Accounting for Climate Change : The first rigorous approach to ESG reporting by Robert S. Kaplan and Karthik Ramanna ((November-December 2021)

 Responding to the United Nation's Intergovernmental Panel on Climate change, Kaplan and Ramanna critiqued the current protocol on greenhouse gas (GHG) emissions and proposed a new method of reporting. The authors acknowledged the desire for 200 CEOs of the Business Roundtable to improve environmental reporting, including the environmental reporting in their ESG "environmental, social, and governance" reports. 

Citing the shortcomings of the ESG reports, which fail to connect company profits to the ESG findings and to integrate the goals of ESG, the authors reported that the reports received public criticism of "greenwashing" and contained auditor validation by citing "no evidence of misreporting". Since most companies use the GHG protocol, the authors analyzed the discrepancies and errors within the Protocol and suggested means of improvement. The flaws involved "the same emissions are reported multiple times by different companies, while some entities entirely ignore emissions from their supply and distribution chains" (p. 2). To remedy these errors, the authors suggested employing these tools: data gathered by environmental engineers, data accumulated by financial and accounting records, and blockchain technologies. 

Errors in the GHG protocol derive from the nature of three measurements designated in its guidance: "Scope 1: Direct emissions from sources that are owned or controlled by a company, such as its production and transportation equipment. Scope 2: emissions at facilities that generate electricity bought and consumed by the company. Scope3: Emissions from upstream operations in a company's supply chain and from downstream activities by the company's customers and end-use consumers. For companies that emit large amounts of GHG, computing Scope 1 and Scope 2 emissions should result from the energy used during operations and accounted for by the company" (p. 3). According to the authors, Scope 3 complicated the accounting and measuring process. "Scope 3 emissions are the fatal flaw in the GHG reporting. The protocol's creators included them to encourage companies to exert influence over emissions that they don't control directly" (p. 3).