The Startups That Could Close the Greenwashing Loopholes

(Bloomberg Opinion) -- Greta Thunberg threw the “greenwashing” charge at financial officials at COP26 last week in what has become a regular problem for companies grappling to become more environmentally friendly. But here’s one reason the slur is so widespread: measuring a carbon footprint is hard.

If you’ve ever tried doing your own taxes, think back to that convoluted task and multiply it by 10. That is carbon accounting, a practice so mind-bogglingly complex that it is hard to imagine anyone but the Big Four consultancy firms, or cloud giants like Salesforce Inc. and SAP SE, doing it properly.

The process of measuring carbon needs a revolution similar to fintech’s, an industry that came out of nowhere to challenge incumbents by bringing together the brightest minds in technology and finance. The good news is that seems to be happening: an array of startups is racing to solve the puzzle.

It’s a complex one for both corporations and the environmentalists watching what they do. Large companies must increasingly report their carbon emissions to do things like list on the New York Stock Exchange or comply with U.K. law. But with a lack of universal standards, everyone is measuring carbon in different ways, making it difficult to compare and rate performance.

Furthermore, companies only need to report on emissions they directly produce, like the pollution from operating their own factories, or from heating their offices, known as Scope 1 and Scope 2 emissions. That represents only a fraction of global pollutants. The NYSE and the U.K., among others, do not require companies to report so-called Scope 3 emissions — carbon emitted via the actions of others in their supply chain PLUS whatever that company’s customers do in the future. Scope 3 represents a mountain of unreported carbon: More than three quarters of the world’s emissions.

The neglect of Scope 3 makes it easier for oil giants like BP Plc and Royal Dutch Shell Plc to say they’ll become net-zero energy businesses by 2050 since for the time being, they are not obliged to track the enormous pollutants made by their customers.Some ambitious companies like Apple Inc. or American Airlines Group Inc. have, to their credit, tried tracking their Scope 3 emissions, but they are chasing a moving target. Companies might one year include new categories like staff commutes, or air travel by their executives, leading to a jump in their numbers. (See chart).

Who are some of the most interesting players going at these problems? Normative, a carbon-accounting startup based in Stockholm, Sweden, uses software to trawl through a company’s transactions to calculate its Scope 3 emissions. Persefoni AI Inc., a similar startup based in Tempe, Arizona, that says it uses artificial intelligence to measure a company’s carbon footprint, raised $101 million last month in its latest funding round. San Francisco-based Watershed was spun out of fintech giant Stripe by the people who built that company’s carbon-management tools; Watershed has received $14.7 million in total funding from Silicon Valley stalwarts Sequoia Capital and Kleiner Perkins, according to Pitchbook, a capital markets intelligence firm.

According to PitchBook, carbon accounting is the most popular category for investment in carbon tech, which overall saw investment double between 2020 and 2021, to a total of $670 million raised by startups globally across 42 funding deals.

Ian Thomson, a professor of accounting and sustainability at the University of Birmingham who has been researching carbon accounting for 30 years, is wary of a single large consultancy firm or cloud company like Salesforce, which sells carbon-accounting software called Sustainability Cloud, dominating the market for carbon accounting. “You need the wisdom of the crowd,” he says, because there are so many complex details to work out when measuring Scope 3 carbon. “It’s going to be difficult to come up with a single solution. The devil is in the details.” Fintech companies grew rapidly over the past decade because many found smaller, modular solutions that the larger banks were missing out, he notes.

Venture capital investors are rightly betting that carbon disclosures will get stricter and more prescriptive. One sign: The U.S. Securities and Exchange Commission is expected to set new rules requiring public companies to report on greenhouse gas emissions by their suppliers, similar to the complex, Scope 3 data. Startups are rising to the challenge, and getting the funding they need too. 

Based on a pilot study of greenhouse gas emissions reported by230S&P 500 firms between 2015 and 2019, carried out by Professor Ian Thomson, Director of the Lloyds Banking Group Centre for Responsible Business at the University of Birmingham.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Parmy Olson is a Bloomberg Opinion columnist covering technology. She previously reported for the Wall Street Journal and Forbes and is the author of "We Are Anonymous."

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