You Can’t Change What You Can’t Measure

The intricacies of accounting for carbon emissions are not well understood in the treasury world. Here, Warren Anadachee, Co-Head of SAP Global Treasury, Front Office and Regional Treasury, explains why treasurers need to be getting to grips with the topic, discusses the technology that does the heavy lifting, and examines the role that MMF providers can play in advancing transparent reporting.

Imagine booking a flight online. You choose your destination, select the most suitable time to fly, and then head to the checkout. There you will see the price of the flight itself as well as a breakdown of the additional charges: hold luggage, a specific seat, speedy boarding, pre-paid meal voucher, the list goes on. And with this hefty total in front you, you will stare at it trying to decide whether you really need to make this journey after all.

The financial impact is quantifiable and will be expensed with a monetary value. But what about the environmental impact of this particular purchase? How can that individual transaction’s impact on the planet be quantified and accounted for?

This is an issue to which Anadachee has given a lot of thought, and transactional carbon accounting is his answer to such questions. He explains that it is a new way to record, report, and act on carbon emissions using actual transaction data, rather than aggregated averages to account for carbon emission.

Many treasurers are familiar with sustainability reporting, and there are estimates of the various levels of carbon emissions caused by companies, he explains. However, no reporting is available on such emissions resulting from individual transactions. With the example of a business flight, there is a clear financial cost, but there is no accounting for how much carbon has been used for an individual’s seat on a particular flight.

“[SAP’s] Green Ledger is a technology that will enable transaction carbon accounting, making it possible to quantify the greenhouse gas emission of business transactions across the value chain,” explains Anadachee. This uses the same principles as financial accounting, including debit and credit, to reach a balance.

We can’t wait another 2,000 years for change

Why is this important? Anadachee gives three reasons. First, he says, customers, shareholders, and investors are increasing the pressure on companies to provide more accurate, reliable, and transparent carbon emission data. Second, is to ensure corporate compliance with a broad range of regulations. Third, he explains, this data can be used to steer companies towards net zero.

Anadachee anticipates an increased regulatory demand for more accurate, reliable, detailed and specifically auditable carbon reporting from corporations. However, the regulation is not forcing reporting on a transactional level. Regulation is in place more broadly, but it is still in its infancy, he says.

“If we look at financial accounting, it took thousands of years to evolve. Simple accounting already existed in 2000 BCE and the system of debit and credit was invented in the 15th century. So eventually, in my view, carbon accounting will replicate the accuracy and reliability we currently obtain with financial accounting. It’s fair to say it will take time – but I do hope it’s not 2,000 years!”

Anadachee continues: “The issue of climate change, which is very dear to me, goes beyond regulation. It necessitates the proactive involvement of us both as individuals and companies. Carbon accounting and the regulation would primarily serve as a framework to enable companies to generate the necessary data so that they can steer toward a net-zero future.”

“Regulation is a primary driver, but we should not also forget about customer behaviour,” he adds.

As well as regulation being a catalyst for change, competitive advantage and customer pressure also have roles to play, plus the input from a younger generation that has a keen interest in sustainable products.

In the same way that consumers look at product packaging for information on an item’s provenance, what it contains, and so on, Anadachee expects to see similar information related to the environmental impact.

“For me, it is conceivable that, in the future, thanks to carbon accounting, people are also going to request more transparency about companies’ emissions. Customers will make a choice based on that information”.

Squaring up to the future

On the question of what needs to be done to implement that change, and the technology that can facilitate carbon accounting, Anadachee notes there has been significant progress. SAP, for example, has a number of solutions: the Sustainability Data Exchange helps capture carbon data; the Sustainability Footprint Management assists with measuring the footprint of carbon emissions, and Green Ledger enables the booking of carbon emissions on a transactional level. “With AI being added to the pool of technology, we can certainly expect an acceleration,” predicts Anadachee.

However, in terms of the next steps for treasurers regarding carbon accounting, he believes it will be a long journey to adoption.

The first step, he advises, is to assess the low-hanging fruit, and treasurers should examine areas where there is the potential to improve and bridge the gap with a carbon-accounting model. One area that lends itself to this focus is the ESG MMF. There is currently a lack of visibility on the impact on climate change from this category of ESG-branded product, as well an absence of any data-recording mechanism, Anadachee points out. 

He argues that treasurers would be wise to start thinking about this now because future regulation will likely require companies to report carbon emissions on a transactional-level basis.

Treasurers have an important role to play, he argues, and they should not be hesitant to face this responsibility. “We are involved with moving money. In my view, money is closely related to the environment: where funds flow, what sort of activities receive finance, how we measure return on investment – all of these questions have consequences for climate change,” he points out.

“For me, global treasury and treasurers have a prime seat at the table regarding fund flows and investment. For corporate treasurers, there will come a time when more transparency, reliability, and measurability will be required,” he warns. “I fear if we don’t start now, we will have a very short runway upon which to react.”

It’s not just treasurers who can take action, however. MMF providers also have a role to play. Currently, MMFs in Europe can classify themselves as ESG compliant if they meet the requirements outlined in the EU’s Sustainable Financial Disclosure Regulation (SFDR). Anadachee explains that most MMFs currently belong to the Article 8 classification, which applies to funds with environmental and social objectives, and very few have made it to the stricter classification of Article 9, which relates to products with a sustainable investment objective.

Let’s put our heads together

Another issue the industry faces is that MMFs interpret ESG in very different ways, which makes it difficult for treasurers to compare the funds.

“If we are not able to measure the impact, then it is not possible to have any data that could create transparency in the carbon accounting system,” points out Anadachee. “I would like to see an honest and constructive discussion among regulators, MMFs, and corporate treasurers on how we can come up with a solution that helps us to understand the impact that ESG MMFs funds have on climate change.”

He continues: “Obviously, this is a journey, and different businesses and companies will be at various stages, depending on the priorities assigned to carbon accounting and ESG. But in terms of the finance world, the Partnership for Carbon Accounting Financial [PCAF], which is starting to create methodology to measure carbon emissions with financial activities, is an extremely interesting development.”

Anadachee emphasises that the corporate world possesses the influence to drive change. He points out that MMFs are a conduit for the flow of money – which globally amounts to billions of dollars annually – and corporates have an important part to play. If everybody put their heads together, he says, they could come up with  a formula which could be applied.

He notes there is a trend in the US of MMFs moving away from the concept of ESG and towards impact investing. “We have a number of D&I brokers who are partnering with MMFs to help channel funds, through the fees they receive, to social causes. We see the impact of our investment and the funds that are going to these causes. We can also compare the MMFs so we can have a direct comparison because we have measurable data.”

In terms of the next steps, he comments: “First, let’s be open minded and proactive on the topic. Whenever I speak to treasurers [about climate change and emissions], I receive an extremely mixed message. People say, ‘It’s not my job, it’s the sustainability department’s’, or ‘it’s the accounting department’s.’

“But I think climate change concerns all of us. It goes beyond our profession”, he says, adding that treasurers are uniquely placed to have an impact and make a difference. “We are major stakeholders in the money market space, for example, and our voices should be heard.”

Warren Anadachee spoke to TMI in a personal capacity and his views do not necessarily reflect those of SAP.