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Author's profile photo Ian Ronayne
Ian Ronayne
June 26, 2023 4 minute read

More reasons to be climate-optimistic: an E-Liability ‘Thought Experiment’

 

When I was a child I really enjoyed experimenting. I remember an experiment I did in Chemistry class that went wrong. We were creating high temperature reactions using powders in the ‘fume cupboard’, but I must have got the quantities wrong and my experiment was way too vigorous, burnt too brightly, and emitted a lot of foul-smelling smoke. After getting things under control the teacher said, with a hint of a smile at the corner of his mouth,

“Ronayne, you’re a ‘liability”

My teacher was no doubt referring to the meaning of Liability as “a person or thing whose presence or behaviour is likely to cause trouble or put one at a disadvantage.”

More recently I’ve been inspired by a different type of Liability. E-Liability.

Harvard Professor Bob Kaplan, inventor of the Balanced Scorecard and Activity Based Costing (ABC), recently co-published a new ‘big idea’ called ‘E-Liability Accounting’ with colleague Professor Karthik Ramanna (Oxford University). I believe this is indeed a ‘BIG idea’, and if this approach or something similar is adopted it would significantly accelerate reductions in global greenhouse gas (GHG) emissions and slow down temperature rises. Their paper, titled ‘Accounting for Climate Change’, won the McKinsey Harvard Business Review of the year award.

I was so inspired by the article I invited co-author Bob to come share his thoughts on the topic at our latest SAP Industry Leaders Think Tank ‘Lab’. During the ‘Lab’ (no fume cupboards this time!) Bob shared with our Chief Procurement, Supply Chain and Sustainability officers how E-Liability Accounting offers a much better way of accurately measuring reporting and reducing GHG emissions across end-to-end value chains. E-Liability is a common-sense approach based on proven accounting principles that is urgently needed to overcome the significant problems with the ‘Scope 3’ approach. We also learnt how massive global companies are already adopting E-Liability and seeing fantastic results.

So what’s wrong with ‘Scope 3’?

Today most global corporate efforts at measuring reporting and reducing supply chain emissions are following the Greenhouse Gas Protocol’s ‘Scope 3’ standard. There are three BIG problems with Scope 3 that are unintentionally slowing down global GHG emissions reduction efforts and contributing to bigger temperature rises:

  1. Allowing bad companies to hide behind inaccurate ‘averages’: Scope 3 aims to be a top-down process. But collecting “primary data” from all suppliers in the value chain is almost impossible for any sizeable company in a complex value-chain. The Scope 3 standard addresses this problem by allowing companies to use industry-average data, but this is analogous to allowing companies to report industry-average gross margins, instead of actual margins. This allows companies to avoid serious reduction efforts by hiding behind industry averages. Only ‘leaders’ will make the efforts required to collect and use ‘actual’ data.
  2. Focussing in the wrong places. Scope 3 treats ‘upstream’ (supply side) and ‘downstream’ (customer side) emissions equivalently. Companies cannot control customers and end-users in the same way they can influence suppliers and their own operations. Treating them equivalently and requiring equal focus distracts companies from effective actions with suppliers (upstream) to lower the actual Scope 1 emissions (the only ones that enter the atmosphere).
  3. Senseless duplication of effort. Each company in an extended supply chain repeats the same measurement process as its suppliers and customers, resulting in repetitive accounting and multiple counting of the same emissions in a value chain.

 

Two of our more mature Think Tank members took the ‘spotlight’ and shared the great work they’ve been doing with their supply chains to reduce emissions. The first one, a large global drinks company has already started doing pretty much what is required for E-Liability accounting – partnering with key suppliers to have them accurately measure and record emissions at the product level and feed those measurements into their own Scope 3 calculations. In doing so, because these suppliers are performing better than average, the drinks company was able to reduce their total Scope 3 number by a sizeable margin.

The second ‘spotlight’ member, VP for Sustainability at a global luxury goods company, shared how they’ve been partnering to significantly reduce ‘enteric emissions’ in their upstream supply chain – feeding cows seaweed which massively reduces their burping and farting – the primary contributor of greenhouse gas emissions in their leather products supply chain.

What we heard is that these types of approaches stimulate greater customer-supplier partnering and innovation to find ways to further reduce or eliminate emissions.

We spent the second hour of the ‘Lab’ conducting a ‘Thought Experiment’ where members imagined they were implementing the E-Liability method, discussing motivations, barriers and key questions that would need to be addressed.

The Lab was a great success. It was full to capacity. Feedback has been extremely positive, and we are working on follow-up activity with some members looking to set up pilots with the E-Liability Institute.

Large companies with thousands of suppliers and millions of products will need great technology to help them adopt new transaction-level approaches like E-Liability at scale. I’m super excited at the capabilities SAP has already brought to market this year (like SAP Sustainability Footprint Management, and SAP Sustainability Data Exchange), and the plans to add a ‘Green Ledger’ to S/4HANA. These exciting innovations will enable companies to better measure, report and reduce their emissions and accelerate down the road to emissions reduction across their value chains.

This is why I’m optimistic.

Working with organizations like E-Liability Institute, we can help companies better manage their emissions ‘liabilities’ and make a real difference to the planet.

If you’re interested in saving the planet from overheating and are working in ‘Scope 3’ reporting or reduction, I’d encourage you to:

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