On "E-liability Accounting" and the "Triple Triangle"

Let me share what I just read on "E-liability accounting" and how it connects to the "Triple Triangle"

The GHG protocol suggests the reporting of Scope 3 emissions. These are the Scope 1 emissions of all direct and indirect suppliers and customers. Apart from the multiple counting of the same emissions, the near-impossibility of measuring Scope 3 forced the standard setters to allow the use of industry and regional averages. That enables corporate greenwashing. Companies can report lower Scope 3 emissions while still buying from the most polluting supplier at the lowest cost. Audits of the reports lead to a double-negative opinion that the reported numbers are "not obviously false".

The alternative is "E-liability accounting", in parallel to the well-know and regular cost accounting. When you buy raw materials, don't register just the purchasing cost but also the accumulated CO2 (or likewise CH4). As you process these raw materials in your production and then transport them to customers, don't just account for the extra costs, but also for the added CO2 (your scope 1 emissions). As you sell your products to customers, pass on the full CO2 (and add a margin to the cost). Simple and clear. Proper CO2 accounting could provide a base for a CO2 tax on the added CO2.

Scope 3 persists because it enables corporate greenwashing and as renegotiating all agreements where the GHG protocol is the base could be politically challenging. A three year transition period to E-liability accounting is recommended.

Focusing on E(nvironmental) metrics is worthwile, because it is the most amenable to rigorous corporate reporting (easier to define and to measure) and it presents the most urgent threat to humanity. Measuring a company's social impact is amenable to the same approach, but reporting it presents a far greater challenge. The lessons from the E-liability approach will serve as a model for measuring and tracking social outcomes.

Some advocates for ESG reporting want to estimate the monetary value of components for inclusion in the company's income statement. Consider the decades-long efforts of some accountants to put 'human resources' on a company's balance sheet. Those efforts failed because the measures of employee value were either irrelevant or subjective and unverifiable. So whether we like it or not, it will be about balancing multiple outcomes. The era of having just one outcome (financial) and stakeholder (the shareholder) is gone.

Companies with environmentally sensitive consumers, with environmentally sensitive equity-ownership or that have hydrocarbon-intensive production processes (steel, cement, glass, ...) will benefit the most from a more accurate E-liability accounting. Those investing in cleaner technologies will have a better way to prove and stand out. That will serve companies that are more environmentally sensitive from a consumer or equity perspective.

All of these enlightening insights in just 2 HBR articles by Robert Kaplan and Karthik Ramanna. A highly recommended enlightening read. Links included below.

So no, it will not be about balancing just 1 triangle but about balancing 3 triangles.

... or about manging the profit triangle within a social foundation and an environmental ceiling

So in any case ... no, we can't just all roll it up into the P&L ... and yes, quantifying the Environmental and Social impact beyond CO2 is difficult, but that doesn't mean it's not a good starting point.

I have learned a lot. Thought it was relevant to share! A refreshing start of 2023. May we all build more sustainable supply chains for a better future!