What’s new: Until recently, small and medium size enterprises have largely avoided stakeholder pressure to quantify their greenhouse gas (GHG) footprint. But a recent influx of regulations requiring companies to report on Scope 1, 2 and 3 emissions has created demand for this information across the value chain. Small and medium size enterprises will need to step up to the call to quantify their carbon footprint.
Good or bad news? The effort and learning curve could be steep. The good news is, there are methodologies available in the public domain, companies can leverage many in-house skills and processes, and support from expert third parties is widely available. And many other companies are on the same journey.
Bottom line: We are in the midst of a transition to mandatory GHG emissions reporting, whether through direct regulatory obligation or downstream/stakeholder needs. This shift will require companies to treat GHG performance in a similar manner to financial performance, integrating considerations into business-as-usual activities tied to strategy, financial accounting and operational resilience.
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Small and mid-size public and private businesses have, until recently, avoided stakeholder pressures to quantify their greenhouse gas (GHG) emissions — this expectation was typically reserved for the largest publicly-traded enterprises. They are, however, starting to understand that GHG emissions reporting will eventually be everyone’s responsibility.
A wider regulatory net
With the adoption of the Corporate Sustainability Reporting Directive (CSRD) in Europe, a number of companies will soon come into scope for GHG reporting — the largest ones in 2026 (for FY 2025), with the net widening to incorporate smaller entities by 2028 (for FY 2027) and non-EU headquartered companies by 2029 (for FY 2028). Under CSRD, Scope 1, 2 and 3 reporting is required for businesses where climate change is considered a material topic.
The California climate bill SB 253, which affects companies that do business in California and have global revenue of more than $1 billion, requires reporting of Scope 1 and 2 emissions, followed by Scope 3 a year later, and is anticipated to take full effect within the next 5 years at the latest.
Should ongoing legal review not impact original timelines, the U.S. Securities and Exchange Commission climate rule requires Scope 1 and 2 reporting from listed companies of any size, starting in 2026. The Scope 3 requirement was struck from the SEC’s final rule. (We discuss the different scopes below.)
Value chain pressures
Even if a company happens to fall between the cracks of these major regulations (e.g., private, U.S. only, under $1 billion or not doing business in California) such company may still need to account for its emissions. The larger in-scope entities’ Scope 3 obligation will be driving them to look up and down their value chains to better quantify and drive down CO2. Smaller players are already beginning to see requests for suppliers to disclose, assure and even reduce their emissions. Refusing to respond to these requests will most certainly result in lost business opportunities.
The challenge and the opportunity
Some larger companies, particularly in the extraction and energy sector, have felt stakeholder pressure for years and are more likely to have the organizational capabilities to meet the current requirements for disclosure. Small and medium size enterprises, however, face disadvantages today in having to quickly catch up.
On the upside, tracking and reporting GHG emissions can be a business advantage. Maintaining the trust of customers; demonstrating to potential investors that the business is long-term viable, responsible and resilient; and reducing operational costs by carefully managing and optimizing resource use are all benefits that can motivate companies to start watching, measuring and reporting their carbon footprint.
Your GHG reporting skills are hiding in plain sight
The good news: Accounting for GHG emissions is a lot like financial accounting — it’s all about numbers. In fact, close parallels to financial accounting and auditing requirements are leading companies to establish an ESG controller position, which often reports through an organization’s finance or accounting function.
Financial accounting, plus
The basic skills for GHG accounting include understanding compliance requirements as well as knowing where to find and how to collect the required data using proper governance and controls, performing the calculations, and writing the report. Imagine recruiting the accounting and audit teams, who already know a lot about data collection and review, and augmenting the skills of those team members with scientific- or engineering-related GHG emissions expertise — this is a lean model that is increasingly popular with companies choosing to establish GHG reporting in-house.
A key point
Placing this new and complex endeavor on the shoulders of the accounting team with no support or training is not always possible or desirable. The point is that most companies possess core accounting capabilities, and that there may be people with accounting, auditing and reporting skills who are willing and even excited to expand their expertise in the area of GHG accounting and become part of the new wave of sustainability reporting.
The GHG Protocol: “GAAP for Carbon”
The other good news is that GHG accounting does not require each company to invent new methodologies and formulas. Most companies today use a commonly accepted set of principles known as the GHG Protocol. The GHG Protocol is the world’s most widely used greenhouse gas accounting standard. Finance and other professionals might think of the GHG Protocol as the Generally Accepted Accounting Principles (GAAP) of GHG emissions reporting.
Scope 1, 2 and 3 emissions
The GHG Protocol focuses on three scope classifications — from the relatively simple to quantify Scopes 1 and 2 to the more complex Scope 3. Scope 3 includes emissions that are a consequence of the activities of the company but occur from sources not owned or controlled by the company — for example, transportation of purchased fuels or use of sold products and services. In other words, a supplier’s Scopes 1 and 2 become the customer’s Scope 3. Most regulators today (with the notable exception of CSRD) require Scope 1 and Scope 2 emission disclosures, with Scope 3 applicable to companies of a certain size, or at a later point. Small and medium size enterprises who are asked to quantify emissions by their customers will typically have to quantify their Scope 1, 2 and 3 emissions related to servicing that specific customer.
Building GHG emissions reporting capabilities
Leaders might treat the establishment of a GHG emissions reporting function as a project. The project would develop the governance, policies, processes and resource requirements to operate a GHG reporting function as a routine aspect of business. The project should sufficiently document how GHG emissions data is to be gathered, what tools are to be used, and what controls should be in place to ensure data integrity, accuracy and completeness.
It’s important to acknowledge that external help may be needed in the beginning of this project to flatten the effort and transfer valuable skills and knowledge. The ultimate goal would be for each company to build capabilities internally and not rely on third parties indefinitely.
Sustainability reporting team
Ideally, each company will eventually establish a sustainability reporting function, likely built from a mix of existing and new resources. Some companies have developed dedicated sustainability organizations reporting to a Chief Sustainability Officer, while others have integrated these organizations into the CFO’s reporting line due to similarities with reporting and audit requirements. Internal audit processes for ESG disclosures will need to be developed too, as most regulators have assurance requirements and indicate that reports will be audited in the future.
In 2022, 272 of the S&P 500 companies obtained assurance over reported Scope 1, 2 and 3 emissions – a steady increase since 2021. (Center for Audit Quality)
A need to respond
As governments, regulators, customers and other stakeholders intensify their focus on GHG emissions, all companies will need to step up. This effort could be significant, and the learning curve steep. Protiviti offers resources on our Sustainability Solutions site, including a Guide of Frequently Asked Questions and examples of how we help clients get off the ground with sustainability reporting.
