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Original research article, past, present, and future of carbon accounting: insights from scholarly research.

• 1 School of Accounting, Yunnan University of Finance and Economics, Kunming, China
• 2 Deanship of Electronic and Distance Learning, Department of Accounting and Finance, University of Science and Technology, Aden, Yemen
• 3 Department of Accounting, College of Business, Jouf University, Jouf, Saudi Arabia
• 4 Faculty of Commerce and Economics, Amran University, Amran, Yemen
• 5 Department of Accounting, College of Business Administration, Umm Al-Qura University, Makkah, Saudi Arabia
• 6 Department of Finance, Universal Business School, Mumbai, India
• 7 Faculty of Forestry and Environment, Universiti Putra Malaysia, Selangor, Malaysia

Although accounting functions have been expanded from traditional practices to recent practices, focusing on environmental, social, and governance issues, there is still a shortcoming in conceiving different approaches to creating organizational and human interaction with the environment. In this study, we review the existing research on carbon accounting from 1994 to July 2022 in order to examine its intellectual development and make recommendations for future studies. This study also discusses the scales, methodological choices, and major themes of carbon accounting research, including the most influential articles and top contributing countries, journals, theories, and institutions. The literature was retrieved from the Web of Science (WoS) and Scopus databases, in which 137 articles were obtained from 62 high-quality journals in accounting, environment, and economics. There has been a significant increase in recent years in the number of studies, with the majority taking place in the United Kingdom, Australia, and China, as compared to the United States. On the other hand, the results show that traditional theories, such as the theory of legitimacy, the theory of organization, and the theory of stakeholders, have been evaluated previously. Although a firm’s characteristics and consumer behavior play an important role in improving carbon efficiency, economic and behavioral theories have been underrepresented in the existing literature. Furthermore, it is found that carbon accounting research provides a mechanism through which carbon emissions can be measured and quantified and helps in knowing the emissions status of companies and making the necessary strategic decisions to achieve mitigation. Therefore, policymakers have to foster setting international standards that would compile firms to report their carbon strategies similar to the international financial reporting standards, allowing investors to verify and compare firms that perform well in terms of carbon reduction.

1 Introduction

Researchers in many topics and disciplines have widely used the term “carbon accounting,” but it is given great emphasis in investigating aspects that discuss the integration of climate issues with accounting ( Stechemesser and Guenther, 2012 ). On the other hand, governments all across the globe have adopted various ways to encourage businesses to cut carbon emissions and alleviate the consequences of climate change ( He et al., 2021 ). Furthermore, most of the stakeholders (including investors) are exerting pressure due to concerns about future carbon laws and the physical hazards of climate change endangering infrastructures ( Rankin et al., 2011 ). Countries have strengthened corporate sustainability rules in recent years to conform to national sustainable development goals and global sustainability standards ( He et al., 2021 ). Furthermore, stakeholders’ desire for greater environmental awareness implies that carbon performance is a critical factor in most organizations’ long-term survival ( Bowen and Wittneben, 2011 ; Zhou et al., 2016 ). As a result, corporate organizations are increasingly under pressure to disclose all climate change hazards ( Eleftheriadis and Anagnostopoulou, 2015 ). Therefore, a significant amount of research on least developed, developing, and highly industrialized nations is being conducted to understand the variables that inspire and/or impede corporate carbon performance ( Kumarasiri and Jubb, 2016 ). Thus, this article has retrieved all studies related to carbon accounting from two sources, WoS and Scopus, in order to answer the following questions.

RQ1 : What is the publication trend for carbon accounting research, and what are the top contributing countries to carbon accounting research?

RQ2 : What theories and methodological choices have been investigated in the literature, and what are the focused scales of carbon accounting research?

RQ3 : What are the main themes and topics that make up the carbon accounting research structure?

RQ4 : How can the research perspective develop the profession of carbon accounting?

Previous studies have examined the literature surrounding carbon accounting, such as Stechemesser and Guenther (2012) , who conducted a literature review to define carbon accounting. Ascui (2014) presented a review of studies that discussed carbon accounting in only eight journals. Chen et al. (2019) evaluated research on city carbon accounting. He et al. (2021) reviewed corporate carbon accounting in light of the Paris Agreement. However, in light of recent advancements and legislation, the studies did not explore all aspects of carbon accounting or emphasize its role in attaining sustainability. This study examines carbon accounting from statistical and objective perspectives, comparing countries with a great interest in the topic to those where the word is less common. It will also explain the general development in the literature that discusses carbon accounting based on theories. Understanding carbon accounting, from standardizing a definition to finding jobs and tasks, it can perform for institutions and society. This study highlights the diversity of carbon accounting and the evolution of literature and research interests in carbon accounting scales. Ascui (2014) argued that there is a combination of theoretical, normative, and empirical debates on carbon accounting, including studies on carbon accounting education, carbon financial accounting, carbon management accounting, and carbon disclosure and reporting.

There has been an increase in the number of studies conducted in recent times compared to the previous decades as a result of the passage of numerous laws supporting the use of carbon accounting in mitigating carbon emissions in order to achieve sustainability, in addition to the presence of motives related to institutional demands and considerations related to creating value for institutions and strengthening the financial aspects of companies ( Chapple et al., 2013 ; Hartmann et al., 2013 ; Naranjo Tuesta et al., 2021 ). Despite this, research interest has been lacking in some countries with significant economic impact on climate, such as the United States and India ( Hazaea et al., 2021a ). This suggests that research studies should be conducted in both developed and developing countries. This review reveals that carbon accounting does not only contribute to reducing carbon emissions but also works to enhancing the financial performance of companies by enhancing competition and creating added value for institutions financially and socially, which enhances sustainability. This study also showed that the development of research from studies that depended on theoretical investigation and content analysis in the past to studies that rely on international reports for a large group of countries may enhance the broad understanding of carbon accounting as a recently used term.

We follow the definition of carbon accounting, which was based on a proposal from Tang (2017) . The author defined carbon accounting as one of the systems that use accounting procedures and methods in order to record, collect, and perform the necessary analysis of climate changes; verify the information; and report on the basic elements of assets, liabilities, expenses, and revenues that have a relationship. Thus, we have collected studies that discuss carbon accounting in accounting, economics, finance, and environmental journals, discussing carbon accounting from the perspective of the accounting profession in the social and economic sectors. Using the keyword “carbon* accounting* from WoS and Scopus, we obtained 137 studies that were used in the analysis.

In light of recent developments and regulations issued in past years, this study contributes to this field by covering the statistical and objective aspects of carbon accounting practice. We expect this study to make substantial contributions to stakeholders and corporate management in highlighting the role that carbon accounting can play in achieving sustainability as the only means by which carbon emissions can be mitigated. In addition, this study demonstrates the significance of carbon accounting in mitigating environmental risks that may affect society. In addition, this study provides an overview that allows one to understand the practice of carbon accounting as one of the new types of accounting and thus how companies’ practice contribute to achieving low-carbon economy. Finally, this study provides directions for future research that can be worked on in a way that contributes to achieving full knowledge of the practice of carbon accounting. These include working to clarify a set of internal and external factors such as economic and organizational pressures and financial and government restrictions and their effects on the practice of carbon accounting.

This review article is organized as follows: Section 1 presents the introduction, Section 2 demonstrates the methodology of the study, Section 3 reveals the results of systematic literature review (SLR), Section 4 discusses the carbon accounting themes, Section 5 highlights the directions for future research, and Section 6 concludes the study and provides implications for policymakers, stakeholders, regulator, and investors.

2 Methodology

This study relies on the structured approach of literature review, which is distinguished from traditional review in terms of the quality of the results and impartiality ( Hazaea et al., 2021b ). This study follows a rigorous, scientific, transparent, and reproducible methodology based on a search for answers to a set of predetermined questions ( Khatib et al., 2021 ; Hazaea et al., 2022 ). Studies based on the systematic approach can provide a different and new perspective based on creating more research questions and working to create and build new theories on the same subject under investigation, away from systematic errors and biases ( Hazaea et al., 2021b ). Furthermore, studies based on systematic reviews provide more replicable and realistic results compared to studies based on narrative reviews ( Kotb et al., 2020 ). We followed the approach specified by He et al. (2021) and Xiao and Watson (2019) and used by Stechemesser and Guenther (2012) , which differed from Dumay et al. (2016) in how the phenomenon is implemented and studied.

We believe that conducting a systematic study in carbon accounting may provide a clear path to discovering the information needed by stakeholders to investigate corporate practices on society and the state, as well as the economic and social consequences of carbon. We used the WoS and Scopus databases to obtain high-impact studies, as they are among the most important databases that include high-quality research articles ( Khatib et al., 2021 ). The articles included in WoS are among the most prestigious journals according to the indicators of various countries as they are one of the oldest public references and are appreciated by a wide range of researchers ( Casimir and Tobi, 2011 ). In addition, data included in WoS-indexed journals can reflect academic development and real research results ( Xu et al., 2019 ; An and Alarcón, 2020 ). Covering the limitations of using the WoS database only as a basis for conducting studies based on the systematic review may lead to not including relevant research results ( Xu et al., 2019 ). The Scopus database has been used as one of the largest databases that include a large and wide range of journals of high quality and impact that are widely accepted by all and sundry ( Nerantzidis et al., 2020 ; Hazaea et al., 2021a ).

We reviewed some previous studies ( Schaltegger and Csutora, 2012 ; Cacho et al., 2017 ; Gibassier et al., 2020a ) to identify the gaps and research questions that this study answered. We used the keyword “carbon* accounting *” in search of relevant documents . We did not limit the years for our study; therefore, the articles started from 1994 until July 2022. The search result from the WoS database revealed 395 studies and 307 studies from the Scopus database. We used a protocol based on several points, the most important of which are 1) studies should be in English language only, 2) studies should be published in journals; therefore, the conference papers and books are excluded, and 3) the articles were published in accounting, finance, and economics journals or articles, discussing carbon accounting and published in environmental journals. Therefore, all articles that discuss carbon accounting with no focus on the subject matter of accounting were excluded, and duplicate documents were also excluded. In total, 137 articles met the inclusion (research protocol) criteria and were retained for the analysis. Figure 1 shows the mechanism of action to obtain the final sample.

FIGURE 1 . Research protocol. Adapted by Hazaea et al. ((2021b) , p. 5)

3 Results of SLR

3.1 publication trends per year.

Figure 2 shows the distribution of the literature that discusses carbon accounting based on the year of publication. The figure shows that researchers’ interest in this topic has grown significantly over the last 10 years, especially between 2019 and July 2022. This increase could be explained by the growing need from international organizations to increase clarity through enhanced research on carbon accounting ( Hartmann et al., 2013 ). These statistical findings corroborate the findings of previous studies, which indicated that carbon accounting in the modern era has sparked widespread interest. Alsaifi et al. (2020) and Ascui and Lovell (2012) emphasized that carbon accounting has developed rapidly in the last decade. The results of Schaltegger and Csutora (2012) showed that there is a rapid development in carbon accounting as it is one of the important areas in the development of sustainability management due to the requirements of climate change, which seek the search for modern methods and mechanisms and its development through scientific research. On the other hand, some countries, such as Australia, have started issuing national plans to examine the importance and impact of the necessary testing services on the stock market using carbon accounting ( Chapple et al., 2013 ). In addition, the expansion of the programs used to reduce carbon emissions as a result of the demands of institutions to develop carbon accounting to meet environmental changes so that it can be used in preparing reports and making decisions, which contributes to creating value for institutions ( Hartmann et al., 2013 ). As for the results of the study conducted by Le Breton and Aggeri (2018) , it is revealed that the field of carbon accounting is emerging, and therefore there is great interest from researchers to know the topic from its various aspects, especially with its connection to environmental changes. Nartey (2018) emphasized that carbon accounting is considered a part of sustainability accounting, through which it is possible to provide information on emissions in environmental changes that benefit the management of institutions in a way that contributes to achieving sustainability. This may be one of the important indicators to explain the interest of researchers in recent years in this topic. The results of other studies, such as Soni and Bhanawat (2018) , show that the need to know the role of carbon accounting in reducing emissions has made researchers conduct multiple studies to achieve this. As a result of climate change, companies are facing many challenges related to carbon accounting, which could be the reason for the increase in literature discussing carbon accounting.

FIGURE 2 . Publication trends per year.

3.2 Literature distributions by country

In this part, we reviewed the country covered by the studies to identify the country and region that pay attention to this topic and determine the reasons for that. It appears from Table 1 that the countries belonging to the European continent are the countries that have taken greater interest than countries on other continents. Therefore, 10 studies were conducted in the United Kingdom, and five studies were carried out in France, totaling 15 studies in Europe. The results indicate that European countries are researching carbon accounting more than other countries because global climate change impacts Europe in many ways: changes in average and extreme temperature and precipitation, warmer seas, increasing sea level, and declining snow and ice cover on land and sea. These have had a wide range of effects on ecosystems, socioeconomic sectors, and human health. Some studies show that the European countries’ introduction of emissions trading in 2005 necessitated a significant amount of knowledge in order to determine the activities related to carbon accounting. In addition, the skills and capabilities of accountants should be developed to enable them to disclose strategic and physical climate information and how to enhance it. This promotes standards for disclosing strategic and material information related to climate ( Ascui and Lovell, 2012 ). In France, too, some laws require commercial companies to include carbon labels on all consumer products and information related to carbon dioxide ( Martineau and Lafontaine, 2020 ). Australia and China came second, with nine and eight studies for each country, respectively. This may also be because the Australian government has worked to present many national schemes for emission trading. Therefore, the study by Chapple et al. (2013) confirmed that their goal is to investigate the impact of educational testing services on the stock market. In addition, the effects of implementing a mandatory carbon reporting system have not been detected ( Hartmann et al., 2013 ). Therefore, this may be some of the reasons for the increase of studies in this country. The absence of studies that discuss carbon accounting in countries with a high impact on industries and environmental changes, such as the United States and Turkey, as well as some countries that pay less attention, such as China, is surprising and scary, and therefore, future studies may take research samples or a case study on these countries. In addition, future studies can discuss the impact of issuing laws that require companies to issue carbon accounting reports and reports related to environmental changes and carbon emissions and their contributions to reducing emissions and achieving sustainability. It should be noted that the use of data from multiple countries appeared from 2018 to 2022 in a large way, which is evidence of the great orientation of researchers toward this topic to identify the importance of reducing emissions at the regional and international levels. More studies based on these reports can improve carbon accounting research.

TABLE 1 . Literature distributed by country.

3.3 Underpinning theories

In Table 2 , cluster 1, we review the theories used in the literature. The analysis results show that there are 67 theories used in 79 studies. In contrast, the other studies included in the sample of this study, which amounted to 58 studies, did not use any theory. We follow many studies that used this classification, which is useful in knowing the extent of the impact of previous studies and the clarity of their results ( Hazaea et al., 2021a ; Khatib et al., 2021 ). Statistical results show that the theory of legitimacy came first, as it was based on 34 studies. This is evidence that this theory is the most important theory that has been investigated to explain the environmental and social aspects and the extent of their disclosure ( Solikhah et al., 2020 ). Stakeholder theory came second, which was based on 25 studies. This theory emphasizes that the pressure exerted by stakeholders determines companies’ environmental behavior and practice ( Kumarasiri, 2017 ), as well as the theory of the institution, which was used in 18 studies. This theory works to describe the changes that occurred in successive periods and to work on evaluating the development of accounting systems to facilitate obtaining the relevant information related to it. We note that the development of the literature has also resulted in a development in the use of new theories that are different from the traditional theories. In addition, the results of statistical analyses show that contemporary studies have used more theories than the older studies, and this is one of the indicators that come to the development of scientific research in this subject. It should be noted that 58 studies, with more than 40% of the studies sample, did not use theories. Future studies should expand the use of theories related to carbon to obtain clearer results and understanding, which contributes to knowing the role of accounting in reducing carbon emissions clearly.

TABLE 2 . Analytical framework of the studies.

3.3.1 Legitimacy theory

This theory is one of the most important theories that explain the environmental and social aspects of accounting ( Nartey, 2018 ). This theory works to clarify the correlations between emissions from all units of revenue (or environmental performance) and economic- and location-based performance to identify and disclose opportunities that result from climate change ( Ascui, 2014 ). Some studies have indicated that legitimacy theory can be used to voluntarily disclose carbon determinants, which helps companies in interpreting and analyzing pressures imposed by society, government, and external parties. The theory also contributes to the development of effective methodological frameworks that enhance the transparency of carbon emissions controls ( He et al., 2021 ). Despite the great importance of this theory in explaining the mechanism of decision-making according to the environmental changes of individual companies, it is not sufficient to explain the significant expansion witnessed by the practice of carbon auditing ( Tang, 2019 ). Finally, it is argued that the legitimacy theory is one of the most important theories for explaining organizational behavior; developing and implementing mechanisms, directions, and policies for social responsibility; and communicating their findings ( Zyznarska-Dworczak, 2018 ).

3.3.2 Stakeholder theory

This theory is one of the political economy theories that is frequently used in carbon accounting. This theory explains the pressure exerted by stakeholders on institutions and organizations and their effects on environmental and management decisions ( Ascui and Lovell, 2012 ) and also confirms that companies that enjoy high-quality governance tend to be more knowledgeable and aware of the issues resulting from climate change, which motivates them to improve national production in line with the expectations of stakeholders and society ( Luo, 2019 ). According to this theory, the achievement of sustainability by enterprises requires more pressure on the issues of social consequences and climate change than enterprises currently undertake in the various organizational activities ( Naranjo Tuesta et al., 2021 ).

3.3.3 Institutional theory

This theory is one of the most important theories used in environmental accounting studies and carbon reports ( Nartey, 2018 ). According to this theory, working to mitigate climate change is a stem issue, which can be solved using various methods, employing regulatory areas in the overlapping carbon accounting ( Callon, 2009 ). Institutional theory can explain the strategies and options available for carbon accounting companies to develop to respond to regulations and policies resulting from climate change to gain legitimacy ( Haraldsson and Tagesson, 2014 ). As a result of new policies and regulations that may lead to the imposition of carbon costs and increase the change in competitive standards between sectors and industries, the enterprise theory may contribute to the explanation on how the institutional environment can create or increase the economic and competitive advantage of companies more than the competitive advantage supported by resources—internal affairs of these institutions ( Ratnatunga and Jones, 2012 ).

3.3.4 Resource dependence theory

This theory is based on the assumption that companies must deal with the environment that surrounds them, including companies and other institutions, to obtain resources ( Archibald, 2007 ). Many studies show that this relationship and participation include many benefits and reciprocal dependencies between all parties, including environmental pressures that affect making changes in internal components of companies, such as members of boards of directors and their actions to obtain resources ( Davis and Adam Cobb, 2010 ; Mardini and Elleuch Lahyani, 2021 ). In addition, this theory emphasizes the importance of providing resources to be available to those in charge of the board of directors ( Hillman and Dalziel, 2003 ). Based on these findings, we conclude that this theory contributes to providing a deep vision that clarifies the rationale for appointing competent and experienced managers in a way that facilitates the provision of a better understanding of the various situations and practices, including environmental problems ( Khatib et al., 2021 ), especially in industries that are associated with a high carbon impact, such as opaque industries.

3.3.5 Other theories

Studies that discussed carbon accounting included many other theories that focus on and are interested in analyzing the relationship between accounting and environmental changes. Contingency theory assumes differences in carbon accounting practices that reflect the personal needs of institutions and companies ( Nartey, 2018 ). Therefore, this theory assumes that the practice of corporate managers aims to search for solutions based on individual actions ( Burritt et al., 2011 ). Input–output theory shows that carbon accounting has a strong and deep relationship with economic methodology ( Kennelly et al., 2019 ). Therefore, carbon accounting can provide a deeper understanding of carbon accounting methods than other accounting methods based on production ( Kennelly et al., 2019 ). The signaling theory is one of the theories that is used in carbon disclosure, as this theory confirms that companies are working to reveal their true position that appears through reports regarding carbon emissions as a result of the market, social, economic, institutional, and regulatory pressures due to their association with disclosure incentives ( He et al., 2021 ).

3.4 Organization focus

This part discusses the distribution of the literature on the type of unit or sector in which the study was conducted. Through this distribution, it is possible to identify the parties interested in applying carbon accounting. This classification has been followed in many recent studies; for example, Kotb et al. (2020 ), Hazaea et al. (2021a ), and Hazaea et al. (2021b contribute to identifying the sectors in which carbon accounting research has been conducted. Table 2 , cluster 2, shows that the number of research studies conducted without specifying the sector in which the research was conducted or the investigative studies based on general/no determined/NA came first with 78 studies, as these studies did not specify the type of institution in which the research was conducted. Due to encouragement from some governments, such as China, the public sector studies came in second with 28 studies. The third is the studies conducted on the stock markets with 26 studies. We expect that there are factors that may encourage researchers to conduct research using data from the public and governmental sectors, especially in light of the desire of governments to encourage researchers to discover the phenomenon more, which facilitates the implementation and practice of what the state seeks properly, especially about environmental changes. Surprisingly, no studies address carbon accounting in the private sector, which necessitates additional research and investigation in future studies. Moreover, future studies may increase the importance of carbon accounting in the economic sector based on data from public reports of international organizations and institutions. Furthermore, studies need to be conducted in a number of public sectors, especially in countries such as China, the United States, Malaysia, and Russia that have a significant environmental impact ( Tang, 2019 ; He et al., 2021 ; Ong et al., 2021 ).

3.5 Types of carbon

In Table 2 , cluster 3, studies are distributed based on the transformations in the concept and function of carbon accounting. It was divided into four sections based on the distribution approved by Csutora and Harangozo (2017 ): 1) carbon accounting (direct emissions), 2) carbon accounting (with indirect emissions), 3) climate change accounting, and 4) environmental management accounting. In addition, we made an additional distribution of studies (others) that did not primarily clarify their classification. Environmental management accounting came first with 39 studies. This type came as a result of the increasing interest of companies in early development at the company level (environmental costs). These studies focus on how to save costs when using available resources ( Lohmann, 2009 ; Warwick and Ng, 2012 ; Chapple et al., 2013 ). Climate change accounting came second with 37 studies. This type emerged due to companies shifting to focus on costs resulting from climate adaptation instead of focusing on costs associated with emissions ( Csutora and Harangozo, 2017 ). This type focuses on providing comprehensive and systematic coverage of all of the impacts of climate change, supply chains, and product costs, thus broadening the horizon toward climate accounting as an alternative to carbon accounting. Carbon accounting (direct emissions) came third with 31 studies. This type of carbon accounting focuses on the audit and reporting of carbon-related emissions at regulatory levels. Companies tend to increase their regulatory attention to climate change of this type. Carbon accounting (with indirect emissions) came with 18 studies. This type focuses on providing systematic and comprehensive coverage of carbon emissions and supply chains and costs associated with products. In contrast, this type of carbon accounting was developed because companies focused on the effects of overseas production and needed to know what these effects were ( Csutora and Harangozo, 2017 ). There have been 12 studies that discuss other topics related to carbon accounting.

3.6 Types of articles

In this section, we review the types of studies that discussed carbon accounting. The studies were divided into seven types, as shown in Table 2 , cluster 4; first came the studies that used annual reports with a number of 54 studies, and this may be due to the ease of obtaining reports from government institutions and stock exchanges. It is noted that there is a tendency to conduct research from realistic data based on reports that companies or organizations maintain to ensure obtaining real results that are closer to reality ( Ghani et al., 2018 ; Kotb et al., 2020 ), where these studies discuss the role of carbon accounting in the system ( Sial et al., 2021 ), the effects of corporate governance on carbon accounting ( Cordova et al., 2020 ; Luo and Tang, 2021 ), carbon accounting and financial performance ( Naranjo Tuesta et al., 2021 ), preparing financial reports and practicing disclosure ( Kumar and Firoz, 2020 ), the impact of the emissions trading plan resulting from the impact of the capital market ( Chapple et al., 2013 ), and carbon management and firm value ( Shrestha et al., 2022 ). The results of these studies show the importance of carbon accounting in controlling climate change and reducing emissions, thus enhancing the performance of companies financially, environmentally, and organizationally, although it is necessary to conduct research based on the application of the case or explain the impact based on appropriate analysis in the field of knowledge of emissions, which may not be covered and known through the use of reports. These indicate the need to conduct various studies based on different methods of analysis.

As a second group, the authors used content analysis and observation with 33 studies, which may reflect the difficulty of analyzing data from companies. Thus, researchers tend to analyze the content. In contrast, researchers paid less attention to studies based on questionnaire and interview, which is where future studies may focus. These can provide more realistic information on carbon emissions and the role of carbon accounting in mitigating them. Carbon accounting is compared to traditional accounting in reducing carbon emissions, where data collection methods based on primary data are one of the most important ways to obtain data in the search for factors that affect the economic aspects ( Roopa and Rani, 2012 ). It is also important to conduct studies using questionnaires and interviews through which it is possible to identify the various factors, whether external or internal, that affect the practice of carbon accounting, including economic, regulatory, and governance pressures, and financial constraints.

3.7 Types of journals

Based on the type and field of the journal, we distributed the literature under investigation in cluster 5 of Table 2 . Our focus was on studies that discussed carbon accounting in accounting, finance, management, environment, and sustainability, and we obtained 137 studies included in this category ( Hazaea et al., 2021a ; Hristov et al., 2021 ). Journals are classified into three types. The first type includes accounting and auditing journals, the second type includes finance and economics magazines, and the third type includes environmental and sustainability journals.

Table 2 , cluster 5, shows accounting and auditing journals had the highest number of studies, with 69. The accounting, auditing, and accountability journals came first with 11 studies; sustainability accounting, management, and policy journals ranked second with 10 studies; accounting and finance journal with five studies; and Australian Accounting Review with four studies. The reason for this large number of studies in accounting journals may be due to the protocol we followed in analyzing studies that discussed carbon accounting in the accounting field only. In addition, it may be an indication of the link between carbon accounting and the field of accounting in the economic and financial aspects, given the achievement of some studies and the application of carbon accounting as being mainly related to emissions without linking them to the economic aspect. Although the sample under investigation was confined to discussing carbon accounting research in the fields of accounting, economics, and finance, the literature published in the journals of environmental and sustainability came second with 47 studies. This indicates the view of researchers and those interested in considering carbon accounting as an environmental accounting issue that aims to help companies reduce environmental emissions. The Journal of Cleaner Production came first with 14 studies. In addition to the accounting and auditing journals we mentioned earlier, this journal is a pioneer in publishing environmental accounting topics. With 21 studies, Journals of Economics and Finance ranked third.

It should be noted that these journals emphasize the important role of carbon accounting in reducing emissions and preserving the environment. It is important to note that most of the journals that discuss the topic of carbon accounting are among the best journals among researchers, which have a high impact factor, such as Journal of Cleaner Production Science Citation Index, Impact Factor 11.072, Accounting, Auditing and Accountability Journal, Social Sciences Citation Index, IF 4.89, and Sustainability Accounting, Management and Policy Journal, SSCI, IF 3.96. The impact of these studies on regulators, stakeholders, and readers can be determined by the importance of the research findings of these studies.

3.8 Focus of the study

We followed Stechemesser and Guenther (2012) and then divided the studies based on four scales, namely, national scale, project scale, organizational scale, and product scale. We adopt this analysis in order to be able to display the content and focus of the studies under investigation. In our distribution and when determining the metrics in each article, we encountered some difficulties in classifying some articles, and therefore the scale that was explained more was adopted considering the article belongs to it. Therefore, the main task in working to reduce climate change and reduce emissions falls on the shoulders of governments.

3.8.1 National scale

It can be said that this measure depends on nonfinancial accounting, that is, noncash accounting. The associated environmental changes have increased in light of the current industrial developments. Therefore, countries, especially developed countries, have worked to issue many programs and policies that seek to reduce carbon emissions by working with institutions and organizations. This is where the studies discuss the role of carbon accounting in reducing emissions at the region, city, and state levels. Therefore, many terms are used in defining this measure, such as footprint accounting, environmental and social carbon accounting, carbon emissions accounting, financial carbon accounting, and general carbon accounting, which is an accounting that includes all carbon flows that are associated with all ecosystems ( Kubeczko, 2003 ). This measure was discussed in 54 studies out of the total sample under investigation. For example, Lövbrand and Stripple (2011) discussed how climate management could be achieved in terms of technical, practical, and computational practices. It was found that carbon accounting could be used to measure flows and stocks and work to demarcate, identify, and aggregate them statistically. In addition, it insists on calculating carbon. As a result, the mathematical methods for carbon accounting can provide different perspectives on the climate. Also, Cordova et al. (2020) investigate the motives through which it is possible to explore the factors and driving forces of the strategies followed in managing carbon reduction and issuing reports in emerging countries. The results showed the presence of many factors, such as the large board of directors and the committee related to corporate social responsibility, with the reliance on social and environmental performance in the policy of executive compensation. Furthermore, the results of the companies show that countries in Africa and the United States are among the regions that report the most carbon emissions. Martineau and Lafontaine (2020) investigate whether the implementation of carbon accounting systems contributes to society’s apathy toward nature. The study results show that understanding carbon systems may push society to forget nature through the way society views the relationship between society and the environment from a neutral and emotional point of view. Therefore, it should deal with nature objectively and commodified. Table 3 summarizes some studies related to this scale.

TABLE 3 . Summary of the major existing studies regarding national scale 13 study.

3.8.2 Project scale

This refers to the nonmonetary measurement and evaluation of the emissions of heating gases and carbon and compensation for projects with the monetary evaluation of the emissions that occurred with the evaluation of compensation balances to inform the stakeholders, investors, and project owners to develop specific methodologies and methods. According to this scale, studies may focus on monetary and nonmonetary aspects together ( Stechemesser and Guenther, 2012 ). It is possible to refer to the studies classified within this scale by the presence of some terms that indicate the practice of carbon accounting under the project, such as carbon trade accounting, carbon accounting system, accounting for emissions, green accounting, and carbon flow accounting. Le Breton and Aggeri (2020) discuss how the deployment and development of a carbon accounting tool by any public organization can affect any corporate business. The findings help to reducing gas emissions and promote the transition to strategies based on carbon reduction. In addition, it can contribute to determining the financing methods for each company. Bebbington and Larrinaga (2014) discuss how carbon accounting possibilities can be explored in light of sustainability methodology and science. According to the findings of Bebbington and Larrinaga (2014) , one of the most important reasons for the emergence of carbon accounting as part of environmental and social accounting is the failure to achieve sustainable development. In addition, the current trend of accounting, in light of the demands to direct its practice toward achieving sustainability, contributed to the emergence of different types of traditional accounting. Chapple et al. (2013) discuss the empirical evaluation of the impact of a trading plan related to carbon emissions on the assumed market value of nonperforming or damaged companies. According to the findings of Chapple et al. (2013) , the penalties that companies face may result from the existence of obligations related to the extent of achieving mitigation costs or future compliance, implying that the degree of market influence dependent on the possibility capital markets being evaluated. Table 4 summarizes some studies related to the project scale.

TABLE 4 . Summary of the major existing studies regarding ( project scale 8 study ).

3.8.3 Organizational scale

This scale also focuses on the monetary and nonmonetary aspects of carbon accounting. Many terms have been used to define this type of scale, such as CO 2 (emissions) accounting, carbon (statement) accounting, carbon cost accounting, and carbon management accounting ( Stechemesser and Guenther, 2012 ). In this type, a distinction must be made between environmental accounting and its use in financial accounting and management accounting ( Ratnatunga, 2008 ); hence, the need to distinguish between carbon financial accounting and carbon management accounting is required ( Ratnatunga, 2007 ). Mardini and Elleuch Lahyani (2021) assess the extent to which the presence of foreign managers in the management of enterprises is related to the performance of companies’ carbon emissions and disclosure. The findings of Elleuch Lahyani (2021) revealed that the presence of foreign directors on company boards is associated with a significant positive impact on disclosure and carbon emission performance. Sial et al. (2021) analyze the challenges that institutions and organizations may face while controlling emissions from heating gases, considering the complexities of climate change. The results show that transitioning toward a green economy from the traditional economy is one of the most important challenges, which requires organizations to implement high-quality administrative work based on achieving balances. Ong et al. (2021) discuss how carbon governance applied by companies can affect the practice of high carbon performance by investigating the relationship between carbon performance in companies and carbon management and the extent to which they are affected by accounting for carbon as a mediating variable. The results showed that carbon performance is positively affected by the application of carbon accounting as a vital topic that companies must apply and publish to contribute to improving the mitigation of carbon emissions. Table 5 summarizes some studies related to carbon accounting.

TABLE 5 . Summary of the major existing studies regarding organization scale 8 study ).

3.8.4 Product scale and others

This scale is concerned with nonmonetary aspect of carbon accounting. Many terms have been used to define this measure under carbon accounting, such as CO 2 accounting, carbon flow accounting, and greenhouse gas accounting ( Stechemesser and Guenther, 2012 ). Although the use of this scale is considered new, 30 studies from the sample investigation discussed this scale with its incorporation into other issues in some studies. Wilting and Vringer (2009) discussed the consumer approach as an alternative approach to environmental accounting, which includes and contains pressures related to the environment and related to domestic consumption imports. The results showed that consumers contribute to reducing the pressures related to the environment through new policies and methods. In addition, the findings show that there is a difference between international environmental pressures and consumer pressures. Feng et al. (2022) investigate the extent to which the carbon efficiency is affected by trade, taking into consideration several factors, including technological innovation, market size, and structural adjustments. The results show that trade through import and export has an important and positive impact on improving the carbon efficiency. Tang and Ge (2018) investigate the impact of the production of goods and services on carbon emissions. The results showed that producing goods and services is one of the most important factors contributing to the increase in carbon emissions. Finally, carbon accounting can be viewed on this scale by measuring emissions associated with products to enhance the awareness of consumers, media, and stakeholders. Table 6 summarizes the studies related to carbon accounting.

TABLE 6 . Summary of the major existing studies regarding product scale 7 study .

3.9 Thematic analysis

Over the past few years, researchers have become increasingly interested in assessing carbon accounting from a strategic and environmental perspective ( Ascui and Lovell, 2012 ; Le Breton and Aggeri, 2018 ; Bui and Fowler, 2019 ). Many empirical, normative, philosophical, and critical studies have been conducted with a great focus on carbon management accounting studies, carbon disclosure, carbon performance, and reporting ( Faria, 2019 ; Tukker et al., 2020 ; Dong et al., 2022 ; Han et al., 2022 ). However, it appears that there is a wide research field for future studies to work on, including carbon education, political and materialism forms of carbon accounting, capital market empowerment, and collaboration with practitioners and professionals. This will lead to the liberalization of carbon accounting and its practice for environmental and strategic assessment, providing diverse opportunities in education and practice and encouraging cooperation, which contributes to creating modern accounts free from traditional accounting practices and restrictions. To identify research gaps related to the investigation of the topics studied in the literature to guide future research to work on covering them, we conducted a comprehensive investigation of all of the articles under investigation and classified them into six categories, which are disclosure (26 studies), management and governance (45 studies), performance and policy (31 studies), assurance and efficiency (10 studies), capital market (seven studies), and others (18 studies).

3.10 Carbon disclosure

The importance of carbon disclosure has evolved significantly in recent years, as it has become one of the important issues in making strategic decisions by companies ( Alsaifi et al., 2020 ). In addition, one of the most important factors that contribute to carbon disclosure is the interest of stakeholders and their demand for reports and the increase in competition between companies ( Alsaifi et al., 2020 ). Thus, companies work to submit their carbon disclosure reports to government agencies in various ways, the most important of which is the annual corporate reports, corporate social responsibility reports, sustainability reports, or specific organizational schemes ( He et al., 2021 ). Some literature discusses the importance of carbon disclosure and the factors that contribute to motivating companies to submit carbon disclosure ( Córdova Román et al., 2021 ; Mardini and Elleuch Lahyani, 2021 ; Adhikari and Zhou, 2022 ). However, some studies confirm that carbon disclosure in developed countries is much greater than disclosure in developing countries. These are the result of several factors, the most important of which are the reports on sustainability, the policies on gender diversity, the presence of a corporate social responsibility committee, and the size of the company ( Córdova Román et al., 2021 ). The results of a study by Kumar and Firoz (2020) show that the lack of mandatory procedures by governments requiring companies to submit carbon disclosure reports is one of the main factors that encourage nondisclosure reports. The study results showed that the pressures of companies and stakeholders are among the most important factors affecting carbon disclosure. In addition, managers perceive institutional pressures ( Vaseyee Charmahali et al., 2021 ). Another study showed that the presence of foreign managers in companies is one of the most important factors in disclosing carbon as a result of their tendency to try to enhance transparency related to the environment and work to reduce information asymmetry, which enhances the improvement of the legitimacy of companies ( Mardini and Elleuch Lahyani, 2021 ). According to this analysis, reporting carbon to companies offers companies and society several benefits. One of the most important benefits is that companies are better able to understand their current situation and performance, which allows them to make appropriate strategic decisions that contribute to sustainability ( Haslam et al., 2014 ). In their study conducted on a sample of US companies, Adhikari and Zhou (2022) found that companies providing integrated disclosure reports have no challenges regarding information asymmetry. In addition, companies can enjoy low supply and demand margins. A study by Pitrakkos and Maroun (2020) found that the disclosure of carbon emissions by companies has important implications for legitimizing and reporting companies and increasing stakeholders’, regulators’, and investors’ confidence. The result of the study showed that disclosure of carbon reports could enhance and improve credibility and reality when making decisions ( Wong et al., 2019 ). Carbon disclosure can enhance and create value for companies ( Kumar and Firoz, 2020 ). Disclosure of carbon might contribute significantly to encouraging various investments to know companies’ behavior better ( Mora Rodríguez et al., 2020 ). Clearly, the disclosure of carbon by companies has many benefits, but the disclosure will not occur unless there are some incentives that encourage companies to submit carbon reporting ( Haslam et al., 2014 ). These factors may be related to the company, the community, the government or stakeholders, and financial aspects ( Tang, 2019 ). If these incentives are available, companies can disclose carbon, which may help them enhance performance, maintain their value among society, and thus achieve sustainable development ( Haslam et al., 2014 ). Finally, in light of the current situation, most carbon disclosures by institutions remain voluntary despite increased pressure, government rules, and regulations. Although some literature discusses the reasons for carbon disclosure, there is an absence of studies that discuss the role of the governmental and political sides in supporting companies to submit disclosure reports due to the fact that climate change is a fundamentally political issue. Therefore, this may be one of the main areas for future studies. In addition, we believe that providing carbon information to managers, shareholders, and government officials may allow companies to identify risks and consequences and understand their current state. Future studies can investigate this by conducting studies using interviews, or the questionnaire through which a clear explanation of these questions can be obtained. On other hand, based on economic theories, future studies can investigate the economic factors represented by the company size, profitability, liquidity, and financial stagnation and their impact on motivating companies to disclose carbon. The factors and benefits associated with disclosure can be illustrated in the Figure 3 .

FIGURE 3 . Factors that motivate carbon disclosure and benefits.

4 Please see Supplementary Appendix S1 which shows all of the factors

By presenting the drivers and determinants that contribute to carbon accounting disclosure, policymakers, researchers, and regulators of carbon accounting practice can explain and understand the pressures that companies face from society, governments, and regulatory parties. Furthermore, it can be used to create clear and effective regulatory rules and foundations that improve transparency in carbon mitigation and control.

4.2 Management, governance, sustainability, and carbon accounting

Carbon management accounting is an essential part of sustainability accounting designed to provide management information ( Nartey, 2018 ). Carbon management refers to the ability of companies to reduce the carbon emissions, resulting from the conduct of their activities ( Hartmann et al., 2013 ). In contrast, Tang and Luo (2014) indicate that it is the ability to manage everything issued by the company and has to do with carbon. Many important topics have been extensively discussed in the literature, including factors influencing carbon management and governance practices and regulatory changes in carbon management practice. The results of a study by Burritt et al. (2011) showed that carbon management provides many benefits, the most important of which are 1) gaining competitive advantages as a result of exceeding and applying regulatory and legislative requirements in reporting carbon emissions and 2) providing the ability to improve and increase the effectiveness and efficiency of information collection and dissemination. Carbon management contributes to providing and supporting all organizational levels in companies in the decision-making process and facilitating the challenges faced by decision-makers, including the challenges of compliance with energy and product innovation regulations ( Schaltegger and Csutora, 2012 ). Through the diversification of product-based carbon accounting approaches and the organization as a common carbon management accounting system, carbon management accounting can be activated and its effectiveness increased in enhancing external communication, performance, and efficiency ( Gibassier and Schaltegger, 2015 ). The results of the study by Nartey (2018) shows that several factors positively affect the adoption of carbon management accounting in companies, including the company’s strategy, size, structure, technology, and perceived environmental uncertainty. On the other hand, the result of a study by Lewandowski (2017) and Naranjo Tuesta et al. (2021) shows that carbon management accounting has a positive and important impact on improving the financial performance of companies. One of the most important challenges facing the application of carbon management accounting is climate change ( Sial et al., 2021 ).

Carbon governance is management and organizational capacity focused on involving companies in carbon activities and how carbon emissions can be mitigated through opportunities and risks, in addition to how to deal with them and the mechanisms resulting from governance ( Tang and Luo, 2014 ). According to the theories of stakeholders and the theory of legitimacy, effective governance contributes significantly to the protection of stakeholders, which contributes positively to the impact on the environmental performance of companies ( Bebbington et al., 2012 ). Some findings from the research literature revealed that there is no significant relationship between carbon accounting and carbon governance, implying that carbon governance has no effect on the practice of carbon accounting in companies ( Larrinaga, 2014 ; Ong et al., 2021 ). On the other hand, a study by Lee (2012) showed that environmental control greatly enhances the alignment between the company’s strategies in carbon management and measuring carbon performance. Thus, decision-makers in companies can benefit from the ability to provide useful information. Furthermore, carbon performance practice can be enhanced in the supply chain ( Lee, 2012 ). On the other hand, the results of Cordova et al. (2020) study showed that several factors could contribute to reducing emissions, including the size of companies and the presence of corporate social responsibility committees. Finally, it can be said that the study of carbon accounting management can contribute to understanding how accounting can manage and practice carbon management. There are different accounting principles and meanings, such as risk, performance evaluation, reporting, disclosure, accounting regulations, and procedures linked to carbon management systems, enabling companies to enhance their capabilities in reducing carbon emissions. Future studies could further investigate the factors that support the practice of carbon management accounting and the environmental factors that help achieve this.

4.3 Performance and policy and carbon accounting

Carbon performance can be expressed by measuring the quality of companies’ performance and management’s ability to control carbon emissions ( He et al., 2022 ). In the literature, the factors that affect carbon performance are discussed, such as the difficulties that companies face in measuring the quality of performance. According to a study by Luo et al., (2012) , carbon performance is positively affected by the quality of overall governance, thus enhancing corporate social responsibility toward carbon performance. According to the findings of Ong et al. (2021) , T-carbon performance is not significantly affected by the quality of carbon governance but rather is positively affected by the extent of the practice and application of carbon accounting as an important topic that contributes to carbon emission reduction. At the same time, the findings of Mardini and Elleuch Lahyani’s (2021) show that the presence of foreigners on corporate boards of directors contributes to improving carbon performance. They are working to reduce the volume of information consistency and improve environmental transparency because they rely on extensive scientific experience and knowledge to provide comprehensive knowledge and information about sustainability. As for the findings of Ong et al. (2022) , they showed that carbon accounting and carbon risk management have a significant and positive impact on carbon performance. In addition, carbon accounting has a significant positive effect on the relationship between carbon risk management and carbon performance. However, Damert et al. (2017) found that institutional pressure and financial benefits have no positive effect on carbon performance, and thus carbon competitiveness has not continued to increase. Although long-term improvements in carbon performance are not related to carbon reduction activities, eventually, Tang and Luo (2014) discovered that the quality of carbon management has a significant impact on carbon performance. Future research may expand on this topic, as the current literature does not fully explain how carbon can be measured, which may expand and increase reliability and comparability when reporting carbon emissions.

4.4 Assurance, audit and efficiency, and carbon accounting

There are studies that prove that there is a difference between assurance and audit in the regulatory and legal environment, the required competencies, the threshold of relative importance, organizational participation, the difference in accounting methods, and the quality of users of assurance reports ( Olson, 2010 ). According to Hazaea et al. (2021a) , traditional audit assurance differs from carbon assurance in that traditional audit assurance, which is based on the implementation of operations covering expenditures, revenues, and financial expenditures; reviewing laws; and reviewing internal management reports. In contrast, carbon assurance covers auditing carbon derivatives and what they are related to. Assurance functions are one of the new functions in various fields ( Zhang et al., 2020 ; Hazaea et al., 2021b ). Carbon assurance is an essential part of environmental assurance, through which it is possible to know how countries and societies can adapt to environmental changes in order to achieve economic development and strengthen national control ( Chen and Mei, 2012 ). Recently, carbon data assurance functions have been created in response to recently issued carbon-specific instructions and regulations, which require reliable and accurate information on carbon emissions ( Martinov-Bennie and Hoffman, 2012 ). Feng et al. (2022) discussed the experimental and theoretical effects of import and export trades in services on and the efficiency of carbon emissions by relying on many factors, the most important of which are structural modifications, technological innovations, and market size. The results of the study showed that there is a dampening effect on the carbon efficiency as a result of trade-in services. According to the findings of Tang (2019) , the recent increase in interest in the practice of carbon auditing was due to the establishment of carbon institutions and organizations and the interest and increase in government funding. Moreover, the result shows that carbon auditing can be used as one of the tools in economic and social reforms, which can enhance social, technical, and organizational innovation and contribute to enhancing sustainability. Córdova Román et al. (2021) demonstrate that the company’s guarantee is one of the primary motivators for disclosing of carbon emissions. The literature has dealt with the field of assurance not broadly, and therefore, future studies may work on conducting studies through which it is possible to understand and know about carbon assurance. Future research may investigate factors that promote carbon assurance. Institutional factors, governmental factors, organizational factors, and social factors are all discussed. Future studies can also be conducted through which it is possible to know the environmental impact of the countries, in which carbon assurance can be applied. On the other hand, industrial transformation and economic development are among the most important reasons for practicing carbon assurance. However, there are few studies that discussed carbon assurance in countries that are witnessing these transformations, such as the United States, China, and East Asian countries ( Green and Taylor, 2013 ; Tang, 2019 ). Therefore, this may be a research area for future studies.

4.5 Other topics

In light of the growing interest among researchers in investigating carbon accounting, we review some of the topics discussed in the literature that relates to carbon accounting. For example, Chapple et al. (2013) discuss the capital market’s impact on the Australian Government’s carbon emissions trading scheme. The findings revealed that the capital market views companies with high carbon intensity as having a low market value, indicating that the market has an impact on the emissions trading plan. Andrade et al. (2018) identify companies’ challenges when defining a production-based carbon inventory. The findings revealed that one of the most important difficulties is the lack of complete information that would help estimate emissions, especially information related to consumer services and goods. In contrast, some studies discussed different topics, such as accounting and carbon market risks ( Jin et al., 2020 ; Ong et al., 2022 ). For example, Baltar de Souza Leão et al. (2020) investigate carbon accounting and emissions inventory analysis. Kurz and Apps (2006) discuss carbon monitoring and reporting system development. Sullivan and Gouldson (2012) examine the investor perceptions and reporting carbon emissions, while Faria (2019) explains the concept of avoiding carbon emissions and environmental policy discourses. Rankin et al. (2011) highlight voluntary reporting on carbon emissions and corporate governance theory, while Chu et al. (2013) determine the factors that motivate Chinese companies to issue carbon reports. Despite the emergence of a large and rapid development in the discussion of carbon accounting with other accounting and economic topics, some are still limited.

5 Future research agenda

Herein we discuss the limitations and gaps in the literature that has been investigated, which would pave the way for future research. This study is designed to provide an answer to the four questions that were identified according to the protocol that was followed. We note that there is an indication that the practice of carbon accounting was as a result of the protocols and regulations issued in many countries, including China, Australia, and the European Union countries. Therefore, the community’s fear of the effects of climate change prompted companies to adopt the use of accounting in an attempt to mitigate the effects of the climate, which calls for action research to understand carbon accounting clearly, and this is evident through the increase in studies that have been conducted in the last 5 years compared to previous decades. This development in the literature led to the consideration of carbon accounting as an accounting and research field independent of social issues or as part of corporate social responsibility toward society. Thus, the literature indicates the importance of accounting in reducing carbon emissions. However, a distinction must be made between traditional and carbon accounting in their practice and implementation.

Traditional accounting is the basis through which carbon accounting was developed and through which sustainable development can be achieved ( He et al., 2022 ). The analysis revealed that the United Kingdom topped the list of countries where research was conducted when compared to the rest of the countries, where the number of studies reached 10. In comparison, Australia, China, and France came second. It can be said that the legislation issued in Europe (Kyoto Protocol and the EU ETS) and the Paris Agreement on climate have greatly contributed to the interest of researchers in researching the importance and practice of carbon accounting and its importance in achieving sustainability. We note that most of the studies discussing carbon accounting were conducted in developed countries. It is revealed that there is a lack of studies that discuss the practice of carbon accounting in the United States and the Arab region. Therefore, studies can be conducted given these countries’ expected role and effective impact on the policies of practicing carbon accounting. In addition, it is believed that conducting studies in countries with a large industrial impact, such as China, India, Malaysia, Japan, and Russia, in which we expect large emissions, and developing countries may contribute to knowing the practice of carbon accounting more clearly, which facilitates providing a clearer and balanced vision on the effects of climate change and the role of carbon accounting in mitigating emissions. On the other hand, several countries in the European Union and China have established service centers for educational testing, which is considered one of the largest global centers for carbon trading, which may encourage conducting multiple studies and contribute to knowing the practice and importance of carbon accounting.

The results of this study show an average use of theories, particularly the theory of legitimacy, stakeholders, and institutional theory in carbon accounting studies. This is an indication that studies still contain theories that are used in noncompulsory (voluntary) carbon disclosure, which indicate that carbon emissions and related management are related to various markets, economics, regulatory, social, and institutional pressures, and this is related to disclosure; future studies may use behavioral and economic theories in investigating the practice of carbon accounting and the factors that can be an incentive for companies to submit carbon reports to the competent authorities and interested parties. We believe that using other theories may add a deeper understanding of the field of carbon accounting research. Concerning institutions that used data to investigate the practice of accounting, we find the absence of using private institutions’ data, and this may be an area for future research; considering the investigation of the contribution of these institutions to preserving the environment as part of the social responsibility adopted by these companies, more studies in the public sector also have expanded the field of research. The analysis of the results showed that there is a need to conduct studies based on the questionnaire and the interview, which significantly contribute to the knowledge development in carbon accounting. In addition, real information can be obtained about the motives and factors that can encourage companies to submit carbon reports as part of corporate social responsibility voluntarily.

There is a widespread of research in high-impact and effective accounting journals among researchers and academics, which is an important indicator of the importance of the research results. The lack of articles that discuss carbon accounting from an economic and financial point of view may be an area for future research. On the other hand, the studies were divided into four sections, the regulatory scope, the national scope, the project scope, and the product scope, as the studies focused largely on investigating carbon accounting and its impact on the national scale, and this may be due to the international agreements that call for action to mitigate carbon emission. In terms of emissions, future studies may discuss carbon accounting at the project scale and the organizational and institutional scopes in a broader way, through which it is also possible to know the factors that help reduce emissions. In addition, future studies can be conducted focusing on the product, which may contribute to identifying some of the causes of increased emissions. Future studies can conduct further research to determine the factors that can motivate companies to disclose carbon. However, some literature has discussed this, and there are factors that have not been investigated economically, organizationally, and politically. In addition to this, the importance of ensuring carbon accounting can be investigated in motivating companies to provide the best methods for measuring carbon and working to improve carbon performance. Although some literature clarifies the importance of carbon accounting in improving investment and green trade, it does not clarify how this can be achieved, what obligations the company must abide by, and the social and economic consequences that companies may be exposed to; future studies can investigate this. It is interesting that no studies discuss the importance of technological development in carbon accounting; therefore, future studies may examine the importance of using blockchain in carbon accounting. In addition, future studies can conduct research showing the importance of using accounting techniques to help stimulus packages mitigate the effects of climate change and achieve economic growth, especially in light of environmental changes and the COVID-19 crisis. Furthermore, while reviewing the previous studies, no study was found based on comparative analysis; therefore, a comparative study could be conducted between the most polluted countries. Another line of inquiry could be to undertake a comparison study on carbon accounting among the industries that are most responsible for the rise in greenhouse gas emissions. This occurs in the lack of accounting standards that would govern the work and practice of carbon accounting, particularly when recording companies’ financial statements and documenting carbon-related provisions in financial statements. Future studies may discuss how the practice of carbon accounting can be adopted according to the current international accounting standards. This contributes to providing basic guidelines and instructions that companies can follow. Finally, only one study by Sullivan and Gouldson (2012) discussed the importance of carbon emissions reports in attracting investors. Future studies may expand the conduct of studies using interviews or questionnaires, which would clarify the investors’ view of the importance of the reports prepared by companies and the controversy in some of the discussions that made it clear that investors see the lack of great benefit from these reports.

5.1 Carbon accounting and COVID-19

In light of the current developments represented in the outbreak of COVID-19, a great trend and focus have contributed to the increase in the demand for decarbonization. In this situation, many organizations and governments will try to decarbonize, but this entails building strategies based on preserving the economic and social aspects. Future studies may address how decarbonization can be carried out and its impact on carbon management for organizations, companies, and individuals in light of the changes imposed by the COVID-19 crisis. In addition, future studies can discuss the current methods used in decarbonization and their effectiveness in light of the COVID-19 crisis, and whether it is possible to develop different approaches that can contribute to decarbonization and reduction in light of the current environmental changes. In the end, future studies can discuss the impact of COVID-19 on carbon management and what lessons can be learned from them in order to contribute to the development of carbon management strategies.

6 Conclusion and recommendations

The issue of carbon accounting has grown rapidly among various interested parties, such as companies, international organizations, researchers, and society. However, empirical research based on real data and reviews that discuss the role and importance of carbon accounting in reducing emissions and its role in the companies and society is still limited. Therefore, we followed a methodological approach through which a comprehensive investigation of the past literature to examine the role of carbon accounting in various companies and societies using 137 studies that have been published in peer-reviewed journals was conducted. The results revealed that carbon accounting provides a mechanism through which carbon emissions can be measured and quantified and helps in knowing the status of companies and making the necessary strategic decisions to achieve mitigation. This study provides a qualitative analysis of the existing literature on carbon accounting by presenting a comprehensive investigation of the literature published in accounting and finance journals and environmental journals on an accounting topic. The review highlights the role of carbon accounting in achieving sustainable development to a large extent for all parties and stakeholders and confirms the important role of carbon accounting in emphasizing the achievement of sustainable development as one of the most important means that contribute significantly to reducing carbon emissions. In general, the study results show that the role of carbon accounting in promoting and achieving sustainable development is very important, especially in light of the availability of incentives to practice carbon accounting. Through the results of the study, all parties such as agencies, international organizations, investors, regulators, and government agencies can enhance their understanding of the role of carbon accounting toward society, companies, and environment, which may constitute a basis upon which to conduct a variety of experiments and research. There is a need to issue regulations and mechanisms for carbon accounting through which it can be practiced professionally, as a result of its importance in various topics, including enhancing the financial performance of companies, attracting foreign investments, encouraging green trade, and making strategic decisions that enable companies to compete and survive.

It should be noted that there are some gaps that future studies can work on, which are discussed in the previous section, with emphasis on the need to conduct studies from real data based on company reports to cover the literature gap that was dominated by the descriptive aspect based on content analysis and measurement, and the future literature can also investigate the basic functions of carbon accounting in light of nondisclosure and comparing it with its role under disclosure and the extent of its impact on greenhouse. However, we believe that legislation must issue instructions that can contribute to achieving this.

Future research can focus on the recommendations mentioned in the previous sections. Finally, this study can provide the necessary guidance and instructions needed by policymakers and companies to identify beneficial methods and best practices for carbon accounting and mitigation. Policymakers have to foster setting international standards that compile firms to report their carbon strategies, allowing investors to verify and compare firms that are performing well in terms of carbon reduction. Firms’ top management has to formulate sound carbon strategies and systems to reduce the carbon effect. On the production management level, firms’ should have carbon accounting software to be associated with the management information system in order to know the total reduction in carbon emission. Furthermore, marketing management has to go with strategies of launching environment-friendly products and services. More importantly, financial managers have to adopt new techniques for evaluating carbon performance and reporting financial performance. Academic institutions have to allocate a budget for environmental-based research that aims to measure carbon emissions reduction and suggest frameworks for carbon accounting disclosure, which will guide those in charge of companies to mitigate emissions and preserve the environment. The findings of this study provide a vision for company managers in a way that enhances their awareness of the importance of practicing carbon accounting, which contributes to helping them to make appropriate decisions by comparing benefits and costs and helping them design plans related to climate change and design the necessary policies. Similar to other studies, this study includes some limitations that can be met and worked on in future studies. We used one keyword while searching for the literature in WoS and Scopus. Future studies can expand keywords related to carbon accounting, such as carbon management and disclosure, which will be used to obtain the literature. In addition, other databases such as ABDC, ABS, and Google Scholar can be used in search of relevant literature.

Data availability statement

The original contributions presented in the study are included in the article/Supplementary Material; further inquiries can be directed to the corresponding author.

Author contributions

Conceptualization and methodology, SAH; software, SAH and AA; validation, AA and JZ; formal analysis, SAH; investigation, SAH, and NHSF; resources, SAH and EMA-M; data curation, SHA and NHSF; writing—original draft preparation, SAH; writing—review and editing, SAH, EMA-M and MHA visualization, SAH, MHA and AA; supervision EMA-M and JZ; project administration, EMA-M and NHSF funding acquisition, EMA-M and MHA.

Conflict of interest

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Publisher’s note

All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors, and the reviewers. Any product that may be evaluated in this article, or claim that may be made by its manufacturer, is not guaranteed or endorsed by the publisher.

Supplementary material

The Supplementary Material for this article can be found online at: https://www.frontiersin.org/articles/10.3389/fenrg.2022.958362/full#supplementary-material

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Keywords: carbon accounting, carbon disclosure, carbon performance, carbon assurance, carbon management, climate change, sustainable development, carbon emissions

Citation: Hazaea SA, Al-Matari EM, Alosaimi MH, Farhan NHS, Abubakar A and Zhu J (2023) Past, present, and future of carbon accounting: Insights from scholarly research. Front. Energy Res. 10:958362. doi: 10.3389/fenrg.2022.958362

Received: 31 May 2022; Accepted: 21 September 2022; Published: 10 January 2023.

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Copyright © 2023 Hazaea, Al-Matari, Alosaimi, Farhan, Abubakar and Zhu. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

*Correspondence: Saddam A. Hazaea, [email protected]

This article is part of the Research Topic

Carbon Capture, Financial Development and Sustainable Energy

Carbon accounting: A systematic literature review and empirical essays

Alzyod, Mohammad Hamad Ahmad (2023) Carbon accounting: A systematic literature review and empirical essays. University of Southampton , Doctoral Thesis , 256 pp.

This thesis seeks to improve current understanding and existing knowledge of corporate carbon accounting (CA) practices, their determinants, and consequences on corporate outcomes. To achieve this, three distinctive but closely related/connected studies focusing on corporate CA literature were conducted. These are: (i) an extensive and up-to-date systematic literature review (SLR) of the development of CA research, covering the theoretical perspectives and empirical evidence on the antecedents of CA and its consequences on corporate outcomes; (ii) an investigation of the complex associations between carbon performance, executive compensation, corporate governance and national governance quality; (iii) an examination of the association between corporate carbon performance, corporate tax avoidance and national business culture. By achieving this, it contributes to the literature by providing a comprehensive and most up-to-date review of the CA research, and offering several suggestions and outlining avenues for future studies to fill the research gaps in the current CA literature. Furthermore, by carrying out two empirical studies on gaps outlined in the SLR, the current thesis contributes to the emerging literature by providing empirical evidence and new insights into climate change, corporate governance and taxation fields. The first study conducts a comprehensive and up-to-date SLR of the existing research on CA. The sample includes 177 mixed, qualitative, quantitative, and theoretical studies published in 39 top-ranked journals from 1992 to 2020 and carried out in more than 50 countries across different disciplines (e.g., accounting, business, economics, and management). The study finds that a considerable amount of past research is descriptive and/or informed by single rather than integrated/multi-theoretical perspectives. It also shows that existing studies have focused on the antecedents of CA more than the consequences that CA has on corporate outcomes. Furthermore, this study highlights a number of research design weaknesses, including the lack of mixed-methods, qualitative, developing and cross-national/cultural studies. Finally, the study also identifies opportunities for future CA research. Drawing on the findings of the SLR study, the second study examines the association between carbon performance and executive compensation (EC) based on the neo-institutional theory, as well as the moderating role of corporate governance and country governance quality on this association. Using a global sample of 1,122 firms located in 28 countries and across 11 industries from 2002 to 2019, the findings of this study suggest that EC is positively associated with process-oriented CP (carbon reduction initiatives; CRI), but negatively associated with actual CP (carbon intensity; INT). Furthermore, this study shows that firms with a large board, more independent directors, and duality in CEO-Chair positions are more likely to link executive compensation with symbolic carbon performance, as well as the actual carbon performance (reductions in emissions). In addition, the results indicate that the presence of women and the sustainability committee on the board seem to prefer/advise the decision of linking the compensation packages with substantive carbon performance, such as the level of actual GHG emissions, rather than symbolically linking them with process-oriented carbon performance (carbon-related initiatives and commitments). It also suggests that firms in countries with low national governance quality are likely to use incentive-based mechanisms, such as executive compensation) to achieve better carbon performance. Drawing on insights from legitimacy theoretical views of organised hypocrisy and organisational facades, the third study investigates how two different perspectives of corporate carbon performance are associated with corporate tax avoidance (TA), and explains the moderating role of national business culture on the association between these constructs. Using a global sample of 45,396 firm-year observations covering a period from 2002 to 2020 (19 years) for 7,189 firms distributed in 54 countries worldwide and across 10 industries, this study finds that corporate tax avoidance is positively associated with CRI as a symbolic behaviour, and it is positively associated with INT as irresponsible or unethical behaviour. These associations are weaker in firms operating in stakeholder-oriented business cultures. Keywords: Carbon accounting, climate change, systematic literature review, corporate carbon performance, executive compensation, corporate governance, national governance quality, neo-institutional theory, corporate tax avoidance, hypocrisy and organisational facades, social and environmental accounting, sustainability development.

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Carbon Accounting: A Systematic Literature Review and Directions for Future Research

• Jillene Marlowe 1 ,  ,  , 
• Amelia Clarke 2
• 1. Memorial University of Newfoundland, Grenfell Campus, Newfoundland, Canada
• 2. University of Waterloo, Ontario, Canada
• Received: 15 October 2021 Revised: 29 December 2021 Accepted: 12 January 2022 Published: 27 January 2022

JEL Codes: G3, M14, M41, M48, Q5, R5, L5

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Carbon accounting is an evolving approach to support decision-making for climate action and reporting of progress. This systematic literature review of 27 journal articles in the field of carbon accounting provides an overview of the current state of the field. It illustrates the lack of transparency, reliability, and comparability within current measurement systems; the lack of research on how greenhouse gas inventories are linked to monitoring, decision-making, reporting and disclosure systems; and the role of the accounting profession. Based on the findings, we provide a summary of where research gaps exist and thus suggestions for future research directions.

• carbon accounting ,
• accounting profession ,
• measurement ,
• sustainability accounting ,
• GHG inventory ,
• carbon budget ,
• climate mitigation

Citation: Jillene Marlowe, Amelia Clarke. Carbon Accounting: A Systematic Literature Review and Directions for Future Research[J]. Green Finance, 2022, 4(1): 71-87. doi: 10.3934/GF.2022004

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Moderating effect of carbon accounting systems on strategy and carbon performance: a CDP analysis

• Original Paper
• Open access
• Published: 07 September 2022
• Volume 33 , pages 483–524, ( 2022 )

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• Binh Bui   ORCID: orcid.org/0000-0001-5215-8879 1 ,
• Muhammad Nurul Houqe 2 &
• Muhammad Kaleem Zahir-ul-Hassan   ORCID: orcid.org/0000-0002-1512-2663 3  

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Carbon emissions bring significant risks and opportunities, and organisations have responded by adopting different strategies and environmental control systems, such as carbon accounting systems (CASs). However, it remains unclear whether a CAS can help reduce emissions, and what role is played by a CAS in the relationship between carbon strategy and carbon performance. Therefore, this paper analyses the strategy-accounting-performance nexus by drawing on 1672 firm-year observations of firms participating in the CDP in 2014 and 2015. The results suggest that the quality of a CAS is influenced by strategic choices; with a proactive carbon strategy being associated with a higher quality CAS. Further, proactive strategies and CASs are found to be associated with carbon savings and emissions reduction. The results indicate a moderating role of CASs on the strategy-performance relationship, with carbon strategy enabling higher carbon savings and lower emissions intensity in the presence of a high-quality CAS. Our findings suggest that formulation of carbon strategies and establishment of carbon measures can drive effective carbon mitigation.

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1 Introduction

Climate change is a global issue. Climate emergencies have been declared by more than a thousand cities and local governments (ICEF, 2020 ). With global recognition of climate emergencies, and the need for rapid carbon mitigation, organisations are under increasing pressure to demonstrate how their climate/sustainability efforts are aligned with organisational strategies, and reflected in management control systems (Ghosh et al., 2019 ; Harris et al., 2019 ). Among different sustainability control systems, carbon accounting has received heightened scholarly interest. Carbon accounting enables the quantification of organisations’ carbon footprint and carbon-related activities, and the use of this quantified information in organisational decision-making (Hartmann et al., 2013 ; Stechemesser & Guenther, 2012 ). Prior literature distinguishes between (reporting-driven) carbon accounting and (internally performance-driven) carbon control, whereby the research that draws upon the CDP is about carbon accounting, and the research that discusses accounting for eco-efficiency, cost savings and material flow accounting, is concerned with carbon control. Despite their differences, carbon accounting and carbon control are intertwined, because the information generated for carbon reporting may also affect carbon management, and vice-versa (Qian & Schaltegger, 2017 ; Qian et al., 2018 ). Using this reasoning, we try to understand the link between strategy, carbon accounting and carbon performance by drawing upon externally reported carbon information in the CDP. By doing so, we respond to calls for an exploration of how businesses internalise legitimacy pressures and demands for creating real improvements (Qian & Schaltegger, 2017 ), and to the need for more empirical studies on sustainability and carbon management accounting (Crutzen et al., 2017 ; Harris et al., 2019 ; Hartmann et al., 2013 ).

Generally, the relevant literature recognises that the effective implementation of a sustainability strategy requires comprehensive environmental management control systems (EMCS) that ensure the integration of sustainability into core businesses, and push organizations towards a sustainable future (Epstein, 1996 ; Epstein & Wisner, 2005 ; Gond et al., 2012 ). Furthermore, previous studies have investigated the design and use of environmental controls, their drivers, and their impacts on organizational performance (Adams et al., 2007 ; Burritt et al., 2011 ; Henri & Journeault, 2010 ). Footnote 1 However, few studies have examined how sustainability strategy influences carbon control design, via a large dataset (Harris et al., 2019 ). Likewise, there is a very limited empirical evidence regarding the impact of carbon accounting on carbon mitigation. Additionally, prior literature often refers to carbon accounting in a limited sense, i.e., the quantification of the carbon footprint and the use of such information in decision making, and does not extend to other controls that also help fulfil carbon management objectives. Therefore, following Simons’ ( 1991 ) concept of ‘levers of control’, we argue that CASs as a subset of EMCS, encompass carbon-focused environmental controls (eco-controls) that include “formalised procedures and systems” that “maintain or alter patterns in environmental activity” (Henri & Journeault, 2010 , p. 64). Hence, CASs include procedures and systems, such as targets and budgets, strategic planning, and reporting systems, working as a package of control (Malmi & Brown, 2008 ), with the aim of achieving the carbon management objectives of organisations.

Further, the control implications, for a firm adopting a proactive climate change strategy, versus another firm adopting a reactive strategy, are unclear in extant literature. As argued by Harris et al. ( 2019 ), future sustainability studies need to examine a larger set of controls as driven by, and implicated in, different strategic orientations. With firms being able to adopt different climate change strategies (Boiral, 2006 ; Kolk et al., 2008 ; Weinhofer & Hoffmann, 2010 ), it is critical to understand which carbon strategy is the most (or least) effective in reducing carbon emissions. Overall, this means that the strategic and EMCS mechanisms, through which firms drive carbon mitigation, are poorly understood.

Therefore, this paper aims to address the three-way relationship between carbon strategy-accounting-performance by utilising an international sample of 1672 firm-year responses to the CDP in 2014 and 2015. The CDP is widely perceived as providing the largest and most comprehensive database of voluntary reporting of carbon-related performance and activities of large firms around the world (Luo & Tang, 2014 ; Matsumura et al., 2014 ). This paper brings the focus on carbon performance by adopting a resource-based view, whereby CASs and proactive carbon strategies can help develop key resources and capabilities that enable organisations to improve their performance and competitive advantage (Eisenhardt & Martin, 2000 ; Teece et al., 1997 ). The proactive carbon strategies include strategic integration, reduction initiatives, policy engagement, value chain engagement, and carbon credit origination (Jeswani et al., 2008 ; Kolk & Pinkse, 2005 ; Weinhofer & Hoffman, 2010 ). Eight CAS components are examined: strategic planning, targets, carbon budget, financial performance measurement, non-financial performance measurement, project management method, incentives, and reporting. Considering eight components allows us to assess the implications of a CAS for carbon performance as a package (e.g., Henri & Journeault, 2010 ; Tang & Luo, 2014 ). In this paper, carbon performance is proxied by annual carbon savings and emissions intensity of firms in a given year (Luo & Tang, 2016 ; Tang & Luo, 2014 ).

The findings of this study make three contributions to the literature. Firstly, consistent with a resource-based view, and extending prior empirical studies that focus on the carbon disclosure-performance relationship (Clarkson et al., 2015 ; Kolk et al., 2008 ; Luo & Tang, 2016 ; Qian & Schaltegger, 2017 ; Qian et al., 2018 ; Schiemann & Sakhel, 2018 ; Tang & Luo, 2014 ), our findings suggest that high quality CASs are linked to higher annual carbon savings and lower emissions intensity. Our findings diverge from other studies that question the contribution of CASs, in that carbon accounting on its own is insufficient to achieve carbon reduction (Jackson & Kaesehage, 2020 ), and that the emissions data may be arranged to present a situation consistent with expectations (Lippert, 2015 ). Rather than just carbon measurement or reporting, we argue that a comprehensive and formal CAS, that captures different components, can have a meaningful effect on carbon mitigation.

Secondly, this study responds to calls in the literature to determine which strategies improve carbon performance (Qian & Schaltegger, 2017 ). We provide cross-country evidence of the varying implications of different strategies on performance. Based on prior literature, this study takes into account five different types of proactive strategies. We find that a proactive carbon strategy is effective in improving carbon savings and reducing emissions intensity. This confirms prior literature regarding the positive impact of proactive strategies on environmental performance (Hart, 1995 ; Kolk & Hoffmann, 2007 ; Kolk et al., 2008 ) and argues that this impact applies equally to a climate change context.

Thirdly, this research suggests a moderating role for CASs in the enactment of strategies for carbon performance. Prior empirical studies reveal a positive impact of CASs on carbon performance, but they do not consider the influence of carbon strategy. This study demonstrates direct effects of carbon strategy on carbon performance, as well as indirect effects as moderated by a CAS. The results are consistent with a resource based view (RBV), that a CAS performs a moderating role on the relationship between carbon strategy and carbon performance, highlighting that a high quality CAS enables strategy to have a stronger impact on carbon performance. The interaction between CASs and carbon strategy has an overall positive relationship with carbon savings and a negative relationship with emissions intensity. Consistent with studies on the CAS-strategy relationship (Bui & de Villiers, 2017 ; Bui & Fowler, 2019 ; Ghosh et al., 2019 ;) we argue that the adoption of both a CAS and strategy rather than each individually, is beneficial for annual carbon savings. This effect is the most pronounced among polluting firms, possibly because the combined effect may drive larger scale operational, behavioural and strategic changes which, in turn, result in significant carbon mitigation.

The rest of the paper proceeds as follows. In Sect.  2 , we review the prior literature in order to understand the relationships between carbon strategy, CASs and carbon performance. Section  3 discusses the theory underlying the link between carbon strategy, CASs, and carbon performance, and proposes the hypotheses. In Sect. 4 we explain the research design, and in Sect.  5 we discuss the results. Section  6 summarizes the paper and provides contributions, limitations and practical implications.

2 Literature review

This section reviews the literature on the relationship between carbon strategy and CASs, and between CASs and carbon performance.

2.1 The carbon accounting system (CAS) and carbon strategy

Despite the extensive literature on management control and strategy (e.g., Ferreira & Otley, 2009 ; Simons, 1990 ), the insights into how companies design or use management control to support sustainability strategies are only just emerging (Crutzen & Herzig, 2013 ; Henri & Journeault, 2010 ). EMCS can be designed to support sustainability strategies (Crutzen et al., 2017 ; Figge et al., 2002 ; Hansen & Schaltegger, 2016 ), but the role played by EMCS in various sustainability strategies is not well understood (Crutzen & Herzig, 2013 ; Ghost et al., 2019).

With the global urgency of climate change, carbon emissions pose significant risks and provide (improvement) opportunities to organisations (Bebbington & Larrinaga-González, 2008 ; Cadez & Czerny, 2016 ) and the focus on carbon emssions has facilitated the growth of a plethora of private standards to guide carbon accounting and disclosure, such as the Greenhouse Gas (GHG) Protocol (Sundin & Ranganathan, 2002 ) and other standards (Green, 2010 ). Corollary there is an increasing integration of carbon accounting into corporate strategic management and EMCS (Engels, 2009 ; Hopwood, 2009 ; Luo & Tang, 2016 ). Carbon-focused management accounting can facilitate cross-departmental communication and increase the efficiency and effectiveness of information processing (Burritt et al., 2011 ; Kumarasiri & Jubb, 2016 ). Similarly, performance measurement systems enable organisations to maintain transparent accounts of carbon emissions, and identify reduction potential (Schaltegger & Csutora, 2012 ; Schaltegger & Zvezdov, 2015 ). Appropriate design and use of CASs can help develop key organisational capabilities and implement a proactive carbon strategy that helps achieve a competitive advantage (Bui & de Villiers, 2017 ; Henri & Journeault, 2010 ; Menguc et al., 2010 ). The carbon strategy and accounting link has been examined in different sectors, such as the automotive industry (Lee, 2012 ), forestry (Ellison et al., 2011 ) and agriculture (Huang & Mi, 2011 ), as well as in a cross-sectional context (Bui et al., 2020 ). While these studies suggest that carbon accounting is useful in mitigating carbon emissions and implementing carbon strategies, it is unclear which form of carbon accounting is useful, and for what type of carbon strategy.

A few studies have looked at the organisational strategic responses in a climate-change-sensitive business environment (Bui & de Villiers, 2017 ; Cadez & Czerny, 2016 ; Kolk et al., 2008 ; Weinhofer & Hoffmann, 2010 ). For instance, Cadez and Czerny ( 2016 ) propose three strategic priorities, ranging from internal carbon reduction (i.e., combustion emissions reduction, process or product emissions reduction) to external carbon reduction (mainly through supply chains), and carbon compensation. Similarly, Weinhofer and Hoffman (2010) classify climate change strategies as focusing on either CO 2 compensation, CO 2 reduction, or carbon independence. Further, firms can adjust their climate change strategy from stable to reactive, anticipatory, proactive, or creative, hinging on the degree of uncertainty of regulatory requirements (Bui & de Villiers, 2017 ). However, it remains unclear how different climate change strategies can influence CASs. Footnote 2

2.2 CASs and carbon performance

This section discusses the use of CASs in carbon management, as well as some limitations of CASs. Prior studies have examined the relationship between carbon emissions and disclosure and financial performance using proxies such as market value of equity (Matsumura et al., 2014 ; Saka & Oshika, 2014 ), cost of equity and cost of debt (Li et al., 2014 ). These studies support the view that carbon accounting and reporting enhance firms’ financial performance. Another stream of literature examines CASs from a managerial perspective, and emphasises the impact of using CAS information on carbon performance, albeit with inconclusive evidence. Henri and Journeault ( 2010 ) provide empirical evidence for the positive impacts of eco-controls on various aspects of environmental performance, such as reduction in material costs, increased productivity, better relationships with stakeholders, or overall company reputation. Wijethilake et al. ( 2018 ) study of 175 manufacturing firms in Sri Lanka and find that EMCS moderates the relationship between environmental innovation strategy and organisational performance. In addition, studies have utilized CDP data to understand the association between carbon accounting and performance (Clarkson et al., 2015 ; Kolk et al., 2008 ; Luo & Tang, 2016 ; Qian & Schaltegger, 2017 ; Qian et al., 2018 ; Schiemann & Sakhel, 2018 ; Tang & Luo, 2014 ). Tang and Luo’s ( 2014 ) study of 45 Australian firms indicates that a firm can mitigate its carbon footprint through a high-quality carbon management system. Qian and Schaltegger ( 2017 ) analyse Global 500 companies, and find that change in carbon disclosure levels is associated positively with subsequent change in carbon performance. However, they do not examine components of carbon accounting and controls but, rather, the extent of disclosure. Differently, Qian et al., ( 2018 ) draw on the Corporate Sustainability Barometer (CSB) and CDP database of 114 large companies across the US, Germany, Australia and Japan, and find that the application of environmental accounting has a significant positive impact on both corporate carbon management and disclosure quality. Ott and Endrikat ( 2022 ), using CDP database of S&P 500, find that financial carbon-related incentives are associated with superior carbon performance, while non-financial incentives are not. This indicates the differing impacts of incentive design on carbon performance. Summing up, CDP based studies have not explored the impact of a comprehensive CAS on carbon performance.

3 Hypothesis development

This study adopts the lens of the natural resources-based view (RBV) as proposed by Hart ( 1995 ) to develop hypotheses. The RBV suggests that firms maintain their competitive advantage by utilising and nurturing resources that are not easily imitated by competitors. The RBV conceptualizes firms as bundles of resources heterogeneously distributed across firms, and suggests that these resource differences persist over time (Amit & Schoemaker, 1993 ; Wernerfelt, 1984 ). Resources must satisfy the key criteria of being valuable, rare, inimitable, and non-substitutable, if they are to lead to the achievement of sustainable competitive advantage (Barney, 2001 ). Resources enable the implementation of value-creating strategies via elements, such as physical assets, human resources, organizational assets, and competencies (Eisenhardt & Martin, 2000 ; Teece et al., 1997 ). Capabilities enable the interaction between these resources and their effective deployment. They are defined as “The firm’s processes that use resources – specifically, the processes to integrate, reconfigure, gain and release resources-to match, and even create, market change” (Eisenhardt & Martin, 2000 , p.1107). Prior research has suggested innovation, organizational learning, market orientation and entrepreneurship are among the primary capabilities needed to reach competitive advantage (Bhuian et al., 2005 ; Henri, 2006 ).

3.1 Carbon strategy and the CAS

Consistent with an RBV, the design and practice of EMCS should be tailored to the corporate strategic intent, in order to optimise organisational performance (Chenhall, 2003 ; Henri, 2006 ) and gain competitive capabilities (Henri, 2006 ; Widener, 2007 ). While sustainability strategy provides high-level direction and policy with regards to environmental issues, EMCS provide the specific tools for coordinating and aligning the resources and processes needed to turn such strategy into actual performance outcomes (Ghost et al., 2019; Lee, 2012 ).

A proactive environmental strategy requires certain capabilities to allow the collective deployment of multiple resources, ensuring that they work in sync to improve organisational performance. For example, a pollution prevention strategy would require the monitoring and management of environmental impacts, over and beyond minimum regulatory requirements (Hart, 1995 ). This is achieved via an EMCS using performance measures and monitoring systems. Proactive environmental strategies require the provision of physical and monetary information regarding the ecological cost of organisational product, process, or activities (Adams & Frost, 2008 ). Indeed, long-term-oriented physical and monetised carbon accounts are used extensively when firms adopt creative or proactive strategies, as opposed to other strategies (Bui & Fowler, 2019 ). Consequently, changes in carbon strategies require modification of CASs to support the new strategic intents and objectives (Bui & de Villiers, 2017 ).

A proactive environmental strategy would also require a good reporting system, so environmental issues are forwarded to relevant managers, and elevated to senior levels if they present significant risks to the organisation. Interactive controls allow top management’s focused attention and intervention with regard to environmental issues of strategic importance (Simons, 1991 ). Furthermore, a proactive strategy involves a high organisational commitment to managing environmental performance (Hart, 1995 ). This inevitably requires some form of formal environmental target, and associated budgets and processes to ensure performance is monitored and corrected against the target (Bui et al., 2020 ).

Accordingly, a more proactive climate change strategy is associated with more formal environmental controls (Pondeville et al., 2013 ), in order to affect various organisational decisions (Christ & Burritt, 2013 ). Therefore, we hypothesise the following.

Hypothesis 1

A more proactive carbon strategy is associated with a higher quality carbon accounting system .

3.2 CAS and carbon performance

In accordance with RBV, we argue that CASs incorporate processes that ultimately provide a source of competitive advantage. Prior studies have documented the direct performance benefits of environmental controls, such as quality enhancement, cost savings, more accurate product pricing, and retention of skilled personnel (Dunk, 2007 ; Gunarathne & Lee, 2015 ). Indirect benefits include organisational learning, continuous innovation, stakeholder integration, and shared vision and goal congruence capabilities (Adams et al., 2007 ; Journeault, 2016 ).

There are different types of controls, such as diagnostic controls and interactive controls. Diagnostic controls, such as managerial incentives, carbon targets and investment modelling, motivate organisational members to align their behaviour with carbon management objectives and, hence, lead to performance improvement. Extant literature provides conflicting evidence regarding the relationship between incentives and performance, from no relationship (Tang & Luo, 2014 ), to a negative relationship found between monetary incentives and carbon mitigation (Ioannou et al., 2016 ). In contrast, setting carbon targets enables firms to monitor emissions, set benchmarks for performance assessment, and control negative deviations from pre-determined targets (Adams et al., 2007 ; Tang & Luo, 2014 ). Prior studies indicate that more difficult targets are more likely than less difficult ones to be accomplished, thus, supporting the impact of target setting on performance (Ioannou, et al., 2016 ; Larrinaga-González et al., 2001 ). The use of carbon measures in investment modelling can provide a platform for discussion and dialogue, and for encouraging innovation within the organisation (Bui & Fowler, 2019 ).

Reporting systems and strategic planning often serve as interactive controls in carbon management (Bui et al., 2020 ; Simon, 1995 ). Reporting systems, notably more frequent communications on risk management and strategy from lower-to top-management levels, allow the detection of risks before they become real problems and threaten the achievement of organisational objectives (Simons, 1995 ; Van der Stede, 2001 ). Differently, a strategic planning process ensures the review of current strategies, evaluation of the risks and opportunities, and the formulation of new strategies. Prior studies have found that the board of directors plays a critical role in monitoring and reporting carbon information and ensuring climate change accountability to firm stakeholders (Ben-Amar & McIlkenny, 2015 ; Prado-Lorenzo & Garcia-Sanchez, 2010 ). Hence, frequent reporting of carbon risk information to the board will feed into the strategic planning process and the development of climate change strategies. Further, active scrutiny by the board is likely to result in intensive monitoring at lower management levels and the promotion organisational learning on carbon issues (Bui, 2011 ; Bui & de Villiers, 2017 ). Through these different processes and resulting capabilities, we expect that comprehensive CASs with diagnostic and interactive controls, that embed climate change issues, will lead to stronger carbon performances. The following hypothesis is, thus, formed:

Hypothesis 2

A higher quality carbon accounting system is associated with stronger carbon performance .

3.3 Carbon strategy and its effect on carbon performance (both directly and moderated by the CAS)

Though it has been theoretically implied, the relationship between proactive carbon strategy and carbon performance has not been adequately investigated. For example, Clarkson et al. ( 2011 ) document a positive relationship between environmental and financial performance, where environmental performance is driven by a proactive environmental strategy. Using a S&P 500 sample, Moussa et al. ( 2020 ) report a positive link between carbon strategy and carbon performance and a mediating role for carbon strategy on the relationship between board environmental orientation and carbon performance.

Prior literature based on the RBV has argued that a proactive environmental strategy can provide a source of competitive advantage. For example, a proactive strategy can improve environmental performance through investing in end-of-pipe pollution treatment or prevention, developing greener products, or pursuing sustainable development through low-impact technologies (Hart, 1995 ). Environmental proactivity can result in capabilities such as stakeholder integration, organizational learning, and continuous improvement (Sharma & Vredenburg, 1998 ). Firms can innovate on their own, or in collaboration with stakeholders and industry partners (Kolk & Hoffmann, 2007 ; Kolk et al., 2008 ) and, hence, they can enhance potential carbon savings or innovation outcomes. A proactive strategy also emphasises organisational changes, such as behaviour shifts towards more sustainable resource consumption and, thus, reduce negative environmental impacts (Aragón-Correa & Sharma, 2003 ). A carbon strategy that takes climate change issues seriously, also encourages risk-taking and entrepreneurship. This is because effective carbon mitigation goes beyond energy efficiency and requires technological transformation, which does not occur without significant investment with high risk, while the returns are realised only in the long term. Accordingly, a proactive climate change strategy results in capabilities that will lead to stronger carbon performance. Hence, we formulate the following hypothesis:

Hypothesis 3a

A more proactive carbon strategy is associated with stronger carbon performance .

Further, we argue that this relationship is also moderated by the quality of the CAS . The RBV suggests that a sustainable competitive advantage relies on organisational “organizing”, i.e., the ability to exploit the rare, valuable, or non-imitable capability or resources of an organisation (Barney, 2001 ). CASs help to organize resources and, hence, to implement carbon strategy through various mechanisms (Crutzen & Herzig, 2013 ). For instance, targets facilitate efficient resource allocation into areas that can result in the highest carbon reduction (Ioannou & Serafeim, 2012 ). Similarly, incentive systems can reinforce manager and staff motivation towards achieving carbon plans and initiatives as part of the carbon strategy (Bui et al., 2020 ). The integration of carbon indicators into investment modelling enables the reorientation of organisational resources towards lower carbon technologies and, hence, the achievement of a lower-carbon business strategy (Bui & Fowler, 2019 ). Further, the reporting of carbon information to the board allows top management monitoring of carbon performance, and timely action to correct deviations against the planned strategy (Moussa et al., 2020 ). Overall, by facilitating strategy implementation, CASs allow the mobilisation of organisational financial and non-financial resources in alignment with carbon strategies, leading to better carbon performance.

Hence, in accordance with the RBV, we argue that a CAS strengthens the relationship between a proactive carbon strategy and carbon performance. Thus, the following hypothesis is formed:

Hypothesis 3b

A higher quality carbon accounting system moderates positively the relationship between a proactive carbon strategy and carbon performance .

4.1 Sample selection

This study utilises the information obtained from the CDP 2014–2015 database, in conjunction with firms’ financial information obtained from the Thomson Reuters DataStream. Information captured in CDP is faithfully represented and reliable, as CDP questionnaires and scoring methodology are well-constructed, leaving little opportunity for managers to provide misleading information (Depoers et al., 2016 ). The disclosures to CDP, according to some studies (Luo & Tang, 2014 , 2016 ), are indicative of the underlying carbon performance. Furthermore, the CDP database is regarded as the largest source of primary climate change information (Andrew & Cortese, 2011 ; Luo & Tang, 2014 ; Matsumura et al., 2014 ) and, therefore, is able to cover various aspects of corporates’ climate change activities.

We choose 2015 and 2014 as our years of investigation, owing to the consistency in the structures and content of the CDP questionnaires, Footnote 3 and the inclusion of two years allows us to control for change over time. After omission of observations with missing dependent and independent variables and zero emissions, and winzorizing of financial variables, we arrive at final sample of 1672 observations, as shown in Table 1 .

4.2 Regression models

To test the hypotheses, the following regression models are employed:

The main variables of interest are CAS (carbon accounting system), ΣCP (carbon performance i.e., CARSAV and INTENS ), PROACT (carbon strategy) and CAS*PROACT (interaction term between carbon accounting system and carbon strategy).

Model 1 analyses the interplay between carbon strategy and the CAS (H 1 ), while model 2 examines the relationship between the quality of the CAS and carbon performance (H 2 ). Model 3 tests for the direct influence of carbon strategy on carbon performance (H 3a ), while Model 4 checks the moderating effect of the CAS on the carbon strategy-performance relationship (H 3b ) by including CAS , carbon strategy and the interaction term between the two.

These examined relationships are portrayed in Fig.  1 .

The key relationships in the study

4.3 Measurement of constructs

4.3.1 the measurement of cas.

This study adopts the scoring methodology recommended by CDP, with minor modifications to assess the quality of the CAS (detailed scoring methodology is in Appendix 1). As this is a voluntary reporting scheme of carbon activities and performance, we are constrained by what is available in the CDP questionnaire, and what is disclosed by the responding organisations.

We follow prior literature in developing eight categories of the formal carbon accounting system. Footnote 4 Based on Gondet al. Footnote 5 ( 2012 ) eight components of the CAS are formulated: Strategic planning, Targets, Budgeting, Financial measurement system, Non-financial measurement system, Project management methods, Incentive, and Reporting. Accordingly, we use strategic planning to ascertain whether carbon issues are integrated into the strategic planning process. As absolute targets are often seen as potential inhibitors of future economic performance and, hence, more difficult to achieve (Ellerman & Wing, 2003 ; Sue Wing et al., 2006 ), absolute targets are awarded higher points than intensity targets. Budgets are captured to denote the existence of a carbon budget or fund. The financial measurement system captures the use of financial measures in carbon management, specifically, to determine (i) whether there is an internal price of carbon, and (ii) whether monetary savings are calculated from carbon reduction initiatives. Next, the non-financial measurement system represents the use of non-financial indicators of carbon management. Project management methods check for the adoption of a formal financial-related method (e.g., IRR or NPV) used to drive investments in carbon projects. Incentive captures the existence of some form of evaluation and reward system for carbon mitigation, either financial, non-financial, or both. Finally, based on Burritt et al. ( 2011 ) and Simons ( 1995 ), we develop the measure: Reporting; to represent the interactive control, i.e., whether carbon information is reported and monitored by the board.

Accordingly, we are able to collect information about eight specific components of the CAS from the CDP questionnaire. This approach is also driven by, and is consistent with, the literature on EMCS and sustainability control systems. These components comprise, arguably, one of the most comprehensive indices in the literature focusing on carbon controls. The CAS is a composite index measure ranging in value from 0 to 13, computed by adding up the scores of the eight components.

4.3.2 The measurement of carbon performance

This paper employs two direct measures of carbon performance. Luo and Tang ( 2016 ) and Tang and Luo ( 2014 ) adopt a relative measure of carbon performance, an index based on four criteria: carbon intensity decline compared to the previous year, carbon intensity lower than the sector’s median, at least one of the firm’s targets being achieved, and carbon savings realised from at least one of the firm's emissions reduction initiatives. While this captures the likelihood of an improvement in carbon performance, a relative measurement does not capture the extent of improvement. Therefore, we capture the actual carbon performance via two direct measures: (i) CARSAV , the amount of estimated annual carbon savings achieved, computed by the natural logarithm of estimated annual CO 2 savings (metric tonnes CO 2 ) achieved from various initiatives implemented during the reporting year, Footnote 6 and (ii) INTENS , emissions intensity as computed by totalling scopes 1 and 2 and scaling by revenues. CARSAV captures both past carbon savings and on-going savings, hence, providing some perspective on the future carbon performance, while INTENS captures the current reporting year’s emission level. Both measures are derived from the CDP questionnaire databases, consistent with the approach used prior studies (Chapple et al., 2013 ; Jung et al., 2018 ; Luo and Tang, 2014 ; Safiullah et al., 2021 ). Footnote 7

4.3.3 The measurement of carbon strategy

Consistent with prior literature and the CDP questionnaire, proactive strategies represent a more proactive stance designed to reduce and offset emissions, or influence the policy-making process (Weinhofer & Hoffman, 2010 ). Hence, we measure proactive strategy as comprising strategic integration (Lee, 2012 ), innovation, and cooperation within or beyond the supply chain (Weinhofer & Hoffman, 2010 ), and political action to influence policy makers on climate change issues (Kolk & Pinkse, 2005 ; 2007 ; Jones & Levy, 2007 ). Strategic integration is represented by the integration of carbon issues into strategic processes ( STRINT ), and its score ranges from 0 to 3. Innovation is proxied by reduction initiatives ( REDINI ), political action by policy engagement ( POLENG ) and credit origination ( CREORI ), which are dummy variables taking the value of 1 should firms participate in any reduction initiatives, have a clear and consistent engagement process with policy matters, and originate their own carbon credits externally, respectively. Cooperation with supply chain partners is proxied by value chain integration ( VALCHA ) and it score ranges from 0 to 2. Proactive strategy ( PROACT ) (ranging from 0 to 8) is measured as the sum of strategy integration, reduction initiatives, policy engagement, value chain integration, and credit origination.

In additional analysis, we check to which extent reactive strategies are associated with performance benefits, as prior research suggests that proactive strategies are more likely to result in performance benefits than reactive strategies (Hart, 1995 ). Reactive strategies ( REACT ) are those that focus on compensation strategies, and comprise ETS participation and credit purchasing.

Table 2 summarises the expected signs of the coefficients based on the hypotheses.

4.3.4 Control variables

SIZE is measured by the natural logarithm of total revenues, which has been found to influence carbon strategy, disclosure/control, and performance significantly (Alrazi et al., 2016 ; Chapple et al., 2013 ; Gallego-Álvareza et al., 2015 ; Journeault, 2016 ). ROA is measured by net income to total assets, as poor profitability may be one factor that limits firms’ ability to embrace higher quality carbon accounting systems (Uchida & Ferraro, 2007 ), and TOBINSQ is calculated to control for corporate management capability, as more innovative firms tend to invest in greener products and low-carbon technologies (Clarkson et al., 2015 ; Daske et al., 2008 ). Finally, NEW is measured by age of the assets of the company.

At the country level, several factors may drive corporate carbon-related strategy and accounting systems. First, developing countries may prioritise economic development ( LNGDP ) over environmental protection (Galeotti, 2007 ). Second, firms operating in code law ( LAW ) jurisdictions may adopt high quality carbon accounting systems, because such adoption can enable stronger firm-level corporate governance, to offset the weakness in the investor protection mechanism (Tang & Luo, 2014 ). Third, firms in countries with an ETS are subject to more regulatory pressures and, hence, are likely to adopt high quality carbon accounting systems (Tang & Luo, 2014 ). Hence, three variables, LNGDP, LAW and ETS are measured and controlled for. The details regarding the measurement of variables are defined in detail in Appendix 1.

5 Discussion of empirical results

5.1 descriptive statistics.

Table 3 panel A reports observations across our sample countries. We find that Japan, the United Kingdom, and the U.S.A. have the largest number of firm-year observations (i.e., over 180 each), and they make up around 50% of the total sample. Canada, France, and South Africa have observations over 80. Footnote 8 Further, our sample is made up of observations from 30 countries across the globe.

The distribution of observations across industries is shown in Table 4 (Panel B). The biggest contributor is industrials (22.85%) followed by Materials (13.40%), and Consumer Discretionary (13.40%) respectively.

Table 5 (Panel A) presents descriptive statistics of all our dependent and explanatory variables. We find that CARSAV has mean (median) values of 9.90 (9.86). INTENS has mean (median) values of 0.03 (0.00) with a standard deviation 0.10. The mean (median) value of CAS is 6.95 (7.00), out of a maximum possible 13 points. This shows that most firms do not adopt extensive carbon accounting systems. Furthermore, PROACT has a mean (median) value of 5.1300 (6.000) out of the maximum possible value of 8, indicating most firms adopt a variety of proactive strategic responses. The summary statistics for the control variables are also shown in Table 5 (Panel A).

Table 5 , 6 , Panel B, presents the Pearson correlation coefficients. It demonstrates positive correlations between CAS and PROACT . CAS is also correlated with CARSAV , but not with INTENS. PROACT have positive correlations with CARSAV and CAS , and a negative correlation with INTENS . Further, we computed Variance Inflation Factors (VIFs 2.71) when estimating our regression models to test for signs of multi-collinearity between the explanatory variables. Thus, multi-collinearity is not a problem in our study (Hair et al., 2006 ).

5.2 Multivariate regression

5.2.1 the relationship between carbon strategy and carbon accounting systems (h 1 ).

Table 7 model 1 presents the baseline results regarding the interplay among the strategy-accounting-performance nexus.

PROACT is associated with CAS positively and significantly, indicating that more extensive carbon strategy requires a higher quality carbon accounting system ( Coff.  =  0.6319, p  <  0.01 ). Footnote 9 Overall, H 1 is supported. Consistent with an RBV, a CAS provides the organizing capability that enables a proactive carbon strategy to be implemented effectively. A proactive strategy requires that an organisation adopts reduction targets, performance measures and regular carbon reporting, and integrates carbon measures into investment decisions in order to realise a proactive strategy aiming at carbon mitigation.

5.2.2 The relationship between the CAS and carbon performance (H 2 )

Table 7 model 2 shows the results, with a significantly positive relationship between CAS and relative carbon performance ( CARSAV, Coff.  =  0.0589, p  <  0.01 ), and with emissions intensity ( INTENS, Coff.  =   −  0.0044, p  <  0.05 ). This confirms our H 2 . Accordingly, a high quality CAS is linked to higher annual carbon savings and a reduction in firms’ emissions intensity.

These findings are aligned with Journeault et al. ( 2016 ) and Luo and Tang ( 2016 ), who also found a positive association between environmental/carbon controls and carbon performance. Footnote 10 This is consistent with the RBV-focused literature that suggests better environmental (carbon) accounting brings about improved performance.

5.2.3 The relationship between carbon strategy and carbon performance, both direct and moderated by the CAS (H 3a and H 3b )

Table 7 Model 3 shows the results of direct relationships between proactive carbon strategy and carbon performance. PROACT is associated positively with both CARSAV ( Coff.  =  0.0777, p  <  0.01 ) and INTENS ( Coff.  =  −  0.0055, p  <  0.01 ). Overall, this confirms H 3a that firms with more proactive carbon strategies achieve higher carbon savings and lower carbon emissions.

While aligning with a RBV perspective on the performance effects of a proactive strategy, our results are inconsistent with prior studies that question the usefulness of carbon management initiatives from a carbon reduction perspective (Damert et al., 2017 ; Doda et al., 2016 ). These studies, suggest that firms may do the talking before the walking, suggesting a gap between the talk (i.e., disclosure) and the impact of the actions (emissions reduction). Doda et al. ( 2016 ) suggest that firms might have already exploited the potential for emissions reduction before reporting. However, these studies use data prior to 2013 and do not capture proactive carbon strategy directly. Damert et al. ( 2017 ) include compensation strategies in the strategy index, while Doda et al. ( 2016 ) capture measurement and disclosure practices in the carbon management initiatives. Our study, by differentiating between proactive and reactive strategies, supports the notion that when firms pursue a proactive strategy in carbon management, their carbon performance is improved.

The indirect relationship between strategy and performance is tested via the moderating effect between strategy and CAS in Table 7 model 4, where both CAS (the moderating variable) and PROACT (the independent variable) and the interaction term are included. Accordingly, CAS and PROACT are no longer associated significantly with carbon performance, but the interaction term PROACT*CAS is significantly associated with both measurements of performance. Hence, the presence of high-quality CAS strengthens the effect of proactive strategy on carbon savings ( CARSAV, Coff.  =  0.0158, p  <  0.01 ). However, the negative association of the interaction term and emission intensity ( INTENS, Coff.  =  −  0.0019, p  <  0.05 ) indicates that the effect of the combined presence of strategy and CAS is less than the sum of the individual effects on performance. In other words, the association between carbon strategy and emission intensity is lessened when firms adopt a higher quality CAS . Overall, the signs of the interaction terms are consistent with H3 b , that the combination of proactive strategy and high quality CAS is associated with higher carbon savings and lower emission intensity.

Accounting for both direct and indirect impacts, the results indicate that carbon strategy has an overall positive relationship with carbon performance, both directly and in the presence of CAS . In other words, CAS moderates the relationship between carbon strategy and carbon performance.

5.2.4 Control variables

Table 7 indicates that firms with higher quality CASs tend to be bigger in size, and to operate in countries with a code law system. Further, based on Table 7 model (4), which controls for both CAS and carbon strategy, firms with more annual carbon savings ( CARSAV ) tend to be bigger in size and operate in countries without an ETS , while firms with higher emissions intensity ( INTENS ) operate in countries with higher economic development and a common law system. This confirms the role played by a voluntary context (no ETS regulation) in encouraging firms to adopt carbon mitigation initiatives and achieve carbon savings, while a code law system is more conducive to lower emissions intensity.

5.3 Additional analysis

Prior research also indicates that carbon strategies can be reactive or proactive (Jones & Levy, 2007 ; Kolk & Pinkse, 2005 ; Weinhofer & Hoffmann, 2010 ). Proactive strategies are more likely to result in performance benefits than reactive strategies (Hart, 1995 ). Table 8 model 1 show that REACT is associated with CAS positively and significantly, indicating that more extensive carbon strategy requires a higher quality carbon accounting system ( Coff.  =  0.3725, p  <  0.01 ). Footnote 11

Table 8 model 1 indicates that a high-quality CAS is needed, whether firms follow a proactive or a reactive carbon strategy. Two explanations are possible here. First, it is established by existing research that strategy (regardless of being proactive or reactive) influences accounting systems (Arjaliès & Mundy, 2013 ; Langfield-Smith, 2005 ). Second, some form of CAS is needed to account for carbon-related activities, even though those activities involve credit purchase or emissions trading (reactive strategies).

Further, results in Table 8 model 3 show that reactive strategy is linked to carbon savings ( REACT, Coff.  =  0.1722, p  <  0.01 ) but has no relationship with emission intensity ( REACT, Coff.  =  0.0019, p  >  0.1 ). No significant interaction terms in model (4) also suggest an absence of a moderating effect of CAS on reactive strategy-performance relationship. Overall, this confirms the lack of a clear association between reactive strategy and performance, partially explaining why earlier studies have not found a relationship between a composite strategy and carbon performance (Damert et al., 2017 ; Doda et al., 2016 ).

In Table 9 model 5, Footnote 12 when we include REACT and PROACT and their interaction terms with CAS in the same regression, the results hold that only proactive strategy has an indirect relationship with both measures of carbon performance via the moderating impact of CAS ( CARSAV Coff.  =  0.0630, P  <  0.01 ; INTENS, Coff.  =  −  0.1898, p  <  0.05 ). However, no such indirect relationship exists when firms adopt a reactive strategy.

For robustness tests, we also adopt alternative measurements for carbon performance, when scaled by total assets, consistent with Chapple et al. ( 2013 ), Jung et al. ( 2018 ), Luo and Tang ( 2014 ) and Safiullah et al. ( 2021 ), and common shares outstanding, consistent with He et al. ( 2021 ). The results reported in Table 10 model 4 are qualitatively similar to our main results, confirming the existence of the moderating effect of CAS on the strategy-performance relationship.

We further divide the sample into carbon intensive and carbon non-intensive firms based on the emitting nature of the industry in which a firm operates (Safiullah et al., 2021 ). According to CDP, we identify carbon intensive firms as high carbon emission or energy consuming industries (energy, utilities and materials sectors are defined as the most carbon-intensive firms). Results in Table 11 model 4 suggest the interaction term is associated with carbon savings among carbon intensive firms ( Coff.  =  0.0262, p  <  0.05 ), while the association with emission intensity is observed only among carbon non-intensive firms ( Coff.  =  −  0.0019, p  <  0.05 ). Hence, CAS has the ability to strengthen the impact of strategy on carbon savings in polluting firms, whereas its presence in less polluting firms may reduce the effect of strategy. This is possibly due to the already low level of emission intensity, such that the adoption of more extensive CAS may not enable significantly more reduction in emission levels.

Our main analyses focus on the relationship from carbon strategy to CAS , and from carbon strategy and CAS to carbon performance. However, it is possible that two-way relationships may exist. Specifically, carbon accounting systems may also have an impact on carbon strategy. We run a lagged model for CAS and PROACT Footnote 13 and in Table 12 model 6 show that CAS is associated with PROACT positively ( Coff.  =  0.2991, p  <  0.01 ), indicating that a higher quality CAS may support proactive carbon strategy in the following year. Thus, arguably, measuring carbon emissions might result in increased emissions awareness among employees and managers who, in turn, might change organisational operations and strategies over time. Hence, introducing a good CAS may lead to increased awareness, and support the move to a more proactive strategy.

We also run lagged models to test for the association between carbon performance (as independent variable) and carbon strategy and CAS . Footnote 14 Results show that firms with higher carbon savings may support proactive carbon strategies ( Coff.  =  0.1686, p  <  0.1, Model 7 ) and a higher quality CASs ( Coff.  =  0.3016, p  <  0.01, Model 9 ) in the following year. Similarly, firms with lower emission intensities adopt more proactive carbon strategies ( Coff.  =  −  0.2.0163, p  <  0.05, Model 8 ) and higher quality CASs ( Coff.  =  −  1.9934, p  <  0.05, Model 10 ). Hence, emissions reduction in the previous year provides the motivation for firms to move to proactive carbon management, in the form of more extensive strategies, or higher quality CASs.

Combining this with our main results, we make two complementary arguments. On the one hand, CASs and carbon strategies appear to incentivise emissions mitigation and carbon savings. The presence of a high quality CAS moderates the relationship between carbon strategy and carbon performance, enabling a stronger effect of proactive strategy on achieving annual carbon savings, whilst lessening the impact of strategy with regards to lowering emission intensity. On the other hand, improved carbon performance incentivises firms to adopt more extensive carbon strategies and high-quality CASs. This can be driven by competitiveness and concern to differentiate in the marketplace via extensive carbon management.

Finally, in order to ensure that uneven country representation in our study does not drive the results, we re-estimate the models by i) excluding USA firm-year observations; ii) excluding the top 3 countries, being USA, UK and Japan. The results reported (Model 4) in Table 13 are similar to the results reported in Table 7 , in terms of both the sign and statistical significance on the test variables of interest. We, thus, conclude that excluding the top countries does not drive/affect the results. Furthermore, Bose et al., ( 2021 ) suggest that investor protection ( INV_PRO ) can increase carbon regulatory oversight and hence this can effect firms’ incentives to manage their carbon performance. Hence, we add an additional country variable, being investor protection INV_PRO in model 4.. The results in Table 13 also suggest that firms in countries with higher investor protection are more likely to achieve carbon savings and lower emissions intensity.

5.4 Endogeneity

In most business studies, endogeneity is a major issue owing to omitted variables, simultaneity, and the correlation between the explanatory variables and the error term in a regression model (Li, 2016 ). Endogeneity leads to inconsistent and biased estimates of the explanatory variables. Li ( 2016 ) demonstrates that the GMM has the greatest correction effect on the bias, followed by instrumental variables, fixed effect models, lagged dependent variables, and the addition of more control variables. Accordingly, we re-estimated our most comprehensive model (Model 4) using the dynamic GMM as developed by Blundell and Bond ( 1998 ) and applied by others (e.g., Al-Najjar & Belghitar 2011 ; El Ghoul et al., 2011 ; Eliwa et al., 2021 ). The results in Table 14 show that the variable PROACT*CAS is positive and significant for CARSAV ( Coff.  =  0.0069, p  <  0.05 ) and negative and significant for INTENS ( Coff.  =  −  0.0019, p  <  0.01 ) . In Table 14 , the results for the control variables are broadly consistent with the main results. Overall, this suggests that the endogeneity issues are not likely to influence our main findings.

6 Conclusions

Carbon emissions bring risks and opportunities to organisations (Bebbington & Larrinaga-González, 2008 ; Cadez & Czerny, 2016 ; Bui and Villiers, 2017 ), and organisations adopt different strategies and environmental control systems, such as CASs. However, existing research has provided limited insights into the influence of carbon strategy and CASs in improving carbon performance (that is, reducing carbon emissions and increasing carbon savings). This paper analyses the three-way relationship between strategy-accounting-performance in the context of climate change issues, by drawing upon the CDP database for 2014 and 2015. In doing so, it provides three contributions to the literature.

Firstly, a CAS is useful in achieving carbon savings and reducing emissions intensity and, hence, plays a positive role in the fight against climate change, at least at the corporate level. Furthermore, a high quality CAS is associated with both proactive and reactive strategies and, hence, supports the significant role played by CASs in implementing different strategies and initiatives undertaken by corporations. Different from prior studies that are limited to one or several countries, or examine only a few components of carbon accounting (Tang and Luo, 2014 ; Wijethilake et al., 2016; Qian et al., 2018 ) we provide cross-country evidence of the association between CASs and carbon performance, using a comprehensive index of carbon accounting and an international dataset that spans 30 countries. We argue that in order to motivate high carbon performance, a high-quality comprehensive CAS needs to be properly designed and used. Our comprehensive CAS includes components such as strategic planning, financial and non-financial performance measures, targets, budgets, project management methods, incentive systems and reporting. Such a comprehensive CAS will provide a basis for best practices in carbon management to be developed and disseminated.

Secondly, the paper highlights the positive relationships between proactive carbon strategies and carbon performance, via enhancing carbon savings and lowering emission intensity. Whilst prior studies either imply (Clarkson et al., 2011 ) or examine a single country context (Moussa et al., 2020 ), we contribute empirical evidence in an international context of the role played by proactive carbon strategies. A carbon strategy helps develop and nurture the unique resources and capabilities that, in turn, improve carbon performance. This applies to proactive strategies that encompass strategic integration, reduction initiatives, policy engagement, value chain engagement and carbon credit origination. However, when firms adopt reactive strategies such as emissions trading and credit purchase, the association applies only to annual carbon savings and not to current year’s emission intensity. Hence, we argue that proactive carbon strategy provides a better driver for both past and future carbon performance.

Thirdly this study is arguably the first to provide empirical evidence regarding the moderating impact of CASs on the strategy-performance relationship. Most prior empirical studies have found a positive association between CASs and performance, but have not considered strategy as a driver. We found that a higher quality CAS helps proactive strategy to have more pronounced impact on carbon savings among polluting firms. Hence, we tentatively argue that there is more value to be gained for polluting firms to improve the quality of their CAS, as this will allow proactive strategy to achieve more annual carbon savings.

This study has four main implications for practice. First, it provides insights to managers and practitioners into the significance of a high quality CAS in pursuing a strategy. It is argued that no matter what strategy a firm pursues, a high-quality CAS is essential for its effective implementation as CAS is needed to account for and manage carbon related activities. Second, a high quality CAS also contributes to the improvement of carbon performance. This will encompass a suite of carbon measures, for example, targets, budgets, incentives, strategic planning and project management methods. In other words, the more formalised a CAS, the more likely it is that firms will achieve a stronger carbon performance. Third, proactive strategies should be pursued to achieve ongoing carbon savings and lower emission intensity. Policymakers wishing to promote carbon mitigation will need to focus on schemes or mechanisms that encourage firms to undertake proactive strategies, including strategic integration, reduction initiatives, and credit origination, rather than to participate in emissions trading or credit purchase activities, which may not have an impact on emission intensity levels. Fourth, the moderating role of CASs indicates that firms that wish to achieve performance enhancement should consider establishing an appropriate CAS, so that when used in combination with a proactive strategy, higher performance outcomes result, compared with those potentially achieved under a proactive strategy alone.

This study is subject to some limitations. Firstly, we focus on disclosure-derived carbon accounting mechanisms and, hence, we cannot make assertions regarding internally derived carbon accounting; for instance, those that are not reported in the CDP, or not reported accurately. Secondly, there might be reservations regarding the accuracy of the emissions data voluntarily disclosed by firms. Footnote 15 Thirdly, we examine only those firms that responded to CDP within a limited timeframe (from 2013 to 2015). Given that reducing carbon emissions may require investments (e.g., in renewable energy to replace fossil fuel burning), a lag over several years has to be considered. A longitudinal study would therefore be needed to analyse whether or not CASs help to improve performance. Fourthly, our use of a disclosure-based database limits the insights into internal strategies and operations of organisational carbon management. We are also unable to discern the presence and use of informal controls, such as peer pressures or culture, towards carbon management objectives. Independent surveys or case studies into both responding and non-responding firms may provide interesting comparative and in-depth insights, especially regarding the process of carbon accounting and strategy. To provide more comprehensive understanding of the three-way interaction between strategy-accounting-performance in achieving the carbon management objectives of organisations, future research can address these limitations through a wider inclusion of time periods, firms, and variables.

It is noted, however, the traditional MCS literature often does not consider the environment or how it should contribute to sustainability (Durden, 2008 ; Gond et al., 2012 ). MCS are traditionally established to align organisational behaviour with economic goals, and maximise economic performance (Gond et al., 2012 ). In contrast, environmental controls in the environmental management literature often consider a small subset of systems and tools for environmental/sustainability management accounting and control (i.e., environmental MCS).

There could be an interactive relationship between strategy and CASs.

The need to limit to only two years’ data was driven by the manual coding of all strategy and CAS variables. Furthermore, since 2016, CDP has changed their questionnaire format and scoring methods, including changes to Scope 2 emissions measurement, science-based targets and the movement from separate disclosure and performance scores to one single-letter performance score (DFGE, 2016 ). This has led to inconsistencies in the way CASs are measured and scored.

Due to data limitations and the structures of CDP questionnaires, we are unable to discern the use of informal controls in carbon management.

Gond et al. ( 2012 ) also suggest a hybrid measurement system (such as the balanced scorecard). However, we are not able to construct the measure for this MCS, as firms do not disclose their sustainability balanced scorecard in their CDP responses.

To reduce the heteroscedasticity, we transform the actual variable into logs, consistent with Bose et al., ( 2021 ).

We are also indebted to one the reviewers for suggesting non-industry-adjusted measurements of carbon performance.

In additional analysis, we removed from our sample countries that have less than 5 observations. Our untabulated results are qualitatively similar to those reported in this paper.

We also ran a regression based on the components of PROACT and its relationship to CAS . Accordingly, all the strategies have a positive relationship with CAS . These results confirm prior studies (Adams & Frost, 2008 ; Bui & de Villiers, 2017 ; Pondeville et al., 2013 ), that the choice of carbon strategy is a significant driver of CAS quality.

Tang and Luo (2016) use similar measures of carbon performance.

We also ran a regression based on the components of PROACT and its relationship to CAS . Accordingly, all the strategies have a positive relationship with CAS . These results confirm prior studies (Adams & Frost, 2008 ; Bui & de Villiers, 2017 ; Pondeville et al., 2013 ) that the choice of carbon strategy is a significant driver of CAS quality.

\(\Sigma CP{\text{ }} = {\text{ }}\delta _{0} + \delta _{1} CAS{\text{ }} + {\text{ }}\delta _{2} PROACT{\text{ }} + {\text{ }}\delta _{3} REACT{\text{ }} + ~\delta _{4} CAS*PROACT{\text{ }} + {\text{ }}\delta _{5} CAS*REACT{\text{ }} + \sum {\text{Control}}_{{{\text{it}}}} + {\text{FE}}_{{{\text{it}}}} + \varepsilon _{{{\text{it}}}} \left( 5 \right)\)

PROACT it (2015)  = α 0  + α 1 CAS it (2014)  + ∑Control it  + FE it  + ε it.

Lagged models are: PROACT it (2015)  = α 0  + α 1 CARSAV (2014)  + ∑Control it  + FE it  + ε it

PROACT it (2015)  = α 0  + α 1 INTENS (2014)  + ∑Control it  + FE it  + ε it

CAS it (2015)  = α 0  + α 1 α 2 CARSAV (2014)  + ∑Control it  + FE it  + ε it

CAS it (2015)  = α 0  + α 1 α 2 INTENS it (2014)  + ∑Control it  + FE it  + ε it

However, 50% of firms responding to CDP in 2014 and 55% to CDP in 2015 have third-party assurance for their emissions inventory (another 8% and 7% respectively had assurance underway, but this was incomplete in the reporting year) (authors’ analysis).

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The authors are grateful to the discussants and participants at AFAANZ 2017 (Adelaide, Australia) and Financial Markets and Corporate Governance Conference 2017 (Wellington, New Zealand) for their valuable comments on the paper.

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Bui, B., Houqe, M.N. & Zahir-ul-Hassan, M.K. Moderating effect of carbon accounting systems on strategy and carbon performance: a CDP analysis. J Manag Control 33 , 483–524 (2022). https://doi.org/10.1007/s00187-022-00346-7

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We Need Better Carbon Accounting. Here’s How to Get There.

• Robert S. Kaplan
• Karthik Ramanna

The current Greenhouse Gas Protocol has a major loophole when it comes to how companies measure the carbon impact of their suppliers.

Any effective system of greenhouse gas (GHG) accounting needs to measure each company’s supply-chain carbon impacts accurately, providing visibility and incentives for it to make more climate-friendly product-specification and purchasing decisions. The authors’ recent HBR article, “Accounting for Climate Change” (Nov-Dec 2021), noted how the current dominant system for carbon accounting, the GHG Protocol, misses this critical point by allowing companies to guestimate upstream and downstream emissions. To address this shortcoming, they introduced an E-liability accounting system, based on well-established practices from inventory and cost accounting, for accurately measuring GHG emissions across corporate supply-chains. In this follow-up piece, they describe the basic flaw inherent in the GHG Protocol, explain why it has persisted, and offer a way forward for robust carbon accounting that does not involve rescinding the Protocol, which has been widely embedded in many global climate agreements. They conclude by identifying which companies stand to gain most from accurate GHG accounting and could be early adopters of the E-liability system.

The Rocky Mountain Institute reports that the average company’s supply-chain greenhouse gas (GHG) emissions are 5.5 times higher than the direct emissions from its own assets and operations. Any effective system of GHG accounting, therefore, needs to measure accurately each company’s supply-chain carbon impacts, providing visibility and incentives for it to make more climate-friendly product-specification and purchasing decisions.

• Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).
• Karthik Ramanna is a professor of business and public policy at University of Oxford’s Blavatnik School of Government. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).”  He is a co-founder of the E-Liability Institute , a global not-for-profit advancing the urgent accounting upgrade needed to drive green innovation.

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5 Carbon Accounting Challenges and How Address Them

The complexity and challenges of carbon accounting practices exceed most current in-house capabilities, leading to the need for outsourcing help and additional costs in order to keep an organization in line with changing regulatory, market, and investor expectations of environmental due diligence. The main challenges include errors in calculations and in collecting data, the definition of emissions boundaries, a lack of credible standardization, and more. Overall, addressing these challenges requires a combination of standardized methods, robust data management systems, transparent reporting, and a proactive approach to managing risks and opportunities related to greenhouse gas emissions.

1. Lack of a credible standardization

While overarching trusted protocols do exist for carbon accounting such as the GHG Protocol, there is still a lack of one definitive calculation model, emissions data collection procedure, and a consistent method of determining scope boundaries. Most areas of the accounting process are subject to strong recommendations and guidance rather than required methodologies, and companies are given significant discretion when it comes to where and how they source their data, and the use of estimation rather than primary data. Not only does this lead to greenwashing down the line, subjecting companies to possible legal trouble as regulations begin to crack down on the reporting of these metrics, but the rampant body of carbon inventories built mainly on estimates leads to results that are incomparable. This is a sizable issue for investors who value this data but cannot trust the data across companies and industries to be comparable, nor can climate change be adequately addressed when emissions accounting is wrong.

The GHG protocol method is widely embedded in many global climate agreements, yet many argue that the protocol falls short when it comes to its scope 3 standards, allowing a company to estimate the scope 1 emissions of all direct and indirect suppliers and customers with industry average data. This method is subject to possible double-counting flaws and greenwashing as more carbon-clean companies help boost the industry average emissions of more polluting firms.

2. Defining boundaries for greenhouse gas accounting

One challenge in greenhouse gas accounting is determining which emissions should be included and which should be excluded. This can be difficult because emissions can occur at different points in the supply chain, and it may be unclear which party is responsible for them. There are significant differences between the definition of organizational boundaries required by US GAAP (Generally Accepted Accounting Principles) relative to those required by the GHG Protocol (e.g., financial control, operational control, or equity share). To address this challenge, organizations need to thoroughly understand and comb through the available standardized methods and tools, such as the GHG Protocol, to determine their scope and boundary of emissions. Companies may also consider outsourcing talent in order to cover their boundaries accurately.

3. Collecting accurate & quality source data

Gathering emissions data manually is not only cumbersome for corporations but error-prone and lacks standardization. Many companies fail to collect activity data in real-time consistently over time, do not undergo emissions baseline calculations at the outset of GHG accounting adoption, and fail to check data progress against checkpoints on a quarterly, yearly, or monthly basis. In order to combat manual entry errors, look for sophisticated energy and sustainability data management solutions that continuously collect environmental data over time straight from the source (meter level), have goal tracking capabilities, internal audit and data checking functionality, and can compute GHG accounting based on current standards and verified calculation methods.

Most companies are fairly accurate about the emissions they directly produce (Scope 1 of carbon accounting), but accuracy is significantly reduced when collecting data from supply chain emissions or sold goods (all indirect emissions: Scope 2 & 3). Companies have little control over their access to and quality control of indirect emissions data, which is managed and distributed at the discretion of other corporations within supply chains. Scope 3 data can be notoriously difficult to acquire from suppliers and downstream business chains, who may not currently collect the necessary GHG data or who avoid requests for any data they deem unsavory to disclose. Because gathering indirect emissions data from other companies is so difficult, many frameworks and standards allow the use of industry average data to represent the direct emissions of a company’s specific suppliers, rather than primary source data. Currently, many companies skip line item accounting of scope 3 emissions, which may be an informed decision, if scope 3 is the deterrent for undergoing all levels of carbon accounting in the first place. Corporates new to GHG accounting should begin with reliable scope 1 and 2 data and integrate scope 3 later on if accurate supply chain valuation data is not accessible to your business or when better accounting standards are introduced. Do not rely on opportunistic and unreliable scope 3 reporting based on inaccurate industry average data. New legislation on climate-related disclosures from the SEC even provides fail-safe loopholes for scope 3 accounting, essentially acknowledging that these disclosures may be unreliable at this moment in time.

4. Errors in calculations and reporting  

In carbon accounting, there is a high amount of measurement uncertainty and error. Many firms are using models that are not representative of true emissions inventory and human error is often introduced through the use of spreadsheets to conduct the accounting calculations. This is costly both in terms of mistakes and time. Corporations should seriously consider the use of third-party software and data tools to collect and dynamically calculate complicated carbon accounting metrics. Calculations completed on data management platforms also allow for more effective auditing and verification of data.  

5. Ensuring transparency and audit credibility

There is no uniform guidance on auditing GHG emissions, which can leave corporations questioning what standards they need to meet in order to pass credibility standards and third-party verification or if assurance on emissions accounting is necessary in the first place. With consolidated sustainability reporting regulations and guidelines just around the corner in 2023 such as the SEC proposal, International Sustainability Standards Board (ISSB), and European Sustainability Reporting Standards, auditing sustainability data will become more mainstream as elements of emissions accounting become tied to the stringent standards of financial reporting. Organizations who have undergone or are planning to undergo GHG accounting should do so with the intent to acquire independent, third-party assurance alongside it for accuracy and reliability sake if not regulatory pressure.

Solutions to keep an eye on:  

• Technology provides more consistency and comparability of reported data
• More guidance documents for some specific sectors and new methods that cover entire supply chains of materials
• Standardization of sustainability reporting frameworks such as CDP, SASB, TCFD, and GRI that all, at least in part, provide direction and guidance around carbon accounting and inform carbon accounting policy
• Better defined scope 3 boundaries that eliminate the greenwashing advantages of the use of secondary industry average data for scope 3 accounting
• Look for systems that address issues in measurement uncertainty: Data should be regularly updated to allow comparisons across reporting periods for benchmarking progress and include viable baseline year emissions data for progress comparability. 

WatchWire provides full-service carbon accounting, tracking Scope 1, 2, and 3 emissions, renewable energy credits (RECs), global warming potential, and more. To discover more about WatchWire and its capabilities, you can visit our website ,  blog , or  resource library ,  request a demo , or follow us on  LinkedIn ,  Instagram , or  Twitter  to keep up-to-date on the latest energy and sustainability insights, news, and resources.

December 28, 2022

Finance-grade emissions data refers to emissions information that is of sufficient accuracy, completeness, and reliability to inform financial decisions. This data is crucial for: Risk Management: Identifying and quantifying climate-related risks to financial assets. Investment Decisions: Guiding investors towards sustainable…

Markets are rewarding decarbonization because decarbonization has benefits. The need for carbon data isn’t being driven by securities regulation, it is being driven by market rewards, consumer preferences, financial costs and incentives, reputational benefits, and a recognition that higher carbon…

Background:  While the final rule takes a much narrower approach than what the SEC proposed in 2022, it marks a significant change in the level of climate-related information publicly listed companies must disclose in the US. The rule requires companies…

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• Published: 02 April 2024

Model-based financial regulations impair the transition to net-zero carbon emissions

• Matteo Gasparini   ORCID: orcid.org/0000-0002-6750-7936 1 , 2 ,
• Matthew C. Ives   ORCID: orcid.org/0000-0002-3536-2787 1 , 2 ,
• Ben Carr 3 , 4 ,
• Sophie Fry   ORCID: orcid.org/0009-0008-6174-9601 5 &
• Eric Beinhocker   ORCID: orcid.org/0000-0001-6312-9731 2 , 5  

Nature Climate Change ( 2024 ) Cite this article

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• Climate change

Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments.

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The role of artificial intelligence in achieving the Sustainable Development Goals

Ricardo Vinuesa, Hossein Azizpour, … Francesco Fuso Nerini

The urgency of climate change has not always been matched by the pace of action by governments. However, increasing concerns about climate-induced financial instability and stranded assets 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 have led some academics and financial regulators to advance a set of possible policy changes to help catalyse the green transition 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 . While various policies aimed at assessing climate-related financial risks—which could possibly indirectly stimulate the net-zero carbon transition—have become widespread in recent years (for example, climate stress testing, climate-related risk disclosure) 29 , 30 , 31 , 32 , financial policies aimed at directly fostering green investments have not always gained traction among policymakers (for example, differentiated capital requirements). Yet, a largely neglected question in this literature and among policymakers is whether existing financial regulations could be negatively contributing to the net-zero carbon transition.

This paper assesses whether widely used model-based risk regulations might create disincentives for financial institutions to divest their portfolios from high-carbon assets. Such financial regulations have extensively required banks to use statistical models for assessing firms‘ and investments‘ financial risk for various purposes (for example, financial stability). For example, capital requirements (for example, Basel III/IV) aim to force banks to hold higher capital buffers for investments that are ‘estimated’ to be riskier. Accounting rules (for example, IFRS9) appraise the ‘fair value’ of outstanding loans on banks’ balance sheets, reducing their net value by the amount of ‘estimated’ expected losses. These regulatory frameworks affect key metrics of financial institutions, which ultimately influence management incentives and resource allocation 33 , 34 , 35 , 36 .

We focus on financial accounting rules, which are a key driver of the profitability of banks, and leverage model-based estimates of risk. A key measure in this framework is loan loss reserves (LLR), which is an allowance for potential future losses from outstanding loans. Due to the structure of double-entry accounting, LLR are liabilities which net the valuation of assets by the amount of their expected losses. Any change in LLR results in loan loss provision (LLP) charges, which are a ‘present’ cost of the ‘future expected’ credit losses from outstanding loans (ECL). When there is any change in these model-based estimates of risk, banks are expected to account for any estimated financial losses before they occur. In turn, differentials in any of these estimates may influence banks’ profitability, management behaviour and resource allocation (see Supplementary Information 4 ).

To examine the impact of such financial accounting rules, we use data from the European Banking Authority (EBA) transparency exercise, which provides the amount of LLR and outstanding loans of supervised banks in the European Union by economic sector (defined as Nomenclature of Economic Activities (NACE) rev2 level 1). We combine these data with the results of the EBA risk assessment exercise, which reports the average exposure towards climate policy relevant sectors (CPRS) 5 within each NACE level 1 section, to classify sectors as ‘high carbon’ or ‘low carbon’. We classify sectors with a share of CPRS higher than 95% as high carbon and provide a set of robustness analyses. We are particularly interested in the ratio of LLR over the value of outstanding loans, which is a proxy of banks’ estimates of expected credit losses. This measure is often called provision coverage ratio (PCR).

Our empirical analysis allows us to observe that model-based estimates of risk are lower for high-carbon sectors compared with low-carbon ones. We then provide an assessment of the implications of this observation for some key financial metrics of banks if they had to divest from high-carbon assets. Specifically, we utilize the accounting relationships among some of these metrics to show that an active divestment from high-carbon assets could be costly for banks. We argue that this, in turn, could create perverse incentives impairing the shift of financial resources from high-carbon to low-carbon assets, possibly including much needed investments in renewable energy. Finally, we provide some possible explanations as to why some of these models may lead to estimates that are negatively correlated with carbon emissions.

Our analysis shows that in 2021, the average PCR of banks in the EU was substantially lower for high-carbon (1.8%) than low-carbon sectors (3.4%), as reported in Table 1 . Such a difference has substantial implications for banks’ return on capital and profitability, and therefore heavily influences management incentives and behaviours. Our analysis shows that this result is consistent for banks of different portfolio sizes and across countries of the banks’ headquarters, with the only exception being Italy. Looking at the results by the size of banks, this effect is exacerbated for smaller financial institutions in absolute terms, but in relative terms, there is no correlation between the difference in PCR and bank size. This finding is also consistent across countries, regardless of the large variation in terms of absolute PCR between Nordic and Southern/ Eastern European regions.

These results emerge from banks’ statistical models based on historical information as required by the accounting framework. Standard backward-looking risk models can show a high-carbon portfolio to be relatively low risk, even if there is a possibility of a rapid transition to green energy (see Discussion). Although it is arguably difficult to take an objective stance on the correct estimate of risk for these investments on a forward-looking basis, our analysis is sufficient to show that the structure of model-based risk frameworks may have an unintended side effect that is potentially in conflict with the purpose of the regulations or other societal goals. By affecting financial institutions’ incentives, model-based financial regulations may create perverse outcomes possibly leading to more investments in polluting activities.

Simulating the effect of a divestment from high-carbon activities and a re-investment in low-carbon sectors allows us to better understand the effects of such action on banks’ financial metrics and the linked management incentives, which ultimately affect behaviours and resources allocation. Specifically, as indicated by the accounting rules, we assume that if a bank had to divest from high-carbon sectors and re-invest the proceeds in low-carbon sectors, the PCR of such investments would need to increase to the higher level of the latter (Table 1 ). This would in turn lead to a higher level of loan loss provisions and higher costs due to the structure of the accounting rules (see Methods ).

Simulation of a divestment strategy

Due to the model-based risk estimates of PCR required by the accounting regulation, the performance of financial institutions would be substantially impacted if they were to swiftly shift their portfolio away from high-carbon to other investments. Our modelling shows that if banks had to stop lending to firms in high-carbon sectors and lend only to low-carbon ones, the portfolio average PCR would need to increase by more than 100 basis points (1%) across most institutions in the European banking sector (Fig. 1 ). This effect is consistent for most banks in our sample and across various nations, except for a few institutions with low PCR for high-carbon assets. Banks in countries with the largest difference in PCR between high-carbon and low-carbon assets would be hit substantially more according to our analysis. Most financial institutions would be affected by this shift regardless of their size, but in line with our empirical observations, banks in the smaller size quartile would be impacted more than others (2.35% increase compared with 0.9% simple average).

Absolute percentage change in PCR following a divestment from high-carbon assets and corresponding re-investment in low-carbon assets, maintaining a constant level of outstanding loans by bank. Colours represent the country of bank’s headquarters. The change in PCR represents the difference between PCR required for low-carbon as opposed to high-carbon assets, for each bank in our sample. Horizontal line represents the average in basis points (bps). a , Banks ranked by absolute change in PCR. b , The same information ranked by gross loan exposure (largest to smallest from left to right).

Source data

We estimate that a shift in investments away from high-carbon to low-carbon assets would require a loan-weighted average increase of 35% of LLR for banks in the European Union (Fig. 2 ). This result is consistent after controlling for bank size and country of headquarter. The decision to divest from high-carbon assets could lead to more than doubling of provisions for some banks in our sample and could thus have material impacts on the bank’s stock market valuations. The increase in LLR will not only depend on the difference between the estimated expected loss from lending to low-carbon and high-carbon activities, but also on the share of high-carbon loans. The higher the share of current outstanding loans towards high-carbon firms, the more pronounced the impact on LLR given a certain level of difference in PCR. This relationship further exacerbates the potential impact of a divestment for banks more exposed to high-carbon sectors, creating greater hysteresis in investing in high-carbon sectors and contributing further to the build-up of risk in assets that could become stranded in a green transition.

Relative increase in LLR following a divestment from high-carbon assets and corresponding re-investment in low-carbon assets, maintaining a constant level of outstanding loans. Horizontal axis represents current share of high-carbon sector outstanding loans (June 2021). Bubbles represent banks in our sample, colour coded on the basis of the country of headquarters. Bubble size represents the total value of outstanding loans. Relative increase in LLR represents the absolute increase in LLR over the level of LLR as of June 2021. Results are gross-exposure weighted. Horizontal line is the weighted average by gross exposure across banks (35%).

The increased PCR, LLR and the resulting LLP charges driven by a potential divestment strategy could weigh substantially on banks’ net profits. An increase in LLR not only impacts the liability side of the balance sheet, but also the income statement through decreased profits. To simulate this effect, we take the absolute increase in loan loss provisions, and we compare it to each bank’s cumulative profits from 2016 to 2020. We select 5 years of profits to smooth possible bad years or extraordinary items in the financial reporting and to provide a stable baseline for our counterfactual analysis.

We estimate that for some banks, the transition could cost as much as 5 years of profits over the divestment horizon and, on an outstanding loan weighted average basis, 15% of the previous 5 years of profits due to a large increase in LLR (Fig. 3 ). The total sum of banks’ lost profits due to the increase in provisions following a divestment from high-carbon assets could be of the order of €28 billion (considering the 59 largest banks in the European Union). This is only a rough estimate as it does not account for (1) how such divestment could affect other investments in a network of interconnected banks (indirect effects), (2) whether sufficient alternative investment opportunities are available to the banks or (3) the impact on the costs and prices of alternative energy generation options resulting from changes in the investments in those options. However, this figure is useful to assess the materiality of our findings. The European Central Bank (ECB) estimates that the impact of physical risk and transition risk could be around €17 billion and €53 billion, respectively, in a short-term scenario for the 41 largest banks in the European Union.

Impact on net profits following a divestment from high-carbon assets and corresponding re-investment in low-carbon assets, maintaining a constant level of outstanding loans by banks. Bars represent the share of cumulative 2016–2020 profits lost due to the required increase in LLR. The impact represents the ratio of absolute increase in LLR over the cumulative profits between 2016 and 2020. The horizontal line represents the average loss of profits (−15%).

Although there are a few instances of banks that experience higher profits due to their lower estimate of risk for low-carbon than high-carbon sectors, our results show consistently that most banks’ profits would be negatively impacted by a divestment from high-carbon assets. Our findings are also robust to the classification of specific sectors as high carbon. It is the prevalence of the lowest PCR among the high-carbon sectors, in general terms, that drives our key results. We found that relabelling some selected sectors between high-carbon and low-carbon clusters does not alter the main outcome of our study, although the magnitude of the impact can change (Supplementary Information 1 ). This sensitivity test provides us with confidence that sectors with particularly low (high) levels of PCR among the high-carbon (low-carbon) sectors are not driving our results.

We then simulate the impact of allocating each sector partially to the low-carbon and to the high-carbon cluster depending on their median share of CPRS found among banks in the European Union taking part in the EBA risk assessment exercise. This robustness analysis simulates a partial divestment of only the high-carbon portion of investments in each NACE level 1 and allows us to better investigate the heterogeneity of high-carbon/low-carbon sectors within each NACE level 1 section. This is because the underlying CPRS classification leverages a much more granular sectoral classification (NACE level 4), which better captures whether economic activities are high carbon or low carbon. Once again, we find that our main results persist. Moreover, our results are robust after controlling for different time periods. If we use quarterly average levels from March 2020 to June 2022 (maximum temporal depth of the data), the impacts are similar (100% increase in PCR, 33% increase in provisions, 14% impact on previous 5-years profits).

The robustness of our results highlights that our findings are not a function of the specific high-carbon/low-carbon classification used but driven by a lower average estimated risk for high-carbon sectors compared with low-carbon ones. As long as the structure of the regulation foresees that (1) losses are costs that are accounted for as expected costs as opposed to incurred costs and (2) provision coverage ratios are proportional to model-based estimates of risk, then divesting from an ‘estimated’ low-risk asset and re-investing in an ‘estimated’ high-risk asset mechanically leads to higher costs in the income statement. Indeed, despite not being able to use carbon emissions data directly, in our Discussion and Methods , we provide strong evidence for a negative correlation between CPRS/emission intensity of assets and risk estimates (Supplementary Fig. 1 ). This in turn leads to a confirmation of our conclusion that there probably exists an implicit incentive structure that might inadvertently favour assets involved in high-carbon activities.

The bias shown towards high-carbon assets identified in this paper probably emerges from the backward-looking nature of risk estimates. That is, it is the outcome of using models that rely on the historical relationship between a firm’s financial performance and past risk as a predictor of future risk. As discussed in the literature and by policymakers, such models are useful but may not be well suited to capturing uncertain macro-economic outcomes when there are structural breaks or non-marginal changes in the system, such as the clean energy transition. In these risk-based models, the creditworthiness of firms is often estimated through financial ratios measuring profitability (for example, Earnings Before Interest, Taxes (EBIT)/Revenue), solvency (for example, Debt/Asset, Interest/EBITDA (Earnings Before Interest, Taxes, Depreciations and Amortizations)) and liquidity (for example, short-term debt/working capital). If these ratios have been historically favourable for high-carbon firms, as previous research has highlighted 37 , risk models will probably produce favourable outcomes for this type of investment. This phenomenon might arguably limit investments in green assets if their past risk estimates have been relatively high.

To illustrate this, we use a simple analysis based on a dataset of 228 oil and gas, and 235 renewable energy firms worldwide and financial information between 2010 and 2021, retrieved from Bloomberg (Supplementary Information 2 ). We use this dataset as a representative sample of some of the most relevant sectors in the high-carbon and low-carbon clusters. We construct some financial ratios that are commonly used in risk assessment to investigate the origins of risk estimate differentials. We then contrast them to infer the likely relative magnitude between these two important sectors in the net-zero carbon transition. The average share of interest expenses over EBITDA for the period 2010–2021 is lower for oil and gas (16%) than for renewable energy firms (32%), and the average debt over asset ratio is lower for oil and gas (31%) than for renewable energy (42%) (Fig. 4a ). Similarly, the outcome of one such model retrieved from Bloomberg shows consistently higher average estimates of risk (expressed in terms of probability of default) for renewable energy than for oil and gas between 2010 and 2021 (Fig. 4b ). This highlights how historically, investing in the former might have been less risky compared with investing in the latter, due to the higher solvency and lower indebtedness.

a , Average of 5 years interest expenses over EBITDA and total borrowing over total assets of 228 oil and gas and 235 renewable energy firms in our sample between 2010 and 2021. Left: simulation of the impact of US$100 carbon tax on EBITDA expressed in terms of average interest expenses over EBITDA ratio. Right: impact of US$20 per barrel write-off of oil reserves on total assets expressed in terms of average total borrowing over total assets. b , Average of Bloomberg 5 years Probability of Default (PD) estimate through time for the companies in the sample.

These ratios have been a good proxy of the historical creditworthiness of firms and have been used extensively by financial analysts. However, problems arise if these historical metrics are not representative of the future, following a change in the probability distribution of losses 38 . For example, we estimate that if there were an increase in the average global level of carbon tax enforced on Scope 1 and 2 emissions to US$100 (or climate policies with an equivalent shadow carbon price), the ratio of interest expenses over EBITDA for oil and gas firms might increase substantially above the ratio of renewable energy companies (from 16% to 46% against 32% for renewable energy). Similarly, a partial write-off of oil reserves valuations in the balance sheet of oil and gas companies of US$20 per barrel might result in an increase in the debt to asset ratio of these firms, much higher than the average value observed among renewable energy companies (from 16% to 86% against 32% for renewable energy). In such case, financial ratios and the resulting risk estimates might become lower for renewable energy investments. A more forward-looking framework which includes scenario analyses that consider climate-related risks might be better suited to capturing such unprecedented emerging risks.

In conclusion, our results suggest that model-based financial regulations, and in particular accounting rules, might disincentivize banks from divesting from high-carbon sectors by directly impacting their profitability. This side effect of the rules might impair the transition towards net-zero carbon emissions and in turn contribute to increasing the build-up of transition risk in the financial system. Our comparison of financial ratios between oil and gas and renewable energy firms indicates that this effect might penalize investments in clean energy. Current financial accounting practices might unintentionally hinder the shift of funds required for the green transition, especially in Europe where these investments are often provided by the banking sector. While the desire to promote a green transition may be based on broader social objectives that lie beyond the remit of financial regulators, the deeper problem for regulators is that this transition could represent a potential source of systemic risk. Broader research is needed to determine whether the existing regulations sufficiently account for any such emerging sources of systemic risks that might accompany the green transition. More research is also needed to shed light on whether this bias might be present in other similar model-based frameworks (for example, capital requirements). Finally, regulators and investors should investigate risk models that include forward-looking assessments of climate and energy transition risk to ensure that those risks are appropriately incorporated in decisions and to remove any inadvertent bias.

We used data from the 2021 EBA transparency exercise, which provides portfolio-level information of banks’ gross exposure and accumulated provisions (LLR) by NACE sector level 1 at the end of June 2021. We used the most recent data, but with additional robustness analysis, ensured that the results do not change using different years (the reader should note that due to the structure of this modelling, the provision coverage ratios oscillate with time in level but the relative difference across sectors is generally preserved). NACE is a standard classification of sectors in the European Union. It has various levels of granularity from 1 (least granular) to 4 (most granular), and the EBA transparency exercise relies on this classification. The exercise is an annual data collection to foster transparency and to complement banks’ own disclosures. The data published includes 111 EU banks across 25 countries and provides information regarding banks’ assets, liabilities, loan loss provisions and other financial information for each bank.

We used the legal entity identifier (LEI) code in the EBA dataset to complement this information with the historical net profit data from Bloomberg. The data identifiers were matched with each LEI code in our sample through manual research on the Bloomberg terminal. We started from the largest 60 banks in our sample representing 95% of the total banking exposure, but we excluded one bank because its name and LEI code were missing, which did not allow us to retrieve their income information. This bank represents ~2% of total EU banking assets. After this manipulation, our dataset covered more than 93% of total banking loans in the European Union and provided us with LLR, total lending amount for all NACE sectors (level 1) and cumulative net profits from 2016 to 2021 for the largest 59 banks in the EU. A summary of the sector-level statistics is reported in Supplementary Table 1 .

High-carbon sectors classification

We added to this dataset the information necessary to classify sectors as high carbon (that is, sectors with high levels of emission intensity). Specifically, we complemented the data with the results of the EBA Risk Assessment exercise, which provides median values of CPRS as defined in ref. 5 within each NACE level 1. CPRS is a classification used to assess the exposure of investments to transition risks, including carbon taxation, and is a proxy for the level of carbon emissions associated with an investment. The exercise was carried out by the EBA and a sample of 29 volunteer banks from 10 countries representing 50% of the total EU banking assets, with the objective of obtaining a preliminary quantification of the exposure of banks to climate-related risks, particularly focusing on transition risk. The data annex provided (publicly available) discloses the share of CPRS sectors in each NACE level 1 section according to banks’ classification of their own clients in CPRS. This information is particularly useful because it allows us to have a more granular labelling of low-carbon and high-carbon sectors than the NACE level 1 (which would not be sufficient to address the heterogeneity of some sectors). The CPRS rely on NACE level 4, which provides a better discrimination between climate-sensitive sectors and others (additional information provided in Supplementary Information 2 ).

The bank-level information on total gross loan amount and LLR by NACE code were grouped into high-carbon and low-carbon sectors. We defined sectors as ‘high-carbon’ if they had a median share of CPRS higher than 95%, as reported by banks in the EBA Risk Assessment exercise. This gave us the following high-carbon sectors and their respective codes: A - Agriculture, forestry and fishing; B - Mining and quarrying; D - Electricity, gas, steam and air conditioning supply; E - Water supply, sewerage, waste management; H - Transport and storage; and L - Real estate activities. We acknowledge that our approach has limitations, but we extensively tested the robustness of our results to a change in the methodology used to classify low-carbon and high-carbon sectors (Supplementary Information 1 ). Moreover, we compared our classification to more granular data reporting emission intensity to provide transparency about their level of correlation. It should be noted that the banks participating in the climate risk exercise did not include Sweden, Denmark and Norway, but results do not change if those countries are excluded due to their relatively low materiality in the overall EU banking system.

Data availability prevented us from assigning carbon emissions to loans directly. However, the CPRS classification we used is highly correlated with GHG emissions intensity (Supplementary Fig. 1 ). The EBA Risk Assessment provides a breakdown of emission intensity by percentiles for CPRS and non-CPRS. They use individual firms’ GHG emissions from the data provider Trucost (representing 30% of total banks’ loan amount) and a proxy based on the average GHG emission intensity at NACE rev2 level 4 for the remaining loan amount. Each bank loan is classified in percentiles of emission intensity in a range from very low to very high (more details could be found in the EBA 2020 Risk Assessment Report, Table 19 ). We used these data to test the correlation between the share of loan amount in CPRS/non-CPRS and its emission intensity. There is a clear correlation between the share of loan amount of CPRS and the clusters of emission intensity (Supplementary Fig. 1 ). Around 85% of the loan amount classified as having ‘very high’ emission intensity are in CPRS. At the opposite end of the spectrum, only 8% of the loan amount of CPRS are in the ‘very low’ emission intensity bucket. The correlation between the share of loan amount in CPRS (non-CPRS) and its emission intensity is therefore strongly positive (negative) and around 90% (−90%). In Supplementary Information 1 , we show that this correlation is very unlikely to change with different classifications using a set of robustness analyses.

Using the data available, we could provide an estimate of the potential impact of a divestment from high-carbon assets on EU banks’ financials. The primary assumption in this estimation is that the total amount of loans of each bank is left unvaried. In other words, the simulation assumes that banks shift their lending portfolio directly from high-carbon to low-carbon investments. We also assume that sufficient low-carbon investments are available for these transactions. The labelling in our data allowed us to calculate the average risk estimate (PCR) of low-carbon and high-carbon sectors for all banks in our sample. We made use of the accounting relationship between provisions coverage ratio, LLP charges and net profits to assess the impact of a divestment from high-carbon assets on these metrics (all else being equal). Importantly, we did not rely on an explicit economic model, but on the accounting relationship among these metrics. In turn, our results were generated by the structure of the regulation as long as a bank divests from a low-PCR asset and re-invests in a high-PCR asset.

It should be noted that LLP changes are only the direct effect of this divestment on bank’s net profit changes at the time they make the investment. This is an expected loss, not necessarily a loss that will occur in the future. More specifically, three conditions need to be satisfied to generate an increase in costs from a divestment by banks:

Losses are costs that must be accounted for as ‘expected’ as opposed to ‘incurred’. That is, financial firms must account for any change in the portfolio expected losses, not the actual incurred losses;

Provision coverage ratios must be equal to model-based estimates of ‘expected losses’. That is, expected losses are proportional to measures of risk;

Risk estimates of the asset in which a bank is divesting are lower than the asset in which it is making a new investment;

Conditions (1) and (2) are provided by the structure of the regulation and replicated in the stylized analysis proposed in this paper (see Supplementary Information 4 ). Evidence supporting condition (3) is provided in our empirical analysis and further corroborated in the analyses described in the Discussion and Supplementary Information 2 . In particular, from the three conditions above, it emerges that the results of the simulation are grounded on PCR differentials. For this reason, we paid particular attention to demonstrating a negative correlation between high-carbon sectors and risk measures.

More formally, we defined the PCR as the LLR (or accumulated provisions in EBA terminology) divided by the gross exposure for the high-carbon and low-carbon sectors i for each bank j . The PCR represents the expected credit loss (of non-default counterparties) and the corresponding loan loss provisions which banks must allocate to lending activities in each sector. This measure is assumed to be the model-based output from each institution risk model, in line with the accounting regulation:

We then calculated the change in the level of LLR following a divestment from high-carbon assets. This was performed by assuming that all low-carbon loans replacing the high-carbon ones would require the average PCR of existing low-carbon assets. In other words, a divestment from low-PCR assets and re-investment in high-PCR assets would lead to an increase in the overall average PCR. More formally, the increase/decrease in provision for bank j is defined as follows:

This result provides the expected increase or decrease in provisions if a bank had to shift the totality of its assets from high-carbon to low-carbon investments. This relationship is an accounting identity defined by the framework. The impact of additional loan loss provisions on a particular bank’s income statement is considered an LLP ‘charge’ (that is, additional cost) with direct effect on their net profit. In particular, the increase in provisions (that is, the LLP charges) is directly deducted from net profit, being an additional cost for the bank in the fiscal year of the divestment. This in turn provides a direct estimate of the change in net profits following a divestment from high-carbon assets. More formally:

where j refers to each bank in our sample, t is the starting point period and t  + 1 is the period post divestments. Importantly, to simulate the effect of the divestment, we assumed it to occur entirely in one fiscal year. This divestment would probably be spread across multiple years, but frontloading the entire impact allows us to better investigate the implicit incentive structure created by the regulation. This simple approach allowed us to simulate what would be the impact of a divestment from high-carbon assets on banks’ balance sheets and income statements, testing the hypothesis that a potential divestment strategy might be costly, disincentivizing banks from taking such action.

Data availability

The data used for the analyses and the results have been deposited in Zenodo at https://doi.org/10.5281/zenodo.10632853 (ref. 39 ).

Loan data, including loan loss reserves and gross exposure, were extracted from the EBA transparency exercise website available at this link ( https://www.eba.europa.eu/risk-analysis-and-data/eu-wide-transparency-exercise ). Financial information, including banks’ profits, and oil and gas and renewable energy companies’ financials were retrieved from the dataset Bloomberg and can be shared only with Bloomberg’s permission. Source data are provided with this paper.

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Acknowledgements

The project has received no external funding. We thank P. Tufano (Harvard Business School), C. Hepburn (University of Oxford), J. Stock (Harvard University) and R. Barker (University of Oxford, ISSB) for feedback on this research; the discussants and participants at the EAERE conference and various people at the European Central Bank (ECB); the International Sustainability Standards Board (ISSB), and the International Monetary Fund (IMF) for feedback on this research.

This paper only reflects the views of the authors. Any organizations they may be affiliated with do not accept any liability for opinions expressed in it.

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Results of the analyses starting from the dataset Gasparini et al. 2024 - input data and reported in Gasparini et al. 2024 - results data.csv.

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Results of the analysis starting from the Bloomberg download of financial data on renewable energy and oil and gas companies’ financials.

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Gasparini, M., Ives, M.C., Carr, B. et al. Model-based financial regulations impair the transition to net-zero carbon emissions. Nat. Clim. Chang. (2024). https://doi.org/10.1038/s41558-024-01972-w

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Accounting for carbon in the oil and gas industry

Finance professionals working in the oil and gas industry have likely been accounting for carbon in some form for many years; and, over the past several years, there have been accelerated efforts to track and lower emissions.

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Since the Task Force on Climate-related Financial Disclosures (TCFD) released their recommendations in 2017, an increasing number of organizations have adopted sustainability reporting to enhance transparency for investors, stakeholders, and regulators on their environmental impact and efforts to reduce the devastation from natural disasters.

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Forest carbon accounting allows Guyana to stay net zero while pumping oil

Experts say UN rules around forests and oil are open to abuse, so that countries like Guyana can claim to be carbon-negative without cutting emissions

Guyana's president Irfaan Ali and Exxon's Guyana country chief Alistair Routledge smile for a picture near an Exxon stand at Guyana's International Energy Conference in Georgetown, Guyana, February 14, 2023. (REUTERS/Sabrina Valle)

The densely forested South American nation of Guyana is fast becoming the world’s newest petro-state, allowing fossil fuel giants like ExxonMobil to hunt for what researchers have referred to as “carbon bombs” on its seabed.

International oil companies, led by US firm ExxonMobil, plan to extract 11 billion barrels of oil from Guyana’s ocean floor and sell it abroad to be burned, thereby worsening global warming. The country pumped its first oil in 2020.

Despite this, late last month Guyanese president Irfaan Ali defended his country’s green credentials in a heated interview with the BBC’s Hardtalk programme, which went viral on social media. “Even with our greatest exploration of the oil and gas resources we have now, we will still be net zero,” he said, referring to the country’s greenhouse gas emissions.

“We have the lowest rate of deforestation in the world… Guyana will still be net zero” President Irfaan Ali says Guyana won’t take lectures on climate change as it exploits its huge offshore oil and gas reserves https://t.co/TKxhR6r3ur pic.twitter.com/xIJTgRsfZP — BBC HARDtalk (@BBCHARDtalk) March 29, 2024

The case of Guyana shows how countries with large forests can use unclear rules on counting national carbon emissions to justify fossil fuel production.

Michael Lazarus, a scientist with the Stockholm Environment Institute (SEI), told Climate Home it is “absurd” to claim that capturing and storing carbon dioxide (CO2) in forests offsets the emissions impact of oil production, as “they have nothing to do with each other than geographic proximity”.

Official United Nations carbon accounting rules, drawn up nearly 20 years ago by the Intergovernmental Panel on Climate Change (IPCC), allow Guyana to claim net-zero status because they do not specify which types of forest governments can take credit for preserving – and also because the emissions from oil are counted in the country where it is used and burned, not where it is produced.

Experts said governments are taking advantage of having barely-touched forests on their land that suck up CO2, and argued that fossil fuel-rich nations like Guyana should bear part of the moral responsibility for the emissions of their polluting products.

“The problem is that within the country, you are allowing the emissions to continue or even to rise, and then you are trying to balance that out internally by saying that we have this forest,” said Souparna Lahiri from the Global Forest Coalition.

Carbon-negative club

Around 93% of Guyana is covered in forest – more than any other nation but its neighbour Suriname. The population numbers just 800,000, mostly clustered on its coastline, and those people on average emit slightly less than the global average per capita.

Although the country’s non-forestry emissions are growing steadily , CO2 absorption by its vast forests more than compensates for that.

In its emissions inventory sent to the United Nations, the government claimed: “Guyana is a net carbon sink, with its lush managed forest cover removing up to ten times more than the emissions produced in the country up to the year 2022”.

Other small, sparsely-populated forest-covered nations like Suriname, Panama and Bhutan assert they are carbon-negative too.

While not claiming the same accolade, leaders of bigger forest nations like Russia and Brazil have also used their forests to defend their climate record.

In 2021, Russian President Vladimir Putin told a US-hosted summit: “Russia makes a gigantic contribution to absorbing global emissions – both ours and from elsewhere – owing to the great absorption capacity of our ecosystems.”

Despite rising Brazilian deforestation under Jair Bolsonaro, the former president told the same summit that the Amazon’s carbon absorption was evidence that “Brazil is at the very forefront of efforts to tackle global warming”.

Managed vs unmanaged

International carbon accounting rules essentially leave it up to governments to decide how much credit they claim for CO2 absorption by national forests, with many opting to count it all.

In 2006, scientists working with the IPCC came up with a distinction between “managed” land – where greenhouse gas emissions and removals should be attributed to humans and nations – and “unmanaged” land where forests are natural and governments should neither be credited nor blamed for emissions levels.

The IPCC defined “managed” land as “land where human interventions and practices have been applied to perform production, ecological or social functions”. Those could include planting a commercial forest, protecting a forest from fire, or designating it for conservation.

In its national emissions inventory report, Guyana does not differentiate between “managed” and “unmanaged land” – and claims credit for CO2 sequestration by all of its forests.

Guyanese forestry expert Michelle Kalamandeen told Climate Home the government is doing well at protecting the rainforest but should not classify it all as managed by the state. Much of it – particularly in the south – is inaccessible, so “they’re just relying on remoteness for protection of it”, she explained.

The Global Forest Coalition’s Lahiri agreed, saying that most of Guyana’s forest seems to be intact old-growth forest “so it is not a plantation or managed forest in that sense”.

A global issue

From this perspective , Guyana is by no means the only country that appears to be over-counting its emission sinks. A 2018 study in the journal Carbon Balance and Management found that over fourth-fifths of the 101 countries analysed counted all their land as managed.

Even those countries that make a distinction often counted all of their forest – but not all their land – as managed. Australia is one example.

Even the rare few that consider some of their forests “unmanaged” have drawn the line in different places.

Russia counts most of its forests as managed with a few exceptions, the US counts everything outside of Alaska (and much inside it) as managed, and Canada counts everything it tries to protect from fires.

The USA’s “managed” land (blue) and “unmanaged” land (grey) (Photos: Carbon Balance and Management )

Brazil stands out as the exception, counting just under half of its huge forests as managed and foregoing a carbon accounting boost from the other half.

Oil emissions

The other carbon accounting orthodoxy Guyana relies on is attributing emissions from burning fossil fuels like oil to the countries where they are burned, not where they are produced.

The vast majority of Guyana’s oil will be exported to regions like Europe and Asia or to neighbouring Brazil , meaning that emissions from its use will be counted there.

This way of measuring emissions prevents them from being double-counted – but it lets extracting nations off the hook for the carbon pollution caused by the fossil fuels they sell abroad.

Kalamandeen said oil-producing countries have some responsibility for the emissions created by the consumption of their fossil fuels, while the home nations of fossil fuel companies should also step up. In Guyana’s case, that would be the US and China, as the oil extraction consortium is made up of ExxonMobil, Hess Corporation and the China National Offshore Oil Corporation.

SEI’s Lazarus described the current system as an “essential accountability framework for governments and civil society” – but agreed that producers should be held morally accountable too.

Without that, he said, “we’d turn a blind eye to… the lock-in effects of long-lived fossil fuel supply investments that impede the global clean energy transition”.

Read more on: Forests | South America | UN climate talks | Guyana Forests

The climate crisis - and how we confront it - is THE story of our lifetimes. At Climate Home News, we believe journalism can make a difference. Our mission is to produce original reporting that informs, engages and inspires action. This takes time and expertise. Support our work today with a donation or by subscribing to our daily newsletter for exclusive extra content.

Inorganic Chemistry Frontiers

Metal− and covalent organic frameworks for photocatalytic co 2 reduction coupled with h 2 o oxidation.

The overuse of fossil fuels has caused serious energy and environmental issues. To address this, the integration of photocatalytic CO 2 reduction with H 2 O oxidation is considered an effective approach towards achieving carbon neutrality and sustainable development. This article presents a comprehensive overview of the recent advancements in utilizing metal− and covalent organic frameworks for photocatalytic CO 2 reduction coupled with H 2 O oxidation. It discusses the key factors influencing the overall reaction, delves into the catalytic mechanisms of CO 2 reduction and H 2 O oxidation half-reactions, and explores the intermediate species involved in the process. Additionally, it summarizes various strategies employed by researchers to enhance the performance and product selectivity for the overall reaction. This review concludes with an outlook on the prospects and challenges of this emerging research field.

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