You won’t believe how corporate emissions measurement is booming, even with data gaps!

The carbon accounting business is booming as regulators, investors and consumers demand more information about companies’ greenhouse gas emissions, despite concerns about the validity of the data.

Venture capital investments in carbon accounting firms rose from $60 million in 2020 to $767 million in 2022, according to data firm PitchBook. The trend has continued into 2023, with VCs investing $333 million in the industry so far this year.

The push comes as companies prepare for complex disclosure requirements expected to go into effect in Europe and the US over the next year, combined with pressure from investors and customers to appear climate-friendly.

The first of the wave of standards came in June with the release of guidance from the International Sustainability Standards Board on how to calculate emissions across supply chains.

The measures were less stringent than initially expected, after the ISSB said in December it would give companies an extra year to report emissions across the entire value chain. But the launch is still an incentive for many companies to start a higher level of tracking.

“This is a good opportunity for companies to get their houses in order,” said Adam Hearne, chief executive officer of CarbonChain, which raised $10 million in Series A funding earlier this year.

The surge in investment coincides with the US Inflation Reduction Act, which offers tax incentives to boost green technology.

In Europe, the Corporate Sustainability Reporting Directive will require companies to report emissions from 2024 to 2028, depending on company size.

Paris-based carbon accounting start-up Greenly said nine out of 10 clients were new to thinking about climate effects. He lifted $32 million in a Series A financing round last year.

“Nobody needed it a few years ago, but now 250-person companies are tasked with doing it and they don’t know where to start,” said Greenly’s chief executive officer Alexis Normand.

But the lack of concrete rules has led companies to resort to a variety of methods.

Some go directly to suppliers for granular data, and many use so-called “emission factors”, a unit that, multiplied by the amount spent or used, calculates the equivalent amount of carbon dioxide.

For example, if an office chair costs $100, its price will be multiplied by an emissions factor, which takes into account the average amount of carbon generated for every dollar spent on office chairs. Alternatively, an emission factor could be used to represent the amount of materials used in one of the chairs.

Emission factors are often derived from scientific studies and databases provided by bodies such as the United States Environmental Protection Agency and the United Nations Intergovernmental Panel on Climate Change. But their use has been criticized for lack of precision.

“Imagine if the [US Securities and Exchange Commission] he said everyone has to report return on assets, but didn’t bother to say how to calculate it. . . if you’re a greenwasher this is like heaven,” said Karthik Ramanna, professor of economics and public policy at the University of Oxford.

McKinsey’s Peter Spiller, sustainability leader in operational practices, likened it to producing annual financial statements “based on your industry’s average revenues and average costs. It’s becoming clear that it’s relatively stupid to do it that way.”

Transparency is another issue; some vendors are reluctant to provide information due to the commercial sensitivity of the data.

“The oil industry has traditionally been quite secretive, because if you know how much energy a company uses in refining, you also know the cost basis of the barrels of oil it’s processing,” Hearne said.

Comparisons are also often difficult, as different units of measurement are used. Georges Tijbosch, chief executive of the MiQ group, which attempts to certify methane emissions from oil and gas, said measurements need to be standardised.

“If you just look at gas, you can express it in cubic feet, cubic meters, megawatt hours, and in scientific papers they can use megajoules,” Tijbosch said. “[Procurement managers] don’t think in megajoules.

There is a widely used standard, known as Greenhouse Gas Protocol, established by non-profit organizations. But some sustainability experts argue that it is not fit for purpose due to the difficulty of obtaining emissions data and the risk of double counting.

By far the biggest challenge for companies is how to account for the decisions made by suppliers that are further away in the supply chain. It can be very difficult to take into consideration all the products and services that a business purchases from third parties, such as business travel, as well as how consumers use its end products.

Meanwhile the SEC is mired in wrangling over its own proposed disclosure rules. It’s unclear when they will go into effect; The agency’s request for comment attracted a record 15,000 responses, including calls for exclusion from highly polluting industries such as agriculture.

SEC Chairman Gary Gensler said the regulator is considering “adjustments” based on the feedback, with a decision expected in October.

Despite its many shortcomings, carbon experts argue that it remains valuable in trying to estimate emissions.

“If you can verify it [a commodity] has lower carbon intensity, a company may pay more for it because of how it fits into their carbon goals,” said Matt Babin, head of energy and natural resources at Palantir Technologies.

Palantir’s customers include Trafigura, one of the world’s largest commodity traders, which feeds information to Palantir’s data analytics platform, Foundry, about its emissions, as well as supplier and buyer data.

Carbmee, a Berlin-based start-up, uses its customers’ emission factors and transaction data to calculate its emissions. Co-founder Robin Spickers, a mechanical engineer by training, said customers could then be informed when choosing new materials or suppliers.

“Markets are starting to find this information useful and are demanding more of it,” said Ramanna of the University of Oxford. “But it’s still very much a wild west where there’s very little architecture and very little consensus about what constitutes good accounting.”