Activity vs Spend-Based Carbon Accounting: Key Differences

Activity-based carbon accounting uses specific data like fuel usage or electricity consumption to calculate emissions with precision. It’s highly accurate but requires significant resources and detailed data collection. This method is ideal for organisations with established systems and direct control over their operations.

Spend-based carbon accounting, on the other hand, estimates emissions based on financial expenditures, applying industry averages. It’s simpler and less resource-intensive, making it a practical starting point for businesses new to carbon accounting. However, it lacks the accuracy of activity-based methods and may oversimplify emissions data.

Quick Comparison

Both approaches have their uses. Activity-based methods are best for detailed reporting and precise reduction strategies, while spend-based methods are great for quick insights and identifying broad emission hotspots. Many organisations combine both for a balanced approach.

Estimating GHG Emissions - Reconciling Different Approaches

Activity-Based Carbon Accounting

Activity-based carbon accounting offers a detailed way to measure emissions by relying on direct operational data. By analysing what an organisation consumes and produces, this method provides an accurate calculation of its carbon footprint.

How Activity-Based Accounting Works

This method starts with gathering specific operational data - like the litres of fuel consumed, kilowatt-hours of electricity used, or kilograms of materials purchased. These figures are then paired with corresponding emission factors to calculate carbon outputs. For example, if a fleet uses 10,000 litres of diesel, the emissions are determined by multiplying this amount by the relevant emission factor.

This approach works across all three emission scopes, making it particularly useful for Scope 3 emissions, where supplier data can significantly improve precision. Many organisations have implemented systems to track energy use at individual locations and assess the carbon intensity of raw materials. Such detailed tracking ensures compliance with regulations and audit-ready reporting. This level of accuracy and transparency is a hallmark of activity-based carbon accounting.

Benefits of Activity-Based Carbon Accounting

The standout feature of this method is its precision, which is essential for meeting science-based targets and staying ahead of tightening regulations.

Several large companies have adopted this approach successfully. For instance, Amazon introduced activity-based emission factors for its delivery fleet in 2021. This allowed the company to pinpoint areas for reducing greenhouse gas emissions as part of its goal to achieve net-zero carbon emissions by 2040. IKEA has also used detailed emission data to identify the most carbon-intensive parts of its supply chain, leading to changes like adopting renewable energy and improving transportation efficiency.

The detailed insights from activity-based accounting also enhance transparency. When preparing ISSB disclosures, organisations benefit from having reliable, verifiable data. This not only supports audit-ready reporting but also builds trust with investors, customers, and regulators who increasingly demand accurate emissions information.

Drawbacks of Activity-Based Carbon Accounting

Despite its accuracy, implementing this method can be resource-intensive. The European Union estimates that adopting activity-based emission factors for road transport alone could raise administrative costs by up to 40%. This highlights the challenges of comprehensive data collection and management.

Organisations need robust systems to gather data from multiple sources, which requires substantial investments in time, skilled personnel, and technology - especially for global operations.

Software can help but has its limitations. Nicole Sullivan, former Director of Climate Services at CarbonBetter, explains:

It's important to keep in mind that software cannot fully replace the human-centred data-gathering activities or business processes associated with your GHG inventory.

Maintaining these systems is an ongoing effort. Companies must dedicate teams to update systems as operations evolve, adjust to new emission factors, conduct audits, and ensure data quality. For smaller organisations, these demands can be particularly taxing. These challenges highlight the importance of balancing technological tools with human expertise to sustain a reliable carbon accounting system.

Spend-Based Carbon Accounting

As organisations work to balance precision with resource limitations, spend-based accounting offers a practical alternative. Unlike the detailed activity-based method, this approach uses financial expenditure data to estimate emissions, skipping the need to track physical consumption. It’s a simpler, more cost-effective way to start understanding carbon footprints.

How Spend-Based Accounting Works

This method relies on financial records like invoices and expense reports. By multiplying these expenditures by industry-average emission factors, organisations can estimate their carbon emissions. The formula is straightforward:

Amount spent on a product or service × Emission factor for that product or service = Total CO₂e GHG Emissions.

The emission factors come from EEIO (Environmentally Extended Input-Output) models, which map how resources flow across economic sectors. For example, if a company spends £50,000 on office supplies, the average emission factor for that industry is applied to calculate the carbon footprint tied to those purchases.

This approach allows companies to identify emission hotspots in their spending and make strategic changes. They can adjust procurement practices, choose suppliers with lower emissions, or explore other interventions. It’s a streamlined way to gain quick insights into spending-related emissions.

Benefits of Spend-Based Carbon Accounting

Compared to the data-heavy activity-based method, spend-based accounting provides rapid estimates, making it ideal for initial assessments. This simplicity explains why it’s used in 90% of carbon calculations.

Some major companies have already adopted this method. In 2020, Walmart committed to becoming a regenerative company, aiming to protect or restore 50 million acres of land and 1 million square miles of ocean by 2030. By using spend-based emission factors, Walmart identifies suppliers with lower emissions intensity and invests in renewable energy and sustainability efforts. Similarly, Marriott set a goal to cut emissions by 38% by 2025, combining spend-based factors with renewable energy and efficiency measures.

For smaller businesses, this method offers a way to estimate emissions without significant upfront costs. It provides a manageable starting point for identifying areas of improvement.

Josh Couchman highlights its importance as foundational work:

"Similar to how calories are a starting point but not the entirety of nutrition, spend-based emissions estimates serve as an initial analysis in carbon accounting. This 'hotspot analysis' helps identify major emission sources based on spending patterns."

Drawbacks of Spend-Based Carbon Accounting

Despite its convenience, spend-based accounting has notable limitations in accuracy. It assumes that all goods and services within a category have the same emissions intensity, which often isn’t the case. Industry-average emission factors don’t reflect the specific practices of individual suppliers, potentially obscuring both high- and low-performing vendors.

This lack of detail makes it harder to set precise reduction targets or track progress. Companies may struggle to distinguish between suppliers with varying emissions levels, complicating efforts to reward sustainable practices or pinpoint areas for improvement. Additionally, the method depends on price data, which can fluctuate and may not always align with actual emissions. It also risks overlooking significant emission sources that fall outside financial transactions.

For organisations aiming to manage Scope 3 emissions effectively, these limitations can slow progress. As a result, spend-based accounting is best suited as an initial tool. Many companies eventually move towards activity-based methods or hybrid approaches to achieve greater accuracy and better long-term results.

Activity-Based vs Spend-Based: Side-by-Side Comparison

Each method has its strengths and is suited to different organisational needs. Understanding their characteristics can help organisations choose the right carbon measurement strategy.

Key Differences Comparison Table

Here's how the two approaches stack up side by side:

Activity-based methods are known for their precision. According to the United States Environmental Protection Agency (EPA), these methods can boost accuracy by up to 90% compared to other estimation techniques. However, this precision comes with higher costs. For example, the European Union reports that using activity-based emission factors for road transport could increase administrative expenses by up to 40%.

When to Use Each Method

The choice between these methods depends on factors like your organisation's resources, data availability, and carbon accounting goals.

Activity-based methods are ideal for businesses with well-established data systems and direct control over their operations. Mature organisations often favour this approach as it provides the granularity needed for effective carbon reduction strategies.

Spend-based methods, on the other hand, are more practical for organisations at the beginning of their carbon accounting journey or those lacking detailed operational data. As Anastasia Lobanova from Climatiq explains:

"Spend-based emission factors have a bad reputation. But by keeping the limitations in mind, they can be an easy and powerful starting point to measure Scope 3 emissions."

This method is particularly useful for companies looking for quick insights into their carbon footprint without the need for significant upfront investments in data collection.

Using Both Methods Together

Many organisations find that combining the two methods offers the best of both worlds. This hybrid approach uses activity-based data wherever possible and supplements it with spend-based estimates for areas where detailed data is unavailable.

This strategy is especially effective for tackling Scope 3 emissions, which often make up more than 70% of a company's total carbon footprint. For high-impact emission sources, activity-based methods deliver the accuracy needed to inform reduction strategies. Meanwhile, spend-based estimates can fill gaps in smaller or harder-to-measure categories.

The hybrid model also supports a phased approach to carbon accounting. Companies can begin with spend-based estimates to establish a baseline and identify emission hotspots. Over time, they can transition to activity-based tracking for critical areas as their data collection capabilities improve. This allows organisations to balance immediate needs with long-term accuracy, aligning their efforts with sustainability goals.

For businesses aiming to meet stringent ESG reporting standards, this flexible approach lays a solid foundation. It enables organisations to adapt to evolving regulatory requirements while maintaining operational efficiency and preparing for seamless integration of ESG reporting tools in the future.

Technology and ESG Reporting Integration

Modern carbon accounting faces significant challenges when it comes to handling data from multiple sources while ensuring accuracy and compliance. To address these issues, technology platforms have become indispensable for organisations aiming to simplify their carbon measurement processes and meet increasingly rigorous ESG reporting requirements.

How Integrated Platforms Support Carbon Accounting

The complexity of carbon accounting is evident in the fact that only 9% of organisations can fully and accurately measure their total greenhouse gas emissions. This statistic underscores the need for integrated platforms that help businesses tackle the intricate task of carbon management.

Financially-integrated sustainability platforms provide a unified solution by connecting financial and environmental data. These systems embed sustainability metrics directly into financial processes, linking every pound spent to its environmental impact. This creates a clear and comprehensive view of an organisation's carbon footprint.

Automation is a key feature of these platforms. By automating tasks, they eliminate the need for manual data entry, saving time, reducing errors, and streamlining complex carbon calculations across multiple categories.

Another strength of these platforms is their ability to support hybrid carbon accounting strategies. Instead of forcing organisations to choose between activity-based or spend-based methods, modern systems integrate both approaches. This means companies can use activity-based data where available and rely on spend-based estimates in areas where detailed operational data is lacking.

The demand for advanced carbon management tools is reflected in the growth of the carbon accounting software market, which is projected to exceed £26 billion between 2024 and 2029. This surge is driven in part by the fact that 63% of businesses are now focused on strengthening their carbon tracking and reduction goals.

Amid this growing interest, platforms like neoeco stand out, offering seamless integration of financial and sustainability data.

neoeco for Carbon Accounting

Building on the advantages of integrated platforms, neoeco delivers a practical and precise solution for audit-ready carbon accounting. At its core is the Financially-integrated Sustainability Management (FiSM) approach, designed to bridge the gap between financial records and environmental reporting.

neoeco introduces the FiS Ledger, a system that embeds over 90 ESG impact factors into financial transactions using double-entry accounting principles. This ensures audit-grade accuracy while automatically mapping transactions to sustainability metrics and generating corresponding data.

The platform’s AI-driven automation goes beyond basic data collection. It maps emissions factors to financial data and produces audit-ready reports across multiple frameworks. This is particularly beneficial for tackling Scope 3 emissions, which often make up the largest share of a company’s carbon footprint and are notoriously hard to track.

neoeco supports compliance with major ESG frameworks, including ISSB (IFRS S1 & S2), CSRD, GHGP, and ISO 14064. This comprehensive compatibility allows organisations to maintain consistent carbon accounting practices while meeting diverse regulatory standards. Its ISSB reporting capabilities are especially relevant as these standards gain prominence in the UK.

The platform also incorporates Life Cycle Assessment (LCA) methodologies, offering detailed insights across 96 ESG impact categories. This level of granularity enables organisations to identify specific areas where carbon reduction efforts can make the biggest difference, supporting both strategic decisions and operational improvements.

neoeco’s integration capabilities ensure smooth operation with existing business systems, such as accounting tools like Xero and QuickBooks, ERP systems, energy meters, and HR platforms. By removing data silos, the platform embeds carbon accounting into daily workflows, making it a seamless part of business operations.

This approach aligns with the broader goal of financially-integrated sustainability management, which envisions environmental impact measurement as a routine and reliable part of business processes - just like financial accounting. For organisations looking to make carbon management a central business capability, rather than just a compliance task, neoeco provides a robust solution.

Key Takeaways

Both methods play distinct roles in assessing and managing environmental impact, with each offering benefits depending on the context.

Main Differences Summary

Activity-based accounting relies on specific operational data, such as fuel usage or electricity consumption, to achieve greater precision. However, this comes with higher administrative costs. For instance, the European Union estimates that using activity-based emission factors for road transport alone could increase administrative expenses by up to 40%.

Spend-based accounting, on the other hand, translates financial data into emissions estimates, making it more accessible and straightforward by using industry-average factors. As Josh Couchman, Head of Data Strategy at Connect Earth, puts it:

Similar to how calories are a starting point but not the entirety of nutrition, spend-based emissions estimates serve as an initial analysis in carbon accounting. This 'hotspot analysis' helps identify major emission sources based on spending patterns.

The key trade-off here is accuracy versus practicality. While activity-based methods demand detailed data collection across the value chain, they provide more precise and actionable insights. Spend-based methods, by contrast, use readily available financial data and industry averages, which may not fully reflect the nuances of specific operations.

For Scope 3 emissions, which often dominate a company’s carbon footprint, activity-based methods are ideal where detailed data exists, while spend-based approaches can offer a broader starting point to identify significant emission sources. These considerations should guide your organisation’s strategy.

Recommendations

To maximise the benefits of both approaches, consider adopting a tailored strategy that plays to their respective strengths. Here’s how:

• Use activity-based accounting when detailed operational data is available and you have direct control, such as energy use in facilities or company vehicles.

• Apply spend-based methods to address data gaps, particularly for indirect suppliers or complex procurement areas.

Evaluate your organisation’s level of expertise in sustainability reporting. If you’re just starting out, spend-based methods provide a practical way to map out your emissions profile. As your capabilities grow, transitioning to activity-based methods in key areas can enhance accuracy.

Leverage technology to combine both approaches seamlessly. Modern platforms can automatically determine the best method based on the data available. For example, tools like neoeco integrate financial and environmental data, streamlining carbon accounting and supporting Scope 3 emissions management. These platforms make it easier to implement a blended approach without the manual hassle of switching between methods.

Ultimately, choose the method that aligns with your goals and resources. The focus should be on building a reliable system that provides actionable insights, ensures compliance, and supports genuine decarbonisation efforts. There’s no need for a "perfect" method - what matters is creating a process that works for your organisation.

FAQs

What are the key factors to consider when choosing between activity-based and spend-based carbon accounting?

When choosing between activity-based and spend-based carbon accounting, it’s essential to weigh the level of detail and accuracy your organisation requires.

Activity-based accounting offers a higher degree of precision by relying on specific data from activities like energy usage or fuel consumption. This approach works best for organisations that have access to detailed data and the resources to analyse it effectively.

Spend-based accounting, in contrast, is a more affordable option and is particularly useful when detailed activity data isn’t available. It calculates emissions based on financial spending, making it a practical choice for high-level assessments or for organisations with fewer resources.

For many organisations, a hybrid approach - blending both methods - can strike the right balance between accuracy and efficiency. This is especially helpful when working within frameworks such as the GHGP or CSRD. Tools like neoeco can simplify this further by integrating financial and sustainability data, ensuring compliance while delivering actionable insights.

What challenges might arise when switching from spend-based to activity-based carbon accounting?

Challenges in Shifting to Activity-Based Carbon Accounting

Switching from spend-based to activity-based carbon accounting isn't without its hurdles. Gathering detailed activity data can demand considerable time and resources, which often translates to increased costs. Some industries, especially those where precise information is difficult to obtain, may face data gaps and inconsistencies, further complicating the process.

Another challenge lies in converting financial expenditure into accurate emissions data. This process can be tricky, with certain sectors presenting blind spots that are hard to navigate. On top of that, ensuring the data's quality and reliability is crucial - errors can compromise the accuracy of carbon reporting, undermining its purpose.

Despite these obstacles, activity-based methods offer a clearer picture of emissions. For organisations committed to meaningful sustainability practices, the deeper insights gained make the extra effort worthwhile.

How can platforms like neoeco streamline activity-based and spend-based carbon accounting?

Platforms like neoeco make it easier for organisations to integrate activity-based and spend-based carbon accounting by automating the process of gathering data from operational activities and financial transactions. Using AI-powered automation and Life Cycle Assessment (LCA) methods, neoeco helps businesses merge detailed activity data with expenditure-based estimates, offering a clearer picture of their carbon emissions.

This combined approach improves the precision of emissions reporting while ensuring alignment with global standards such as ISSB and CSRD. With access to real-time insights and audit-ready reports, companies can seamlessly connect their sustainability goals with financial data, all while staying compliant with regulatory demands.

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• Primary vs Secondary Data in Scope 3 Emissions

• How Activity-Based Data Improves Scope 3 Reporting