Greenhouse Gas Emissions: measure, ignore, or estimate in real-time?

In today’s landscape, marked by a growing focus on sustainability, companies face a multitude of complex challenges. ESG reporting and sustainability disclosures have become essential requirements, accompanied by the continuous evolution of regulatory frameworks.

Determining the starting point can be daunting: how can a company quantify its carbon footprint in terms of Scope 1, 2, and 3, for instance? The answer to this question is often not straightforward.

This is precisely where GHG Nowcasting by modefinance comes into play—an innovative solution designed to simplify this process.

GHG Nowcasting is an innovative tool developed by modefinance to provide real-time estimations of a company’s greenhouse gas (GHG) emissions, classified according to Scope 1, Scope 2, and Scope 3 categories defined by the GHG Protocol. Using alternative data, mainly purchase invoices, and artificial intelligence (AI), this tool helps companies and investors accurately monitor emissions, enhancing sustainability efforts and regulatory compliance.

Greenhouse gas emissions are classified into three categories based on their origin:

• Scope 1: Direct emissions from owned or controlled sources, such as on-site fuel combustion
• Scope 2: Indirect emissions from purchased energy, such as electricity or steam
• Scope 3: Other indirect emissions across the value chain, including those from suppliers, transport, and product usage.

Together, these scopes provide a comprehensive framework for measuring and managing a company’s environmental impact.

1. Data Collection: The solution draws on a vast database of purchase invoices from a representative sample of Italian companies, containing detailed information on energy consumption (fuel and electricity) as well as purchases of goods and services.
2. Data Processing: Invoices are analyzed using AI algorithms, including Large Language Models (LLMs), to filter and identify relevant data for emissions calculation. For example, distinguishing between the different items on an energy bill, isolating the expenses directly related to energy consumption from other items such as taxes or transportation costs.
3. Categorization and conversion: The expenditure and consumption amounts are filtered and categorized based on the type of goods or services purchased. These amounts are then converted into kilograms of CO2 equivalent using emission factors, coefficients that quantify greenhouse gas emissions per unit of activity. For example, the emission factor for gasoline expresses the amount of CO2 emitted per liter of gasoline consumed.

4. Cluster creation: The emission data, once processed and converted, are grouped into clusters based on three parameters: industry sector, company size, and geographic location. The creation of homogeneous clusters allows for more accurate estimates, as companies within the same group tend to have similar emission profiles.

5. Emission estimation: Starting from the company’s VAT number, GHG Nowcasting identifies the reference cluster to which the company belongs and provides median emission data, broken down by the three Scopes (Scope 1, 2, and 3). The estimates provided include:

• Monthly emissions
• Emissions from the last 12 months
• Emissions since the beginning of the year.

This information allows for monitoring the trend of emissions over time and assessing the impact of actions taken to reduce the carbon footprint.

The GHG Nowcasting is a versatile tool that can be used by different categories of users:

• Banks: Banks can use GHG Nowcasting to assess the impact of their investment portfolios in terms of greenhouse gas (GHG) emissions, a factor that is becoming increasingly important for sustainability-conscious investors. This analysis helps identify companies with higher exposure to transition risks, namely those that, due to their high emissions, may be more vulnerable to future environmental regulations or changes in consumer preferences. Banks can then adapt their investment strategies, reducing exposure to climate and environmental risk, and directing capital toward types of companies with a more solid sustainability profile.
  Traditionally, banks rely on median values by sector, built on data from large companies, to assess the impact of their portfolios. GHG Nowcasting provides a competitive advantage by offering a more accurate estimate based on real data from small and medium-sized enterprises (SMEs), which often lack internal monitoring systems.
  
  
• Large Companies: Large companies can benefit from using GHG Nowcasting to identify opportunities for reducing environmental impact within the value chain. By analyzing the emissions of their suppliers, for example, a company can pinpoint areas for improvement and collaborate with partners to reduce the overall carbon footprint.
  
  
• SMEs: Small and medium-sized enterprises often find themselves at a disadvantage compared to large companies when it comes to calculating and managing their greenhouse gas emissions. Unlike their larger counterparts, SMEs often lack the resources to invest in expensive internal evaluation systems. This is where GHG Nowcasting becomes essential, as it allows SMEs to obtain an estimate of their emissions without incurring significant costs.
  This ability to quantify environmental impact provides a significant competitive advantage for SMEs, opening doors to preferential financing or new business opportunities. GHG Nowcasting provides SMEs with the necessary data to transparently communicate their commitment to sustainability to customers, investors, and other stakeholders, strengthening their reputation and differentiating them from the competition.

The use of GHG Nowcasting offers numerous advantages compared to traditional methods of estimating emissions:

• Timeliness: It provides real-time estimates, updated monthly, unlike official data which is often outdated
• Completeness: It is based on a large database of invoices, ensuring significant coverage of the Italian production sector
• Accuracy: The use of AI allows for precise data analysis and reliable estimates
• Granularity: It provides detailed estimates for the three Scopes, enabling companies to identify priority areas for intervention.

In addition to providing an accurate and timely overview of a company’s environmental impact, GHG Nowcasting opens the door to an era of greater awareness and action on sustainability. This tool not only quantifies greenhouse gas emissions but also acts as a catalyst for positive change, encouraging companies to implement concrete strategies to reduce their environmental impact.

The availability of granular data on Scope 1, 2, and 3 allows companies to go beyond simple reporting and direct efforts toward targeted actions, such as optimizing energy consumption, choosing more sustainable suppliers, and adopting innovative low-impact technologies.

The accessibility of GHG Nowcasting, particularly for SMEs, makes it easier to access crucial sustainability information, helping to create a more responsible and aware business ecosystem. In a context where sustainability is increasingly a determining factor for business success, GHG Nowcasting stands as a strategic tool to guide the transition towards a greener and more resilient future.