Selecting an Emissions Source

The burning question: How do I categorise my transaction - what category is ‘right’?

You’re not going to like this answer and neither do we, but in the spirit of transparency, here it goes…

Judgement calls in carbon accounting

If you don’t have primary emissions data from your suppliers, you have to code transactions to an emissions source in the carbon ledger, applying an industry average. It turns $100 on milk to 1 kg of carbon. Read more about the method here.

So you’re looking at the options thinking “which one?”. Essentially, there isn’t always a “correct” answer, you’re making a judgement call based on what you know about the transaction and how it corresponds to the emissions source available.

Those options are derived from the databases Sumday uses to provide average emissions factors. Where suppliers are using Sumday, and providing their primary data this becomes much more precise!

Those databases often use different naming conventions, depending who has developed the dataset. Some of the industry naming systems include ISIC, ANZIC or NAICS. So Sumday has reviewed those names, summarised them and made them available for selection.

Transparency to explain the calculation

When you run the carbon general ledger report, you’ll be able to see what emissions factor database was relied on and the numerical factor applied based on your selection. You can learn more about each of these databases in the Emission Factors section of the Knowledge CentreWe’re working hard to make this as transparent yet user friendly as possible and there’s a bunch of features in the pipeline.

If you can't find an emissions source that matches the transaction, we suggest using your judgement to select an option that represents the best fit. If there is really nothing that aligns, get in touch with support@sumday.io and the team will share insights, previous examples or public database links to guide you towards the best option for you.

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Coming soon - Soon you’ll be able to search the full catalogue if you want to go deeper on every potential option before making a selection in the carbon ledger.

A common problem

Every company in the world that’s carbon accounting relies on industry averages at the moment (we’re on a mission to solve that). So it’s worth noting that every carbon accounting platform on the market pulls from these average sources as well. Often they’re making assumptions on how your transactions should be coded to apply the relevant industry average. Yet all too often they lack the transparency companies now require (most aren’t doing this for the warm and fuzzies anymore, they want it done right to meet compliance requirements, share data with stakeholders and track emission reduction).

If you can’t explain how the numbers came to be, then you aren’t carbon accounting.

The Sumday difference

There’s a reason top accounting firms use Sumday, we’re the only platform:

Providing full transparency on the emission factors applied, including the source and specific number so you can explain it to stakeholders or clients and disclose your assumptions and approach.

Enabling you to export a carbon general ledger report with those details against every single financial transaction and activity based inputs

Disclosing the approach to CPI and currency conversion for every dataset

Agreeing with you that, yes, it’s a stupid approach (that’s why it’s a last resort under the GHG Protocol) but in the absence of primary data it’s often the best companies can do

We’re making carbon accounting accessible to every business so you don’t have to calculate 90% of a footprint based on industry averages, and can get primary data from your supply chain.

We want your carbon ledger to light up with emissions factors provided by your suppliers!

By carbon accounting with Sumday you’re becoming part of the solution to the biggest problem the world has when it comes to tracking progress towards net zero…

It all comes down to the accounting.

Who woulda thought…

What about Excluded transactions?

Sumday allows organisations to import all of their General Ledger transactions for a given reporting period. This helps to facilitate completeness of emissions resulting from financial transactions as part of the carbon accounting process.

The catch here is that not all financial transactions are used to as the basis for calculating GHG emissions. To address this fact transactions can be marked as Excluded within the Category column of the Carbon Ledger. This means that when the transaction is reconciled it will be excluded from the emissions calculation process and no emissions will be recognised for it. The transaction will still appear in the Reconciled Transaction section and as a result it can be tied back through to the financial GL and trial balance.

“What is an example of a transaction that would be excluded?” you ask. Well there are quite a few common examples, some of which are listed below:

Income and revenue

Salaries and Wages

Superannuation/Pension payments

VAT/GST payments

Leave and other provisions

Prepayments

Depreciation

For most businesses we find that on average around 40% of a business’ general ledger transactions will be excluded for carbon account purposes. This can mean a lot of time selecting “Exclude” from the category drop down. Fortunately however when you import transactions you can choose to mark all transactions from a specific GL account as excluded eliminating the need to code each of these transactions individually. Learn more in Import confirmation screen.

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What about Accruals and Prepayments? Similar to financial accounting, expenses accrued or prepaid should be accounted for in the period they are incurred, regardless of when the payment is made. Prepayment Example: Insurance covering January 1st to December 31st has been paid upfront. If we're assessing the year-end as of June 30th, only six months of prepaid insurance expense should be included in this emissions assessment period. Accruals Example: Fees for legal services incurred in June have not yet been invoiced or paid. If we're assessing the year-end as of June 30th, these fees should be included in this emissions assessment period. Depending on how your organisation does their financial accounting (whether they record upfront and adjust at year end only vs monthly adjusting journals are posted), you can either import the full transaction and split the amount to reconcile the irrelevant portion as ‘Excluded’, or alternatively, skip the import of that transaction and you can raise an adjusting entry to account for the correct portion (similar to adjusting journal entries in financial accounting). Learn more in Adjustments to imports For fuel, electricity, water etc where the expense is often accrued at period end, our Workpaper Templates guide you through how to document and include/exclude the appropriate usage to address the accounting principle of cut-off.

The Calculation that’s performed

When you code a transaction, you are following the spend based method under the GHG Protocol (this is the lowest quality and you will be able to improve on this with activity data in the assessments section). This process enables you to identify categories where activity data may be available while ensuring you have an audit trail back to the reconciled financials.

When you code a transaction, Sumday is using this data and your location to select the most appropriate emissions factor from the database that will perform the following calculation:

Dollars spent $ x emissions factor = equivalent amount of carbon.

You can see exactly what emissions factor was applied by going to the Reports section and running the carbon general ledger report.

When you complete this process, you’ve done a first pass on your scope 3 emissions applying the spend based method.

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Learn more about the emissions factor databases Sumday uses here.

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Keep your eyes peeled for the upcoming fully searchable emissions factor catalogue, you will be able to select the database you want emissions factors to be made available from, upload your own and search how the database originally defined the relevant categories and view the exact currency and CPI calculation that was applied.

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Watch this short clip to step through the process

Feature Name: Selecting an Emission Source

Product Location: Transactions

Jobs to be done: Carbon bookkeeping, this is where you will reconcile transactions to related emission sources

Summary: This video will go through how to use search, filter, column management features in the Carbon Ledger and how to reconcile transactions to emission sources and how to unreconcile for when changes need to be made.