Companies are facing heightened pressures for greater transparency around their carbon impact. Both consumers and legislative bodies are pushing for greater accountability, with recent controversies around greenwashing fuelling the call for change. Beyond the growing pressures, carbon markets have witnessed remarkable expansion in both scope and maturity. Approximately 23% of carbon emissions are already subjected to either a carbon tax or an Emissions Trading System (ETS), a substantial increase from a decade ago when only 7% were covered. Carbon taxes and markets mandate companies to measure their carbon emissions and foster a strong incentive for them to do so.
Amidst this evolving business landscape and growing calls for emissions accountability, a new ecosystem of innovative start-ups is emerging to help companies adapt to new carbon reporting requirements and investors are taking notice. Last year, climate fintech start-ups received $2.9 billion in funding, almost 2.5 times more than in 2021, with carbon accounting receiving the largest portion of $970 million.
From a “nice to have” to a “must have”
Carbon-related regulation is on the rise, leading to stricter disclosure requirements and reporting standards for emissions. In the EU, The Corporate Sustainability Reporting Directive (CSRD) took effect in January 2023, strengthens the rules for social and environmental information reporting by companies. It mandates businesses to account for their carbon emissions and include them in their reporting frameworks. Around 50,000 companies in the EU must provide comprehensive sustainability performance reports by the 2024 financial year.
In the UK, regulators are enforcing the Streamlined Energy and Carbon Reporting (SECR) policy, introduced in 2019. It applies to UK companies listed on various stock exchanges, large unquoted companies and LLPs. Quoted companies must disclose their GHG emissions from direct operations, while Scope 3 emissions reporting is optional. Additionally, the UK Financial Conduct Authority (FCA) mandates over 1,300 of the country’s largest companies and financial institutions to report their carbon emissions annually.
The US is also following course with the SEC revealing in March 2022 plans to standardise climate-related disclosures for investors, highlighting the growing importance of ESG issues among public companies. This emphasises the necessity for businesses to adopt comprehensive carbon accounting practices, meet regulatory demands, and ensure transparency in their reporting.
Several carbon accounting start-ups are developing solutions to support companies in meeting these regulatory demands. Companies like Greenly, out of France, offers a Legislation Checker to help companies verify their legal obligations in terms of carbon assessment and help companies get compliance with SBTi (Science Based Targets initiative) and CSDR. It also offers companies a wide range of compliance options through its climate app store. nZero, out of the US, provide tailored, audit-ready data compliant with SEC and EU regulations, while Normative’s carbon accounting technology uses over 30 million data points to calculate a company’s emissions and enables the exportation of carbon data in compliance-ready formats.
A new generation of conscious consumers are demanding that businesses prioritise sustainability, transparency, and ethical practices throughout their operations. A Global Sustainability Survey found that 37% of global consumers are willing to pay a premium for sustainable products and services. Another survey found that buying from a sustainable company is very important for 83% of consumers. These findings underscore a shift in consumer behaviour, necessitating businesses to demonstrate more commitment to reducing their emissions and credibly prove their sustainability credentials or risk losing market share and damaging their brand reputation.
Start-ups like Cleartrace have emerged with solutions designed to help companies up their game when it comes to measuring and reporting their carbon emissions. The company has developed a leading carbon and energy management software that delivers traceable and actionable hourly carbon records. By doing so, Cleartrace enables these companies to comply with industry regulations and showcase their progress in carbon reduction efforts.
Access to financing
An increasing number of investors have joined consumers in demanding more sustainable products and services. Regulations such as The EU’s Sustainable Finance Disclosure Regulation (SFDR) mandate investors to report on the carbon emissions of their investment portfolios, which means they will need their investees to disclose their own carbon reporting. As a result, integrating carbon accounting into operations and developing robust mitigation strategies has become essential for businesses to secure financing.
Moreover, a larger pool of money is now dedicated to climate investments, with Asset managers globally are expected to increase their ESG-related AuM to US$33.9tn by 2026, up from US$18.4tn in 2021. Such investors are required to consider carbon output in their investment process and report consistently about the carbon emissions of their investees.
Major banks have already started incorporating climate risk into their investment decisions to reinforce their commitment to net zero. Many are also expected to integrate climate risk assessment based on carbon accounting into their loan decision-making process. Deutsche Bank, for example, aims for €500 billion in cumulative ESG financing and investment volumes by the end of 2025 and aims to actively reduce the indirect financing of emissions. Deutsche is just one of many banks part of a collaborative initiative led by industry in conjunction with the UN called The Net-Zero Banking Alliance. With participating banks accounting for over 40% of global banking assets, the alliance aims to align their lending and investment portfolios to achieve net-zero emissions by 2050.
Making carbon accounting easy and reliable is a $60bn market opportunity
Carbon accounting is complex
Carbon accounting involves categorising and measuring emissions in three scopes: Scope 1 for direct emissions from a company’s operations, Scope 2 for indirect emissions from purchased electricity and heating, and Scope 3 for emissions from the entire supply chain.
Data for scopes 1 and 2 are accessible internally but require streamlining through automation and APIs. Scope 3 data collection is complex due to numerous external suppliers, leading to limited visibility and understanding of emissions.
Only 13% of companies can fully map their supply chain, while many large businesses lack visibility beyond their immediate suppliers. New EU and SEC reporting requirements on Scope 3 emissions create concerns, but also offer significant opportunities for start-ups to help companies overcome these challenges.
Sustain.Life democratises sustainability by offering tools to measure, manage, and report carbon emissions and environmental impact, making it accessible and affordable for businesses. The platform is user-friendly and powered by integrations with a wide range of providers, ensuring accuracy of generated data.
Software solutions simplify carbon accounting
Carbon emission accounting and assessment have long been the domain of consultants and auditors whose services have often had limited effectiveness and come at a high cost. Today, these players have been joined by a new wave of innovative start-ups leveraging data analysis, automation, and domain expertise to make carbon accounting simpler and more accessible to businesses of all sizes.
Besides helping companies with compliance, Greenly also tailors its accounting software for all businesses, including SMEs. It simplifies data collection by integrating with the existing company applications (e.g., accounting software) and uses data analysis at scale to account for carbon emissions. By doing so, it creates an automated and low-touch experience for SMEs, which often lack the time and resources to measure their own emissions
San-Francisco based Sinai specialises in automating carbon analysis and reporting for businesses operating in carbon-intensive sectors, its offering includes financial models that enable companies to assess internal carbon pricing and quantify their emission targets.
From accounting to acting
Integrating across the carbon value chain
Carbon accounting is crucial in carbon markets, where companies use it to monitor, verify, and offset their carbon emissions. Carbon markets charge fees on carbon-producing activities, motivating companies to reduce emissions by adopting cleaner energy sources. Emissions Trading Systems (ETS) limit total emissions but allow trading of permits and credits, establishing a market price. Companies can voluntarily commit to reducing their carbon emissions or achieving net zero by purchasing credits from others who have reduced or sequestered emissions.
This has led to a rise in start-ups generating carbon credits through reforestation projects or collaborating with farmers. Some start-ups like CarbonFuture offer digital marketplaces for transparent and secure trading of carbon certificates. German start-up CarbonFuture recently raised €5.5 million and is a leader in the $50 billion carbon credit market expected by 2030.
Other start-ups like Toucan Protocol and Topl use blockchain platforms to authenticate and track carbon credits securely, preventing fraud and enhancing transparency.
Setting plans for carbon reduction
Carbon accounting start-ups are also using data to provide companies with dedicated plans to reduce their carbon footprint and develop strategies for achieving net zero emissions.
Greenly and Emitwise are two such companies that offer this in addition to their other core software solutions. Greenly provides plans for companies to assess their footprints and gives recommendations to reduce their emissions. The company’s reliance on software and data analysis makes its offering well-suited for smaller companies looking to reduce and better understand their emissions.
Emitwise offers comprehensive and easy-to-follow five-step plans for companies seeking to achieve net-zero targets. These plans include dynamic mapping, tracking, and reporting of a company’s carbon activities, helping facilitate a more effective path to carbon neutrality.
A new era of responsibility and accountability is here
As consumer awareness of climate change grows, regulations proliferate, and carbon markets continue to mature, the need for companies to account for their carbon emissions will become increasingly imperative to remain compliant and competitive.
Digital-first solutions have a remarkable opportunity to flourish and scale within this evolving and complex environment, as measuring different scopes will require significant data analysis capabilities. There are also substantial opportunities for carbon accounting start-ups to cultivate distinctive domain expertise and establish themselves as industry leaders. Aggregating supplier data within a particular sector can unlock more precise insights on scope 3 carbon emissions measurement, the holy grail for companies with vast supply chains and limited visibility.
Looking ahead, the projected growth of the carbon accounting software market is expected to quadruple to over $60 billion between now and 2030. With the market for carbon credits hitting upward of $50 billion in 2030, there’s ample room for market expansion, offering enormous investment opportunities over the coming years.
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