Accounting

Accounting for Climate Change

The first rigorous approach to ESG reporting

by

Robert S. Kaplan

and

Karthik Ramanna

by

Robert S. Kaplan

and

Karthik Ramanna

From the Magazine (November–December 2021) · Long read

Michael Schauer

Summary.

Corporations are facing growing pressure—from investors, advocacy groups, politicians, and even business leaders themselves—to reduce greenhouse gas (GHG) emissions from their operations and their supply and distribution chains. About 90% of the companies in the S&P 500 now issue some form of environmental, social, and governance report, almost always including an estimate of the company’s GHG emissions. The authors describe these as “catchall reports that are often made up of inaccurate, unverifiable, and contradictory data.” They propose a remedy: the E-liability accounting system, whereby emissions are measured using a combination of chemistry and engineering, and principles of cost accounting are applied to assign the emissions to individual outputs. The authors provide a detailed method for assigning E-liabilities across an entire value chain, using the example of a car-door manufacturer whose furthest-removed supplier is a mining company, which transfers its products to a shipping company, which transports them to a steel company, and so on until the car reaches the end customer.

Idea in Brief

The Problem

Climate change is an existential threat to life as we know it, but corporations’ progress in reducing greenhouse gas (GHG) emissions remains slow, despite the time and energy companies spend on their ESG reports.

Why It Happens

The GHG Protocol—used by more than 90% of Fortune 500 companies for those reports—has numerous basic accounting problems, resulting in a misleading picture.

The Solution

An alternative, comprehensive system, based on established accounting practices, enables the measurement and transfer of GHG emissions along an entire corporate value chain. The authors explain their E-liability system and describe its considerable benefits, for both corporations and society at large.

The August 2021 report of the UN’s Intergovernmental Panel on Climate Change warns that pollution caused by humans has led to an increase in extreme events such as heat waves, heavy precipitation, droughts, and tropical cyclones. Greenhouse gas (GHG) emissions from global economic activity are at the heart of climate change, with atmospheric CO2 already 50% above its pre-industrialization levels.

A version of this article appeared in the November–December 2021 issue of Harvard Business Review.

Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “Accounting for Climate Change” (November–December 2021).
Karthik Ramanna is a professor of business and public policy at University of Oxford’s Blavatnik School of Government. He coauthored the McKinsey Award–winning HBR article “Accounting for Climate Change” (November–December 2021).” He is a co-founder of the E-Liability Institute, a global not-for-profit advancing the urgent accounting upgrade needed to drive green innovation.

Accounting for Climate Change

Idea in Brief

The Problem

Why It Happens

The Solution

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