vetőné Mózner

has shown that in scientific circles it is already accepted that accounting for indirect
scope 2 and 3 emissions is essential. Previous empirical results have shown that
more and more companies try to integrate GHG accounting and reporting to their
management practices. To integrate indirect emission reporting to companies,
proper methodological tools and guidelines are needed. Disclosure standards at the
corporate level should be developed and companies should also engage in working
out carbon reduction strategies and acknowledge the significance of disclosing
corporate carbon information.
Relevant literature regarding scope 3 emissions in China were summarised as
well. In China there is a growing pressure to mitigate and account for GHG
emissions, a great proportion of these are due to indirect, embodied emissions. The
empirical findings of this paper examined direct and indirect emission intensities in
Chinese economic sectors. Furthermore, the focus was on those specific economic
sectors which contribute significantly to total Chinese emissions due to their great
share of exports. Empirical data confirmed that there are certain economic sectors
where it is highly important to account for scope 2 and scope 3 indirect emissions. It
is also important to recognise that economic sectors often have completely different
material input needs and thus accounting for scope 3 emissions is not equally
important for all sectors. Climate change may have significant impacts on the
business activities of corporations, creating internal and external costs and benefits.
Companies need to respond to this challenge properly and become more motivated
to account not only for the direct but also for the indirect emissions of their
production activities. Long supply chain industries should become the focus of
carbon accounting, especially those which are major exporters. Controlling the
expansion of high intensity and long supply chain industries is needed. Furthermore
minimizing material inputs and shortening unnecessary supply chains to
sector-level production are also efficient ways to reduce indirect emissions. This
point is specifically important for sectors with long supply chains.
The example of Chinese economic sectors described in this paper showed that
hybrid input-output accounting can be a useful tool to identify and highlight eco-
nomic sectors where embodied carbon emissions are significant, and to identify
long supply chain industries. The likely future sources and drivers of carbon-related
impact need to be analysed further. More detailed analysis of aggregated economic
sectors is particularly needed.
Several implications of the present research can be summarised which can be
useful for management practices. Managing the upstream and downstream conse-
quences of carbon emissions is critical for reducing carbon related input and GHG
emission risks. The results of carbon accounting for direct and indirect emissions
may be a highly important factor when evaluating company performance. Carbon
accounts can help corporate leaders to develop scenarios and to identify what the
main sources and drivers of carbon impacts could be in the future. This information
will also benefit corporations, consumers and investors through reducing infor-
mation asymmetry and increasing the transparency of the company’s emission
accounting (Matisoff 2013). Analysing corporate level scope 3 emissions can also
be used to highlight examples of companies that have already reduced their
Carbon Accounting in Long Supply Chain Industries 159

emissions as a result of accounting for their indirect impacts. The methodology

presented can be used to measure carbon performance both in the production
process as well as in the supply chain. It can also help companies to choose their
suppliers based on the carbon intensity. This can help to expand low-impact supply
chains in the economy and to re-configure the supply chain networks. Rationalizing
supply chains may be a source of cost-saving as well. When key sources of indirect
emissions are known, the carbon intensity of suppliers (that contribute to indirect
emissions) may become an important criterion for companies when choosing
suppliers. Supply chain partners should become more aware of the fact that not only
scope 1 but scope 3 emissions are generated by production activities and that
companies and industries have responsibilities that extend beyond their organisa-
tional borders.
A firm’s carbon management strategy and carbon performance measurement can
provide useful quantified information for corporate decision makers. Investors can
be more informed when making decisions related to the production processes and
environmental impact of companies. Combination of direct emission data with the
indirect or embodied emissions may provide a picture of total emissions discharged.
This way the impact of future environmental legislation and changes in cost for the
manufacturer can be forecasted in a carbon-constrained world. Managers should be
more motivated to collect and use carbon-related information. Carbon management
could be integrated to mainstream management practices. Hybrid accounting may
serve as a good framework for companies to estimate and account for their scope 2
and scope 3 emissions.

Acknowledgements The research described in this paper was supported by the ‘Sustainable
supply chain’ OTKA 50888 project. The author would further like to gratefully acknowledge the
contribution of TÁMOP project 4.2.2./B-10/1-2010-0023 of the Doctoral School of Management
and Business Administration, Corvinus University of Budapest for proofreading services. The
author would like to thank Dr. Maria Csutora for her helpful comments on the paper.

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Voluntary Greenhouse Gas Reporting:
A Matter of Timing?

Nele Glienke

Abstract Private sector action is perceived to be a major source for climate change
mitigation and climate change-related data is a major source of information for the
involved stakeholder groups. In this article, I investigate the timing of voluntary
greenhouse gas (GHG) reporting and corporate stakeholder orientations. To this
end, I analyze corporate participation in the best known voluntary initiative in this
context, the Carbon Disclosure Project (CDP) at two points in time. These are at the
beginning of the CDP in 2003 and once the initiative is a globally institutionalized
practice in 2011. I use multinominal logistic regression analysis and focus on
corporations listed in the FTSE Global 500 index between 2003 and 2013
(n = 270). These are classified into corporations that started participating early
versus those that started participating late. More than half of the corporations in my
sample are categorized as early participants. The results of my analysis show that
CDP participation is linked to different stakeholder orientations depending on its
timing. In 2003, by participating in the CDP right from its start, corporations satisfy
the claims of legislature and civil society. In 2011, by participating in the CDP once
the initiative is a globally institutionalized practice, corporations satisfy the claims
of investors and final consumers. Empirical research on voluntary GHG reporting
examines its factors of influence. However, the timing of voluntary GHG reporting
and the related stakeholder orientations are not in the focus of the literature. The
present analysis elaborates on these issues and suggests recommendations for future
research.

1 Introduction

The first report of the Intergovernmental Panel on Climate Change (1990: 11) stated
that “emissions resulting from human activities are substantially increasing the
atmospheric concentrations of the greenhouse gases … These increases will

N. Glienke (&)
Technische Universitaet Dresden, Dresden, Germany
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 163

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_8
164 N. Glienke

enhance the greenhouse effect, resulting on average in an additional warming of the

Earth’s surface.” More than two decades after this assertion, the emission of
greenhouse gases (GHG) into the global atmosphere through the burning of fossil
fuels is with a high probability the major contributor to global climate change
(Intergovernmental Panel on Climate Change 2013). It is influencing the regulating
services of the global atmosphere in a negative way and overcharging the carrying
capacity of the earth (Carroll and Hannan 1995; Meadows et al. 1972). At present,
climate change has already passed its planetary limits (Rockstroem et al. 2009).
In the debate about man-made climate change, the private sector proves critical
for two reasons. Firstly, corporate industrial activity is the main source of climate
change, contributing to the changing global climate via the direct emission of GHG
in production processes as well as via the indirect emission of GHG that arises
along the value chain (Porter and Reinhardt 2007). This subsequently results in the
fact that, secondly, private sector action is perceived to be a major source for
climate change mitigation. In this context, climate change-related data is a major
source of information for investors, policy makers and the general public in order to
assess and compare corporate performances (Andrew and Cortese 2011; Busch and
Hoffmann 2011; Kolk et al. 2008; Matisoff et al. 2013; Stanny 2013). As a result,
the voluntary reporting of climate change-related information has risen strongly on
the agenda of corporate decision makers and increasingly comes into focus of
researchers and policy makers alike.
The empirical literature on the voluntary reporting of GHG emissions (voluntary
GHG reporting hereafter) examines firstly the amount and quality of information
disclosed in corporate advertisements, on corporate websites, in annual, environ-
mental and sustainability reports and to voluntary initiatives. Secondly, it targets
corporate engagement in voluntary GHG initiatives, such as participation in the
Carbon Disclosure Project (CDP), the Canadian Voluntary Climate Challenge and
Registry (VCR) and several programs launched by US governmental bodies.
In sum, this research agrees on a significant positive influence of a number of
internal factors, including size (Clark and Crawford 2012; Rankin et al. 2011),
profitability (Prado-Lorenzo and García-Sánchez 2010; Ziegler et al. 2011), envi-
ronmental performance (Brouhle and Ramirez-Harrington 2010; Welch et al. 2000),
media visibility (Berthelot and Robert 2011; Dawkins and Fraas 2011), shareholder
pressure (Reid and Toffel 2009) and multinational scope (Stanny and Ely 2008;
Stanny 2013). Furthermore, corporate environmental reporting behaviour can be
differentiated by industry (Amran et al. 2011; Freedman and Jaggi 2005; Moon
2008) and region (Brouhle and Ramirez-Harrington 2009; Luo et al. 2012).
To the best of my knowledge, this stream of literature examines the factors of
influence for voluntary GHG reporting but not the timing of voluntary GHG
reporting. Regarding voluntary GHG reporting over time, Matisoff et al. (2013) find
improvements in the reporting of GHG emission amounts to the CDP from 2003 to
2010 but criticize insufficient external verification of the data. The logistic
regression results of Stanny (2013) suggest that answering the CDP questionnaire
has increased from 2006 to 2008 for US corporations. Those that previously
answered the questionnaire have been found more likely to participate in the
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 165

following years. Interestingly, the author explains the ambiguous results regarding
the regulatory proxies with the suggestion that “firms that disclose in earlier CDPs
disclose for different reasons than those that disclosed in later ones” (Stanny 2013:
155). She points to the need to investigate this phenomenon in more detail. Thus,
answering her call for research and contributing to the above cited research, I
investigate the timing of voluntary GHG reporting.

2 Theories on Voluntary Reporting

Socio-political theories conceive the voluntary reporting of corporate information

as a function of social and political pressures in an organization’s business envi-
ronment (Gray et al. 1995). They can be differentiated into three overlapping the-
ories which are stakeholder theory, legitimacy theory and political-economy theory
(Gray et al. 1995; Patten 2002).
I begin with stakeholder theory as it manifests the largest overlap with the other
theories. Stakeholders (Freeman 1984) include all actors relevant for a company’s
strategy and the direct achievement of its objectives (Dill 1958). As they control
critical resources (Frooman 1999; Jacobs 1974; Lawrence and Lorsch 1967; Pfeffer
and Salancik 1978), they are in the situation to exert pressures on corporations to
report information (Clarkson 1995). These pressures are perceived and treated
differently by corporate decision makers, depending on internal corporate charac-
teristics (Delmas and Toffel 2004). Stakeholders often hold opposing or conflicting
demands regarding environmental protection issues (Buysse and Verbeke 2003;
Delmas and Toffel 2004; Hart and Sharma 2004; Rueda-Manzanares et al. 2008;
Sharma and Henriques 2005) that have to be reconciled. Because these are often
opposed to economic interests (Rugman and Verbeke 1998), a profit-driven orga-
nization only attends those environmental claims that involve salient stakeholders
(Mitchell et al. 1997) and thus are linked with economic consequences (Starik and
Rands 1995).
Stakeholder groups can be differentiated into regulatory, primary and secondary
stakeholders (Buysse and Verbeke 2003). Regulatory stakeholders involve local,
national and global regulatory agencies. They have the ability to halt or hamper
corporate operations on the grounds of insufficient compliance with environmental
standards (Buysse and Verbeke 2003). Primary stakeholders are situated in the
corporate market environment and maintain formal relationships with corporations,
i.e. contracts of employment and monetary funding as well as customer relation-
ships. Their claims directly compromise uncertain and critical production factors
needed in order to achieve long-term corporate success (Freeman 1994; Jacobs
1974; Lawrence and Lorsch 1967; Pfeffer and Salancik 1978). Secondary stake-
holders, such as the media, NGOs or competitors, indirectly influence a corpora-
tion’s long-term success through informal relationships (Clarkson 1995; Henriques
and Sadorsky 1996). They have a strong influence on public perceptions of what is
acceptable corporate behaviour, the corporate legitimacy. Corporate decision
166 N. Glienke

makers need to accommodate secondary stakeholders’ claims in order to keep their

‘license to operate’ (Bozeman 1987; Meyer and Rowan 1977; Powell and
DiMaggio 1991). On this account, they engage in the voluntary reporting of
non-financial information (Deegan 2002).1
Legitimacy theory has a large overlap with stakeholder theory as it focusses on
one specific stakeholder group, namely secondary stakeholders or civil society
(Boesso and Kumar 2007). From this perspective, organizations strive to accom-
modate the pressures exercised by civil society to achieve social legitimacy (Meyer
and Rowan 1977; Powell and DiMaggio 1991). Public perception of corporate
legitimacy is in constant evolution (Lindblom 1994). Thus, corporate legitimacy is
always endangered when public perception of what is acceptable corporate beha-
viour changes. This might be linked with particular events calling into question the
legitimacy of a specific corporation or industry sector (Patten 1992).
According to legitimacy theory, information is instrumental for changes in public
perceptions to bridge the gap between what is publicly accepted corporate behaviour
and how a corporation is perceived by the public (Cormier and Gordon 2001;
Dowling and Pfeffer 1975; Patten 1992). Public perceptions of corporate legitimacy
are thus perceived as modifiable by corporate decision makers through the use of
voluntary reporting (Deegan 2002) and corporate decision makers voluntarily adopt
the practice to report non-financial information to socially legitimize their opera-
tions. Several communication strategies have been proposed for corporations to
maintain corporate legitimacy. A corporation can either try to change external
perceptions of legitimacy through use of disclosures, employ disclosures to direct
public attention away from a certain critical issue, or change its disclosures to fit with
external perceptions of legitimacy (Dowling and Pfeffer 1975; Lindblom 1994).
Political economy theory has large overlaps with stakeholder and legitimacy
theory. This theory focuses on the exchanges of power between the economic
system and the larger political, social and institutional framework (Gray et al.
1995). It examines the interplay between structural and regulative institutions at the
national level and organizational structure and functions (Tempel and Walgenbach
2007). In short, political economy theory specializes on another specific stakeholder
group, namely regulatory stakeholders or legislature.
In this context, a Marxian interpretation and a bourgeois interpretation of political
economy theory can be differentiated (Gray et al. 1995). The Marxian interpretation
of political economy focuses on class interests and structural inequities within the
productive economic system that conflict with the government (Abercrombie et al.
1984). By contrast, in the bourgeois interpretation of political economy theory, the
reconciliation of a pluralism of social and political interest groups by the productive
economic system is at the heart of the analysis (Arnold 1990).
From the perspective of economics based voluntary reporting theories, the
voluntary reporting of corporate information is characterized by information

1
This is a theoretical ideal distinction. In practice, the boundaries between different stakeholder
groups, especially between primary and secondary stakeholders, are not always sharp.
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 167

asymmetry and adverse selection (Akerlof 1970; Spence 1973): A corporation (the
agent) possesses more information than its stakeholders (the principal). According
to these theories, the agent’s reporting behaviour results from an optimization of the
related costs and benefits, assuming a fixed reaction of the principal (Verrecchia
2001). Economics based voluntary reporting theories can be further differentiated
into information and proprietary cost theory (Verrecchia 2001).
Information cost theory assumes that corporate decision makers take into account
the costs of publication and dissemination when taking their decision to voluntary
report any non-financial information. According to this theory, the costs of pub-
lishing and disseminating non-financial information are decreasing with corporate
size (Diamond 1985). Furthermore, good performing corporations report more
non-financial information because they value the potential benefit of a proactive
image higher than the potential information costs (Lang and Lundholm 1993).
Proprietary cost theory further elaborates the information cost theory by including
propriety costs into corporate decision maker’s profit maximization. Propriety costs
involve those costs that are “associated with disclosing information which may be
proprietary in nature, and therefore potentially damaging” (Verrecchia 1983: 181).
In sum, the theories cited above conceive voluntary reporting of corporate
information either as dependent on the external expectations and pressures exerted
by different stakeholder groups (socio-political theories) or as dependent on the
internal payoff related to voluntarily disclosing any information (economics based
theories). I will now analyse the empirical evidence of voluntary environmental
reporting regarding its fit with these two theories.

3 Evidence of Voluntary Environmental Reporting

The voluntary reporting of environmental information is largely analysed from a

socio-political (and especially legitimacy) perspective (cf. Clarkson et al. 2008;
Darrell and Schwartz 1997; Deegan et al. 2002; Patten 2002; Reid and Toffel 2009;
Stanny 2013) while economics based theories of reporting only play a minor role
(cf. Jira and Toffel 2013). Current research finds that corporations are more likely to
participate in voluntary environmental initiatives and report more and
higher-quality environmental information when faced with higher scrutiny by
legislature, civil society, investors and final consumers. I will detail this evidence in
the following.

3.1 Scrutiny by Legislature

Because of expected and existing environmental regulations, corporations have

been repeatedly found to adopt proactive environmental management practices in
168 N. Glienke

general (Delmas 2002; Majumdar and Marcus 2001; Rugman et al. 1997; Rugman
and Verbeke 1998) and environmental reporting in particular (Clarkson 1995;
Patten 2002). GHG regulation has been found to promote corporate efforts to
mitigate climate change (Hoffman 2007; Porter and Reinhardt 2007), with the
Kyoto Protocol (UNFCCC 1997) being the most common example. Differing GHG
regulations in the US and EU have repeatedly been identified as the main cause for
differences in corporate action on climate change. Skjærseth and Skodvin (2001)
trace the reactive stance of the US oil industry back to a lack of regulative pressure
to reduce emissions. Levy and Rothenberg (2002) identify a considerable difference
between the climate change responsiveness of car manufacturers in the EU and in
the US, where regulation of vehicle emissions is less pronounced.
As regards voluntary GHG reporting, European policymakers are at present
working on binding rules for the reporting of non-financial information (Council of
the European Union 2014; European Commission 2011). Binding reporting
requirements already exist for those installations subject to the European Emissions
Trading Scheme (European Community 2009). In the US, mandatory reporting
requirements of potential negative impacts from climate change target corporations
subject to the supervision of the US Securities and Exchange Commission
(SEC) (SEC 2010). So far, common agreement exists on a promoting influence of
stringent environmental regulation. Globally, a corporation’s home country Kyoto
Protocol ratification is suggested to enhance voluntary GHG reporting (Freedman
and Jaggi 2005; Gallego-Álvarez et al. 2011; Prado-Lorenzo et al. 2009).
Furthermore, GHG reporting is also promoted by environmental regulation at the
national (Luo et al. 2012; Reid and Toffel 2009) and corporate level (Stanny 2013;
Welch et al. 2000). For example, Brouhle and Harrington (2009) analyse partici-
pation in the VCR, a voluntary regime encouraging the reporting of GHG emis-
sions, the establishment of mitigation targets and their accomplishment in Canada.
They find an overall improved involvement across federal provinces and sectors
over time. This is suggested to be linked to Canada’s ratification of the Kyoto
Protocol in 2002. Stanny’s (2013) results suggest that the publication of the CDP
questionnaire has largely increased from 2006 to 2008 for US corporations (Stanny
2013), a time period when a political discussion regarding mandatory GHG
reporting requirements in the US was in full swing.

3.2 Scrutiny by Civil Society

Empirically, corporate reporting of environmental and social information has fre-

quently been linked with the intention to receive social legitimacy (e.g. Darrell and
Schwartz 1997; Deegan et al. 2002; Patten 1992). The rise in public attention to
global environmental problems has been linked to an increase in proactive envi-
ronmental management practices (Aerts et al. 2008; Dunlap and van Liere 1978;
Hilgartner and Bosk 1988) as the general public pressures the government to create
new regulations or strengthen existing ones (O’Dwyer 2002). In this context,
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 169

voluntary reporting of environmental and social information is employed by cor-

porate decision makers to gain or increase corporate legitimacy (Cormier et al.
2005; Darrell and Schwartz 1997; Deegan et al. 2002; Frost 2007; Nikolaeva and
Bicho 2011; Patten 1992). For example, Patten (1992) finds that, after the Exxon
Valdez oil spill, the voluntary reporting of environmental information of the pet-
roleum industry greatly strengthened due to increased public interest.
As to voluntary GHG reporting, Dawkins and Fraas (2011) show that visibility,
measured via media visibility of the corporation in general as well as regarding
climate change issues in particular, promotes CDP participation. Welch et al. (2000)
reveal that US corporations headquartered in states with high levels of environ-
mentalism are more likely to volunteer in the US Climate Challenge program.
Finally, previous engagement in a voluntary GHG initiative positively influences
future engagement which is linked to corporate concerns of social legitimacy
(Brouhle and Ramirez-Harrington 2010; Stanny and Ely 2008; Stanny 2013).

3.3 Scrutiny by Investors

Lenders and investors are also hypothesized to foster the adoption of new envi-
ronmental practices (Funk 2003; Weber et al. 2010) and enhance voluntary
reporting of non-financial information (Bushee and Noe 2000). Stock markets
positively evaluate corporations with a favourable environmental management
reputation (Aaron et al. 2012) and those involved in environmental policies
(Al-Najjar and Anfimiadou 2012).
Regarding voluntary GHG reporting, Reid and Toffel (2009) find that corpora-
tions are more likely to participate in the CDP if they or their competitors have been
targeted by climate-change-related shareholder resolutions in the previous year.
However, the authors find no relationship between the proportion of shares held by
CDP signatories and CDP participation. This reflects earlier results of Stanny and
Ely (2008). Research on stock market returns is similarly ambiguous. In an event
study, Keele and DeHart (2011) find the announcement of participation in the US
Environmental Protection Agency’s Climate Leaders program to result in negative
stock returns except for on the announcement day. Contrary to this finding, Ziegler
et al. (2011) show that the stock performance of EU corporations and US utilities
disclosing GHG mitigation measures and a public statement on climate change is
higher compared to their non-disclosing counterparts over a six year period.

3.4 Scrutiny by Final Consumers

Corporate market-orientation has been found to result in innovativeness and

superior economic performance (Han et al. 1998). If consumers are environmentally
sensitive, market-orientation enhances the adoption of new environmental practices
170 N. Glienke

(Yalabik and Fairchild 2012) and is suggested to increase environmental reporting

(Ilinitch et al. 1998; Moneva and Llena 2000; Munilla and Miles 2005). In this
regard, González-Benito and González-Benito (2008) find that market-oriented
industrial corporations are more likely to engage in new environmental practices.
Kassinis and Soteriou (2003) provide evidence of a positive relationship between
consumer satisfaction and environmental practices in the services industry.
Regarding voluntary GHG reporting, results are more ambiguous. Regression
analyses of the relationship between consumer proximity and corporate engagement
reveal both, negative (Brouhle and Ramirez-Harrington 2010; Dawkins and Fraas
2011; Stanny and Ely 2008) and positive (Luo et al. 2012) coefficients.

4 Hypotheses Development

Against this empirical background, I take a socio-political perspective on voluntary

environmental reporting in the following. In order to develop my research
hypotheses on the timing of voluntary GHG reporting, I now analyse the diffusion
of corporate practices across corporations, sectors and time.

4.1 The Diffusion of Innovative Corporate Practices

The organizational innovation literature examines one of the key mechanisms in the
analysis of organizations, namely the diffusion of innovative corporate practices
within and across corporations as well as across time (Davis and Marquis 2005).2 It
can be differentiated into three separate streams of literature. These include litera-
ture on the diffusion of innovations across organizations and time (diffusion of
innovation research), on the factors of influence for organizational innovativeness
(organizational innovativeness research) and on the stages of innovations within
organizations (process theory research) (Wolfe 1994).
The focus of this research is on the innovative practice, namely participation in
the CDP. Therefore, I rely on the first stream of literature hereafter, the diffusion of
innovation research. This research stream focuses on the innovation itself and
analyses its spread within a population of potential adopters—its diffusion (Wolfe
1994). Within diffusion research, there exist two contradicting models, the rational

2
In theory, a distinction between innovation, i.e. the commercially successful application of a new
idea by its developers, and the diffusion of innovations, i.e. the commercially successful appli-
cation of a new idea beyond its developers, exists. In practice, this differentiation is, however,
blurred (Ashford 2002).
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 171

model and the sociological model (Ansari et al. 2010). I will look at both in more
detail in the following.
Rational models conceive the likelihood of the diffusion of an innovation as a
function of its economic benefits (Strang and Macy 2001). The core mechanism in
these models is the accumulation of information about the cost effectiveness of an
innovative practice by corporate decision makers. Observing early adopters, they
continuously update their information about the value of an innovative practice and
thus optimize their point of entry (Terlaak and Gong 2008). With rising diffusion
rates, the accumulated information about a practice reduces both, uncertainty and
search costs related to the innovation which is in turn further speeding up its
diffusion process (Ansari et al. 2010). Thus, cost effective innovative practices
diffuse faster than less effective practices due to increased imitation.
While rational models are based on the concept of accumulating information
about the cost effectiveness of an innovative practice, increasing levels of pressure
in the institutional business environment are at the heart of sociological models
(Ansari et al. 2010). These models assume that corporations imitate other corpo-
rations because they want to keep or increase their social legitimacy (DiMaggio and
Powell 1983; Scott 2001). Thus, the diffusion of innovative practices may have
little to do with its cost effectiveness or notions of corporate performance
(DiMaggio and Powell 1983; Greenwood and Hinings 1996; Meyer and Rowan
1977). Indeed, in its strong form, sociological models conceive the diffusion of an
innovative practice as completely independent of its cost effectiveness, such that
even ineffective practices may diffuse due to the expectations of stakeholders
(Abrahamson 1991; DiMaggio and Powell 1983). The weak form of sociological
models assumes that cost effectiveness plays a role in the initial adoption phase
(Ansari et al. 2010). However, the more an innovative practice diffuses, the less
important become these considerations and the more important becomes the imi-
tation of peers and fashion setters (Tolbert and Zucker 1983).
In sum, the above cited models conceive corporate decision makers either as
rationally scanning their business environments for efficient practices that they
decide to adapt depending on their internal circumstances (economic mechanisms
of diffusion) or as adapting practices that seem to increase social legitimacy, (al-
most) regardless of their efficiency (strong/weak sociological mechanisms of dif-
fusion). I will now analyse the empirical evidence of the diffusion of environmental
practices regarding its fit with these two models.

4.2 Evidence of the Diffusion of Environmental Practices

Regarding the diffusion of corporate environmental management practices, research

shows that once there is awareness for and public pressure to reduce environmental
degradation, legislature represents the single most important factor of influence for
the adoption of corporate practices (cf. Henriques and Sadorsky 1996; Hocking and
Power 1993; Rugman and Verbeke 1998). This has been shown in Hoffman’s
172 N. Glienke

(1999) longitudinal analysis of corporate environmentalism in the US chemical

industry. Bansal (2005: 203) further suggests that at this time, a limited number of
“firms may also see the opportunity to generate rents from resources and capabil-
ities because of imperfectly competitive strategic factor markets” (Bansal 2005).
In later years, the professionalization of environmental protection as a corporate
responsibility dominates the earlier importance of environmental regulation
(Hoffman 1999). As task and institutional environments connect over time, this
allows for the diffusion of corporate environmentalism (Jennings and Zandbergen
1995) through the reproduction and development of corporate best practices. This
leads to the situation where successful environmental practices are increasingly
mimicked because they are recognized as competitively valuable (Jennings and
Zandbergen 1995).
Against this background, I base my hypotheses on strong sociological mecha-
nisms of diffusion and argue that voluntary GHG reporting is at no time adopted
due to cost efficiency reasons. Instead, corporations participate in the CDP due to
pressures exerted by different stakeholder groups to gain or increase social legiti-
macy. In detail, I hypothesize that corporations were more likely to participate in
the CDP at its early days due to legislative pressure and pressure from civil society.
By contrast, once the CDP was professionalized, corporations were more likely to
participate due to pressures from investors and final consumers. Thus, my
hypotheses are as follows:
Hypothesis 1 In 2003, new CDP participants were more likely under pressure to
report GHG emissions by legislature than firms that will start participating later.
Hypothesis 2 In 2003, new CDP participants were more likely under pressure to
report GHG emissions by civil society than firms that will start participating later.
Hypothesis 3 In 2011, new CDP participants were more likely under pressure to
report GHG emissions by investors than firms that have started participating earlier.
Hypothesis 4 In 2011, new CDP participants were more likely under pressure to
report GHG emissions by final consumers than firms that have started participating
earlier.

5 Data and Method

5.1 Sample

Regarding voluntary GHG reporting, the CDP is accepted worldwide as most rel-
evant because of its large coverage and continuity over time (Kolk et al. 2008;
Stanny and Ely 2008). Since 2003, it annually requests climate change-related data
of corporations around the globe in the name of government bodies, institutional
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 173

investors, and purchasing organizations. The CDP questionnaire involves detailed

questions on corporate risks and opportunities of climate change as well as con-
ceivable corporate action. Corporate responses are made publicly available on the
CDP website in case an organization does not choose to exclude this possibility.
Furthermore, responses are summarized in an annual report. In 2013, over 5000
corporations have been requested by the CDP (2013). The initiative is currently
supported by 722 investors with assets of 87 trillion US dollars (CDP 2013).
Responding to the CDP has developed into a global trend over the past ten years
(Kim and Lyon 2011a; Kolk et al. 2008). Figure 1 provides a graphic exemplifi-
cation of the rising response rates over time. The black bars depict the percentage of
completed questionnaires for the total of corporations listed in the Financial Times
Stock Exchange (FTSE) Global 500 index (the Global 500 hereafter) from 2003 to
2013 as published by the CDP. This index includes the 500 largest publicly traded
corporations worldwide according to market capitalization in the FTSE Global
Equity Index (CDP 2013). Figure 1 shows that response rates have generally
increased with the most pronounced rises appearing in 2004 and 2005. The per-
centage of completed questionnaires first rose above 70 % in 2005. After that,
response rates show a steady but less pronounced increase. Finally, in 2009 and

100

90

80

70
Percent of Global 500

60

50

40

30

20

10

0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig. 1 Response rates of the Global 500 to the CDP from 2003 to 2013
174 N. Glienke

2010 response rates reached 82 %, the highest value up to now. Since 2011, CDP
response rates steady at 81 %.
I analyse CDP participation of the Global 500. The sample includes corporations
that have been surveyed by CDP within the Global 500 from 2003 to 2013.
Changes in corporate ownership have been solved as follows:
• In the case of acquisitions and if the new parent company has been surveyed by
the CDP within the Global 500 from 2003 to 2013, the acquired corporation is
kept in the sample as a separate observation, along with the parent company.
• In case of partial acquisitions by different corporations, the acquired corpora-
tions are excluded from the sample. This involves for example Cendant, Fortis
and Lehman Brothers.
• The same approach applies to mergers.
• Corporations that have been transferred to government sponsored organizations
are excluded from the sample. This involves for example: ABN AMRO, Fannie
Mae and Freddie Mac.
My final sample consists of 270 corporations. Of these, I obtained financial and
other information from the Datastream database. All dependent and control vari-
ables (except the measure for pressure by legislature as explained below) are lagged
one year. Thus I obtained the Datastream data for the years 2002 and 2010.

5.2 Dependent Variable

CDP participation is defined as a public or non-public answer to the CDP. The

provision of information other than the completed questionnaire, such as environ-
mental or sustainability reports, is not considered as CDP participation. I classify
corporations as early participants if they participated in the first two years of the
CDP, i.e. in 2003 and 2004, and continually participated in the CDP up to 2012.
Corporations are classified as late participants if they have been surveyed by the
CDP within the Global 500 since 2003 and first participated in 2011 and 2012.
These years are chosen as a breakpoint to differentiate late participation because this
is when response rates slow down among the Global 500, indicating an institu-
tionalization of the CDP (compare Fig. 1).
The categorical variable participation takes a value of one for early participants
and a value of two for late participants. Regarding corporations that are neither
considered early nor late participants, the variable takes a value of zero. These
corporations are participating in the CDP irregularly and are therefore called
undecided participants.
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 175

5.3 Independent Variables

Pressure by legislature. (2005) find that a corporation’s home country Kyoto Protocol
ratification positively influences voluntary GHG reporting. It can be argued that
regional or national regulations represent more accurate measurements for regulatory
pressure. However, their scope is often limited while Kyoto Protocol ratification is
globally applicable. For example, the European Emissions Trading Scheme covers
only airlines and production installations operating in the EU. The mandatory reporting
requirements of potential negative impacts from climate change regulation in the US
exclusively targets corporations subject to supervision by the SEC.
Since 2006, Germanwatch each year publishes a report on the climate change
performance of the top CO2 emitting countries worldwide with the aim to create a
greater understanding of these countries’ national and international climate policies
(Germanwatch and Climate Action Network 2014). Based on standardized and
objective indicators, the authors calculate the so called Climate Change
Performance Index (CCPI hereafter). In 2014, the CCPI is based on indicators
regarding emissions, energy efficiency and renewable energy as well as “national
and international climate policy assessments by more than 250 experts from the
respective countries” (Germanwatch and Climate Action Network 2014: 7). Since
2013, emission indicators also consider emissions from deforestation
(Germanwatch and Climate Action Network 2013).
Despite the continually improving methodology of the CCPI, I use the data of
the first report in 2006, as my analysis of legislative pressures focusses on the time
frame 2002/2003 3. In this report, the indicators under review were indicators of
emission trends and emission levels as well as expert opinion on climate policies.
Thus, the ordinal variable CCPI represents a corporation’s home country CCPI
ranking in 2006 (Germanwatch 2006).
Pressure by civil society. Echoing Dawkins and Fraas (2011) I use the Google
News Archive to measure a corporation’s media exposure to the issue of climate
change. The archive collects and summarizes news stories from worldwide sources,
such as newspapers, news agencies and aggregators. For each corporation in the
sample, I searched its home country-specific Google News Archive site for articles
published between January 1990 and December 2002. I searched for the corpora-
tion’s name alone and for the corporation’s name and the phrases ‘climate change’
and ‘global warming’. Phrases and names have been translated into the home
country’s official language(s) with help of native speakers.
The metric variable SOC represents the share of climate-change-specific articles
in all articles on a corporation published in the Google News Archive between
January 1990 and December 2002.

3
Thus, there is a misfit between the year of observation (i.e. 2006) and the year of the analysis (i.e.
2003). However, this misfit is accepted in favour of the level of detail reached with this measure
for legislative pressure when compared with other possible measures, such as for example Kyob
Protocol ratification.
176 N. Glienke

Pressure by investors. Institutional ownership has been suggested to promote

voluntary corporate reporting (Bushee and Noe 2000). A positive relationship has
been shown between the amount of shareholder resolutions targeted at a corporation
and its competitors and CDP participation (Reid and Toffel 2009). Following
Stanny and Ely (2008) as well as Reid and Toffel (2009) I use institutional own-
ership as a proxy for pressure by investors.
The metric variable SHARE represents the percentage of total shares in issue
held by pension or endowment funds as well as investment banks or institutions.
This data is gathered from the Datastream database.
Pressure by final consumers. Echoing Moon (2008), Brouhle and
Ramirez-Harrington (2010), industry sectors are taken as a proxy for final consumer
orientation. Final consumer oriented corporations produce goods and provide ser-
vices that need no further processing before sale to the final consumer. The final
consumer is thus highly relevant for these corporations.
The categorical variable CON takes a value of one if a corporation is operating in
the industry sectors consumer goods or consumer services in 2010. It takes a value
of zero in all other cases. This data is also gathered from the Datastream database.

5.4 Control Variables

In deciding on control variables, I follow similar research in the environmental

management domain. As will be detailed below, I choose control variables in a
comparable way.
Environmental sensitivity. It has been argued that corporations operating in
environmentally sensitive industry sectors are more likely to disclose non-financial
information (Brammer and Pavelin 2008; Cormier et al. 2005; Kim and Lyon
2011b). In reference to Cho and Patten (2007), industry sector is taken as a proxy
for environmental sensitivity. The following industry sectors are considered envi-
ronmentally sensitive: aluminium, commodity chemicals, consolidated electricity,
exploration and production, general mining, gold mining, integrated oil and gas,
iron and steel, multiutilities, pharmaceuticals, and specialty chemicals. The cate-
gorical variable ESI takes a value of one if a corporation is operating in one of the
above-cited industry sectors and a value of zero in all other cases.
Size. Empirical evidence suggests that larger corporations are more likely to dis-
close non-financial information because they benefit from lower information costs
and are under higher public scrutiny (Clarkson et al. 2008; Kim and Lyon 2011b).
Echoing Brouhle and Ramirez-Harrington (2010), Dawkins and Fraas (2011), Moon
(2008), the metric variable lnEmp represents the natural log of total employees.
Profitability. Following the argumentation of information cost theory, a more
profitable corporation disposes of more financial and other resources to voluntarily
publish and disseminate non-financial information (Brammer and Pavelin 2006). For
example, Stanny and Ely (2008) reveal a positive link between profitability and CDP
participation. Accordingly, the metric variable ROE represents the return on equity.
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 177

5.5 Empirical Model

OLS regression is not applicable as my dependent variable participation is a cat-

egorical variable. Instead, I applied a logistic regression model (Hair et al. 1998) in
order to assess the influence of my explanatory variables on CDP participation
patterns. An ordinal logistic regression model could not be used because the pro-
portional odds assumption does not hold.
Logistic regression models predict the probability of a certain outcome in
comparison to a reference group. Because of the logistic relationship, the estimated
regression coefficients specify the direction of influence, but not the strength of the
relationship. Therefore, I analyse the exponential of the estimated regression
coefficients, the so-called odds ratio. Odds-ratios are interpreted as follows:
• For a value of one, the probability of the analysed event occurring is inde-
pendent of the independent variables.
• For a value below one, the probability of the analysed event occurring is smaller
than in the comparison group.
• For a value exceeding one, the probability of the analysed event occurring is
larger than in the comparison group.

6 Results and Discussion

Tables 1 and 2 provide an overview of my sample regarding CDP participation

patterns by home country and aggregated industry sector. It can be seen that more
than half of the corporations (51.1 %) are early participants. The residual share is
almost evenly divided between late participants (21.5 %) and undecided partici-
pants (27.4 %). This high share of early participants in my sample might be
explained by the fact that I am looking at the biggest corporations worldwide. It is
empirically verified that corporate size positively influences corporate participation
in voluntary climate change initiatives (Clark and Crawford 2012; Dawkins and
Fraas 2011; Lee 2012; Moon 2008; Reid and Toffel 2009; Stanny and Ely 2008;
Welch et al. 2000) and voluntary GHG reporting (Berthelot and Robert 2011;
Brouhle and Ramirez-Harrington 2010; Ciocirlan and Pettersson 2012; Cotter and
Najah 2012; Freedman and Jaggi 2005; Prado-Lorenzo et al. 2009; Prado-Lorenzo
and García-Sánchez 2010; Rankin et al. 2011; Stanny 2013). In the case of my
sample, corporations within the Global 500 are exposed to higher public scrutiny
due to their high visibility to civil society. Supposedly, these corporations are thus
more open to new mechanisms of voluntary environmental reporting, such as the
CDP. This bias towards larger corporations in my sample needs to be kept in mind
when interpreting the results.
Table 1 shows that more than 80 % of the corporations are headquartered in the
Triad regions, i.e. in the USA, Europe and Japan. Looking at CDP participation
178 N. Glienke

Table 1 CDP participation patterns by home country

Total Early Late participants Undecided
participants participants
No. % of No. % of No. % of No. % of
total country country country
Australia 5 1.9 4 80.0 0 0.0 1 20.0
Brazil 1 0.4 1 100 0 0.0 0 0.0
Canada 11 4.1 4 36.4 4 36.4 3 27.3
China 1 0.4 0 0.0 0 0.0 1 100
Europe 78 28.9 43 55.1 18 23.1 17 21.8
Belgium 1 0.4 0 0.0 0 0.0 1 100
Denmark 1 0.4 1 100 0 0.0 0 0.0
Finland 1 0.4 0 0.0 0 0.0 1 100
France 15 5.6 7 46.7 5 33.3 3 20.0
Germany 15 5.6 8 53.3 1 6.7 6 40.0
Italy 3 1.1 1 33.3 2 66.7 0 0.0
Netherlands 3 1.1 3 100 0 0.0 0 0.0
Norway 1 0.4 1 100 0 0.0 0 0.0
Spain 7 2.6 3 42.9 2 28.6 2 28.6
Sweden 5 1.9 2 40.0 2 40.0 1 20.0
UK 26 9.6 17 65.4 6 23.1 3 11.5
Hong Kong 7 2.6 2 28.6 4 57.1 1 14.3
India 1 0.4 0 0.0 0 0.0 1 100
Japan 29 10.7 17 58.6 4 13.8 8 27.6
Mexico 2 0.7 2 100 0 0.0 0 0.0
Russia 3 1.1 1 33.3 0 0.0 2 66.7
Singapore 2 0.7 1 50.0 0 0.0 1 50.0
South Korea 1 0.4 0 0.0 0 0.0 1 100
Switzerland 8 3.0 3 37.5 2 25.0 3 37.5
United States 121 44.8 60 49.6 26 21.5 35 28.9
Total 270 100 138 51.1 58 21.5 74 27.4

patterns, more early participants than average are headquartered in Australia, Brazil,
Europe, Japan and Mexico. As the number of observations for Brazilian and
Mexican corporations is below three, any interpretation of frequency distributions
needs to be accompanied with extreme caution. Finally, more late participants than
average have their headquarters in Canada, Europe, Hong Kong and Switzerland. It
is interesting to note the intra-European differences. When looking at those coun-
tries with three or more observations, I find that more than average German and
Dutch corporations are participating early. More than average French and Spanish
corporations are participating late. Finally, UK corporations exceed the average for
both participation patterns but fall below the average regarding undecided
participation.
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 179

Table 2 CDP participation patterns by aggregated industry sector

Total Early Late Undecided
participants participants participants
No. % of No. % of No. % of No. % of
total sector sector sector
Financials 68 25.2 33 48.5 17 25.0 18 26.5
Basic materials 16 5.9 11 68.8 0 0.0 5 31.3
Consumer goods 35 13.0 20 57.1 7 20.0 8 22.9
Consumer services 27 10.0 10 37.0 11 40.7 6 22.2
Healthcare 21 7.8 12 57.1 2 9.5 7 33.3
Industrials 29 10.7 13 44.8 8 27.6 8 27.6
Oil and gas 19 7.0 9 47.4 3 15.8 7 36.8
Technology 18 6.7 6 33.3 5 27.8 7 38.9
Telecommunications 19 7.0 10 52.6 4 21.0 5 26.3
Utilities 18 6.7 14 77.8 1 5.6 3 16.7
Total 270 100 138 51.1 58 21.5 74 27.4

Comparative institutional approaches may shed light on these regional partici-

pation patterns (Hall and Soskice 2001; Whitley 1999). Hall and Soskice (2001)
argue that national economic systems are the most relevant determinant for the
implementation of abstract management concepts into organizational practice. The
authors distinguish between liberal, coordinated and ambiguous market economies.
In the case of CDP participation, corporations headquartered in Germany, the
Netherlands and Japan may have been driven to participate in the CDP as of its
beginnings because of pressures in their surrounding coordinated market econo-
mies. In comparison, corporations headquartered in Canada, France and Spain may
have been less driven to participate in the CDP because of their surrounding liberal
and ambiguous market economies and start participating as the CDP reaches a state
of global institutionalization (Kolk et al. 2008). However, corporations headquar-
tered in Switzerland and in the UK represent an exception to this comparative
institutional interpretation. More Swiss corporations than average are late partici-
pants in spite of Switzerland being considered a coordinated market economy. UK
corporations are embedded in a liberal market economy. Nonetheless, they exceed
the average for both, early and late CDP participation. Whether and under what
circumstances national economic systems can explain early versus late CDP par-
ticipation could be an interesting topic for future research.
Table 2 shows that the majority of corporations are operating in the industrial,
financial and consumer goods sectors. Regarding CDP participation patterns, more
early participants than average are identified within the aggregated industry sectors
basic materials, consumer goods, healthcare, telecommunications and utilities.
More late participants than average are identified within the aggregated industry
sectors financials, consumer services, industrials and technology.
180 N. Glienke

A detailed look into the sub-sectors of these aggregated industry sectors may
explain some of these sector-specific patterns. Of the aggregated industry sectors
basic materials, healthcare and utilities most sub-sectors are environmentally sen-
sitive. It is empirically verified that environmental sensitivity and participation in
voluntary climate change initiatives (Brouhle and Ramirez-Harrington 2010) as
well as in voluntary GHG reporting (Amran et al. 2011; 2005; Prado-Lorenzo et al.
2009; Rankin et al. 2011) are positively related. Therefore, I employ environmental
sensitivity as a control variable in my regression analysis.
Finally, more than average late participants are operating in the consumer ser-
vices industry. This seems to support my fourth Hypothesis that late participants
were more likely under pressure to report GHG emissions by final consumers than
other participants. However, I also find that more than average early corporations
are operating in the consumer goods industry, which seems to oppose my fourth
Hypothesis. I will analyse whether final consumer orientation has predictive power
to explain late CDP participation in the regression analysis.
Table 3 provides descriptive statistics for my explanatory variables. I conducted
Pearson’s chi-squared tests for all categorical variables. These test the null
hypothesis that the frequency distribution in the participation groups is statistically
independent. I conducted Mood’s median tests for the ordinal and metric variables.
These test the null hypothesis that the medians in the participation groups are the
same. In all three cases, the test statistic χ2 has a chi-squared distribution with one
degree of freedom under the null hypothesis.
The results show that the distribution of environmentally sensitive and
non-environmentally sensitive corporations differs significantly between participa-
tion groups. Furthermore, regarding the CCPI ranking of a corporation’s home
country, I find that medians differ significantly between participation groups.
Regarding my control variables, I find significantly differing medians for corporate
size in both years and corporate profitability in 2010. It is also interesting to note
that the median for institutional ownership is 5 % for late participants and zero for
early and undecided participants. However, the test statistic is not significant. In the
following, I apply regression analysis to investigate whether these explanatory
variables have predictive power to explain CDP participation patterns.

6.1 Stakeholder Influences on Early CDP Participation

in 2003

To test Hypotheses 1 and 2, that in 2003 new CDP participants were more likely
under pressure to report GHG emissions by legislature (H1) and civil society (H2)
than firms that will start participating later, I estimated the following model:
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 181

Table 3 Descriptive statistics for explanatory variables

Total Early Late Undecided χ2a
participants participants participants
% or % in group % in group % in group
median or median or median or median
Industry sector is 24.1 64.6 7.7 27.7 10.635**
environmentally sensitive
Industry sector is not 75.9 46.8 25.9 27.3
environmentally sensitive
Industry sector is final 23 51.6 24.2 24.2 0.583
consumer oriented
Industry sector is not final 77 51.0 20.7 28.4
consumer oriented
Home country’s CCPI 46 34 52 52 41.927***
ranking in 2006
Share of institutional 0.00 0.00 5.00 0.00 4.019
investors in 2010
Share of climate change 0.0229 0.0000 0.0398 0.0257 3.957
specific articles in 2010
Natural log of total 10.7673 11.0157 10.6328 10.4401 7.346**
employees in 2002
Natural log of total 11.1679 11.3510 11.0311 10.9765 4.914*
employees in 2010
Return on equity in 2002 14.00 14.67 13.36 13.43 0.629
Return on equity in 2010 11.94 10.86 12.30 13.67 4.077*
*p < 0.1; **p < 0.005; ***p < 0.005
a
Pearson’s χ2 test for categorical variables. Mood’s median test for ordinal and metric variables

Logit Pðparticipation ¼ 1Þ ¼ b0 þ b1 CCPI2006 þ b2 SOC2002

þ b3 ESI2002 þ b4 lnEmp2002 þ b5 ROE2002

Regarding the predictive ability of my logistic regression model and its goodness
of fit, I analyse the likelihood ratio (LR) test statistic and Nagelkerke’s R2. The LR
test statistic equals (−2) times the log-likelihood of the model including only the
intercept minus (−2) times the log-likelihood of the model including all explanatory
variables. It tests the null hypothesis that the explanatory variables are statistically
independent of the dependent variable. Under the null hypothesis, the test statistic
has a chi-squared distribution with the amount of explanatory variables representing
the degrees of freedom. For the above-cited model, the LR test statistic equals 78.20
with ten degrees of freedom. Thus, the explanatory variables have a highly signif-
icant effect on CDP participation patterns. Values for Nagelkerke’s R2 range
between zero and less than 1. The predictive power of a logistic model increases with
increasing values for Nagelkerke’s R2. It has to be noted that values for R2 in logistic
182 N. Glienke

regression are not comparable to OLS regression and need to be interpreted with
caution. The above-cited model reaches a value of 0.290 which represents a fair fit.
Table 4 provides the estimated odds ratios and standard errors for the group of
late and undecided participants compared to the group of early participants. I find
that regarding the group of late and undecided participants, my variable for pressure
by legislature is significant on a level of p < 0.005 and the related odds ratios are
above one. Specifically, the value of 1.090 (1.029) indicates that a lower rating in
the CCPI (i.e. an increase of the CCPI ranking) makes a corporation 9 % (3 %)
more likely to belong to the group of late (mixed) participants than to the group of
early participants, given that all other variables are held constant. In other words,
with a rising CCPI ranking corporations are more likely to belong to the group of
early participants than to the group of late or undecided participants in 2003. These
results lend strong support to my first Hypothesis.
Furthermore, I find that regarding undecided participants, my variable for
pressure by civil society is significant on a level of p < 0.1 and the related odds ratio
is below one. In detail, the odds ratio of 0.613 indicates that given an increase in
climate-change-specific articles by one unit, the probability for a corporation of
being an undecided participant is expected to decrease by 40 %, given that the other
variables are held constant. In other words, with a rising share of
climate-change-specific articles corporations are more likely to belong to the group
of early participants than to the group of undecided participants in 2003. I find no
such relationship for the group of late participants. Therefore, my second
Hypothesis is only supported when comparing the group of early relative to the
group of undecided participants.
It is interesting to note that I find a significant influence of industry sector when
comparing the group of late to the group of early participants with an odds ratio

Table 4 Results of the multinominal logistic regression analysis

Standard error Significance Odds ratio
Undecided participation Constant 1.011 0.828 –
SOC 0.290 0.092* 0.613
CCPI 0.008 0.001*** 1.029
ESI = 1 0.375 0.980 1.009
lnEmp2002 0.087 0.196 0.893
ROE2002 0.006 0.483 0.996
Late participation Constant 1.317 0.027** –
SOC 0.261 0.802 0.937
CCPI 0.017 0.000*** 1.090
ESI = 1 0.609 0.007** 0.194
lnEmp2002 0.101 0.222 0.884
ROE2002 0.001 0.158 1.002
The reference group is early participation. Explanatory variables are stated by row
n = 270; Nagelkerke’s R2: 0.290; LR: 78.20
*p < 0.1; **p < 0.05; ***p < 0.005
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 183

below one (p < 0.05). Specifically, the odds ratio of 0.194 indicates that corpora-
tions operating in environmentally sensitive industries are 80 % less likely to
belong to the group of late participants than to the group of early participants. In
other words, operating in an environmentally sensitive industry largely increases
the probability of a corporation to belong to the group of early participants in 2003.

6.2 Stakeholder Influences on Late CDP Participation

in 2011

In the descriptive analysis I identified differences between corporations operating in

the consumer goods and in the consumer services industry. Therefore, I decided to
differentiate the explanatory variable CON into the additional variables CONconsumer
goods and CONconsumer services. The former focusses on corporations operating in the
consumer goods industry while the latter regards those in the consumer services
industry. To test Hypothesis 3 and 4, that in 2011 new CDP participants were more
likely under pressure to report GHG emissions by investors and final consumers
than firms that have started participating earlier, I thus estimated the following
models:
Logit Pðparticipation ¼ 2Þ ¼ 0 þ 1 SHARE2010 þ 2 CON2010 þ 3 ESI2010
(1)
þ 4 lnEmp2010 þ 5 ROE2010
Logit Pðparticipation ¼ 2Þ ¼ 0 þ 1 SHARE2010 þ 2 CONconsumer goods;2010
(2)
þ 3 ESI2010 þ 4 InEmp2010 þ 5 ROE2010
Logit Pðparticipation ¼ 2Þ ¼ 0 þ 1 SHARE2010 þ 2 CONconsumer services; 2010
(3)
þ 3 ESI2010 þ 4 lnEmp2010 þ 5 ROE2010
Regarding the predictive ability of the three models and their goodness of fit, I
find that the LR test statistic is highly significant for all models. The highest value is
reached in model 3 (37.97). Nagelkerke’s R2 reaches values of 0.140 (model 1),
0.139 (model 2) and 0.152 (model 3). Model 3 should therefore be preferred over
the former models.
Table 5 provides the predicted odds ratios and standard errors for the group of
early and undecided participants compared to the group of late participants. I find
that regarding the group of early and undecided participants, institutional ownership
is significant on a level of p < 0.1 in all three models. In all cases, the related odds
ratios are below one. Specifically, the odds ratio of 0.939 in model 3 indicates that
increases in shareholder ownership make a corporation about 6 % less likely to
belong to the group of early participants, given that the other variables are held
constant. In other words, with a rising share of institutional ownership corporations
are a little more likely to belong to the group of late participants than to the group of
early participants in 2011. The same is true for the group of undecided participants.
This lends support to my third Hypothesis.
 184

Table 5 Results of the multinominal logistic regression analysis

Standard error Significance Odds ratio
Model Model Model Model 1 Model 2 Model 3 Model Model Model
1 2 3 1 2 3
Undecided Constant 1.805 1.830 1.833 0.326 0.281 0.366
participation CONindustry = 1a 0.445 0.592 0.564 0.277 0.802 0.132 0.617 1.160 0.428
SHARE 0.029 0.029 0.029 0.052* 0.067* 0.060* 0.945 0.948 0.947
ESI = 1 0.574 0.565 0.567 0.103 0.057* 0.093* 2.550 2.930 2.595
LnEmp_2010 0.164 0.162 0.163 0.420 0.327 0.462 0.876 0.853 0.887
ROE_2010 0.010 0.009 0.009 0.348 0.500* 0.343 1.009 1.006 1.009
Early participation Constant 1.809 1.804 1.809 0.132 0.155 0.104
CONindustry = 1* 0.393 0.522 0.501 0.363 0.384 0.040** 0.700 1.575 0.357
SHARE 0.028 0.028 0.028 0.019** 0.028** 0.022** 0.937 0.941 0.939
ESI = 1 0.541 0.532 0.535 0.002*** 0.001*** 0.002*** 5.228 6.124 5.078
LnEmp_2010 0.159 0.157 0.158 0.050* 0.073* 0.035** 1.364 1.326 1.396
ROE_2010 0.010 0.009 0.009 0.245 0.361 0.230 1.012 1.008 1.011
The reference group is late participation. Explanatory variables are stated by row
n = 248; Nagelkerke’s R2: 0.140; LR: 34.77 (model 1)
n = 248; Nagelkerke’s R2: 0.139; LR: 34.42 (model 2)
n = 248; Nagelkerke’s R2: 0.152; LR: 37.97 (model 3)
*p < 0.1; **p < 0.05; ***p < 0.005
a
Industry is represented by the sectors consumer goods & services (model 1), consumer goods (model 2) and consumer services (model 3)
N. Glienke
Voluntary Greenhouse Gas Reporting: A Matter of Timing? 185

Furthermore, I find that final consumer orientation is significant on a level of

p < 0.05 for the group of early relative to the group of late participants in model 3.
The related odds ratio is 0.357. Accordingly, the probability for corporations in the
consumer services industry to belong to the group of early participants is 65 % less
likely compared to the group of late participants. In other words, corporations in the
consumer services industry are less likely than other corporations to belong to the
group of early participants in 2011. Therefore, my fourth Hypothesis only finds
support for consumer service orientation and when comparing the group of early
relative to the group of late participants.
In line with my findings for the year 2003, I find a significant influence of
environmental sensitivity when comparing the group of early to the group of late
participants in all three models (p < 0.005). The related odds ratios are above one.
In detail, the odds ratio of 6.124 in model 2 indicates that corporations operating in
environmentally sensitive industries are more than six times more likely to belong
to the group of early than to the group of late participants in 2011.

7 Conclusions

Three CDP participation patterns (early, late and undecided participation) are
examined for the Global 500 at two distinct points in time (2003 and 2011). More
than half of these corporations are categorized as early participants. In 2003, cor-
porations under regulatory pressure are more likely to belong to the group of early
CDP participants. In 2011, corporations under pressure by investors are more likely
to belong to the group of late participants.
The evolution of managerial motivations and objectives for adopting environ-
mental management practices has been empirically researched by Hoffman (1999),
Bansal (2005). Supporting my findings, both studies reveal that pressures by leg-
islature and civil society dominate managerial decision making at the start of new
environmental practices.
My analysis of the timing of CDP participation supports strong social models of
innovation diffusion research as it shows that legitimacy reasons play a strong role
for CDP participation (cf. Stanny 2013). This ties in with the critique of Hesse
(2006), Kolk et al. (2008) who doubt the value of the information reported to the
CDP for non-managerial stakeholders, especially regarding investment decisions.
Supporting this critique, the results of my study show that corporate engagement in
voluntary GHG reporting is linked to different managerial motivations and objec-
tives depending on the timing of participation. In 2003, by participating in the CDP
right from its start, corporations satisfy the claims of legislature and civil society. In
2011, by participating in the CDP once the initiative is a globally institutionalized
practice, corporations satisfy the claims of investors and final consumers.
Nonetheless, my insights indicate that legislature, civil society, investors and final
consumers are assessed as salient stakeholders regarding the issue of voluntary
GHG reporting. Therefore, despite the ongoing debate about the usefulness of
186 N. Glienke

climate change regulation for corporate performances, my findings demonstrate that

stringent climate change policies enhance voluntary GHG reporting.
My findings contribute to stakeholder theory and have important implications for
policy making. Firstly, as regards the contribution to stakeholder theory, current
empirical studies of voluntary GHG reporting focus on regulatory and financial
stakeholders, such as lenders and investors. Other measures for non-financial
stakeholders, such as civil society and final consumers, are mostly excluded from
empirical research (for an exception see Sprengel and Busch 2011). This analysis
therefore contributes to stakeholder theory by expanding the scope of existent
measures.
Secondly, according to my results, the design of policies aimed at enhancing
voluntary GHG reporting should account for different managerial motivations and
objectives depending on the timing of participation. I suggest that in the beginning
of such programs, policy makers should focus on instruments of communication
and dialogue with regulators and the media, such as periodic reports, press con-
ferences and round tables. Once the program reaches maturity, it should be com-
plemented with instruments that address primary stakeholder claims, such as labels
or benchmarking.
For long, voluntary environmental reporting was based on the mechanisms
known from mandatory financial reporting and driven by initiatives that are uti-
lizing these (Higgott et al. 2000). Both reporting types have in most cases been kept
separately. Since 2009 however, a global coalition of policy makers, investors,
corporations and especially accounting firms, standard setters, as well as
non-governmental organisations, the International Integrated Reporting Council
(IIRC), is engaged in mainstreaming the integrated reporting of financial and
non-financial information. In addition, European policymakers are preparing
binding rules for the reporting of non-financial information (Council of the
European Union 2014; European Commission 2011). Against this background, the
practical relevance of my findings for corporate decision makers becomes evident:
the integrated reporting of non-financial information is currently in a situation
where a rising number of corporations adopt this practice (Abeysekera 2013;
Mustata et al. 2012; Singleton-Green 2010), supposedly to conform to the pressures
of legislature and civil society. Already, claims of investors are expressed through
the actions of the IIRC. It seems thus advisable for corporate decision makers to
closely follow their stakeholders’ claims regarding integrated reporting and to keep
informed about this issue. Thus, professional managers will firstly be in a position
to show action on integrated reporting in time and secondly they are prepared for a
situation where integrated reporting is a globally institutionalized practice.

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Carbon Emissions and Corporate
Financial Performance: A Systematic
Literature Review and Options
for Methodological Enhancements

Stefan Lewandowski

Abstract This paper systematically reviews the existing empirical literature on the
linkage between carbon emissions and corporate financial performance (CFP). The
results show that superior corporate environmental performance (CEP) pays off when
market measures, such as Tobin’s q, are linked to a firm’s level of carbon emissions.
However, modeling the relationship between carbon emissions and CFP is a complex
task. This complexity is illustrated by methodological differences between the studies
included in the review which may systematically influence the results. Therefore, a set
of options for methodological enhancements is suggested which may guide further
inquiries into the relationship between carbon emissions and CFP.

1 Introduction

Measuring corporate environmental performance (CEP) based on pollution indi-

cators involves knowledge from various disciplines like chemistry, economics and
engineering sciences. Therefore, management scholars attempting to further close
the knowledge gap regarding the relationship between CEP and corporate financial
performance (CFP) have to “transcend disciplinary boundaries” (Hirsch Hadorn
et al. 2006: 124). This holds especially true if trying to quantify financial impli-
cations of pollution prevention with the help of statistical data as well as mathe-
matical modelling techniques.
In recent years, an increasing body of empirical research has used self-reported
carbon emission data for inquiries into the ‘CEP-CFP nexus’ (Günther et al. 2011).

S. Lewandowski (&)
School of Business, Economics and Social Science, University of Hamburg,
Hamburg, Germany
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 193

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_9
194 S. Lewandowski

More specifically, a firm’s level of carbon emissions is used as proxy for CEP in
regressions on different accounting and market measures. Thereby, the studies aim
at identifying a systematic relation between CEP and CFP. The results can then be
used to derive conclusions about the potential impact of emission abatement on
firms’ financial bottom lines. Here, empirical management research can support
corporate decision making regarding potential returns from investments in renew-
able energies and low-carbon technologies.
This paper systematically reviews the existing empirical literature on the rela-
tionship between self-reported carbon emissions and CFP. The literature review
aims at synthesizing results across studies and at reaching conclusions regarding a
possible ‘business case for corporate sustainability’ (Salzmann et al. 2005). The
results indicate that superior CEP actually pays off when market measures, such as
Tobin’s q, are used in regressions on carbon emissions. However, recognizing the
complexity accompanying the CEP-CFP nexus while building on the concept of
transdisciplinarity in sustainability research (Hirsch Hadorn et al. 2006), this paper
subsequently points to methodological differences between the reviewed studies.
These differences may systematically influence the results. Therefore, a set of
options for methodological enhancements is suggested which incorporates recent
research findings and discussions from carbon accounting research. As a result, this
paper supports further research focusing on the relationship between carbon
emissions and CFP.
The remainder paper is organized as follows. Section 2 highlights empirical
research on the CEP-CFP nexus as well as its background. It also deals with the
relatively new phenomenon of carbon data available through mandatory or vol-
untary emission reporting schemes. Section 3 elaborates on the methodology
employed in the literature review. The results are presented in Sect. 4.
Subsequently, four possible methodological adjustments are presented (Sect. 5).
Finally, conclusions are drawn and options for further research are suggested
(Sect. 6).

2 Background

Studies investigating the relationship between CEP and CFP are mostly driven by
theoretical arguments. Conventional wisdom assumes environmental protection to
be a cost burden eroding a firm’s competitiveness, whereas other scholars assume
environmental pollution to be a waste of inherently scarce resources (Ambec and
Lanoie 2008).
A tremendous body of empirical research inquires about a possible relation
underlying the CEP-CFP nexus (frequently cited examples include the studies of
Hart and Ahuja 1996, and Konar and Cohen 2001). After almost 40 years of
empirical research (Günther et al. 2011), enhancements in CEP are perceived to
positively influence CFP at least to a small degree (Orlitzky et al. 2003; Peloza
2009). However, as the evidence is mixed and underlying methodologies differ
Carbon Emissions and Corporate Financial Performance … 195

substantially (e.g. Horváthová 2010), the results are “far from conclusive enough to
be considered satisfactory” (Günther et al. 2011: 279). Thus, the CEP-CFP nexus
remains “one of the most puzzling phenomena pertaining to research on organi-
zations and the natural environment” (Endrikat et al. 2014: 1).
Empirical management research on the CEP-CFP nexus is always confined to
available CEP variables (Konar and Cohen 2001). However, not many of them are
publicly accessible. Until recently, a vast part of early research relied on data from
the Toxic Release Inventory (TRI) (for an overview, see, e.g., Molina-Azorín et al.
2009). The TRI database was established in the USA by the Environmental
Protection Agency (EPA) and collects data about the release of toxic chemicals,
such as aluminum oxide and phosphoric acid (for more details, see EPA 2014).
In recent years, CEP-CFP research has started to benefit from self-disclosed
carbon emission data, which is increasingly available through several databases. In
this paper, the term carbon emission refers to all six greenhouse gases covered by
the Kyoto Protocol (for more details, see United Nations Framework Convention on
Climate Change (UNFCCC) 2014). This kind of CEP data is collected through
voluntary or mandatory reporting schemes such as the European Union
Emission-Trading System (EU ETS) and the Carbon Disclosure Project (CDP).
From a theoretical point of view, constructing CEP variables based on carbon
emissions is justified by increasing concerns among different stakeholders. The
latter perceive the dependency on carbon-based materials and energy sources as
increasingly constraining the competitiveness of firms (Busch and Hoffmann 2007).
Especially, relatively high carbon emission levels are associated with mainly using
fossil fuels. But fossil fuels are increasingly scarce and, therefore, are likely to
experience massive price volatilities in the future (Busch and Hoffmann 2007).
Moreover, businesses with high levels of carbon emissions are vulnerable to
restrictive regulatory environments, which are implemented to combat global
warming internationally. Accordingly, carbon emissions constitute an ‘off-balance
sheet liability’ (Griffin et al. 2012), posing serious financial risks to businesses and
financial investors.

3 Methodology

The literature review aims at synthesizing the results of empirical studies which rely
on self-reported carbon emission data. Specifically, the review includes studies that
provide quantitative estimates of the effect of (self-reported) firm level carbon
emissions on CFP. It must be noted that this review does not intend to review the
CEP-CFP literature in general.
Aiming for a high degree of comprehensiveness, the literature review followed a
complementary multi-step methodology. In a first step, ProQuest’s search engine
ABI INFORM Complete was used to identify relevant articles published in
‘Scholarly Journals’ and work in progress presented in ‘Working Papers’.
196 S. Lewandowski

According to ProQuest, ABI INFORM Complete has become “the world’s most
comprehensive and diverse business database” providing “more of the information
needed by business researchers than any other single source available” (ProQuest
2014). Two search strings were used, combining the terms ‘carbon emissions’ (or
‘CO2 emissions’ or ‘greenhouse gas emissions’) and ‘financial performance’ (or
‘corporate performance’ or ‘firm performance’). These search strings were than
identified in the titles or abstracts of the literature within ABI INFORM Complete.
This search led to a list with 140 documents. From this list, the author considered a
total of 14 journal articles and two working papers relevant.
After having identified these 16 documents, the reference lists of the selected
studies were screened manually. The aim was to identify studies with a similar
methodological framework, but a terminology not considered by the search strings.
This step added five journal articles and two working papers to the list of relevant
studies. In addition, two journal articles and four working papers were added. These
did not appear in ABI INFORM Complete nor in the references mentioned above.
However, they were presented at conferences or known from other sources. In the
end, a total of 21 journal articles and eight working papers were identified to be
relevant for the literature review.
In a third step, studies not meeting a set of criteria were excluded. As already
mentioned above, a study was required to estimate the effect of (self-reported) firm
level carbon emissions on CFP. The study of Boiral et al. (2012) was excluded
because they operationalize a firm’s carbon performance based on a five-step rating
scale rather than on the level of self-reported carbon emissions. Similarly, the
studies of Chapple et al. (2013) as well as García-Sánchez and Prado-Lorenzo
(2012) were excluded because they transform carbon emission levels into binary
dummy variables. The study of Lee (2012) was excluded because the author
employs cluster analysis. For similar reasons, the study of Kuo et al. (2010) was
excluded because they apply correlational analysis instead of an econometric
approach. The study of Sariannidis et al. (2013) was excluded because they estimate
the effect of global carbon emissions on CFP. Finally, the working paper of Saka
and Oshika (2010) was excluded and instead the recently published journal article
was used (Saka and Oshika 2014).

4 Results

Based on the above described methodology, a total of 22 studies was considered

relevant for this literature review. These 22 studies are separated into 15 journal
articles and seven working papers (including papers presented at conferences). The
series of studies was published between 2009 and 2014. Table 1 summarizes the
studies included in the literature review. It also contains information regarding
applied data sources, performance variables, and sample sizes, inter alia.
Table 1 Summary of empirical studies about carbon emissions and CFP
Author(s) Emission data Sample Carbon performance variable(s) Scopecoverage Financial Evidence of
(Year) source performance variable the business
(s) case for
carbon
mitigation
Pogutz and Company 177 firms (worldwide) GHG emission ratio (measured Unspecified ROA, ROS, ROE, Increases all
Russo sustainability and from the Fortune 500, as the ratio between firm total Tobin’s q variables
(2009) CSR reports for the period 2002– emissions divided by sales and
2005 industry total emissions divided
by sales)
Brzobohatý EU ETS data 125 Czech firms, for the Carbon emission intensity 1 Revenue, profit, costs Increases
and Janský obtained from period 2004–2006 (measured as the ratio between revenue and
(2010) the Czech total emissions and revenues) costs
Ministry of
Environment
Delmas and Trucost 1100 US firms, for the Total CO2e emissions 1, 2, 3 ROA, Tobin’s q No clear
Nairn-Birch period 2004–2008 evidence
Carbon Emissions and Corporate Financial Performance …

(2010) (increases
Tobin’s q but
decreases
ROA)
Tatsuo Japanese 129 Japanese Eco-efficiency (measured as the Unspecified ROA Increases
(2010) Ministry of manufacturing firms, for ratio between sales and total ROA (for the
Environment, the year 2006 emissions) chemical
company industry)
environmental
reports
(continued)
197
Table 1 (continued)
198

Author(s) Emission data Sample Carbon performance variable(s) Scopecoverage Financial Evidence of
(Year) source performance variable the business
(s) case for
carbon
mitigation
Busch and Own survey, data 174 firms (worldwide), Carbon intensity (measured as 1, 2 ROA, ROE, Tobin’s Increases
Hoffmann is obtained from for the year 2007 the rescaled ratio between total q Tobin’s q
(2011) Sustainable emissions and sales)
Asset
Management
(SAM)
Iwata and Toyo Keizai 268 Japanese GHG emission intensity Unspecified ROE, ROA, return on Increases
Okada Corporate Social manufacturing firms, for (measured as the ratio between investment (ROI), ROA, ROI,
(2011) Responsibility the period 2004–2008 total GHG emissions and return on invested ROIC, and
Database operating revenue) capital (ROIC), ROS, Tobin’s
Tobin’s q q (i.e., q − 1)
Alvarez Company 89 firms (worldwide), Variation of total carbon Unspecified ROA, ROE Increases
(2012) sustainability and for the period 2007– emissions between two years ROA
CSR reports 2010
(websites)
Chen and eGRID 44 US firms, for the Carbon dioxide emission rate 1 Cost of equity, bond Decreases
Gao (2012) periods 2002–2003 and (measured as the ratio between yield-to-maturity both
2006–2008 total carbon emissions and spread variables
electricity generation in MWh)
Clarkson EU ETS data 211 European firms, for Total carbon emissions 1 Stock price Increases
et al. (2012) (own the period 2006–2009 (measured as allocation stock price
calculation), rely shortfalls)
on CDP for
further analysis
(continued)
S. Lewandowski
Table 1 (continued)
Author(s) Emission data Sample Carbon performance variable(s) Scopecoverage Financial Evidence of
(Year) source performance variable the business
(s) case for
carbon
mitigation
Ennis et al. CDP 50 UK firms from the Total carbon emissions and 1, 2 Revenue, expected No empirical
(2012) FTSE 350, for the period carbon emission intensity stock price return evidence
2006–2009 (measured as the ratio between (estimations
total emissions and revenue) insignificant)
Griffin et al. CDP 498 US firms from the Total carbon emissions 1, 2, 3 Stock price Increases
(2012) S&P 500 and 264 stock price
Canadian firms from the
TSE 200, for the period
2005–2009
Hatakeda Japanese 1089 Japanese GHG intensity (measured as the 1 Profitability (after-tax No empirical
et al. (2012) Ministry of manufacturing firms, for ratio between the product of total cash flow) evidence
Environment the year 2007 GHG emissions and emission (decreases
trade price and total assets) profitability)
Carbon Emissions and Corporate Financial Performance …

Nishitani Japanese 641 Japanese Carbon dioxide productivity Unspecified Tobin’s q Increases
and Kokubu Ministry of manufacturing firms, for (measured as the ratio between Tobin’s q
(2012) Environment, the period 2006–2008 net sales and total emissions)
Japanese
Standard
Association
Misani et al. CDP 164 firms (worldwide), Carbon intensity (measured as 1 Tobin’s q Increases
(2012) for the period 2006– the ratio between total CO2 Tobin’s q
2008 emissions and firm assets)
Unspecified
(continued)
199
Table 1 (continued)
200

Author(s) Emission data Sample Carbon performance variable(s) Scopecoverage Financial Evidence of
(Year) source performance variable the business
(s) case for
carbon
mitigation
Fujii et al. Japanese Japanese manufacturing Carbon efficiency (measured as ROA, ROS, capital Increases
(2013) Ministry of firms, for the period the ratio between sales and CO2 turnover (CT) ROA and
Environment 2006–2008 emissions) ROS
Lou and CDP 48 Australian firms, for Total CO2 emissions 1, 2 Abnormal return Increases
Tang (2013) the year 2010 abnormal
returns (for
scope 1
emissions)
Ngwakwe Company 1 firm (3M company), Total CO2-equivalent emissions 1, 2 Dividend per share Increases
and Msweli website for the period 2002– dividend per
(2013) (sustainability 2010 share
report)
Nyirenda Sustainability 1 firm (anonymized Emission reduction (measured as Unspecified ROE No empirical
et al. (2013) reports mining company), for an total CO2-equivalent emissions) evidence
unknown period (estimations
insignificant)
Wang et al. CDP 69 Australian firms, for Total carbon emissions 1, 2 Tobin’s q No empirical
(2013) the year 2010 evidence
(decreases
Tobin’s q)
Matsumura CDP 256 from S&P 500, for Total CO2 emissions Unspecified Market value Increases
et al. (2014) the period 2006–2008 market value
Unspecified Market value
(continued)
S. Lewandowski
Table 1 (continued)
Author(s) Emission data Sample Carbon performance variable(s) Scopecoverage Financial Evidence of
(Year) source performance variable the business
(s) case for
carbon
mitigation
Saka and Japanese 1094 Japanese Emission intensity (measured as Increases
Oshika Ministry of manufacturing firms, for the ratio between total emissions market value
(2014) Environment the period 2006–2008 and sales)
Segura et al. EU ETS 745 Spanish companies, Total carbon emissions 1 ROA No empirical
(2014) for the period 2005– (measured as allowance evidence
2010 surpluses) (decreases
ROA)
Carbon Emissions and Corporate Financial Performance …
201
202 S. Lewandowski

The names of the applied carbon performance variables were decided by the cor-
responding authors and are given in Table 1 without any terminological adjustment.
While parts of the studies’ analyses were often conducted with smaller sample
sizes, Table 1 always indicates the largest sample size used in the corresponding
study. In the bibliography at the end of this paper, each study included in the
systematic review is marked with an asterisk in front of the reference itself.
The reviewed studies are very heterogeneous in their conceptualization of CFP
variables. They either use accounting measures, market measures, or a combination
thereof. The following sections highlight the results of the studies in terms of their
respective conceptualization of CFP.

4.1 Carbon Emissions and Accounting Measures

Accounting measures reflect a company’s economic success in the past. They can,
thus, be considered as a backward-looking conceptualization of CFP (Delmas and
Nairn-Birch 2010). The reviewed studies employ a broad range of accounting
measures. The most commonly used are calculated as ratios, e.g. return on assets
(ROA), return on sales (ROS), and return on equity (ROE). Accounting measures
can be expected to relate with carbon emissions in all possible ways, depending on
project-specific investment costs.
Comparatively low levels of carbon emissions (i.e., good CEP) can be positively
associated with accounting measures. A positive relationship is in line with theo-
retical arguments presuming the existence of a business case for sustainability.
Accordingly, companies can gain competitive advantages if their commitment to
corporate sustainability is accompanied by either cost savings or revenue increases
(Porter and Van der Linde 1995). Pogutz and Russo (2009), who investigated the
relationship between CEP and CFP for a sample of multinational companies listed
under the Fortune 500, support a positive relationship. Their findings suggest that
low carbon emission levels are positively related to ROA, ROS and ROE. Tatsuo
(2010), Iwata and Okada (2011), as well as Fujii et al. (2013) studied the rela-
tionship between CEP and CFP for samples consisting of Japanese manufacturing
firms. Their findings support a positive relationship between comparatively low
carbon emission levels and a broad range of accounting measures (e.g., ROA and
ROS). However, such a relationship is not supported for each accounting measure
or is—in some cases—not valid for all industries. The same holds for the study of
Brzobohatý and Janský (2010). The authors analyzed the relationship between CEP
and CFP for a sample of Czech firms regulated under the EU ETS. Alvarez (2012),
in turn, gathered data for a sample of multinational firms in order to study the
association between carbon emission mitigation (i.e., the variation of total emis-
sions between two years) and ROA. The author’s findings are similarly mixed.
Comparatively low carbon emission levels can also be negatively associated with
accounting measures. A negative relationship is in line with conventional wisdom
Carbon Emissions and Corporate Financial Performance … 203

presuming pollution prevention to be a cost burden for shareholders (Hart and

Ahuja 1996). This is the case when companies apply large mitigation projects
which are accompanied by substantial increases in capital expenditures. A negative
relationship between comparatively low carbon emission levels and ROA is sup-
ported by Delmas and Nairn-Birch (2010) who analyzed a sample of US firms, as
well as by Segura et al. (2014) who analyzed a sample of Spanish companies.
Hatakeda et al. (2012) also support a negative relationship between comparatively
low carbon emission levels and accounting-based CFP measures for a sample of
Japanese manufacturing firms. According to their results, low levels of carbon
emissions are a precursor for lower profitability.
Last but not least, carbon emissions can be unrelated to the levels of
accounting-based CFP measures. This is the case where companies pick ‘low
hanging fruits’, i.e. reducing carbon emissions with negligible investment costs, or
—in the best case—no costs at all, before moving to higher cost options (Sims et al.
2003). The absent relationship between a firm’s level of carbon emissions and
accounting measures is supported by Busch and Hoffmann (2011). The authors
analyzed an international sample of firms listed under the Dow Jones Global Index.
According to their results, carbon emission levels have no significant impact on
either ROA or ROE. Ennis et al. (2012) as well as Nyirenda et al. (2013), present
similar results for a sample of UK firms from the FTSE 350, and a single-company
sample consisting of a mining company, respectively.

4.2 Carbon Emissions and Market Measures

Market measures reflect investors’ evaluation of a firm’s financial performance in

the future. Therefore, market measures can be considered as a forward-looking
conceptualization of CFP (Delmas and Nairn-Birch 2010). The reviewed studies
use a broad range of market measures. These include stock prices, abnormal returns,
or dividends. The most frequently used measure is Tobin’s q. This indicator
denominates the ratio between a firm’s market value and the replacement costs of its
tangible asset base (Chung and Pruitt 1994). Accordingly, the measure reflects a
firm’s intangible or unrecorded assets (e.g. the value of advertising, see Smith
2002). From a theoretical point of view, and as already established for accounting
measures, market measures can be expected to be affected by carbon emission
levels in all possible ways.
Comparatively low carbon emission levels can be positively associated with
market measures. An increase in capital expenditures to enhance CEP reflects
management efforts to address risks related to future changes in the business
environment, such as regulatory changes or increasing costs due to emission trading
204 S. Lewandowski

(Busch and Hoffmann 2011). Accordingly, investors may perceive compara-

tively low carbon emission levels as a competitive advantage securing long-term
profitability. A positive relationship is supported by Nishitani and Kokubu (2012).
The authors examined the relationship between CEP and Tobin’s q for a sample of
Japanese manufacturing firms. According to their findings, low carbon emission
levels are positively related to market performance. Misani et al. (2012) obtained
similar results for an international sample of firms. According to their results, CEP
is positively related to Tobin’s q. Further support for a positive relationship between
CEP and Tobin’s q is presented by Pogutz and Russo (2009), Busch and Hoffmann
(2011), as well as Delmas and Nairn-Birch (2010). Saka and Oshika (2014), who
studied a sample of Japanese manufacturing firms, also support a positive associ-
ation between CEP and market-based CFP. According to their findings, low levels
of carbon emissions are positively related to the market value. Matsumura et al.
(2014) also support a positive relationship between CEP and the market value for a
sample of US firms listed under the S&P 500. Further support for a positive
relationship is presented by Clarkson et al. (2012) for a sample of European firms,
as well as by Griffin et al. (2012) for a sample of North American firms. Both
studies suggest a positive relationship between CEP and stock price. Ngwakwe and
Msweli (2013), as well as Lou and Tang (2013), also support a positive
relationship. While Ngwakwe and Msweli (2013) suggest that carbon emission
reduction is positively related to dividend payments, the findings of Lou and Tang
(2013) indicate that superior CEP is positively related to abnormal stock
returns. Chen and Gao (2012) obtained similar results for a sample of US firms.
According to their findings, enhanced carbon emission abatement is likely to
decrease a firm’s cost of equity and has negative impacts on bond yield-to maturity
spreads.
Comparatively low carbon emission levels can also be negatively associated with
market measures. This is the case when investors do not regard superior CEP as a
form of intangible value. Analogous to accounting measures, investors may regard
emission abatement efforts as a cost burden reducing a firm’s profitability. Wang
et al. (2013) support a negative relationship between CEP and market-based
CFP. Their findings suggest that emission reductions decrease Tobin’s q for a
sample of Australian firms. The authors explain their diverging results referring to
the “unique economic structure and development of Australia, particularly its
dominant mining industry” (Wang et al. 2013: 1).
Last but not least, carbon emission levels can be unrelated to a firm’s market
performance. This can be observed when investors assume indifferent positions
with respect to CEP. Ennis et al. (2012) found no empirical evidence of a rela-
tionship between carbon emissions and expected stock price returns for a sample of
UK firms. So far, this is the only empirical study failing to determine an effect of
carbon emission levels on market-based variables.
Carbon Emissions and Corporate Financial Performance … 205

4.3 Summary of Findings

The results indicate that superior CEP pays off when market measures, such as
Tobin’s q, are used in regressions on carbon emissions. This not only shows that
investors incorporate CEP in their investment behavior, but also shows that
investors regard carbon emissions as intangible liability.
In contrast, there is no clear evidence that superior CEP pays off when
accounting measures are used in regressions on carbon emission levels.
Accordingly, the potential effect of carbon emission abatement on accounting
measures such as ROA, ROE, or ROS is unclear. In fact, the results of the con-
sidered studies suggest impacts in every possible direction: positive, negative, or no
effect. These mixed results indicate that each theoretical argument discussed above
may be applicable and that the results are likely to be influenced by the choice of
methodological frameworks and applied data.
The difference between the results obtained by market and accounting measures
may be explained by a non-linear relationship between carbon emission abatement
and CFP. While financial markets appear to generally reward enhancements in
CEP, the effect of CEP on CFP may follow a non-linear relationship when
accounting measures are used. While emission abatement appears to be generally
profitable in the beginning, the effect might be turned around when CEP is
enhanced beyond certain carbon emission levels and, subsequently, becomes
negative (Tatsuo 2010).

5 Options for Methodological Enhancements

According to Hirsch Hadorn et al. (2006), transdisciplinary research “transcends

disciplinary boundaries” and “goes beyond our normal conceptions of scientific
disciplines” (Hirsch Hadorn et al. 2006: 120, 124). Transdisciplinary research also
refers to academic research being driven by practitioner engagement (Brandt et al.
2013). Considering the underlying complexity of the relationship between a firm’s
level of carbon emissions and CFP measures, while also keeping in mind the rather
mixed results presented in the literature review, the extent to which regression
analysis is based on transdisciplinary research may have an influence on the reli-
ability and validity of the results (for an overview of the concepts of reliability and
validity, see Cooper and Schindler 2011).
In the following, a set of ideas for methodological enhancements is suggested.
This set is intended to increase the degrees of validity and reliability in CEP-CFP
research that relies on self-reported carbon emissions. The presented suggestions
do not claim to be comprehensive. Rather, they are inspired by recent research
in the field of carbon accounting, which basically deals with technical and
methodological processes related to “tracking the current level of carbon emissions
and developments over time” (Schaltegger and Csutora 2012: 4). Carbon
206 S. Lewandowski

accounting is best placed to provide valuable background information on the rel-

evance of carbon emissions for different industries, the technical processes under-
lying carbon emission measurement, and carbon emission indicator development.

5.1 Creating Industry-Specific Emission Samples

Samples used in the reviewed studies differ substantially concerning scope-cover-

age. Following the Greenhouse Gas Protocol (GHG Protocol)—an accounting tool
jointly developed by the World Resources Institute (WRI) and the World Business
Council for Sustainable Development (WBCSD)—part of the studies account for
carbon emissions in three tiered scopes (WBCSD and WRI 2004). Scope 1 covers
emissions directly controlled and released by a company; scope 2 accounts for
indirect emissions embodied in purchased energy; and scope 3 refers to other
indirect upstream and downstream emissions along the value chain of a company
(WBCSD and WRI 2004).
A first set of studies, e.g. Brzobohatý and Janský (2010) as well as Misani et al.
(2012), uses scope 1 emissions as a CEP proxy. Misani et al. (2012) argue that only
reductions of direct emissions require “radical technological change” which is in
turn linked to structural capital expenditures and modifications in production sys-
tems (Misani et al. 2012: 22). Scope 2 emissions, in contrast, could be reduced
without substantial investments “by a simple switch to electricity suppliers that use
renewable sources or more efficient plants” (Misani et al. 2012: 13).
A second set of studies, e.g. Busch and Hoffmann (2011) as well as Lou and
Tang (2013), operationalize CEP based on scope 1 and 2 emissions. Lou and Tang
(2013) use scope 2 emissions even though they assume (and find) that indirect
emissions are less likely to affect CFP than direct emissions. This results from
indirect emissions being not subject to regulatory constrains—and, thereby, not
representing a significant cost driver (Lou and Tang 2013).
A third set of studies operationalize CEP based on all three emission scopes.
These studies highlight that direct emissions provide only limited insights about the
full range of financial risks along the value chain (Hoffmann and Busch 2008;
Sundarakani et al. 2010). In fact, for some sectors, “the largest sources
of emissions may be buried further upstream than many companies may have
previously perceived” (Huang et al. 2009a: 217). Delmas and Nairn-Birch (2010),
for example, argue that the demand for transparency does not end with disclosing
direct emissions. Rather, shareholders increasingly recognize the importance of
emissions along the whole value chain. The authors emphasize that a company’s
costs related to the release of carbon emissions is not solely driven by direct
emissions; instead, controlling and reducing indirect carbon emissions can also
require considerable expenditures. The latter may substantially affect shareholder
value generation (Delmas and Nairn-Birch 2010). Furthermore, emission intensive
suppliers are likely to be affected by environmental regulation and, thus, bear a
Carbon Emissions and Corporate Financial Performance … 207

potential risk for cost increases if they cannot be adequately replaced with less
carbon intense competitors (Delmas and Nairn-Birch 2010).
The scope-coverage applied in a study may significantly influence the obtained
results. In this context, it is important to note that each industry’s value creation
relies on direct and indirect emissions differently. This is because carbon emissions
are unevenly distributed along the value chain across firms and industries (Busch
2010). Huang et al. (2009a), for example, calculate the percentage share of scope 1
emissions for four different sectors in the USA. According to their calculation,
direct emissions account for about 73 % of the total emissions in the crude oil and
gas extraction sector, whereas they account only for around 10 % in the pharma-
ceutical sector, 4 % in data processing, and for no more than 2 % in the publishing
sector (Huang et al. 2009a). Similarly, Matthews et al. (2008) show in their study
that direct emissions account for 92 % of the total emissions in power generation,
whereas only for 14 % on average across all industries. Tatsuo (2010) emphasizes
that “direct consumption of energy and CO2 emissions during production at car
assembly plants are not very high” because “Japanese car manufacturers outsource
about 70 % of their components” (Tatsuo 2010: 215). This is confirmed by Lee and
Cheong (2011) who calculated the carbon footprint for the car manufacturing
company Hyundai Motors Co. They estimated a total quantity of 135 t of direct
emissions (scope 1) and 8486 t of indirect emissions (scope 2) (Lee and Cheong
2011). As a result, in car manufacturing, scope 1 emissions appear to reflect only a
minor part of the total emissions. Indirect emissions are more relevant than direct
emissions in other industries as well. Examples include companies involved in
manufacturing computer devices or semiconductors as they consume substantial
amounts of purchased energy (Huang et al. 2009b). However, for industries with
large value chains, including scope 2 emissions can be similar insufficient. Huang
et al. (2009b) state that most of the carbon emissions in the electronics manufac-
turing sector, e.g. the computer industry as well as circuit board and semiconductor
manufacturing, are embodied in the supplies of purchased parts, components,
chemicals, and other materials. Accordingly, scope 1 emissions may only ade-
quately reflect CEP for samples constituting of energy utilities and other
high-emitting industries. Brzobohatý and Janský (2010), for example, used data
from Czech companies listed under the EU ETS. Since the emission trading system
covers only high-emitting industries, scope 1 emissions can be considered as
adequate approximation for CEP in this context. In contrast, for companies or
industries emitting less direct than indirect emissions (such as car manufacturers),
an operationalization of CEP based on scope 1 emissions may be threating the
reliability of the results.
Considering the substantial differences in scope-coverage across the reviewed
studies and recognizing that some studies may have used emission data constituting
only a minor part of the overall pollution, some studies may only inadequately reflect
CEP. Hence, the estimated causal effects may not adequately explain how changes in
CEP actually affect changes in CFP. Therefore, future studies might want to consider
whether their scope-coverage fits industry-specific distributions of carbon emissions
along the value chain in order to make sure that they adequately reflect CEP.
208 S. Lewandowski

5.2 Applying Forward-Looking Emission Indicators

Carbon emissions offer a wide range for measuring CEP and studies differ sub-
stantially in their methodological approaches to fulfilling this task. Basically, a
firm’s carbon performance can be measured in two different ways, either as (ab-
solute) total emissions or as ratio.
A first set of studies operationalize CEP based on the absolute quantity of total
emissions. This indicator, however, provides no information on how companies
depend on carbon emissions for conducting their business activities. Furthermore,
carbon emission levels can substantially vary over time, depending on the timely
use of production capacities and the overall economic conditions. There may also
be changes in emission levels due to special effects caused by mergers or process
outsourcing (Hoffmann and Busch 2008). Country-specific regulations can also
influence the level of carbon emissions. The reviewed studies try to address this
problem through model specifications and the use of dummy variables. Thereby,
inter alia, the studies control for a firm’s leverage, industry, and company size.
However, as control variables are often statistically insignificant, some studies may
fail to capture economic variations across industries or countries.
A second set of studies relate a firm’s absolute carbon emissions to a business
metric or functional unit (e.g., sales or market value). Such measures account for
changes in business activities during the same time period when carbon emission
levels change (Hoffmann and Busch 2008). Depending on the form of standard-
ization, the relation between total carbon emissions and a business metric can be
used for measuring two different indicators:
First, relating the amount of total carbon emissions to a business metric leads to
an indicator measuring a firm’s carbon intensity (Hoffmann and Busch 2008).
A firm’s carbon intensity describes the extent to which its business activities depend
on carbon emissions for a defined scope within a fiscal year (Hoffmann and Busch
2008). In other words, it indicates the quantity of carbon emissions a company
releases in order to generate one monetary unit of revenue or profit. Carbon
intensity measures are, for example, applied in the studies of Brzobohatý and
Janský (2010), Busch and Hoffmann (2011), as well as Misani et al. (2012).
Second, relating a business metric to the quantity of emitted total carbon
emissions leads to an indicator measuring a firm’s carbon efficiency. This mea-
surement concept is derived from the ecoefficiency literature (e.g., Schaltegger and
Sturm 1990). A company’s carbon efficiency reveals how much it earns for every
ton of carbon emissions released into the atmosphere. Nishitani and Kokubu
(2012), for example, apply such a ratio even though they refer to this measure as
‘carbon dioxide productivity’.
A problem related to using all of the indicators described above is that they only
reflect past emission levels. They contain no information on a firm’s future emission
levels or its strategy concerning carbon abatement activities. While this is a much
debated issue in the accounting literature (Schaltegger and Figge 2000), the
reviewed studies apply a combination of forward-looking market measures for an
Carbon Emissions and Corporate Financial Performance … 209

operationalization of CFP (e.g., Tobin’s q) and a backward-looking measures for

operationalizing CEP (e.g., total carbon emissions). This combination postulates
that investors are expected to estimate a firm’s future cash flows based on its status
quo emissions rather than its ability to tackle related risks in the future. This sharply
contrasts to the assumption that financial markets are likely to evaluate a firm’s
ability to take advantage of its asset base in order to realize optimization potentials
for future emission mitigation instead of only taking its current emission levels into
consideration (Hoffmann and Busch 2008).
Instead of using status quo carbon emissions for measuring backward-looking
CEP, empirical studies might use risk indicators capturing future developments.
Such variables, which can be called forward-looking emission indicators, are
specified by Hoffmann and Busch (2008). These indicators may help to gain a better
understanding of how financial investors are valuing financial risks related to
current carbon emission levels.

5.3 Controlling for Methodological Diversity

Studies use emission data collected through various different reporting schemes.
This methodological diversity may lead to differences in the reported quantity of
total carbon emissions. These differences occur due to variations in applying these
reporting schemes. Andrew and Cortese (2011), for example, conducted a study of
104 worldwide energy firms. Their study shows that although CDP directs reporting
companies towards applying the GHG Protocol, carbon reporting methodologies
vary substantially across their sample of companies. In some cases, the GHG
Protocol is only used as a guideline for other reporting schemes which companies
are actually following. Andrew and Cortese (2011) also show that companies often
combine different reporting schemes and measurement frameworks in order to
comply with both legislation requirements and voluntary reporting schemes like
CDP. The problem related to the combination of various reporting schemes and the
consequent lack of comparability is also stressed by Kolk et al. (2008). The authors
stress that the application of diverging, industry or country-specific ‘conversion
factors’ (e.g., provided by the UK Department for Environment, Food and Rural
Affairs or the Intergovernmental Panel on Climate Change) constrains the com-
parability of carbon performances across companies (Kolk et al. 2008). This
problem supports the view of Talbot and Boiral (2013), who state that “it appears
impossible for a company to ensure that one ton of CO2 equivalent in the metal-
working sector represents one ton of CO2 in the aluminum sector” (Talbot and
Boiral 2013: 8).
Companies not just combine various reporting schemes but also apply more than
one scheme simultaneously in order to account for regulatory differences across
countries. In their article, Kolk et al. (2008) present the example of E.ON. The
company reports its carbon emissions in Germany according to the Monitoring and
Reporting Guidelines (MRG) of the EU ETS. In contrast, it reports its carbon
210 S. Lewandowski

emissions in the US according to the GHG Protocol on a voluntarily basis as it faces

no other legislative requirements in this country (Kolk et al. 2008). Finally, Sullivan
(2009) finds that companies inconsistently apply the definitions of the GHG
Protocol, some include emissions from their vehicles in scope 1, whereas other
companies list them under scope 3.
The reviewed studies obtained results based on samples comprising of compa-
nies which apply different methodological frameworks for carbon accounting.
Considering the diversity of the applied reporting schemes, forthcoming studies
may include dummy variables to capture differences in the application of reporting
standards. As a result, studies could detect systematic differences in emission data
related to a firm’s choice of methodological framework.

5.4 Adjusting Emission Figures

Scholars involved in empirical analysis heavily rely on trustworthy data sources for
collecting environmental indicators (Dragomir 2012). As Brown (1959) puts it:
“However good the economic theory, the mathematical techniques, and the com-
putational facilities, no useful econometric results can be obtained if the data are
inadequate in quantity or quality” (Brown 1959: 26).
The reviewed studies exclusively use self-report emission data for an analysis of
the CEP-CFP nexus. However, the quality of self-reported emission data has
recently been questioned. As Andrew and Cortese (2011) observe, we are “a long
way from producing quality carbon information” (Andrew and Cortese 2011: 137).
This implies an inconsistency of quality levels between CFP measures and carbon
emission data. Talbot and Boiral (2013), for example, conducted a case study of ten
Canadian industrial firms from the aluminum, mine and pellet, petrochemical, and
metallurgy industries in order to shed some light on carbon measurement practices.
One interviewed manager admitted to have deliberately manipulated his company’s
reported emission figures for image reasons. This statement fuels concerns of ‘green
washing’ (Talbot and Boiral 2013).
However, errors in carbon emission data might not only occur due to intended
manipulation of emission figures. Rather, measurement errors may be caused by
insufficient knowledge and limited understanding. Both factors restrict the capa-
bilities of firms and audit companies to measure the actual quantity of released
carbon emissions. In fact, there is little knowledge of how companies collect carbon
emission data (Burritt et al. 2011; Gibassier and Schaltegger 2013), and recent
research shows that companies still appear to be in a learning process (Engels 2009).
Talbot and Boiral (2013) observe that limited scientific knowledge about the process
of emission generation is likely to cause substantial discrepancies in esti-
mating carbon emissions. More specifically, technical limitations may confine
measurement accuracy to a maximum of 100,000 t and can be expected to
generally vary by at least 10 % (Talbot and Boiral 2013). As some companies report
emission reductions below 100,000 t (CDP 2014), this lack of accuracy constitutes a
Carbon Emissions and Corporate Financial Performance … 211

serious problem for the purpose of empirical analysis if this is based on self-reported
carbon emission data.
For an assessment of studies’ data reliability, emission factors could be used to
evaluate the accuracy of self-reported emission figures. Koch and Bassen (2013),
for example, estimated carbon adjusted cost of capital and equity values for a
sample of European energy utilities. The authors estimated carbon emission levels
based on generation capacities and emission factors of the fuel technologies.
Another option would be to examine whether data differences exist between
reporting leaders and reporting laggards in voluntary reporting schemes. This
approach may deliver insights into the reporting behavior of firms and may provide
a better understanding of whether companies use emission data from their rivals as
a proxy for their own carbon performance. It would be possible to include dummy
variables in future studies to capture the effect related to time differences in data
reporting.

6 Conclusions and Further Research

The purpose of this paper was twofold. In a first step, it systematically reviewed the
existing empirical literature on the relationship between self-reported carbon
emissions and CFP. The aim was to synthesize the results in order to make a
consequent statement regarding the existence of a business case for corporate
sustainability (Salzmann et al. 2005). The results indicate that superior CEP pays off
when market measures, such as Tobin’s q, are used in regressions on carbon
emission levels. This result does not only show that investors incorporate CEP in
their investment behavior. It also indicates that investors regard carbon emissions as
intangible liability. There is, however, no clear evidence on pay-offs caused by
superior CEP when accounting measures are used in regressions on carbon emis-
sion levels. Consequently, the relationship between carbon emissions and
accounting measures (such as ROA, ROE or ROS) remains unclear. In fact, the
results of the considered studies suggest impacts in every possible direction: pos-
itive, negative, or no effect.
In a second step, a set of ideas for possible methodological adjustments was
presented. These approaches may help to increase the degrees of reliability and
validity. Specifically, the paper pointed to four options for methodological
adjustments: (1) creating industry-specific emission samples, (2) applying
forward-looking emission indicators, (3) controlling for methodological diversity in
reporting schemes, and (4) indicator-based evaluations of self-reported emission
figures.
To further base the analysis of the effect of carbon emission levels on CFP, it
appears to be highly relevant to expand the interdisciplinary analysis to include
research from the field of Finance. Hitherto, little is known about how investors
technically account for carbon emissions in their investment decisions. Even where
regressions detect a structural relation between carbon emissions and CFP variables,
212 S. Lewandowski

the results cannot be explained theoretically in the context of the basic concept of
modern portfolio analysis, as introduced by Markowitz (1952). Specifically, it
remains unclear how investors incorporate carbon emissions as a risk factor. The
debate concerning ‘double counting’ is based in the same line of research. Carbon
emissions may be doubly counted, or not counted at all, if a company sets its
organizational accounting boundary within or outside the system of another com-
pany (Kolk et al. 2008). For investors, this complicates identifying the overall risk
related to a specific portfolio (Busch 2011). In fact, incorporating a firm’s full range
of carbon emissions along the value chain would distort quantitative risk assess-
ments if financial investors hold two companies pertaining to the same value
chain in their portfolio.
Furthermore, it remains to be seen if and how investors perceive climate change
and carbon emissions as a risk factor. One important step would be to conduct
preliminary interviews with financial investors in order to gain a better under-
standing of how they incorporate carbon information in their investment decisions.
This would be in line with the concept of transdisciplinarity stressing the impor-
tance of further engaging with practitioners. These interviews would also shed some
light on the reliability of rather opinion-driven media reports as the latter observe
that financial markets appear to not yet adequately appraise carbon emissions as a
risk factor (e.g., Gore and Blood 2013).

Acknowledgements Comments from two anonymous reviewers improved the results of the lit-
erature review substantially. Special thanks go to editors Stefan Schaltegger and Dimitar Zvezdov
for their valuable support and to Timo Busch, Alice Sakhel, and Marcel Richert for insightful
discussions. All errors are the responsibility of the author.

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Organizational Climate Accounting—
Financial Consequences of Climate
Change Impacts and Climate Change
Adaptation

Kristin Stechemesser, Anne Bergmann and Edeltraud Guenther

Abstract This study aims to investigate how climate change impacts and related
climate change adaptation measures affect positions of traditional financial
accounting, i.e. the balance sheet and the profit and loss account. We conduct a
content analysis based on 57 in-depth expert interviews with CEOs of different
industry sectors in one distinct region of Western Europe. Our analysis reveals that
the balance sheet is affected mainly by climate change impacts on the following
positions: intangible assets, tangible assets, inventories, receivables and other
assets, cash-in-hand, prepaid expenses, and on equity/accruals/liabilities. The profit
and loss account is influenced mostly by climate change impacts but also by related
adaptive measures on the following positions: sales, own work capitalized, energy
costs as part of material costs, material costs, personnel expenses, selling expenses,
insurance costs, other operating income, other operating expenses, depreciations
and amortization, disposal costs, interests, extraordinary income, and extraordinary
expenses. Interestingly, the positions sales and energy costs, as part of material
costs, can also be affected positively. To gain deeper insights, an investigation in
other regions and industry sectors should be realized. Furthermore, based on our
definition of organizational climate accounting and our classification into a
three-stage approach, we suggest three areas for future research: first, to analyze the
traditional financial accounting for the mitigation perspective; second, to investigate
if organizations should react rather anticipatorily or reactively by using the
Net-Effect; third, to analyze the environmental impacts of mitigation and adaptation
measures by realizing a life cycle assessment. We contribute to accounting science
by conducting the first comprehensive study on how climate change impacts and
related climate change adaptation measures influence traditional financial
accounting. Additionally, we propose a definition for organizational climate
accounting.

K. Stechemesser (&)
A. Bergmann
E. Guenther

Technische Universitaet Dresden, 01062 Dresden, Germany
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 217

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_10
218 K. Stechemesser et al.

1 Introduction

Climate change mitigation but also the potential failure of climate change adapta-
tion represent two of the most challenging global risks (World Economic Forum
2013) and are considered to have substantial effects on organizations as well as on
global society as a whole (e.g. Busch and Hoffmann 2009). To deal with climate
change effects, organizations can follow two different response strategies: mitiga-
tion and adaptation (Dlugolecki 2008). Mostly, prior studies investigated how
organizations seek to reduce their greenhouse gas (GHG) emissions, i.e. mitigation,
(Galbreath 2011), and thus have taken an inside-out perspective (Winn and
Kirchgeorg 2005). However, considerably fewer studies analyzed issues of climate
change from an outside-in perspective (Winn and Kirchgeorg 2005). These studies
primarily investigate how climate change affects organizations and how they
(could) adapt to the changing natural environment (e.g. Berkhout et al. 2006).
Studies explicitly focusing on financial consequences of climate change impacts
and related adaptation measures could not be identified. Therefore, we want to
investigate how climate change impacts and related climate change adaptation
measures affect positions of traditional financial accounting. To answer our research
question, we analyzed 57 semi-structured interviews conducted with experts mainly
in one distinct region of Western Europe.
We therefore contribute to climate change adaptation literature in two ways: first,
our analysis represents the first systematic study of financial consequences of cli-
mate change impacts and related adaptation measures; second, we define the related
term of climate accounting.
Our paper is organized as follows. First, we define climate accounting by
extending the definition of carbon accounting through climate vulnerability
accounting. Then, we review the existing literature concerning financial conse-
quences of climate change impacts and climate change adaptation. After explaining
the methodology, we present and discuss in Sect. 4 the results of the content
analysis. In Sect. 5, we summarize our results, point out the limitations of the study,
and present a future research agenda.

2 From Carbon Accounting to Climate Accounting

What do climate accounting or related terms such as climate change accounting,

climatic accounting or accounting for climate (change) mean? The literature pro-
vides no explicit definition of these terms although the terms climate accounting
(Hirschfeld et al. 2008; Searchinger et al. 2009), climate change accounting (Lovell
and MacKenzie 2011; Milne and Grubnic 2011; Ngwakwe 2012; Pignatel and
Brown 2010), and accounting for climate change (Andrew and Cortese 2011; Milne
and Grubnic 2011) are used by several scientists. According to Hirschfeld et al.
(2008), climate accounting can be understood as “Accounting for the impact on the
Organizational Climate Accounting—Financial Consequences … 219

climate of […] production processes” with the aim “to compare the effects on the
climate of different […] production processes.” (p. 11). Schaltegger and Csutora
(2012) differentiate between carbon accounting and climate change accounting:
carbon accounting considers only carbon emissions; climate change accounting
takes further greenhouse gas (GHG) emissions into account by applying their global
warming potential. Ngwakwe (2012) refers climate change accounting to emission
accounting and GHG foot-printing, but also to carbon capture and storage,
including sequestration calculations. Contrarily, Brown et al. (2009) describe
accounting of climate change as comprising of “reviews of climate change
reporting, stakeholder reactions to disclosures of climate change information, new
systems of accounting designed to incorporate climate change performance, dis-
cussion about the role of accounting in promoting or undermining the climate
change, environmental audit, discussion about general climate change conditions,
climate change accounting policies, climate change coverage of product and pro-
cess related information, climate change financial related data, sustainability,
environmental aesthetics, development of theories to explain or inform climate
change accounting practices, and discussion of methods and methodological issues
associated with this research.” (p. 6)
Stechemesser and Guenther (2012) suggest, without defining climate account-
ing, to extend the term carbon accounting to climate accounting whereby carbon
accounting is understood interdisciplinarily as “the recognition, the non-monetary
and monetary evaluation and the monitoring of greenhouse gas emissions on all
levels of the value chain and the recognition, evaluation and monitoring of the
effects of these emissions on the carbon cycle of ecosystems.” (p. 35) At the
organizational level, carbon accounting is understood by Stechemesser and
Guenther (2012) as “the voluntary and/or mandatory recognition of direct and
indirect GHG emissions, their evaluation in non-monetary and monetary terms as
well as their auditing and reporting for internal purposes (carbon management
accounting) and external purposes (voluntary and mandatory carbon financial
accounting” (p. 33). Similar to Stechemesser and Guenther (2012), Ascui and
Lovell (2012) and Burritt et al. (2011) differentiate between physical and monetary
carbon accounting for internal or external purposes.
For internal purposes, organizations could develop carbon flow accounting
(physical) or carbon cost accounting (monetary) and could integrate monetary and
non-monetary information into strategic carbon management accounting (Ascui and
Lovell 2012). The introduction of the emission trading systems (ETS) in the
European Union resulted in costs arising due to allocated or purchased allowances
(Bebbington and Larrinaga-González 2008).
For external purposes, the carbon footprint of products or organizations can be
labeled and reported. Additionally, the ETS influences the balance sheet: European
Union Allowances (EUAs) are considered as assets and the obligation to deliver
allowances as liabilities (Bebbington and Larrinaga-González 2008). According to
Bebbington and Larrinaga-González (2008) to maintain a ‘true and fair view’ of the
organizational performance, non-financial reporting will be needed to inform about
climate change impacts and adaptation to these impacts.
220 K. Stechemesser et al.

The organizational related definition of carbon accounting is partly consistent

with explanations of Hirschfeld et al. (2008), Ngwakwe (2012), and Schaltegger
and Csutora (2012) that focus only on a non-monetary evaluation of GHG emis-
sions. But also parts of Brown et al. (2009), i.e. “climate change financial related
data” (p. 9), are considered within the definition of Stechemesser and Guenther
(2012).
Additionally, the above mentioned publications mostly do not consider the
financial consequences of climate change impacts on organizations including, on the
one hand, level effects, e.g. in average changing temperatures or precipitation
amounts, and on the other hand, stability changes, e.g. extreme weather events
(Stechemesser and Guenther 2012). One exception is presented by Bakhshi and
Krajeski (2007), who explain for a fictional organization under the heading
“Accounting for Climate Change” how climate change might affect an organiza-
tion’s balance sheet, especially its assets and liabilities. They are taking into account,
on the one hand, effects arising from improving buildings to environmentally sus-
tainable buildings to meet specific standards or from introducing new energy effi-
cient product portfolio on profit growth in order to mitigate climate change effects.
Another typical impact on the balance sheet arises from the EU ETS as described
above. On the other hand, Bakhshi and Krajeski (2007) assume to pay higher
insurance premiums and to realize asset write-downs resulting from hurricane
damages. The first examples present the inside-out perspective (Winn and
Kirchgeorg 2005), or how an organization affects the biophysical environment, i.e.
climate change (Tashman 2011). The second examples describe the outside-in
perspective (Winn and Kirchgeorg 2005), or how the biophysical environment
influences organizations, which also reflects the organizational dependency of
ecosystem services or their organizational vulnerability (Tashman 2011) (see Fig. 1).
From an organizational perspective, vulnerability can be understood as “the
degree to which a business organization is susceptible to, or unable to cope with,
adverse effects of climate change” (Bleda and Shackley 2008, p. 521). To reduce
the dependence on resources, organizations can implement adaptation strategies
(Tashman 2011). But according to Hoffmann et al. (2009), a higher vulnerability of
an industry sector is not reflected in a higher level of adaptation. Hence, although
the more vulnerable industry sectors might have more financial impacts from direct
climate change effects, they might not be the ones with the highest financial
expenses for climate change adaptation.

Dependence of ecosystem services

Organization Biophysical
Natural power / Ecological impacts environment
on organizations
Socioeconomic power /
Organizational impacts on ecosystems

Fig. 1 Interdependence of organization and biophysical environment (source Tashman 2011)

Organizational Climate Accounting—Financial Consequences … 221

To consider the outside-in-perspective, i.e. the accounting for climate vulnera-

bility, we extend carbon accounting to climate accounting. We understand climate
accounting as the recognition, the non-monetary and monetary valuation and
monitoring of GHG emissions as well as climate change impacts and its response
options on all levels of the value chain. Focusing on the organizational level, we
suggest the following rather specific definition taking into account the definition of
carbon accounting of Stechemesser and Guenther (2012) as well as the explanations
above regarding carbon management accounting and carbon financial accounting:
climate accounting at the organizational scale can be summarized as the voluntary
and/or mandatory recognition of direct and indirect GHG emissions as well as the
direct and indirect impacts of climate change and its response options, their eval-
uation in non-monetary and monetary terms, as well as their auditing and reporting
for internal purposes (climate management accounting) and external purposes
(voluntary and mandatory climate financial accounting). Based on our definition,
the following cube can be deduced (see Fig. 2) that considers three perspectives: a
monetary and a non-monetary perspective; an internal and an external perspective;
and the two response options to climate change: mitigation and adaptation. Based
on our definition, we can differentiate between climate vulnerability accounting and
carbon accounting. In the following, we focus on the monetary values of climate
vulnerability accounting (red box in Fig. 2) and, thus, on traditional cost
accounting.

Fig. 2 Climate accounting at

organizational level
222 K. Stechemesser et al.

3 Financial Consequences of Climate Change Impacts

and Climate Change Adaptation

Although no scholars have investigated how climate change impacts and related
climate change adaptation affect the balance sheet or the profit and loss account
directly, literature provides some hints regarding the financial consequences.
Therefore, we present the findings of a recent literature review on financial con-
sequences of climate change impacts and climate change adaptation separated into
the consequences for the balance sheet and the profit and loss account.

3.1 Financial Consequences on the Balance Sheet

Focusing on the balance sheet, impacts on tangible assets were observed such as
damages to buildings and altered asset values (Busch 2011; Maynard 2008) and,
thus, decreasing lower returns on investments (Maynard 2008). Considering
insurance companies, liabilities increase as a result of higher damages (Botzen et al.
2010; Dlugolecki 2000; Dlugolecki and Keykhah 2002; Hawker 2007; Herweijer
et al. 2009; Sato and Seki 2010) and, therefore, more capital is required (Hawker
2007; Maynard 2008). To conclude, prior studies detect the organizational balance
sheet being affected on both sides, primarily (Maynard 2008). As already pointed
out above, the fictional case of Bakhshi and Krajeski (2007) shows that climate
change impacts can influence the position Cash and cash equivalents (cash as part
of currents assets) by increasing insurance costs and the position Property and
equipment (tangible assets) due to write-downs to the property account.
In the literature, several response options to climate change impacts can be
identified which are mostly linked to costs and revenues. The costs include in-
vestment costs and, thus, a change in tangible assets (Becken 2005; Hoy et al.
2011), for example for snowmaking machines (Pickering and Buckley 2010), water
distribution infrastructure (Subak 2000), or the laying of power cables in the ground
(Linnenluecke et al. 2011). According to Dessai and Hulme (2007), the more robust
an adaptation measure to climate change uncertainties, the more expensive the
adaptation measure is.
Indications concerning positive impacts on the balance sheet could not be
identified in the scientific literature.

3.2 Financial Consequences on the Profit and Loss Account

According to the literature, impacts from climate change influence organizational

costs and revenues, especially by decreasing sales or profit (Botzen et al. 2010;
Dlugolecki and Keykhah 2002; Maynard 2008; Mills 2003, 2009; Moen and
Organizational Climate Accounting—Financial Consequences … 223

Fredman 2007; Pickering and Buckley 2010; Surugiu et al. 2010; Ward et al. 2008)
or by resulting in losses (Bank and Wiesner 2011; Elsasser and Bürki 2002; Hoy
et al. 2011). To compensate for losses in winter tourism, summer tourism could be
developed (Hoy et al. 2011). According to Reidsma et al. (2010), a changing
climate can result in profits or losses depending on the geographic region of the
agricultural organization.
Looking at the profit and loss account, the following positions are influenced:
personnel expenditures [for example due to lower productivity of employees or
personnel shortages (Wedawatta et al. 2011)] and material costs [for example due
to purchased resources (Busch 2011)], or (higher) operational (Busch 2011; Mills
2009) and maintenance costs (Busch 2011), including service costs (Busch 2011).
Additionally, Busch (2011) mentions insurance costs that are part of other oper-
ating expenses, and Hawker (2007) discusses capital costs. In the specific case of
water treatment costs, positive as well as negative developments can be observed.
On the one hand, water treatment costs can decrease as a consequence of higher
water quality (Thorne and Fenner 2008). On the other hand, decreasing water
quality (Meuleman et al. 2007; Thorne and Fenner 2011) results in decreasing
useful life of filters and increasing chemical input (Thorne and Fenner 2011).
Furthermore, implementing specific adaptation measures results in operational
costs (Pearce et al. 2011) such as energy and water costs for snowmaking machines
(Moen and Fredman 2007) or in maintenance costs (Becken 2005; Pearce et al.
2011). Additionally, a changing climate can require adapting the type of trans-
portation, which can result in higher transportation costs (Pearce et al. 2011).
Heavier precipitation could lead to water discharge, including sewage, into the
river, which can cause financial penalties. Adaptation of insurance policies or
withdrawal from the market could result in reputational damage and thus in
decreasing stock prices (Maynard 2008). Contrarily, adapting to climate change
impacts, for example, by providing new products and services, can result in higher
sales (Herweijer et al. 2009).

4 Methodology

To realize our research objective, we applied a case study design (Dul and Hak
2008) because climate change, including extreme weather events, are being
described as one of the most significant risks (World Economic Forum 2013). Thus,
climate change can be classified as a present-day phenomenon which is a
requirement for conducting case studies (Yin 2003). Moreover, Yin (2003) rec-
ommends conducting case study research when attempting to answer “how”
questions. In addition, Eisenhardt (1989) suggests case studies in order to answer
questions of causality and details.
224 K. Stechemesser et al.

4.1 Sampling Method

To select our cases, we combined different sampling strategies. First, we chose

seven different industry sectors by using the “a priori determination”. Therefore, we
determined two criteria: climate sensitivity1 and economic relevance.2 According to
our analysis, the energy and the water sectors as well as the transportation industry,
as part of the tourism industry, can be classified as energy sensitive. Water sensitive
industries are the food and tobacco industry, as part of the manufacturing industry,
and the hospitality industry, as part of the tourism industry. Of high economic
relevance is the construction industry, but also the mechanical engineering industry.
To consider new emerging markets that are not part of current statistical systems,
we also included companies from the high-tech industry.
In a second step, we defined the following criteria to choose companies: situated
in a predefined geographic region in Germany, the head offices or their regional
offices are located in that region, and more than ten employees. Overall, we
identified more than 1000 companies (data provided by Chamber of Commerce,
Dresden).
In a third step, we applied a typical case sampling method in order to select
companies that are typical representatives of the industry sector, such as producers
of meat/meat products or fruit and vegetables for the food and tobacco industry.
Lastly, our sample includes 57 organizations of all sizes: thirteen organizations
from the high-tech industry (H), twelve organizations from the tourism industry (T),
nine organizations from the mechanical engineering industry (M), nine organiza-
tions from the water and sewage supply industry (W), six organizations from the
food and tobacco industry (F), four organizations from the energy supply industry
(E), and four organizations from the construction industry (C). All relevant data is
provided in Table 1. In order to arrange an interview appointment, firstly a letter of
invitation was sent to all corporations, and then all the companies were called by
phone.

4.2 Data Collection

We conducted semi-structured German language face-to-face interviews3 with

experts (Meuser and Nagel 2009); this means the managing director of the company

1
Climate sensitivity consists of water intensity and energy intensity. Water intensity: relation of
water input to the gross value added of the industry sector. Energy intensity: relation of energy
input to the gross value added of the industry sector.
2
Regional gross added value compared to gross added value of Germany and regional number of
people in employment compared to number of people in employment in Germany; calculated for
every industry sector.
3
Two interviews were conducted via phone.
Organizational Climate Accounting—Financial Consequences … 225

Table 1 Case profiles

Organization Industry Organizational Organization Interviewee’s
sizea owner position
H1 High-tech industry 2 Yes Managing director
H2 (H) 4 No Managing director
H3 3 No Head of
Development
H4 3 Yes Managing director
H5 3 No Managing director
(CTO)
H6 2 No Authorized Signatory
H7 4 No Environmental
Manager, PR
(2 persons)
H8 1 Yes Managing director
H9 2 Yes Managing director
H10 4 No Head of Technology
Controlling
H11 3 No Director Research
and Development
H12 2 Yes Managing director
H13 3 No Managing director
T1 Tourism industry (T) 2 Yes Managing director
T2 2 Yes Managing director
T3 2 No Managing director
T4 1 Yes Managing director
T5 2 No Managing director
T6 2 Yes Managing director
T7 3 No Managing director
T8 2 Yes Managing director
T9 3 Yes Managing director
T10 3 No Managing director
T11 3 Yes Managing director
T12 3 No Managing director
M1 Mechanical 3 Yes Managing director
M2 engineering industry 3 No Managing director
(M)
M3 3 No Managing director
M4 3 Yes Managing director
M5 2 Yes Managing director
M6 3 Yes Managing director
M7 2 Yes Managing director
M8 3 Yes Managing director
M9 3 Yes Managing director
(continued)
226 K. Stechemesser et al.

Table 1 (continued)
Organization Industry Organizational Organization Interviewee’s
sizea owner position
W1 Water and sewage 4 No Managing director
W2 supply industry (W) 4 No Department manager
W3 3 No Managing director
W4 3 No Managing director
W5 2 No Area manager
W6 3 No Managing director
W7 2 No Managing director
W8 2 No Managing director
W9 2 No Authorized signatory
F1 Food and tobacco 3 No Managing director
F2 industry (F) 3 Yes Managing director
F3 3 No Managing director
F4 3 No Managing director
F5 4 No Plant manager
F6 3 Yes Managing director
E1 Energy supply 2 No Managing director
E2 industry (E) 2 No Department manager
E3 4 No Department manager
E4 4 No Department manager
C1 Construction 3 No Authorized signatory
C2 industry (C) 2 Yes Managing director
C3 4 No Assistant to the
management board
C4 4 No Sales representative
a
Classification according to the European Commission (2003) (number of employees): 1—
microenterprises; 2—small enterprises, 3—medium enterprises, 4—large enterprises

or a person with a comparable position. In order to create new (additional) questions

spontaneously and to avoid limited answers, we decided for a semi-structured
interview guideline (Groenman 1992).
The questions comprise, on the one hand, questions concerning the profit and
loss account and, on the other hand, questions regarding the balance sheet. We
decided for these financial indicators because corporations (in Germany) are legally
obligated to draw up an annual financial statement consisting of an annual balance
sheet and a profit and loss account.4 But also international accounting regulations
such as the International Financial Reporting Standard (IFRS) refer to the

4
See § 242 III HGB (Fleischer 2013). Abbreviation of German Commercial Code originates from
German term Handelsgesetzbuch.
Organizational Climate Accounting—Financial Consequences … 227

instruments of balance sheet and profit and loss statement as being recognized as
the core of financial statements (Coenenberg et al. 2007).
Balance sheets summarize corporate assets and liabilities (§ 242 I HGB).
Contrarily, profit and loss accounts compare expenses and income (§ 242 II HGB).
Both instruments differ regarding temporal coverage: balance sheets represent all
assets and liabilities on a specific date; profit and loss accounts comprise expenses
and income over a determined time period (Döring and Buchholz 2009). Besides,
profit and loss accounts include data that are important for success in terms of profit
and loss and are relevant for external financial accounting.5
The questions about financial effects of climate change impacts and related
adaptation were embedded in broader interviews about climate change impacts and
related response options. To consider all items of the profit and loss account and the
balance sheet, the interviewees received relevant templates. All interviews were
recorded and professionally transcribed. Anonymity was guaranteed to respondents.

4.3 Data Analysis

We analyzed the transcripts by using a qualitative content analysis approach in

order to make “replicable and valid inferences from texts (or other meaningful
matter) to the contexts of their use.” (Krippendorff 2004, p. 18) To build categories,
we combined a deductive and an inductive approach (Früh 2007; Krippendorff
2004) by using the profit and loss account and the balance sheet as main categories.
For a more detailed analysis we differentiated on the sub-category level between
financial consequences arising from climate change impacts and financial conse-
quences resulting from the adaptation to these impacts. Additionally, we separated
answers about experienced financial consequences currently or in the past from
answers concerning expected financial consequences.
Beforehand, we explained the sub-coding in detail to differentiate sub-codings
from each other and to assure a common understanding on sub-codings among the
scientists. Moreover, we described coding rules such as the coding of whole sen-
tences, but, if possible, every financial position separately, or that repetitions have
to be coded again.
To assure a valid and reliable coding system and coding (Früh 2007), we con-
ducted a pre-test with a few organizations. After that, we reviewed the categories
critically and discussed them within the research group (Kvale 1995). We firstly
investigated every interview independently, then we analyzed every sub-code
separately. Finally, we discussed all codes within the research group (Kvale 1995).
The coding is proceeded by using MAXQDA software.6

5
For instance, Coenenberg’s (2005) approach of analysis of annual financial statement
(Coenenberg 2005).
6
http://www.maxqda.com.
228 K. Stechemesser et al.

5 Results and Discussion

The following chapter presents the results of the performed content analysis. First,
the results of the analysis of the balance sheet are provided, followed by the results
of the analysis of the profit and loss account. Although the balance sheet and the
profit and loss account are closely intertwined (Coenenberg et al. 2007), we only
coded the primary impact mentioned by the interviewee.

5.1 Impacts on Balance Sheet

All results of our analysis for affected positions of the balance sheet are listed in
Table 2. Our conducted content analysis identifies impacts of climate change on
balance sheets for 63 % of interviewed organizations. Whereas these 36 companies
report impact on assets, only two organizations (T6, W4) see an impact of climate
change on equity and liabilities. As described in the methodology part, we dis-
tinguished between financial consequences either due to climate change impacts or
by realized adaptation measures. There are 21 organizations reporting on climate
change impacts on positions of balance sheet. Regarding the financial consequences
of realized adaptation measures, we identified 25 organizations. Almost all realized
adaptation measures pertain to the position of tangible assets (44 % of organiza-
tions relate to tangible assets). Since also 30 % of organizations see climate change
impacts affecting these positions, in sum 60 % of interviewed organizations report
tangible assets as the main position of the balance sheet being affected. Regarding
fixed assets in general, there are just two organizations seeing an impact either by
adaptation measures (T7) or by climate change impacts (E1). Inventories represent
the second most affected position, which lags far behind affected tangible assets
with only four impaired organizations. Whereas two of these organizations (H12,
F2) report on climate change impacts, the other two (T6, T7) relate adaptive
measures to changing position of inventories.
Looking at it from this side, some issues exist. Inventories. When it gets too hot, such as
silage, problems arise, of course. This effects everything somewhere. (F2, 86)

In the following, we further identified only a few other affected positions on

corporate balance sheets. To start with, two organizations see overall negative
concernment (M6, M9).
The biggest dilemma, we said it at the beginning, was the flood that happened along the
river. Precipitation represented a crucial variable, which led to a business interruption of
three to four days. Of course, this strongly impacts costs, too. (M6, 83)

Changed cash-in-hand due to adaptive measures are reported by organization

H12. Climate change impacts affect prepaid expenses (E1) as well as equity and
liabilities side for organizations T6 and W4.
Organizational Climate Accounting—Financial Consequences … 229

Table 2 Overview on reported impacts on balance sheet. Note: Numbers in brackets indicate
mentioned impacts in the future
Position on balance sheet Type of Industry sector
impact H T M W F E C Σ
# Organizations
13 12 9 9 6 4 4 57
Balance sheet in general Positive 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Negative 0 0 2 0 0 0 0 2
impact (0) (0) (0) (0) (0) (1) (0) (1)
Neutral 0 0 0 0 0 0 0 0
impact (2) (0) (0) (0) (0) (0) (0) (2)
Fixed assets Direct 0 0 0 0 0 1 0 1
impact (0) (0) (0) (1) (0) (0) (0) (1)
Impact by 0 1 0 0 0 0 0 1
adapt. (0) (1) (0) (0) (0) (1) (0) (2)
Intangible assets Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Tangible assets Direct 4 4 3 5 0 1 0 17
impact (1) (0) (0) (1) (1) (1) (0) (4)
Impact by 4 8 2 4 3 1 3 25
adapt. (6) (7) (5) (3) (4) (1) (1) (27)
Financial assets Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Current assets in general Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (1) (0) (1) (0) (2)
Impact by 0 0 0 0 0 0 0 0
adapt. (1) (1) (0) (0) (0) (0) (0) (2)
Inventories Direct 1 0 0 0 1 0 0 2
impact (0) (0) (0) (1) (1) (0) (0) (2)
Impact by 0 2 0 0 0 0 0 2
adapt. (2) (0) (1) (2) (1) (0) (0) (6)
Receivables and other Direct 0 0 0 0 0 0 0 0
assets impact (0) (0) (0) (0) (1) (0) (0) (1)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Securities Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Cash-in-hand Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact by 1 0 0 0 0 0 0 1
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
(continued)
230 K. Stechemesser et al.

Table 2 (continued)
Position on balance sheet Type of Industry sector
impact H T M W F E C Σ
# Organizations
13 12 9 9 6 4 4 57
Prepaid expenses Direct 0 0 0 0 0 1 0 1
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Equity/accruals/liabilities Direct 0 1 0 1 0 0 0 2
impact (0) (0) (2) (1) (1) (0) (0) (4)
Impact by 0 0 0 0 0 0 0 0
adapt. (0) (1) (2) (0) (0) (1) (0) (4)
Σ Direct impacts per position 2 2 1 2 1 3 0 5
(1) (0) (1) (5) (4) (2) (0) (6)
Σ Impacts by adaptation per position 2 3 1 1 1 1 3 4
(3) (4) (3) (2) (2) (3) (1) (5)
# Organizations impacted directly, by 7 9 4 7 4 2 3 36
adaptation, or in general (8) (7) (6) (6) (5) (3) (1) (36)

We are further interested in industry sector specific differences. Organizations of

the water and sewage supply industry tend to be most affected, with 77 % of the
organizations reporting being affected, followed by organizations of the tourism and
construction industry sector (both 75 %). Food and tobacco (66 %), high-tech
(53 %), energy supply (50 %), and mechanical engineering industries (44 %) follow
afterwards. The same pattern can be seen when regarding the most affected position
of tangible assets.
During interviews, we also asked for forecasts or possible consequences. In the
future, 61 % of interviewed organizations see an impact on the balance sheet. In
comparison to present impacts, only 21 out of 36 organizations which reported on
current or past impacts also see future or vague impacts. In contrast, 15 organi-
zations which are currently not affected by climate change see impacts in the future.
Forecasts of interviewed experts show fewer climate change impacts (12 organi-
zations), whereas the amount of financial consequences for adaptive measures will
increase from the present 25 up to 31 organizations in the future. The same applies
to the position of tangible assets. Forecasted climate change impacts on tangible
assets strongly decrease (17 to 4), but financial impact on tangible assets by
adaptive measures will stay at the same level (27 organizations see an impact in the
future, 25 organizations report on current impacts). Striking to us are the financial
consequences by adaptive measures for inventories, as six organizations report on
such predicted or vague changes. Climate change might also affect current assets in
general by direct impacts (E1, W4) and adaptive measures (H12, T6). The last
Organizational Climate Accounting—Financial Consequences … 231

analyzed positions are future or vague changes on the equity and liabilities side.
There are seven reporting organizations that see changes in equity and liabilities, in
comparison to currently only two affected organizations.

5.2 Impacts on Profit and Loss Account

In a second step, we deeply analyzed impacts of climate change on the profit and
loss account. In total, 91 % of interviewed organizations see multiple positions of
their profit and loss account being affected by climate change. All results of our
analysis for affected positions of profit and loss account are listed in Table 3.
First of all, we distinguish between positions of the profit and loss account being
affected either by climate change impacts or by adaptation measures. The inter-
viewed organizations list altogether 139 times positions affected by climate change
impacts and 61 times positions affected by measures in order to adapt to climate
change.
We begin our detailed analysis with the most affected position by climate change
impacts: sales were mentioned by 60 % of interviewed organizations. In total, we
realized 68 codings concerning affected sales figures. On the one hand, experts from
the construction industry, for example, report on positive effects:
As positive, I would like to mention the position of sales. Since you have talked about the
flood, there, we have already had some more orders. This means in fact, sales increased by
this. (C1, 98)

Another organization from the food and tobacco industry stated that:
If I were mean, then I would say right now, the warmer, the better, as people consume
more. (F5, 27)

On the other hand, interviewed experts complain on six to eight weeks of sales
shortfalls after a flood event (M7, 212–214; M9, 123). To conclude, there are
tendencies in both directions, either positive or negative impacts on sales. In
addition, organizations from the energy supply industry reported on climate change
to have already taken affect in positive and negative manners:
Yes, climatic phenomena, when there are particularly warmer winters, of course, sales are
affected, likewise, when there are cold winters. (E4, 11)

These altered sales figure are followed by altered energy costs being part of the
position material costs. This second most affected financial figure is mentioned by
40 % of organizations having a climate change impact and by 16 % of organizations
as a result of realized adaptation measures. Oftentimes, a climate change impact on
energy expenses is a result of higher cooling demand in order to keep proper
production requirements (H1, 63; H2, 96; H4, 26–27; H7, 32; C3, 138–139; H8,
32–33; F1, 7, 33, 95; F2, 89; F3, 65–70; F6, 19, 47–48; T8, 136; T9, 227–228; T11,
89). H2, for instance, argues that variation of temperature for the production in
232 K. Stechemesser et al.

Table 3 Overview on reported impacts on profit and loss account. Note: Numbers in brackets
indicate mentioned impacts in the future
Position on profit and loss Type of Industry sector
account impact H T M W F E C Σ
# Organizations
13 12 9 9 6 4 4 57
Profit and loss account in general Positive 0 0 0 0 0 0 0 0
impact (0) (0) (0) (1) (0) (0) (0) (1)
Negative 0 0 2 0 0 0 0 2
impact (0) (1) (1) (0) (0) (1) (0) (3)
Neutral 0 1 0 0 0 0 0 1
impact (0) (1) (0) (0) (0) (0) (1) (2)
Sales Direct 5 8 3 7 5 3 3 34
impact (3) (3) (3) (3) (1) (4) (3) (20)
Impact 0 0 0 0 0 0 0 0
by adapt. (2) (0) (0) (0) (0) (0) (0) (2)
In-/decrease in finished goods Direct 0 0 0 0 0 0 0 0
inventories and work in process impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Own work capitalized Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 0 0 1 0 0 0 1
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Material costs (MC) Direct 1 1 1 4 5 2 1 15
impact (1) (1) (2) (2) (2) (1) (0) (9)
Impact 0 1 0 2 2 0 4 9
by adapt. (0) (1) (2) (1) (0) (0) (0) (4)
Energy costs (part of MC) Direct 6 5 3 4 4 0 1 23
impact (3) (1) (5) (0) (2) (0) (0) (11)
Impact 0 2 2 3 2 0 0 9
by adapt. (2) (4) (1) (1) (0) (0) (0) (8)
Personnel expenses Direct 1 3 2 1 0 1 3 11
impact (1) (1) (1) (0) (3) (0) (1) (7)
Impact 2 2 0 0 0 0 3 7
by adapt. (1) (0) (0) (0) (1) (0) (0) (2)
Selling expenses Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 0 1 0 0 0 0 1
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Depreciations and amortization Direct 0 3 0 2 0 0 0 5
impact (0) (0) (0) (1) (0) (0) (0) (1)
Impact 0 2 0 2 0 0 0 4
by adapt. (0) (2) (3) (1) (0) (0) (0) (6)
Other operating income Direct 1 1 1 1 2 0 0 6
impact (0) (0) (0) (1) (0) (0) (0) (2)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
(continued)
Organizational Climate Accounting—Financial Consequences … 233

Table 3 (continued)
Position on profit and loss Type of Industry sector
account impact H T M W F E C Σ
# Organizations
13 12 9 9 6 4 4 57
Other operating expenses Direct 1 0 0 2 1 0 0 4
impact (1) (3) (0) (1) (0) (2) (0) (7)
Impact 1 4 0 1 0 1 3 10
by adapt. (0) (0) (6) (1) (1) (0) (0) (8)
Insurance costs (part of other Direct 1 1 1 2 0 0 1 6
oper. expenses) impact (2) (1) (1) (0) (1) (0) (2) (7)
Impact 2 3 3 3 1 0 2 14
by adapt. (1) (0) (0) (0) (0) (0) (0) (1)
Disposal costs (part of other oper. Direct 1 0 0 1 1 0 0 3
expenses) impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 2 0 0 0 0 0 2
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Operating result Direct 0 0 1 0 0 0 0 1
impact (0) (1) (0) (0) (0) (0) (0) (0)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Income from other participation Direct 0 0 0 1 0 0 0 1
of which… from affiliated impact (0) (0) (0) (0) (0) (0) (0) (0)
companies Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Income from other investments Direct 0 0 0 0 0 0 0 0
and long term loans, of which… impact (0) (0) (0) (0) (0) (0) (0) (0)
relating to affiliated companies Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Interest and similar expenses, of Direct 0 1 0 0 0 0 0 1
which…to affiliated companies impact (0) (0) (0) (1) (0) (0) (0) (1)
Impact 0 0 0 3 0 0 0 3
by adapt. (0) (0) (2) (1) (0) (0) (0) (3)
Result of ordinary activities Direct 0 0 0 1 0 0 0 1
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Extraordinary income Direct 0 3 2 3 0 1 0 9
impact (0) (0) (0) (0) (0) (0) (0) (0)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Extraordinary expenses Direct 2 2 0 2 1 2 0 9
impact (0) (0) (0) (2) (1) (1) (1) (5)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (1) (0) (0) (0) (0) (0)
(continued)
234 K. Stechemesser et al.

Table 3 (continued)
Position on profit and loss Type of Industry sector
account impact H T M W F E C Σ
# Organizations
13 12 9 9 6 4 4 57
Extraordinary result Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (1) (0) (0) (0) (1)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Taxes on income Direct 0 1 0 3 0 0 0 4
impact (1) (0) (1) (0) (0) (0) (0) (2)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (1) (0) (0) (0) (0) (1)
Other taxes Direct 0 0 0 0 0 0 0 0
impact (0) (0) (0) (1) (0) (0) (0) (1)
Impact 0 0 0 0 0 0 0 0
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Net income/net loss for the year Direct 3 1 0 2 0 0 0 6
impact (0) (3) (1) (3) (2) (1) (1) (11)
Impact 0 0 0 0 0 0 1 1
by adapt. (0) (0) (0) (0) (0) (0) (0) (0)
Σ Direct impacts per position 10 12 8 15 7 5 5 17
(7) (8) (7) (10) (7) (5) (5) (14)
Σ Impacts by adaptation per position 3 7 4 7 3 1 6 11
(4) (3) (7) (5) (2) (0) (0) (9)
# Organizations impacted directly, by 11 12 6 9 6 4 4 52
adaptation, or in general (11) (10) (8) (6) (5) (4) (3) (47)

clean rooms is 0.5 °C (H2, 96). Hence, increasing temperature extremes highly
affect energy expenses:
And there is a considerable cost factor, the energy expenses, they are immense. (H2, 96)

In contrast, one expert from the mechanical engineering industry looks for
positive impacts because heating expenses decrease during milder winters
(M1, 151).
The third most affected position of profit and loss accounts are material costs
(excluding energy costs). 15 organizations see climate change impacts, while nine
organizations report on adaptive measures that influence material expenses. To list
just a few examples for such adaptation measures, organizations of the water and
sewage supply industry have to add more chemicals (W2, 112; W7, 279–281);
likewise, construction companies require chemical additives or protective foils
when they are concreting in extreme heat or extreme cold periods (C1, 95–96; C2,
178–179, 202–204; C3, 123; C4; 220–221, 223).
Organizational Climate Accounting—Financial Consequences … 235

Insurance costs, as part of other operating expenses, also represent a highly

affected financial figure. 25 % see adaptive measures and 11 % of interviewed
experts discuss climate change impacts that alter the position insurance costs.
Experts mainly discuss the idea that newer scientific findings induce insurers to
higher insurance rates. For instance, the insurer of organization W5 included higher
likelihood of lightning strikes for the distinct region and, therefore, the insurer
adapted rates to a higher amount (W5, 126–127). Otherwise, an expert from
organization H10 explains that they adapted to the higher risk of lightning strikes
by concluding an insurance contract about power outages (H10, 102–105).
A high impact by climate change is also measurable by mainly higher personnel
expenses. 19 % of organizations report climate change impacts, 12 % list adaptation
measures in the context of personnel expenses. In addition, there is a noticeably
high impact on the construction industry: two organizations discuss climate change
impacts as well as adaptive measures (C1, C3), the other two either climate change
effects or impacts by realized adaptation (C2, C4). Reasons are lower productivity
(C2, 209; C3, 113–115) or more required staff for realizing adaptive measures such
as protective foils or moistening while concreting (C1, 96).
Further pertained positions are, amongst others, depreciations and amortization
(5 climate change impacts, 4 impacts by adaptive measures), other operating
income (6 affected organizations by adaptive measures), other operating expenses
except insurance costs (4 climate change impacts, 10 organizations with adaptive
measures), as well as extraordinary income and extraordinary expenses (both
positions with 9 organizations listing climate change impacts). Depreciations arise
for example from disturbed machines or technical equipment as well as from new
machines such as air-conditioning systems. Provided that an organization has an
insurance policy and the insurance company paid the insured loss, this money is
then registered as other operating income. Additionally, several organizations
received governmental subsidies after the flood event in 2002, which can be
assigned to extraordinary income. Unless an organization has no or insufficient
insurance coverage and the government subsidies are not enough to cover the extent
of loss, then an organization can realize an extraordinary expense.
To list just one further example, we consider adaptive measures related to other
operation expenses. Here, energy supplier E2 provides free water to the staff (E2,
118–119), similar to organizations H9, C1, and T11 (H9, 120; C1, 93; T11, 89).
Finally, two organizations of the mechanical engineering industry argue that
climate change takes negative effects on profit and loss accounting in general (M6,
M9). According to our results, climate change affects profit and loss accounts in
various fields and in both, negative as well as positive, directions.
Considering listed climate change impacts and impacts by adaptive measures as
well as general statements, we identify the water and sewage supply industry with
the most frequently mentioned affected positions of profit and loss account: 36
mentions for climate change impacts and 15 mentions by adaptation measures
divided by nine organizations results in a factor of 5.66. This is followed by the
construction industry (factor 5.5), food and tobacco industry (factor 4), and tourism
industry (factor 3.83). In contrast, organizations of the high-tech industry reach a
236 K. Stechemesser et al.

factor of 2.07. Hence, positions of the profit and loss account from an average water
and sewage supplier are more affected by different climate change impacts and
impacts by adaptive measures in comparison to positions of an average interviewed
organization in the high-tech industry.
Looking at the future and vague formulated statements, we identify 82 % of
interviewed organizations. 41 out of these 47 affected organizations forecast climate
change impacts, while 21 organizations report on adaptive measures that will take
effect on positions of profit and loss account. We start with general statements of
three organizations that predict climate change to take an overall negative effect on
their profit and loss account (E3, M9, T3), whereas water supplier W6 forecasts
positive effects (W6, 78) and C4 as well as T12 talk about balanced impacts of
climate change.
Once more, the most affected position by impacts of climate change is repre-
sented by sales (39 % of all interviewed organizations forecast a future sales
impact). 35 % of experts argue for future climate change impacts. Two organiza-
tions of the high-tech industry (H1, H5) already predict adaptive measures to affect
sales in a positive manner as they adapt to changing market requirements induced
by climate change with the development of new technologies and related products
(H1, 43, 79–80; H5, 92). Tourism company T4 states that:
Perspectively, sales would increase. (T4, 131),

mainly due to a possible longer touristic season (T4, 131); on the other hand,
organizations have to deal with higher expenses for material, energy, and personnel.
Future changes for energy costs as part of material costs are listed by one-third of
all organizations; eleven of these organizations report future climate change
impacts, the other eight organizations attribute altered energy expenses to adaptive
measures. More cooling in summer as well as less heating demand in winter rep-
resent the main reasons. Expert of M1 concludes:
This will be a zero-sum game. (M1, 191)

Future adaptive measures mainly refer to more energy demand for using the air
conditioning system more often (e.g. W2, 114; T4, 133–136; H9, 107).
In contrast to reported past or current impacts on other operating expenses
excluding insurance costs, in the future, more organizations see climate change
impact on this position of the profit and loss account (7 organizations in comparison
to 4). These higher expenses will primarily arise from higher maintenance efforts
(E1, 151; E3, 144–145; T1, 156–159; T5, 190; T9, 229–230). Impacts on other
operating expenses by adaptive measures will decrease from ten to eight reporting
organizations.
Future material costs represent the fourth most affected position as 19 % of all
interviewed organizations report on such impacts by climate change. In comparison
to current or past reported impacts, climate change impacts (15 current mentions to
9 in the future) as well as impacts by adaptive measures (9 current mentions to 4 in
the future) on material costs will decrease.
Organizational Climate Accounting—Financial Consequences … 237

Analysis results in the same tendency of lower impacts by climate change for
future personnel expenses as well as the position of future insurance costs as part of
other operating expenses.
One noticeable change concerns the position of net income/net loss for the year.
For the future, there are more experts (19 %) talking about climate change impacts
on annual net profit. F1 argues that higher future expenses such as for energy
cannot be directly passed to the customer, hence, net income will decrease as the
margin decreases, too (F1, 95).
Finally, we also calculated a factor of climate change impacts and impacts by
adaptive measures as well as general statements divided by number of organizations
per industry sector. Here, we identify industry sector of mechanical engineering
with the highest factor of 3.44 since analysis revealed 14 mentions for climate
change impacts and 16 mentions by adaptation measures as well as one general
statement. Energy suppliers and construction companies follow with a factor of
2.25 and 2.0. High-tech industry comes last with a factor of 1.38. Hence, in the
future, other industry sectors (mechanical engineering and energy supply) might
have more affected positions on their profit and loss account. However, the mag-
nitude and likelihood of reported future impacts are not included in our analysis.
In conclusion, our analysis shows different positions of the balance sheet and the
profit and loss account influenced by climate change impacts and related adaptation
measures.
We identify that especially the tangible assets are affected by climate change
impacts and climate change adaptation. Damages to buildings and technical
equipment resulting from extreme weather events and, thus, depreciations (Bakhshi
and Krajeski 2007) were mentioned mostly by organizations similar to the inves-
tigation by Busch (2011). Changes arising from climate change adaptation focusing
mostly on new investments, for example in air-conditioning systems. Contrarily,
liabilities were only mentioned by a few companies, which can be reasoned by the
non-investigation of the insurance industry. Additionally, we identified that the
following positions are affected by climate change impacts and climate change
adaptation: intangible assets, cash-in-hand, and prepaid expenses. As mentioned
above, we only considered those positions mentioned by the organization without
transferring them to the balance sheet and vice versa. Following Bakhshi and
Krajeski (2007), who explain that insurance costs affect the current assets or the
cash positions, we also observed this effect.
Similar to the literature (e.g., Botzen et al. 2010; Wedawatta et al. 2011), we
have found that especially the position sales is affected by climate change impacts;
but contrary to the literature, we could also observe positive influences arising from
climate change impacts. Contrary to the literature, our interviewees mentioned
several times the influences on energy costs as part of material costs arising from
climate change impacts and climate change adaptation. Mostly, organizations
observe negative effects due to increasing energy prices, decreasing demand, or due
to additional air-conditioning systems. However, due to milder winters a few
organization expect decreasing energy costs. Similar to Busch (2011) we identified
higher material costs because of the use of additional materials and changed
238 K. Stechemesser et al.

insurance costs due to higher insurance premiums in consequence of an extreme

weather event or the decision to finalize an insurance contract. Lower productivity
was also the main reason for increasing personnel expenditures as already
Wedawatta et al. (2011) stated. But also additional expenditures in order to realize
adaptation measures were one mentioned reason for an increase of this cost posi-
tion. Additional to the literature, our interviewed experts mentioned depreciations,
other operating income, other extraordinary income, and extraordinary expenses.
We can conclude that the profit and loss account is in the first instance rather
affected by climate impacts and adaptation measures in comparison to the balance
sheet. However, both financial reporting instruments are closely intertwined
(Coenenberg et al. 2007), and during our analysis, we only coded the primary
impact mentioned by the interviewee. Hence, in a second step, impacts on the
balance sheet are noticeable, too.
Moreover, we can currently observe more climate change impacts than impacts
by climate change adaptation. This can be explained by a noticeable sum of
organizations which have not realized adaptation measures so far.

6 Conclusion

Climate change already financially affects organizations in various ways. The

findings of the conducted content analysis present the empirical proof that corporate
finances are affected by climate change impacts as well as by climate change
adaptation. The examination of 57 in-depth expert interviews from seven different
industry sectors determines several impacts on balance sheets and profit and loss
accounts across all industry sectors investigated.
The first limitation of our analysis is that the analyzed organizations originate
from one distinct region in Western Europe. Hence, the transferability of results to
organizations in other developed or even developing countries is not provided.
Besides the quite limited sample, the analysis only considered the change in
financial indicators on balance sheets and profit and loss accounts. Furthermore, this
study does not address aggregated indicators as a measurement tool for financial
performance. Thus, the emphasis on determining the source of impacts on financial
indicators presents a second limitation. Therefore, future research strongly neces-
sitates the exploration of further financial indicators and even more specific data
from even more varied industry sectors. Research continues to require access to
sensitive data in order to determine business challenges of climate change.
By realizing this in-depth analysis, we answered which financial positions of the
traditional financial accounting are affected by climate change impacts and related
climate change adaptation measures. Thus, we analyzed the traditional cost
accounting system and identified hidden costs of organizations which would not
arise if an organization would not be vulnerable to climate change. However, in
most cases organizations do not analyze these costs in detail. For future research,
we firstly suggest a similar study for the outside-in perspective. Secondly, to
Organizational Climate Accounting—Financial Consequences … 239

consider the monetary climate management accounting perspective, we recommend

to analyze more deeply if and how organizations decide for mitigation or adaptation
measures. For those decisions, the Net-Effect can be used, which considers three
different cost categories: action costs, transferable costs, and opportunity costs.
Looking at the outside-in perspective, action costs encompass the costs for adap-
tation measures. The second group of costs can be transferred to a third-party, for
example to the supplier or the consumer. Consequences of third parties, for example
taxes or penalties, can be assigned to opportunity costs. Moreover, organizations
have to consider increasing insurance costs or decreasing sales in consequence of an
extreme weather event. Based on this Net-Effect, organizations can decide if they
react rather anticipatorily or reactively. In a third step, we propose to consider the
environmental impacts of mitigation and adaptation measures by realizing a life
cycle assessment and, thus, to consider the non-monetary perspective of climate
financial accounting and climate management accounting or of climate vulnerability
accounting and carbon accounting, respectively.
To give this research agenda a suitable framework, we suggest to take up the
three-stage model of Guenther and Guenther (2003) considering ecological resources
within accounting with the aim to control these resources. Stage 1 of the framework
—Differentiated Value Added—comprises the monetary part of climate financial
accounting. Our conducted analysis belongs to this first level (monetary, external,
adaptation). The above described Net-Effect can be included in the second stage of
the framework—Adjusted Value Added—to decide for or against a response option
and, thus, it includes the monetary climate management accounting. The realization
of the Adjusted Value Added implies that the resources can be assessed monetarily,
which is not possible in all cases. Therefore, at stage 3 of the framework—Extended
Value Added—the non-monetary assessment of measures can be realized in order to
consider the non-monetary perspective of climate financial accounting and climate
management accounting or of climate vulnerability accounting and carbon
accounting, respectively. However, in order to bring this proposed three-stage model
into the organizational mindset and decision making, there is still a long way to go
and will require more efforts—by scientists and practitioners.

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Carbon Emission Accounting Fraud

Shamima Haque and Muhammad Azizul Islam

Abstract This chapter explores the motivation behind potential carbon emission
accounting fraud by corporations. There are several different possible risks of
carbon emission accounting fraud which remain mostly overlooked by researchers
to date, despite the fact that such frauds have a negative impact on a country’s
economy as well as the real purpose of mitigating carbon emissions. The chapter
offers discussion of some potential risks of carbon emission accounting fraud as
well as related prevention policy. The study suggests that an effective mandatory
carbon emission related fraud prevention policy is essential to eliminate opportu-
nities to commit such fraud by corporations.

1 Introduction

In recent years, climate change has drawn attention in the international scientific
and policy arenas, to the extent that it is now considered to be the most important
global environmental issue that the 21st century is facing. As the science of climate
change has continued to evolve, increasing evidence of anthropogenic influences on
climate change has been found. Correspondingly, the Intergovernmental Panel on
Climate Change (IPCC), a group established by the World Meteorological
Organization (WMO) and the United Nations Environment Programme (UNEP),
released a number of authoritative reports about human impacts on the Earth’s
climate, which ultimately led to the development of the Kyoto Protocol in 1997.
Among the human influences noted, the business community is largely responsible
for many of the causes of global climate change, and at the same time, it will also be

S. Haque (&)
M.A. Islam

School of Accountancy, QUT Business School, QUT, Brisbane, Australia
e-mail: [email protected]
M.A. Islam
e-mail: [email protected]

© Springer International Publishing Switzerland 2015 243

S. Schaltegger et al. (eds.), Corporate Carbon and Climate Accounting,
DOI 10.1007/978-3-319-27718-9_11
244 S. Haque and M.A. Islam

affected by the potential risks associated with it. There are differential risks that
climate change poses on businesses, which in turn, can affect their profitability and
value, and even threaten their survival and accountability (Carbon Disclosure
Project 2008; CERES 2002; Labbat and White 2007; Rolph and Prior 2006;
Bebbington et al. 2008). Apart from risks, climate change has also provided
potential business opportunities through projects that reduce greenhouse gas
(GHG) emissions, such as the development of more efficient and alternative energy
supplies, reduced petroleum dependence, and the trading of carbon credits in the
energy market (Southword 2009; Martin and Walters 2013). However, such
opportunities can also create a risk of climate change fraud. There is increasing
evidence of climate change fraud being reported in the media. For example, there
are reports of widespread fraud in trading in the European Union Emissions Trading
System (EU ETS) and in the production and sale of carbon credits from carbon
abatement projects (offset projects) (Lohmann 2010).
This chapter offers discussion of some of the potential risks of carbon emission
accounting fraud as well as related prevention policies. There are several different
possible risks of carbon emission fraud which remain mostly overlooked by the
researchers to date, despite the fact that such frauds may have a negative impact on
a country’s economy as well as the real purpose of mitigating carbon emissions.
While relevant carbon emission frauds include, among others, carbon investment
scams, transactional frauds, and accounting and reporting frauds, this chapter
provides an extended discussion of carbon emission accounting fraud. In particular,
we explore the motivation behind potential carbon emission accounting fraud by
corporations. The study suggests that an effective mandatory carbon emission
related fraud prevention policy is essential to eliminate opportunities to commit
such fraud by corporations.

2 Major Carbon Emission Schemes: An Overview

From the IPCC to the Kyoto Protocol, there is an imperative objective of con-
trolling the human impacts of global GHG emissions within a certain benchmark.
Carbon credit trading is one such initiative that is used by different nations across
the globe. It is a cap and trade system for carbon dioxide (CO2) emissions cer-
tificates. A limit (or ‘cap’) is set for countries or companies on the total amount of
GHG emissions they can produce. If they exceed the limit they are required to buy
carbon credits from others. Those with surplus carbon credits may sell them to
emitters that require more (the ‘trade’). Thus carbon trading gives an incentive for
major emissions-intensive companies to reduce their emissions. As the market
grows, companies may maximise the value of their carbon credits. It is reasonable
to predict that if a company reduces its emissions, while simultaneously increasing
its profits, it will be motivated to continue to do so; however, this is not always
the case.
Carbon Emission Accounting Fraud 245

The global carbon market is now estimated to be worth approximately

$118 billion (Deloitte 2009). Carbon can be traded in two markets: the regulated
market (ETS) and the voluntary market (unregulated market). While the EU ETS is
by far the world’s biggest carbon market, and fundamental to the international
carbon market, the number of carbon emissions trading systems around the world is
increasing. Besides the EU ETS, national or sub-national systems are already
operating in Australia, Japan, New Zealand and the United States, and are planned
in Canada, China, South Korea and Switzerland (Climate action 2012). There are a
number of other national and regional carbon markets that have been, or are in the
process of being, developed or expanded. For example, the New Zealand Emissions
Trading Scheme (NZ ETS), the New South Wales Greenhouse Gas Abatement
Scheme (NSW GGAS), the Regional Greenhouse Gas Initiative (RGGI) New York,
the Western Climate Initiative (WCI) Québec, and so forth. Many countries are also
seriously considering the EU ETS as a model for their possible permanent trading
scheme. For example, the Australian Government introduced an emissions trading
scheme (also known as the Carbon Pricing Mechanism or CPM), which started on
July 1, 2012. CPM became law in November 2011 as the Clean Energy Act (2011)
which required the CPM to start with a three-year fixed price period (2012–2015)
and then transition to a fully flexible interim one-way link between CPM and the
EU ETS in July 2015, with a full two-way link by July 2018 (Carbon Spectator
2013; Interpol 2013; International Carbon Action Partnership 2014). However, in
light of new developments in Australia1 subsequent to the government change in
September 2013, bilateral linking talks are currently on hold (International Carbon
Action Partnership 2014).
Carbon emission is also connected to the developing nations through the Kyoto
Protocol’s Clean Development Mechanism (CDM). CDM is one of the flexibility
mechanisms defined in the Kyoto Protocol (IPCC 2007) that provides for emissions
reduction projects which generate Certified Emission Reduction (CER) units which
may be traded in emissions trading schemes (IPCC 2007). CDM provides a way of
transferring financial and technological resources to developing countries in
exchange for emissions reductions. The CDM, and the associated generation of
CERs, are an essential component (in the form of marketable securities) in the
efficient and effective functioning of cap and trade markets (Drew and Drew 2010).
These markets, such as the EU ETS, allow for price discovery to occur resulting in a
market price for carbon (Drew and Drew 2010). Integrity issues, real or perceived,
resulting from the potential for fraud and/or deception in market-based mechanisms
such as the CDM are of paramount importance to all stakeholders to ensure a
meaningful, sustained response to the challenges of climate change (Drew and
Drew 2010).

1
On September 7, 2013 a new Government was elected with a policy to repeal the CPM and
replace it with a Direct Action Plan. On November 13, 2013, the Government introduced draft
legislation to repeal the Carbon Pricing Mechanism. Until the re-peal legislation passes both
Houses, the CPM will remain law (International Carbon Action Partnership 2014).
246 S. Haque and M.A. Islam

3 Carbon Emissions Fraud

While carbon trading systems, set by regulators as discussed (EU ETS for exam-
ple), aim to benefit the economy as well as preserve the environment for future
generations by reducing emissions, trading systems do offer potential negative
effects which cannot be ignored. In contrast to traditional commodities, carbon
credits do not represent a tangible product which can be delivered to a consumer;
instead they can be described as a ‘legal fiction’ that is poorly understood by many
sellers, buyers and traders (Interpol Environmental Crime Programme 2013). Due
to this limited understanding, carbon trading is often vulnerable to fraud and other
illegal activity. Like other financial markets, carbon markets are also at risk of
exploitation by criminals due to the large amount of money invested, the imma-
turity of the regulations and a lack of oversight and transparency (Interpol
Environmental Crime Programme 2013).
The Interpol Environmental Crime Programme lists five categories of illegal
activities in carbon markets: fraudulent manipulation of measurements to claim
more carbon credits from a project than were actually obtained; sale of carbon
credits that either do not exist or belong to someone else; false or misleading claims
with respect to the environmental or financial benefits of carbon market invest-
ments; exploitation of weak regulations in the carbon market to commit financial
crimes, such as money laundering, securities fraud or tax fraud; and computer
hacking or phishing to steal carbon credits and theft of personal information
(Interpol Environmental Crime Programme 2013). According to the Interpol report,
carbon credit projects provide opportunities to fraudsters to manipulate measure-
ments and dishonestly obtain a greater allocation of carbon credits, either by
overinflating the estimate of the emissions or by fraudulently claiming that the
project reduces emissions to a greater degree than it actually does. On the other
hand, the intangible nature of carbon credits also makes it possible to separate
ownership in the carbon rights from the physical project; for example, a project may
be owned and managed by one person or company, while another acquires the legal
rights to trade in any carbon credits generated. The risk of corruption, therefore, is
increased by the fact that there is no physical indication of the identity of the person
who holds the carbon rights, beyond a piece of paper or record in a government
register. Also, because of the lack of understanding among traders and buyers about
how the carbon markets operate, companies can take advantage of the paucity of
expert knowledge, with many examples of advertising campaigns or investment
advice that involves false and misleading claims. Poor legal regulation, together
with the lack of any tangible asset behind the traded carbon credits, makes this
market perhaps even more vulnerable to exploitation in the form of Value Added
Tax (VAT) scams, money laundering and securities fraud. National registries have
been established to keep a record of all carbon credits under the mechanisms of the
Kyoto Protocol (UNFCCC 2011). However, weaknesses in the internet security of
these registries have been exploited by criminals who have been able to steal carbon
Carbon Emission Accounting Fraud 247

credits. Also, the electronic nature of carbon credits and their registries makes the
carbon trading market particularly susceptible to technology crimes such as
hacking.
The media frequently reports news about frauds and scams related to carbon
credit trading (ACCC 2013). Specifically, these news reports often refer to carbon
trading fraud cases around the globe (including the UK, EU and Australia). One of
the most notorious scams which occurs in the EU market is the VAT scam. As
explained by Singh (2009), the VAT scam occurs when a company sells a carbon
credit to another company. According to the regulations, both companies should
pay VAT; however, in this scam, after the buyer pays VAT, the seller declares
bankruptcy, avoids paying the tax, and the buyer can then claim the VAT back from
the tax authority. Later, the buyer can then re-sell the carbon credits to overseas
buyers who are not liable to pay VAT. These kinds of carbon credit scams were
reported to be worth more than €1.5 billion (in five European countries) and
£38 million in the UK (Deloitte 2009). In 2010, a number of investigations of
carbon credit scams, in particular those related to VAT fraud, took place in Europe
(Interpol Environmental Crime Programme 2013). This resulted in hundreds of
raids on European offices and over 100 arrests in relation to VAT fraud within the
EU ETS (Interpol Environmental Crime Programme 2013). The EU trading market,
as the first to implement an ETS scheme, made a loss of €5 billion from tax fraud on
carbon credits, as well as a loss of €33 million from a series of other fraudulent
activities within the ETS regulation system (Jeffries 2012).
As the size and value of the carbon markets grows, the amount of fraud taking
place can be expected to rise. For example, one particular type of fraud being
investigated in the EU involves buyers importing carbon permits in one EU country
(without paying VAT), and then selling them in another, adding tax to the selling
price and pocketing the difference. A specific example is an incident involving six
traders in Germany, who were accused of evading over €200 million in VAT in the
European carbon market between September 2009 and April 2010, taking advan-
tage of German tax regulations which were valid only until April 2010 (Reuters
2011). The penalty for this kind of crime is possible prison terms of up to nine
years. In another example, during 2013, in the UK, 19 companies sourced
investment of nearly £24 million from over 1500 people (including many elderly
people) by selling carbon credits in the manner of shares or bonds (The Guardian
2013). These small investors were promised significant returns for permits, each
worth the emission of one ton of CO2. While each permit was relatively expensive
for the individual purchasers, they were too small to attract interest from large
companies, who generally trade CERs in bulk quantities (The Guardian 2013).
Another example comes from the UK, where three defendants were found guilty
of carbon trading carousel fraud and jailed for a combined total of 35 years in 2012
(Interpol Environmental Crime Programme 2013). The three individual traders
defrauded the VAT system by setting up bogus companies, which imported carbon
credits into the UK, and were then dissolved after the carbon credits were sold. At that
time the carbon credits were resold to other ‘buffer’ companies, which were also
248 S. Haque and M.A. Islam

organised by the three individuals (to make the trading chain appear legitimate), and
finally to legitimate companies, charging VAT which was never paid to the gov-
ernment. This occurred in 69 days of trading and generated €276 million (including
€41 million worth of VAT). These trades were completed online within minutes. The
stolen VAT was sent to bank accounts in the United Arab Emirates, and the money
was later spent by the group (Interpol Environmental Crime Programme 2013).
In a non ETS country such as Australia, the most common fraud occurring in the
voluntary carbon market is false carbon investment scams. One famous case is that
of the Western Field Holdings Inc. (WFH). WFH is a telemarketing organisation
from overseas which targeted Australian consumers and businesses seeking
investment in carbon credits. WFH acted on behalf of an investment scam business
based in Japan, which then contacted the Australian individuals who expressed
interest in investing in projects that generated carbon credits. The victims of the
scam were typically people with a strong environmental interest, limited knowledge
of carbon credit trading, and seeking investment opportunities. WFH sourced the
investment through an apparently genuine website and ‘investment certificates’.
When some of the victims later discovered the certificates were fake, and requested
their money be refunded, WFH took no action. Ultimately investigators found that
more than AUD $3.5 million was invested by Australians in the “projects”, and this
was sent via major banks (and remittance services) to accounts in Taiwan and
China. Australian regulatory authorities have made public statements about WFH
and have advised investors to avoid dealing with this company (AUSTRAC 2011).
In a similar case (in 2009–2010), another company conducted an aggressive tele-
marketing campaign in Australia, claiming false connections with legitimate
organisations as well as environmental standards. In this example, the investors
were again offered a high return investment opportunity in carbon credits. The
claims by this organisation were shown to be false, and that particular company is
estimated to have defrauded Australian victims of $3.2 million (SCAM Watch
2012; Fogerty 2010).
In another case in Australia in early 2010, an energy company that was part of the
Government’s Global green programme designed to encourage home owners to use
green power, was investigated by the Australian Competition and Consumer
Commission (ACCC) who took action against the company (Interpol Environmental
Crime Programme 2013). Under the government programme, the company accepted
(additional) payments from customers in return for promising to purchase renewable
energy certificates (carbon credits) on their behalf. Following the investigation, the
ACCC found the power company had not purchased as many carbon credits as it had
promised to its customers. The company was forced to purchase the extra credits,
and was eventually deregistered from the Global Green programme. The
Acting ACCC chairman at the time, Michael Schaper, commented:
These are markets where consumers don’t fully understand what’s on offer to them,
businesses are still coming to grips with what they can and can’t do, and regulators are still
grappling with how consumer’s expectations are matching up with promises from business
(Thomson 2010).
Carbon Emission Accounting Fraud 249

Apart from tax fraud, other carbon frauds, such as transactional frauds, occur
during transactions between parties and include money laundering, intentional
round-trip transactions and consumer fraud, and so on (Deloitte 2009). Since
trading and blending is forbidden currently in the regulated market, we have found
no cases related to those frauds. For this reason, the implementation of relevant
prevention policies is necessary to avoid fraudulent activity in the future. The
Australian Government has apparently taken note of the seriousness of potential
fraud in this area, and some cautions have already been issued by specialists in the
forensic industry. Consumer fraud is another type of risk which companies, espe-
cially those in the tourism, hospitality and leisure industries, are at risk of exposure
to. This could happen when those companies enter into arrangements with
third-party partners to offer individual customers the opportunity to purchase carbon
offsets by means of reducing the environmental impact of their travel (Deloitte
2009). The risk of fraud by air travel companies, on cost estimation of an offset,
does exist, and currently occurs in some countries. There could also be a potential
risk of collusion between a company and a third party to set the price of a carbon
offset higher than is necessary (Walter and Martin 2012).
While most of the carbon trading frauds have so far been evident in developed
nations (under the EU ETS), developing countries are also at risk, especially within
CDM projects. There are stakeholder concerns about organisational fraud in many
CDM projects in the developing world. Many believe these projects are misrep-
resented and some projects are run or become profitable at the expense of the
broader community, or even by contributing to global warming. An important
example is the CDM Mega Dams projects in Sikkim. The state of Sikkim, known as
the land of rhododendrons, is extremely picturesque, and is located in the
Himalayan foothills in India’s North East. In Sikkim, rivers have been aggressively
dammed over the last decades (Yumnam 2013). Dam developers have attempted to
promote these projects as clean energy sources to seek carbon credits as additional
profits from the UN CDM (Yumnam 2013). More than fifteen mega hydro projects
are already seeking carbon credits in Sikkim, where hydropower is a common
energy source. Many are of the opinion that some of these decisions should be
reversed, and that no further projects should be approved. As Yumnam (2013)
stated:
The dams in Sikkim are not green and clean and will only worsen global warming if their
credits are used to comply with emission reduction obligations. At the same time they will
destroy the backbone of livelihood support for millions. Most dam projects ignore the
recommendations of the World Commission of Dams (WCD) and the recommendations of
the UN Committee on Elimination of Racial Discrimination in 2007 to respect indigenous
people’s rights in dam construction in India’s North East. All validation and registration of
big hydro projects for CDM from Sikkim and other parts of India’s North East should
therefore be revoked immediately and no new projects approved. Indigenous peoples’
rights in Sikkim must be fully recognized in all development policies and projects.

In summary, there are a number of different types of carbon fraud and scams that
are evident However, most carbon frauds are complex in nature and often difficult
to detect. While there are various types of carbon frauds, research has identified
250 S. Haque and M.A. Islam

emissions reporting as an increasing area of fraud risk (Deloitte 2009; Lindquist and
Goldberg 2010). For example, one of the common ways to manipulate credit
measurements is to intentionally misreport the data, meaning that the analysis is
distorted by measuring only certain variables, a selective choice of sites for col-
lecting data, or adopting certain assumptions in the calculations (Interpol
Environmental Crime Programme 2013).

3.1 Nature of Carbon Emission Accounting and Reporting

Fraud: A New Nature of Fraud

Misrepresentation and fraudulent reporting of emissions by liable companies is one

of the significant risks that exists in the carbon trading market (Goldberg 2010).
While only a small number of cases can be found to support the existence of
emissions misreporting, this area is the most susceptible to fraud, and this has
attracted a considerable amount of concern from different groups (Walter and
Martin 2012). Craig Mackenzie, sustainability director at Scottish Widows
Investment Partnership, found that even the mandatory emissions data issued by EU
companies was incomplete, scattered, often confusing and time-consuming to find
(Jeffries 2012). The risks of data misreporting and related frauds are even higher in
the case of voluntary carbon emissions reporting, where there is a lack of unified
reporting standards for companies.
Reporting of emissions is required because if a company is not monitored in a
particular period, its report is the only available information on its emissions which
can be used to determine how many permits are used for current compliance and
how many are carried into the next period (Stranlund et al. 2005). Companies
should, therefore, provide full disclosure of emissions and accounting policies
voluntarily to ensure that the financial effects of using emission rights and related
contracts are understood (Lindquist and Goldberg 2010). However, some compa-
nies dishonestly misreport the real emissions figure due to financial pressures
(Deloitte 2009). Through under-reporting of emissions, they can understate the
actual carbon credits used to overstate income and asset values (Deloitte 2009;
Lindquist and Goldberg 2010). Alternatively, through increasing the baseline of
carbon emissions they can gain additional carbon credits, and produce fewer
emissions over the pre-established baseline (Lindquist and Goldberg 2010). By
doing so, they can save some unused credit and bank or sell it later to make a profit.
This would result in an underestimation of emissions and less permits being sur-
rendered to government.
There is also the chance of over-reporting of carbon emission purchases which
reduces investments in carbon reduction mechanisms (Lindquist and Goldberg
2010). For example, in countries such as Russia, China, India, and Brazil, there are
so-called environmental projects built specifically for the sake of generating
emission reduction credits. While some of these ventures are semi-legitimate, others
Carbon Emission Accounting Fraud 251

are pure scams to generate profits. Companies can, therefore, purchase these
emission credits and claim exaggerated carbon reductions (Lindquist and Goldberg
2010). Sometimes companies even disclose their emissions performance nor-
malised by revenue, employee or floor space, so that it seems to have improved,
even if absolute emissions have increased over the years (Jeffries 2012).
Following is an example of carbon accounting fraud, as reported by the Interpol
Environmental Crime Programme. In 2008 and 2009 respectively the United
Nations (UN) temporarily suspended two independent carbon-accounting organi-
sations—Norwegian company Det Norske Veritas and Swiss firm SGS, after random
checks revealed flaws in their accounting methodologies, such as inadequate over-
sight of their CDM audits and insufficient training and qualifications of their auditing
staff (Global Witness 2011; INTERPOL Environmental Crime Programme 2013).
At the time of the suspension, the two companies were major stakeholders in vali-
dation and verification of approved projects. It was found that projects had been
approved by the companies without being scrutinised. One of the companies had a
flawed review process, and inadequately qualified auditing staff. The other company
was also found to be using staff without the necessary skills and sub-standard
internal reviews. The temporary suspension of the two companies was a significant
move by the UN to oversee the activities of the Designated Operation Entities
(DOEs), however, it also demonstrates that the UN is limited in its ability to monitor
these kinds of companies. In this instance, the UN had to rely on the data provided by
the DOEs when undertaking the investigation. Random checks found that the
activities performed by the companies were office-based, not field-based, adding to
the unreliability of the data. This problem is set to continue with the increasing
number of projects taking place in remote areas across the globe and the limited
capacity of the UN to properly monitor those projects. A review in 2009, of the
validation process used, undertaken on behalf of the World Wildlife Fund
International, and the Öko-Institut, a Berlin think tank, found that the performance of
the five largest DOEs could not be rated better than a score of D on an A-to-F scale.
Within the context of a developing nation, there is also a risk of carbon emis-
sions accounting and reporting fraud. The CDM projects in developing nations
enable firms and governments in the developed world to buy credits which allow
them to continue emitting GHGs. These are sold to them, through well-rewarded
brokers, from companies in developing countries that can show that they have
nominally reduced their emissions (Booker 2010). This is concurrent with the
notion that there should be appropriate levels of transparency about CDM projects
(Kruger and Egenhofer 2005; Drew and Drew 2010). There also needs to be
avoidance of insulation from the perpetration of deceptive or fraudulent acts to
allow for consideration of the validity of the information itself.
For instance, the regulator within the current CDM system, in most instances,
relies on self-reported data. Given this, it is not enough to rely on simply the apparent
transparency of information as sufficient insulation against fraudulent or deceptive
behaviour. The regulator must have access to a system that is able to check
self-reported data and have sufficient powers to institute penalties against those who
seek to falsify information (Kruger and Egenhofer 2005; Drew and Drew 2010).
252 S. Haque and M.A. Islam

Misreporting of emissions would also have implications at a firm or industry

level. For example, the emitter that underreported emissions would be placed at a
competitive advantage vis a vis other market participants, as they would need to
surrender fewer permits (BarnbyisRight 2011). This advantageous position would
be a result of non-compliance with the law rather than legitimate business practices
and could entail significant costs for competing companies (BarnbyisRight 2011).
This would also have implications for the accuracy of national emissions estimates
and would represent an effective loosening of the cap (BarnbyisRight 2011). This
occurs frequently during the early stages of regulation (Lindquist and Goldberg
2010). This kind of fraud is also very difficult to audit and expert knowledge is often
required. According to Lindquist and Goldberg (2010), “Pollution measuring
equipment is very technical and a dedicated fraudster can miscalibrate gauges and
meters to give false carbon readings.”

4 Motivation for Carbon Accounting Fraud

Carbon emission accounting fraud can be explained by the fraud triangle model
proposed by Cressey (1953). According to Cressey (1953), regardless of the many
ways to commit fraud, there are generally three common elements that make up
what is known as the fraud triangle (Cressey 1953; Albrecht et al. 2014, p 34).
These three elements of the fraud triangle are perceived pressure (financial, vices
(e.g. drugs, alcohol, gambling), work or other), perceived opportunity (wider scope
to commit fraud, conceal fraud or avoid being punished, for example, weak policy
or internal control systems) and rationalisation (being able to justify the fraud in
some way, for example, ‘I am underpaid by the employer’).
Diagram: Cressey’s (1953) fraud triangle lens

Incentive /pressure

Opportunity Ratinoalisation

Among these three elements of the fraud triangle, perceived opportunity is the
most important one (Albrecht et al. 2014, p 51). Albrecht et al. (2014) claim that
without opportunity fraud cannot occur, and hence it is the opportunity which is the
central focus of this chapter, as carbon emission accounting fraud can be controlled
if the scope of opportunity for such fraud to take place is limited.
Carbon Emission Accounting Fraud 253

The key opportunities for carbon accounting fraud appear to be due to:
(a) Inadequate internal policy framework and control and auditing systems for
effective carbon fraud detection.
(b) Weak regulation of emissions-intensive companies, despite some international
and national guidelines to eliminate carbon trading fraud. The carbon-trading
market has opened the door to fraud, profiteering, and scamming by partici-
pants. The main reason behind this risk of fraud lies within the existing reg-
ulatory system. Because of the lack of regulation or weak regulation, and
limited enforcement agencies for both verifiers and carbon offset providers,
there is a high risk of fraud in these voluntary carbon markets (Buckstein
2009).
(c) The problem of the weak regulatory system, together with the problem of
insufficient unified codes and standards in place that can be used as a guide to
measure emissions accounting or auditing to ensure consistent quality
(Buckstein 2009).
(d) Inadequate fraud awareness training for employees and managers.
(e) The opportunity for fraud arising as the carbon emissions market is new,
controls are untested and often large amounts of money are at stake (Chris
2011). It can be seen in the EU market, or even the Australian market, that the
roll out of new government schemes are a draw for people and groups seeking
to improperly benefit. The issue here is not about the environment or the
validity of carbon tax or ETS, but rather about providing another opportunity
for fraudsters to commit fraud.
(f) The lack of any tangible asset behind the traded carbon credits. This makes the
market perhaps more vulnerable to exploitation. This is of particular concern
with the development of new financial products which have not been ade-
quately vetted, and with regulators whose technical knowledge and resources
are limited (Interpol 2013).
(g) The difficulty in tracing the movements of carbon credits. It is anticipated that
in the near future, carbon credits may be generated in one country, widely sold
to persons in another, and traded through several carbon exchanges before
reaching the hands of the final owner. The more countries involved, the harder
it is to trace the carbon credit from its origin to final purchaser, and the easier it
is for fraudsters to take advantage of any legal loopholes or inconsistent
regulations between different national legislation (Interpol 2013).
(h) The lack of harmonised tax and VAT regimes across certain regions (such as
the EU member states). This can provide a potential cause for fraud.
(i) The limited ability of law enforcers and regulators to work outside their own
domestic legal jurisdiction, making enforcement of international carbon mar-
kets complicated and difficult without a proper global enforcement response
(Interpol 2013).
254 S. Haque and M.A. Islam

(j) The differing requirements for carbon trading across different jurisdictions,
some more stringent than others. Because there is limited understanding of
these multiple standards, there is an increased risk of exposure to fraud
(Buckstein 2009).
(k) The lack of mandatory reporting requirements. There is also no explicit
penalty for carbon emissions reporting violations under current reporting
requirements. Therefore companies are tempted to misreport their emissions
information.
Other elements of the fraud triangle, such as perceived pressures and perceived
rationalisation, should not be underestimated. An example of a perceived pressure
would be the financial stress a company may experience if it produces significant
emissions, and the large expense of purchasing sufficient carbon credits. In relation
to rationalisation, a company may rationalise its behaviour by seeking excuses for it
(such as, the belief that the money contributed is not used for reducing GHG
emissions, rather, is being pocketed by government officials); or, the belief that it is
in the shareholders’ best interests (that is, profit will be maximised) if the fraudulent
activity is carried out.

5 Possible Ways to Curb Opportunities for Carbon

Accounting and Reporting Fraud

We believe if regulators are able to limit opportunities for carbon accounting fraud,
as mentioned earlier, the risk of general carbon emission fraud occurring will be
substantially reduced. We are not arguing that currently there is a lack of regulation
in place to control carbon accounting fraud within or beyond the organisational
level. Rather, for example, in Australia, under the National Greenhouse and Energy
Reporting Act (NGER) (2009), significant powers have been given to the regulator
to enter and audit relevant premises of liable corporations and to compel the pro-
visions or regulations of the Act (NGER Act, Sch. 73A). There is also a case for
imposing penalties for violation of carbon trading provisions. In 2009, the biggest
clean energy auditor in the world, SGS UK, had its accreditation suspended by UN
inspectors, because it did not properly audit projects in carbon trading markets
(Environmental Leader 2010). Although there are laws and regulations set by the
government, they do not necessarily prevent fraud. There is a need for effective
security and anti-fraud measures for emissions trading. The responsibility of carbon
trading regulators in different nations, apart from administering legislation, is ful-
filled through auditing, compliance and enforcement of emissions reporting stan-
dards. There should be a specific and comprehensive auditing legislative framework
to undertake GHG and energy audits. There is a view that while detailed infor-
mation on auditing methodologies has been provided by the regulator, liable cor-
porations are chosen for audit and the extent of examination of the emissions
reports from liable corporations is not apparent. While there is doubt that a
Carbon Emission Accounting Fraud 255

country’s legal enforcement agencies, including local police, would be required to

play a role in regulating emissions trading, there should be a defined responsibility
for the law enforcers in validating, monitoring and penalising offenders, given the
enormous scale of carbon emissions fraud.
Within the context of developing nations, in relation to CDM projects, an
essential step in minimising or at the least, limiting the opportunities for fraud,
corruption and/or deception must involve ensuring that verifiers and certifiers are
independent assessors (Chan 2009; Drew and Drew 2010). This system of fraud
detection may also prove potentially valuable in CDM governance (Drew and Drew
2010).
In order to create real accountability and transparency, corporations as well as
regulators need to consider carbon governance and reporting as seriously as
financial reporting. While in the voluntary carbon market there are 10 different
standards that can be used for the verification of carbon offset credits, and each has
different requirements, some more stringent than others, there is limited under-
standing of these multiple standards, and this creates an increased risk of exposure
to fraud (Buckstein 2009). There needs to be uniform carbon reporting guidelines
across the globe, and at the same time, there should be explicit penalties for mis-
reporting of carbon emissions under current reporting requirements. While creating
enforcement of emissions reporting is the responsibility of the regulators, the
capacity of the regulators in different jurisdictions differs significantly. There must
also be adequate capacity building training facilities for the regulators of different
jurisdictions.

6 Conclusion

This study explores the motivations behind corporate carbon emissions accounting
fraud. The study suggests that effective mandatory carbon emissions related fraud
prevention policy is essential to eliminate opportunities to commit frauds by cor-
porations. Effective monitoring and auditing mechanisms are essential to eliminate
misreporting of carbon emissions. While specialised audits should be imposed by
regulators, the reliability of auditing itself is more essential, but also hard to detect.
There should be a separate specific law or act (similar to the UK Bribery Act 2010,
which is a specialised law to curb bribery) which may help in the prevention of
fraudulent reporting and misreporting of carbon emissions. While there should be a
uniform standard across the globe, mandatory auditing and reporting requirements
should at least be in place to limit carbon emissions fraud globally.
More research is needed to investigate those areas and aspects of carbon
emissions measurement, integration, reporting and auditing that may provide sig-
nificant potential risk for fraud to take place. The future research should direct the
focus on a particular type of fraud and interviews based study on the actual
motivations behind it.
256 S. Haque and M.A. Islam

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