Your Ledger is about to go Green

Double Entry Bookkeeping was introduced by Florence in the 14th century, and arguably was one of the triggers for the subsequent mercantile economy which enabled the Renaissance. Green Bookkeeping may just be as transformative, and could well be the enabler of the Green Economy.

For enterprises, gathering costs, allocating, estimating them, recording them, accruing for them is a fundamental part of doing business. And entire classes of software, and entire codes of law have been set up to manage and regulate them.

But things are changing. Consumers and soon legislators are going to ask companies to maintain a second set of books, that run in parallel to the traditional ledgers, and that’s a set of books called the Green Ledger.

The Green Ledger expands traditional cost accounting to include ecological costs and benefits.

Elements of the Green Ledger vary, depending on the legislative framework and cultural context. For example, The EU has passed regulations requiring products containing palm oil to be labelled as such in the ingredients list: no such requirement exists in the US. This is about to get a whole lot more complicated as governments and consumers start to mandate that companies offer similar audit of Carbon, Scope 3 emissions.?

If you do business in the EU, look out, companies with more than 500 employees are legally required to report on scope 3 emissions. And some consumer companies are jumping the gun : Patagonia, Polestar, and Allbirds have announced voluntary initiatives to label products with scope 3 emission estimates.

In the near future, when your daughter goes out to choose her first bike she may deliberately choose the one with the most favourable Carbon emissions rating. And although the company could tell you to the nearest penny the exact cost of every nut washer, including transportation and other indirect costs which are allocated such as marketing, they wouldn’t be able to do the same for the carbon.

Companies know costs in their supply chain to the nearest penny, but are clueless about the carbon consumed

Your firm is in the middle of a long, complex value chain, you may not know much about the suppliers and what they do. Worse, you could change suppliers or a supplier themselves could change their operations to a more green process, or regress and start using a dirty supplier of their own. This lack of knowledge inhibits capturing Scope 3 environmental data, and it can also act to obscure social issues (e.g., slave labour, non-liveable wages, unsafe working environment, etc.) because the people affected are way back in the supply chain.

Most enterprise software technology today addresses business events within the four walls of an enterprise with only a monetary connection to immediate suppliers and customers. This inwardly focused approach pays the bills, and produces an SEC compliant balance sheet but is not well-suited to providing visibility of environmental impact across the whole value chain. And that is what current customers and future regulators are increasingly concerned about.

Businesses need solutions that monitor not just the movement of money, but also the movement of carbon emissions.

From the extraction of natural resources, to the transportation of these items, through the various conversion and production processes they undergo, and an allocation for all sorts of other indirect processes such as sales, marketing and services.

When you get an invoice from a supplier, they have calculated all their costs from their suppliers, and allocated their internal costs to, added on a profit margin, and that’s what you see. Tools such as Sustainability Data Exchange from SAP aim to do the same with carbon. You need a per-item Green cost (such as grammes of carbon) to be produced, a kind of Green Invoice, that you put on your Green Ledger, that you at some point present to your customer.

The little girl who wants to buy the bike, and these future legislators expect you to have transparency of the real CO2 footprint of parts/components across the production and logistics steps?along the complete supply chain (from raw materials?all the way to the finished product)

To do this you have to ask for and get certified ?CO2 data within the supply chain while upholding data Sovereignty of data owners. Many of your suppliers may already be giving average, or index data, and that’s a good start, but actual data is better. So our solution tracks which suppliers you have asked for higher precision data based on primary data, who has done it, and even who has asked it from their suppliers.

But there’s more than just keeping COP28, consumers, campaigners and Congress happy, now you have this data you can start to Identify products or processes with high potential for CO2 reduction and create goals and optimization scenarios. This can become the trigger for developing innovative products, and find innovative suppliers.

You can learn more about SAP Sustainability Data Exchange and SAP Sustainability Footprint Management by following these links.