The Climate Data Wars Are Just Beginning
The effort to measure companies’ carbon footprints is remarkably imprecise — and suddenly more important than ever.
Large companies generate a gargantuan amount of carbon-dioxide pollution.
Take the big-box retailer Costco. During the financial year 2020, it emitted 144.5 million metric tons of carbon dioxide — a number on par with the Philippines’ annual emissions. Nike pumped out the equivalent of 11 million metric tons of carbon during the same period, a footprint roughly equal to Zimbabwe’s. Apple, meanwhile, was somewhere on the order of Estonia.
You’ve probably seen data like this before. But here’s a question: How do companies actually arrive at these numbers? How did Costco know its carbon footprint in 2020? Carbon dioxide and other climate-warming gases are invisible, potent even in trace amounts, and constantly absorbed and produced by hundreds of billions of different organisms and chemicals around the world. Costco alone directly or indirectly choreographs the actions of millions of people and things: sailors and longshoremen, factory workers and cotton farmers, employees coming in for their shift and marketing managers spending down an advertising budget.
How could a company like that possibly know its carbon footprint?
Here’s the sorry answer: Most companies don’t. They estimate.
Those estimates are suddenly looking more important. New laws and a proposal from the U.S. Securities and Exchange Commission could soon require that companies treat this data with the same seriousness that they devote to their accounting books. Companies now need their corporate climate data to do something that it was never meant to do: help them make decisions.
So the race is on to help companies estimate better. On Wednesday, Watershed, a startup that helps companies run their climate programs, bought VitalMetrics, a climate-data mainstay that owns and manages one of the most important tools that companies use to estimate their carbon footprints.
That tool, called the Comprehensive Environmental Data Archive, or CEDA, provides what’s known as carbon-intensity data for hundreds of products as made in more than 140 countries. It is one of several tools that has been used to advise Microsoft, Kellogg’s, and Virgin Atlantic since Sangwon Suh, an industrial-ecology professor and Intergovernmental Panel on Climate Change author, founded VitalMetrics in 2005.
Watershed’s acquisition of VitalMetrics signals that corporate climate data is entering a new stage, Taylor Francis, one of the company’s cofounders, told me. Watershed, at least, is a different kind of company than the climate bean counters of yore: Founded by former employees of the payments behemoth Stripe, it has raised $84 million from the venture-capital firms Kleiner Perkins, Sequoia Capital, as well as the billionaire Laurene Powell Jobs.
“The traditional corporate climate complex was basically designed for a world of numbers in the corporate social responsibility report, and a pledge, and a press release,” he said. ”We’re shifting to the new world of numbers in a 10-K,” the annual financial report that public companies must file with the government, “and a planet running out of time.”
I will admit I had it all wrong. I had assumed that because corporate carbon footprints sounded precise and vaguely science-adjacent, they were produced by something like a scientific methodology themselves. I imagined a company’s employees — or at least their consultants — collecting emissions data smokestack by smokestack, pacing around factories while studying air-quality monitors, and doing careful math somewhere in the vicinity of a bunsen burner or two. (I believed this, I should add, despite knowing that many corporate climate reports contain glaring arithmetic errors and sometimes literally do not add up.)
That sort of methodology is the “platonic ideal of carbon accounting,” Francis, the Watershed cofounder, told me. In a perfect world, a company would have measured the per-ton emissions of each of its processes, and it would know these for each of its suppliers down to the raw material.
Yet this is still a ways off for most companies. Instead, the bulk of carbon accounting today now happens in spreadsheets, and it uses dollars, not tons, as an input. Each consumer good or raw commodity aligns to a “factor,” a multiplier that says that for every dollar spent on, say, glass or aluminum, a certain amount of carbon is emitted. A climate team inputs the dollar amount, multiplies it by the factor, and arrives at a result: a company’s annual carbon footprint.
Until now, Watershed and other firms have often calculated corporate climate emissions by using a U.S. Environmental Protection Agency-made database called the Environmentally Extended Input-Output, or EEIO, model, Francis said. “You start with very coarse input data like, we spent $100 million on marketing. So you go to the old EEIO database, and the EEIO says that in the U.S. 10 years ago, the carbon emissions per dollar of marketing spend was X, and you multiply that to get your emissions number.”
“I think that gets you into the right order of magnitude,” he said, but it was messy. The EEIO data is roughly a decade out of date, meaning it overstates climate pollution from the power grid and understates the role of inflation.
VitalMetrics’ CEDA database, on the other hand, is updated every year. It contains carbon-intensity factors for more than 300 products and — most important — it varies these factors based on the country of origin. Going forward, Watershed will calculate corporate emissions data using these CEDA estimates.
This kind of data-gathering isn’t fine-tuned enough for companies to actually make better decisions with their data, Madison Condon, a law professor at Boston University who has criticized the reigning approach, told me. Under the current approach, a company can improve their carbon-accounting data only by shifting production to countries with lower emissions factors. It doesn’t get credit for, say, installing technologies at its existing factories that lower emissions.
That is unsustainable because corporate carbon accounting is becoming important to governments around the world. The Securities and Exchange Commission has proposed requiring publicly traded companies to disclose carbon data and major climate-related risks. Even if that rule is swatted away by the Supreme Court, the European Union will soon require tens of thousands of companies to disclose sustainability and emissions data; these rules could apply to more than 10,000 foreign companies, including many mainstream American brands. California could soon pass its own law mandating that companies produce carbon-accounting data.
Even apart from those disclosure requirements, carbon-footprint requirements are now written into laws. Some of the Inflation Reduction Act’s subsidies will pay out only if a product’s carbon intensity is below a certain threshold.
Eventually, Watershed hopes to produce a hybrid tool that can use dollar-based production factors, tonnage estimates, and technology-based improvements together, Francis told me. More broadly, Watershed’s acquisition of Vitalmetrics — not to mention Watershed itself — is a gamble about how the climate economy will eventually work.
“Five years from now, the disclosure piece is just part of the water. No one talks or writes about it because it is an expected part of doing business for every company. And it’s relatively low friction. It’s a part of your annual close, your quarterly close,” Francis told me. “We don’t really talk about climate as a political issue because businesses don't think of climate as a political issue because they see it as, you know, the biggest growth sector of the decade.”
Of course, if that’s true, then companies may not need a startup like Watershed to do their climate counting for them. Bog-standard corporate accountants, like KPMG or Deloitte, will do the task just fine.
But Watershed is betting that climate accounting will remain both more technical and more central to a company’s employee and investor relationships than, say, its power bill. Just as companies use Salesforce specifically to manage customer relationships, or Justworks to manage payroll and benefits, Watershed hopes they will need a single place to manage all their climate data — a single source of emissions truth. It’s investing in its database to try to make that bet payoff.