Carbon Accounting vs. Climate Risk Management - What's the Difference

With climate-related pressures on the rise, organisations are increasingly expected to monitor both their environmental footprint and their vulnerability to climate-related risks. This has driven the need for two specific types of software: Carbon Accounting Software and Climate Risk Management Software. Although some platforms offer both functionalities, each type serves a unique purpose and relies on different data, timelines, and outputs.

Understanding Carbon Accounting and Climate Risk Management

Carbon Accounting Software

Carbon Accounting Software measures a company’s greenhouse gas emissions. It’s the tool businesses use to understand and control the pollution they produce, tracking emissions from things like energy use, transportation, and waste. The goal is to monitor, manage, and reduce emissions to comply with environmental laws and reach sustainability targets. In simple terms, carbon accounting is about keeping your company’s emissions in check.

Climate Risk Management Software

Climate Risk Management Software, on the other hand, looks at how climate change might impact the company itself. Rather than measuring what your business puts into the environment, it predicts how external climate events—such as floods, wildfires, and rising temperatures—might disrupt operations or drive up costs. This software is essential for companies that need to plan for potential climate-related risks and protect their long-term stability.

Key Distinctions

Though they both contribute to a climate strategy, carbon accounting and climate risk management software differ in their core focus, the data they use, and the reports they produce.

Focus and Time Frame

Carbon Accounting looks at your company’s direct impact on the environment, focusing on current and past emissions. It’s all about how much pollution you’re creating and what you can do to reduce it. The reporting is usually done on an annual basis, which allows for regular updates and goal-setting.

Climate Risk Management, however, looks outward at potential risks posed by climate change. It generally focuses on the future, using long-term projections (10, 20, or even 30 years out) to anticipate events like extreme weather, temperature increases, or sea-level rise. However, it also considers shorter time horizons (1–5 years and 5–10 years). These shorter-term assessments are crucial for evaluating more immediate risks, such as regulatory changes, supply chain disruptions, or insurance cost increases. These predictions help companies prepare for risks they might face down the road.

Data Sources

Carbon Accounting Software relies on internal data from the company’s own operations, such as energy use, transportation, and waste management records. This data is essential for calculating emissions.

In contrast, Climate Risk Management Software draws on external data sources—like climate models, geographic maps, and economic projections—to assess what kinds of climate threats could impact the business. For instance, if a company has factories in flood-prone areas, this software can help model the risk of flooding in the years to come.

Outputs

The reports and action plans produced by each type of software are also different. Carbon Accounting Software provides emission inventories (a breakdown of emissions by source) and reduction plans (steps to reduce emissions). These are often measured in terms of metric tons of CO₂ equivalent, or tCO₂e, which represents the total greenhouse gases produced.

Climate Risk Management Software, however, delivers risk assessments that identify potential climate threats to the company’s assets, operations, and revenue. It can also produce adaptation strategies to help reduce or manage those risks—essentially, a plan for how to handle the worst-case climate scenarios.

Regulations Driving Each Type of Software

Carbon accounting and climate risk management are driven by different sets of regulations, each with its own focus.

Carbon Accounting Regulations

The main purpose of carbon accounting regulations is to reduce a company’s greenhouse gas emissions. These rules require businesses to track and report their emissions to meet both national and international standards. Some key frameworks include the Greenhouse Gas (GHG) Protocol, a widely accepted standard for tracking and reporting emissions, and California’s Cap-and-Trade Program, which places a cap on emissions and penalises companies that exceed it.

Climate Risk Management Regulations

Climate risk management is governed by regulations that aim to prepare stakeholders for potential risks that climate change might bring to the business. Although the Task Force on Climate-Related Financial Disclosures (TCFD) was instrumental in developing these standards, it has now disbanded as of October 12, 2023. This decision followed the release of TCFD’s final status report and the transition of its responsibilities to the International Sustainability Standards Board (ISSB), which now leads in this area.

The ISSB’s standards—IFRS S1 and IFRS S2—are built on the foundations of TCFD’s recommendations and will continue to guide climate-related financial disclosures. The Financial Stability Board (FSB) has requested that the ISSB monitor the progress of climate-related financial disclosures starting in 2024. Meanwhile, regulations requiring TCFD-aligned disclosures, such as those from the UK Financial Conduct Authority (FCA), remain in effect until they are formally updated.

Where the Regulations Overlap

Some companies may need to report both their emissions and their climate risks. For example, current ISSB standards incorporate elements of the original TCFD recommendations, requiring companies to disclose both their emissions and their exposure to climate risks, especially in industries with high environmental impact and vulnerability to climate change. This means businesses must report their direct and indirect emissions (from carbon accounting) and explain how those emissions might lead to financial risks (as part of climate risk management).

Let's put this in a real-world scenario:

Imagine running a factory that produces emissions. Carbon Accounting Software is like having a monitor that tracks how much smoke is coming out of your factory’s chimneys each day. It measures the exact amount of pollution your factory is releasing into the air, helping you understand and manage your direct impact on the environment. This data is crucial for meeting regulatory requirements, setting emission reduction goals, and demonstrating accountability for your organisation's carbon footprint.

On the other hand, Climate Risk Management Software is like a tool that assesses the risks to your factory if the surrounding climate changes significantly—such as rising temperatures, more frequent storms, or floods. It’s not tracking your factory’s emissions but instead predicting how external environmental changes might threaten your operations. For instance, it can help forecast the likelihood of extreme weather disrupting supply chains, damaging infrastructure, or increasing insurance costs.

To summarise:

• Carbon Accounting Software focuses on measuring your factory’s output (the emissions it produces) to help you minimise your environmental impact.

• Climate Risk Management Software looks at the potential threats to your factory from changing climate conditions, helping you plan for future disruptions and safeguard your operations.

Types of Software Solutions

Companies have several options when it comes to climate software, and knowing what each tool does can help you make the right choice.

Carbon Accounting Software

This software tracks emissions from various sources, such as fuel use, energy consumption, and waste. It’s specifically built to handle Scope 1 (direct), Scope 2 (purchased energy), and Scope 3 (indirect) emissions data. Features often include data collection, emissions factor databases, and automated emissions calculations.

Climate Risk Management Software

Climate Risk Management Software helps companies understand and prepare for physical risks (like floods or wildfires) and transition risks (such as regulatory changes or market shifts). It often includes tools for geospatial analysis, climate modelling, and financial forecasting, allowing companies to simulate different climate scenarios and their potential impacts.

Combined Solutions

Although Carbon Accounting and Climate Risk Management are distinct categories, some software platforms may provide both tools. These combined solutions can be particularly useful for companies looking to track their own emissions while also assessing their exposure to climate risks.

Choosing the Right Software for Your Needs

If your primary goal is to measure and reduce emissions, then Carbon Accounting Software is likely the best fit. It’s ideal for organisations aiming to track their environmental impact and comply with emissions reporting regulations.

If you’re more focused on understanding and managing climate-related risks to your business, then Climate Risk Management Software is the better choice. This software helps identify vulnerabilities and supports planning for a resilient future.

For organisations with comprehensive sustainability strategies, a solution that integrates both functions may provide the most value, enabling them to address both their impact on the environment and the potential impacts of climate change on their operations.