Understanding GHG Emissions and GHG Inventory

Global concern about sustainability and climate change has made “greenhouse gases” (GHGs) a prominent term. Governmental frameworks for addressing climate focus on GHGs, and companies are under increasing pressure to manage their emissions as part of corporate sustainability and responsibility. Accurately measuring GHG emissions to then develop and implement a plan to effectively reduce emissions requires strategies and processes that can be complex for both large and small companies. While small companies may find securing the resources to enact these steps challenging, large companies face a very complicated task in measuring emissions across their entire value chain.

Determining a single company’s GHG impact by measuring the emissions associated with business operations can require a significant investment of resources. Many sources of a company’s total GHG emissions from its operations (known as the GHG inventory) are outside its direct control, which further complicates the task of measuring and managing emissions. Moreover, there are seven different types of GHGs, and they tend to come from different sources and activities. The process of measuring and managing GHG emissions begins with establishing an accurate GHG inventory. This critical first step defines the overall level of GHGs produced by a company’s activities, which serves to identify priorities for setting targets to reduce emissions.

What are GHG Emissions

Greenhouse gases trap heat in the atmosphere through a process known as the greenhouse effect. The Kyoto Protocol covers seven greenhouse gases: carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF₆) and nitrogen trifluoride (NF₃), which are the GHGs referenced by many external bodies including the GHG Protocol, the U.S. Securities and Exchange Commission’s (SEC’s) proposed climate rule, and the International Sustainability Standards Board (ISSB). According to the US Environmental and Protection Agency (EPA), CO₂ emissions accounted for 79% of the United States’ 2021 GHG emissions produced by human activities (also known as anthropogenic emissions). Each GHG has its own global warming potential (GWP), which is defined as the amount of heat that one ton of the gas will absorb over a given period of time relative to one ton of C0₂, typically 100 years. GWPs are used to convert all emissions into carbon dioxide equivalent (CO₂e) units so emissions from all seven GHGs can be summed together.

As a result of CO₂’s ubiquity, the term “carbon” has become shorthand for GHG emissions and efforts to address climate change (for example, by “de-carbonizing” energy production or business operations).

Another factor in evaluating the GHG impact involves the natural processes that remove them from the atmosphere. These processes are called carbon sinks. Because plants take in CO₂ and release oxygen, forests are naturally occurring carbon sinks. According to the EPA, land use and forestry in the US are a net sink, offsetting 12% of the country’s GHG emissions. Among natural features, oceans also provide major carbon sinks.

Sources of GHG Emissions

Anthropogenic GHG emissions are driven largely by commercial and industrial activity, from energy production and usage to agriculture. In the United States, the world’s largest economy by GDP, the total direct GHG emissions in 2021 by economic sector were:

1. Transportation (28% of total emissions)
2. Electric power (25%)
3. Industrial processes (23%)
4. Commercial and residential activities (13%)
5. Agriculture (10%)

Globally, the relative amounts from these sources vary significantly by country and region.

At the national level, emissions are generally reported in gigatons (gt) of CO₂e (1 gt = 1 billion tons). According to Our World in Data, the five countries producing the greatest amount of GHGs in 2021 were as follows:

1. China (13.7 gt)
2. US (5.9 gt)
3. India (3.9 gt)
4. Russia (2.4 gt)
5. Brazil (2.1 gt)

The total emissions of the European Union’s individual member states would rank fourth in 2021 at 3.3 gt.

Why is a GHG Inventory Important?

A GHG inventory is the calculation of total GHG emissions within a particular “boundary.” In carbon accounting under the GHG Protocol, companies define boundaries for measuring their emissions. An accurate GHG inventory is an essential first step for reducing emissions because it establishes a baseline for measuring progress and gives management more details about different sources of emissions, which can help set priorities for reduction strategies.

Inventories are determined at the national and local levels as well as for specific companies and industries. Under the UN Framework Convention on Climate Change, national governments report their own national GHG inventories. Many regional and local governments also have their own initiatives for tracking and reporting emissions.

Benefits of a GHG Inventory and Emissions Reduction

You can’t manage what you don’t measure, as the common saying goes. The core benefit of a GHG inventory is establishing a baseline. By better understanding what is happening in the present, companies may improve how they define opportunities for improvement in the future. In terms of engaging stakeholders, a GHG inventory signals that a company acknowledges the importance of measuring emissions and has taken the first step necessary to instill an emissions reduction plan. A credible and verifiable measure of emissions can mitigate compliance and regulatory risks, especially as more jurisdictions implement mandatory reporting requirements. Reducing GHG emissions has many benefits for companies, oftentimes including lower energy costs, reduced exposure to potentially volatile energy prices and supplies, and the resulting competitive advantages from a lower and more stable cost base. Additionally, companies on credible pathways to long-term and meaningful emissions reduction can improve relations with consumers, employees, and investors who increasingly see value in supporting companies that have demonstrated a long-term strategy around managing the risks associated with GHG emissions.

Based on findings from Nasdaq’s 2023 ESG & Climate Survey, 38% of respondents plan to increase spending on emissions calculations by >10% and 32% of respondents plan to increase spending on net zero/science-based target performance management by >10% in the next 12 months. Identifying opportunities to improve energy efficiency may reduce costs and implementing well-designed strategies may enhance organizational planning and alignment across teams and units. Reputational benefits include transparency, accountability, and improved investor relations. Because a growing number of institutional investors and financial institutions consider environmental, social, and governance (ESG) factors in their decision-making process, demonstrating a material commitment to addressing GHG emissions may also have an impact on access to capital.

Sony Corporation initially began pursuing a strategy of tracking and reducing its GHG emissions as a function of organizational culture and as part of a collaboration with the World Wildlife Fund, going back to 1989. However, the corporation also found that its efforts contributed to its business strategy as well. According to Keiko Shiga, general manager in Sony’s Environmental Department, “It puts us in a good position vis-à-vis our competitors, and also regulators, it means we meet and try to surpass what stakeholders expect of us, keep offering the best to our customers, and in doing so, get ahead of what other companies are doing. We also save money, because of energy efficiency.”

A 2022 report by S&P Global Ratings found that under current policies, physical climate risks could expose 4% of world GDP to losses by 2050. National and local governments focus on addressing different aspects of the overall problem, whether through regulation or other policies. At the corporate level, some companies have specifically identified reduction targets based on a desire to help achieve larger goals for the planet. In 2012, pharmaceutical company Pfizer changed its targets based on new data from the Intergovernmental Panel on Climate Change (IPCC) 4th Assessment Report. As Pfizer’s chief counsel for environmental and sustainability law later explained, “Rather than simply setting a target we think we can meet, let’s set one that puts us on track for where we—and the world—need to be by 2050.”

GHG Inventory Reporting and Software

The GHG inventory is the first step in carbon accounting, one aspect of sustainability programs. The major sustainability frameworks for reporting standards provide guidance on calculating GHG inventories.

• The GHG Protocol is the widely used framework of principles for carbon accounting and provides general principles for determining GHG inventories.
• ISO 14064 standards define more detailed specifications for quantifying, monitoring, and verifying emissions and reduction programs.
• The Science Based Targets initiative works with organizations to help them set reduction targets and develop strategies for achieving those goals.

Carbon accounting software typically includes capabilities for calculating GHG inventory because determining baseline inventory is the initial step of the accounting process. The best platforms go beyond GHG inventory to support tracking, coordination, alignment, auditing, verification, and reporting, among other capabilities. A comprehensive organizational approach may include an ESG platform that integrates with widely accepted reporting frameworks, which include other aspects of ESG. For example, Nasdaq Metrio™ provides end-to-end sustainability reporting software that streamlines the way companies collect, analyze, and share ESG data. It includes the ability to create custom key performance indicators (KPIs) and calculate carbon footprint from multiple sources and transform the data into standard reporting metrics.

A GHG inventory is a fundamental concept of carbon accounting, requires careful calculation, and encompasses a wide range of interconnected factors. Ideally, the overall process should be integrated with a systematic approach based on well-defined reporting standards that can be leveraged by an effective software platform. For companies at any stage of developing and implementing sustainability programs, outside expertise can be a valuable resource. The Nasdaq ESG Advisory team, for example, works with companies to empower business operations with a defined, aligned, and forward-thinking ESG strategy.