FASB working on accounting rules for climate-related credits

Many of your peers at publicly traded companies are mulling over best practices for reporting purchases of climate-friendly credits to build their environmental, social and governance (ESG) portfolio.

If the proposed Securities and Exchange Commission’s (SEC) ESG disclosure requirements become final, Finance leaders will need to have a plan when it comes to accounting for carbon offset and/or renewable-energy credits.

Companies buy these credits to help balance their carbon footprint and bolster their “green” credentials with socially conscious investors and customers.

The money spent on carbon offset credits goes to fund various environmental projects that reduce greenhouse gases in the atmosphere. These can include programs that:

• plant trees
• preserve forests, or
• fund renewable (wind, solar or hydroelectric) energy projects.

Farmers can also use these credits to reduce or capture methane emissions from livestock.

CNBC reported that “one carbon offset credit supposedly equals one metric ton of carbon dioxide (the equivalent of driving a gas-fuel car 2,500 miles), or a comparable amount of other greenhouse gases, removed from the air.”

Renewable energy credits can be purchased along with your electricity. The credits are tradable, but intangible, commodities that represent proof that a certain amount of megawatt hours of electricity was generated from a renewable energy resource and is fed to the power grid.

But according to the Wall Street Journal, there are no set generally accepted accounting principles related to these two types of credits that fight climate change, and this could pose a problem with disclosure to the SEC. For example, some companies expense the credits when they’re acquired, while others write them off later.

FASB has noticed climate interest

The Financial Accounting Standards Board (FASB) recently said it will look into what guidance it can provide on climate-related credits.

FASB added a project to its technical agenda that would monitor the recognition, measurement, presentation and disclosure requirements for participants in both mandatory or voluntary programs that result in the creation of environmental credits.

This could lead to new rules U.S. companies would need to follow. We’ll keep you posted.

After receiving more than 500 letters last year from businesses and their stakeholders about how important climate-related credits will become for them in the future, the FASB asked its staff to start researching environmental credits in December.