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Featured AIQ Podcast: Counting emissions and accounting omissions

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All the talk is about net zero, but how well are we measuring and monitoring what’s going on?

Find out more in this episode.

[Intro music]


Welcome to the AIQ podcast, an audio series from Aviva Investors exploring the long-term themes influencing investment markets and economies.

Today, after a year of record-breaking temperatures, life-threatening fires and shocking floods, people around the world are having to think much harder about global warming – from changes in their lifestyles and the goods they buy to how they might use their pensions to help shape a more sustainable world.

What needs to change to ensure capital is directed towards organisations likely to contribute to a lower-carbon world?

But before we can craft solutions, we really need to understand what’s going on. That’s why this podcast will focus on the essential nuts and bolts.

We’ll be asking what we know about major stores of carbon in the natural world, and who is counting them.

We’ll explore if there are polluters deliberately releasing warming gases who are not being checked.

And we’ll look at the accountants, the professionals tasked with keeping the corporate score. Will they ‘save the world’, as one senior accountant has suggested, or fail to measure and monitor what every one of us needs to know?

To begin, we head deep into the forests of Panama, where research scientists have been looking at a very practical question: how much carbon is being locked into the landscape, into the trees and soil? The answer forms part of a much bigger picture; a view of how people are affecting forests, changing the carbon flux and ultimately impacting global warming.

Here’s one of the scientists – Dr. Catherine Potvin from the Department of Biology at McGill University in Canada. She took a five-hour trip in a dug-out canoe when she first embarked into the wilds of Panama to research forest carbon:

Catherine Potvin

The tree carbon is a function of its height, its diameter and the content of carbon of its wood. In theory it should be simple to measure, but because the trees are very tall, we find all sorts of very imaginative ways to get up there and measure these diameters. It’s quite challenging.


While Potvin and others have worked for years to shine light on different land management practices, there is still a huge amount to learn about the carbon cycle. It’s the ‘backbone of life’: linking the rocks in the earth’s crust to birds, animals and the air we breathe.

Understanding the cycle means grappling with ‘nearly everything’- so it’s not surprising that some of our knowledge is a bit patchy.

For example, just over a decade ago, researchers were contemplating where around one billion tonnes of warming carbon dioxide might have gone.

“They looked for it here and they looked for it there, but the carbon had vanished into thin air,” wrote Jane Burgermeister for an article published in a science journal in 2007, keen not to miss a catchy line.

Scientists assumed some of the carbon dioxide being produced from burning fossil fuel, removing virgin forest and introducing modern agriculture had been locked into trees in vast boreal forests in the northern latitudes.

This wasn’t the case.

The ‘lost’ carbon was later ‘found’ in the tropics.

So how on earth could this be possible?

Perhaps the challenge of measuring forest carbon accurately is part of it, as Professor Dave Ellum, Professor of Ecological Forestry at Warren Wilson College in the US, in North Carolina, explains:

Dave Ellum

It’s really, really, really complicated to measure forest carbon. It varies by species, density of the forest, age classes – how old the forest is, whether you are measuring above ground or below ground biomass, it’s easier above ground, aspect…

It’s really complex.


And many areas of tropical rainforest are so remote they are not closely observed at all. Think of Potvin’s marathon research trip in a canoe! 

Building an overview means taking a tiny amount of data from the ground, perhaps from a site less than six metres square, then scaling it up and linking it with information from ecosystem models and satellite images.

As a result, many estimates are inexact, which has implications for how we assess human actions.

Other landscapes, like African agricultural systems, are monitored even less than tropical forests. They are “data deserts”, where scientists say the information gaps are “staggering.”

If one billion tonnes of carbon can be ‘lost’ when it’s stored in tangible form – in tree trunks and roots - how much greater is the challenge when the carbon compounds are invisible?

Take methane, for instance, the main constituent of natural gas and a major contributor to human climate warming. There are many natural sources of methane, including paddy fields and ruminating cattle, but the gas escaping from human energy systems is now a priority.

Some gas is released deliberately or burnt off to manage the build-up of pressure in energy networks – that’s the sound you can hear now - but in other cases it’s simply leaking out. The amounts can be large – as much as nine per cent according to some studies. Others put the figure much lower, less than one per cent.

That gas can contribute to human respiratory problems, like asthma, as well as slowing plant growth and affecting crop yields from farms. But monitoring it is difficult, because methane can disperse or oxidise quickly. It cannot be seen and has no smell, and needs specialist equipment, like quantum cascade lasers and spectrometers to measure it.

Here’s Fred Krupp, president of the Environmental Defence Fund, a non-profit organisation that works with oil majors like Shell and BP to solve big environmental challenges. He explains why it makes sense to focus on methane from a climate perspective.

Fred Krupp

Methane is 34 times more potent than CO2 over 100 years. It turns out methane doesn't last 100 years; it lasts less than 20 years. Over that period, it's over 80 times more powerful than CO2. When you reduce methane emissions, you can have an outsized effect on reducing the temperatures we're going to see over the next 20 years.


Gas can leak from many different parts of energy and petrochemical infrastructure - from the wells themselves to processing plants and storage tanks. Figuring out where gas is escaping from is a measurement challenge, but the International Energy Agency believes just using industry best practice could cut emissions by around 15 per cent, all at a relatively low cost.

But, as often the way, deeper probing into network emissions has introduced new complexities. Here’s Krupp again: 

Fred Krupp

We know from US oil and gas field submissions that, on average, two per cent of what is coming out of the ground is going into the air. In the Permian basin in the US, one of the biggest oil fields globally, we learnt very recently that (network) emissions are three to five times higher than what is being reported. The number is closer to 3.7 per cent.”

“When we have two per cent leakage, burning natural gas is only slightly better than coal. With 3.7 per cent leakage, burning natural gas is substantially worse….


The view from the bottom-up, from specific sources, and samples taken in the air from monitors on aeroplanes and drones, can be quite different too – yet another challenge.

It feels like the whole area of identifying all the emissions produced and measuring them is awash with unanswered questions.

Although there is a formal greenhouse gas recording protocol in place with agreed units of measurement, we don’t know precisely how much warming gas is being emitted from human energy systems, or from where.

Equally, we don’t know the quantity of warming gases natural systems are emitting or sequestering, or where.


The accountancy profession finds itself at the centre of the confusion. It already faces the monumental task of incorporating intangible assets into financial accounts. Now it has another: how to assess the change implied by the Paris Climate Agreement.

It means accountants are having to ask big questions of themselves. 

For instance, are established concepts – like materiality and prudence – leading to meaningful assessments of risk? Do they reveal which companies are most exposed to the risks and opportunities in the transition to net zero? Or could the patchwork of different reporting requirements fail to communicate exactly what’s on the line?

At the moment, there are obvious gaps between what’s being written in the front of financial reports, where climate risk is mentioned a lot, and the sparse data appearing in the back end, in the audited accounts.

Those gaps are making the detective work of the professional investment community much, much harder.

Professional bodies like the International Accounting Standards Board insist existing frameworks should already ensure climate risk is taken into account.

They point to ‘materiality’ set out in International Accounting Standard 1.

In addition to that, there are the requirements of International Financial Reporting Standards 7,9,13,36,37…. There are a lot of relevant requirements for companies exposed to climate risk! You get the idea.

Applying these prudently, using assumptions aligned with the Paris Agreement, will have significant implications, according to David Pitt-Watson from the Judge Business School at Cambridge University.

David -Pitt Watson

If we do do accounting that way, then we will not be investing in the future in stranded assets. In the short term, there’s going to have to be some write offs if we have been valuing climate-exposed assets as though there is no climate issue. That’s the right thing to do, just as it is the right thing to write off a bad loan rather than pretend the organisation is solvent.


In the background, deeper questions are being asked about the philosophy driving the metrics as well. Who are accounts for?

Professor Richard Murphy, professor of accounting at Sheffield University Management School, flags how financial reporting and sustainability reporting are not closely intertwined. He highlights that the IFRS Foundation has ‘creating financial capital’ as its main priority, which he believes is inconsistent with sustainability - because it creates an incentive to over-exploit the natural world.

Richard Murphy

Whilst financial capital is important, it's a secondary consideration compared to the requirement for businesses to operate within the environmental constraints imposed upon them by the greater goal of achieving sustainability, aligned with the Paris Agreement, however we wish to define that.


This is effectively the accountancy version of the conversation around the purpose of a corporation. Should companies be all about maximising profit for shareholders, or must that be balanced that with wider environmental and social concerns?

Murphy has an idea which he believes could put sustainability at the heart of the matter, a concept he calls sustainable cost accounting.

In countries like the UK, where achieving net zero is set out in law, Murphy argues a crystalising event has taken place, which should force companies to detail exactly how they intend to achieve the goal using proven technologies, then provision to cover the costs. This would take the costs of transitioning to a low-carbon world right onto company balance sheets.

The implications would be radical:

Firstly, corporate decision makers would be forced to cost the options to transition to a zero-carbon world; decisions could no longer be kicked down the road.

Secondly, climate provisioning could cut their ability to pay dividends, which might affect a company’s attractiveness from an investment perspective.

Richard Murphy

I don’t think companies can afford to pay dividends unless they can demonstrate how they can also address climate change. This is a going-concern issue. If they can put forward plausible plans to raise capital to fund the transition, then they can carry on paying dividends. If not they will have to constrain distributions.


Out of this comes Murphy’s idea of carbon insolvency. Exactly which businesses will fail to make it in a zero-carbon world is the question gripping investors everywhere; it features in regulatory risk conversations and discussions on how organisations on the brink of collapse might be handled via a climate ‘bad bank’. But financial disclosures do not allow stakeholders to assess the situation with any precision.

In many cases, the information needed to direct capital is incomplete. Information on greenhouse gases – if it is included at all - might involve large margins of error – perhaps as much as 20 per cent.

That data is not being translated into public accounts in an accessible way for non-technical readers.

Plus there are some companies exploiting loopholes, according to Dr. Matthew Brander, lecturer in carbon accounting at the University of Edinburgh.

Dr. Matthew Brander

The reporting under the Science based targets initiative. A proportion of the reductions that are being reported are not real reductions. They are just the outcome of an accounting trick…


These questions about who is doing what, how to measure it, the values reflected in data gathering, and the significance of metrics on the balance sheet are going to be critical in addressing the climate emergency. They will ultimately determine investment flows, which companies survive and fail. But agreeing on what happens next is not straightforward.

Steve Waygood

We are trying to course correct the global economy – by surveying the terrain, drawing the map and re-planning the route, all at the same time. And it’s difficult.


That was Steve Waygood, chief responsible investment officer at Aviva Investors, who has been campaigning for greater transparency on climate exposures for years. He believes the changes being discussed are too slow for what’s needed, but at the same time feel too fast.

Steve Waygood

There are a lot of areas where people are having to define new terms, set up new processes, and we need to acknowledge quite a lot of people are pretending to have answers they can’t yet have. For example, I don’t believe any country or company has a clear vision of how we are going to deliver net zero. And yet we have over 100 countries and over 1000 companies saying they will be.

For us, it’s an ambition: we will either comply with it or explain why we have unfortunately not.

I don't think that's broadly understood.


If you would like to find out more about the views of the leading analysts and academics featured in this piece, please go to AIQ’s Investment Thinking at

Thanks for joining us.

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