Application of Artificial Intelligence in Carbon Accounting and Firm Performance: A Review Using Qualitative Analysis

Abdulrahman Saad H. Alqahtani

doi:10.52756/ijerr.2023.v35spl.013

Abdulrahman Saad H. Alqahtani Accounting Department, College of Administrative Sciences, Najran University, Najran, Saudi Arabia https://orcid.org/0009-0007-2977-2724

DOI: https://doi.org/10.52756/ijerr.2023.v35spl.013

Keywords: Artificial Intelligence, Carbon Accounting, Environmental Impact, Firm Performance, Global Oil Industry

Abstract

The increasing role of the corporate sector in global carbon emissions has raised significant concern among stakeholders, leading to a thorough reassessment of corporate responsibility. Corporations, directly influencing society due to their carbon emissions, acknowledged as externalities, are facing growing pressure to tackle this environmental challenge actively. As a reaction, companies are increasingly implementing carbon accounting and other environmentally conscious practices in line with a broader dedication to comprehensive environmental ethics. The accounting department, tasked with incorporating carbon accounting into non-financial reports alongside regular financial statements, encounters adoption obstacles such as limited awareness, insufficient expertise, unclear guidelines, and a lack of standardized terminology. This paper conducts a comprehensive study to evaluate the feasibility of using artificial intelligence (AI) solutions in carbon accounting and its subsequent effect on firm performance based on the well-established effectiveness of AI in financial reporting and accounting tasks. As of 2021, Saudi Aramco, the foremost emitter of carbon dioxide worldwide, accounts for more than 4 percent of global Greenhouse Gas Emissions. This highlights the pressing necessity for intervention in this industry. Moreover, the study highlights electricity and heat production as the primary global sources of carbon emissions. The research demonstrates a clear link between effective carbon accounting practices and improved firm performance, especially when stakeholders are highly aware of sustainability issues. Nevertheless, the paper highlights the considerable obstacles and the urgent requirement for extensive advancement in AI applications to fully exploit its potential as a significant resolution to the complexities of carbon accounting. The study is limited by the wide range of accounting standards companies use to disclose their environmental impact and a need for more information on using artificial intelligence in carbon accounting. The research highlights the crucial significance of collaborative endeavours in promoting AI solutions to strengthen carbon accounting practices, thereby enhancing corporate sustainability and overall performance.

References

Ababneh, A. (2019). The impact of carbon accounting on corporate financial performance: evidence from the energy sector in Jordan. In Proceedings of the International Conference on Industrial Engineering and Operations Management, pp.1157-1163.

Aldowaish, A., Kokuryo, J., Almazyad, O., & Goi, H.C. (2022). Environmental, Social, and

Governance Integration into the Business Model: Literature Review and Research Agenda, Sustainability, 14, 2959. https://doi.org/10.3390/su14052959

Archer, T., Cromwell, E., & Fenech, C. (2022). How Consumers are Embracing Sustainability. [Online] Available at: https://www2.deloitte.com/uk/en/pages/consumer-business/articles/sustainable-consumer.html [Accessed 05 July 2023].

Baratta, A., Cimino, A., Longo, F., Solina, V., & Verteramo, S., (2023). The impact of ESG practices in industry focusing on carbon emissions: Insights and future perspectives. Sustainability, 15(8), 6685. http://dx.doi.org/10.3390/su15086685

Bui, B., Houqe, M. N., & Zahir-ul-Hassan, M. K. (2022). The moderating effect of carbon accounting systems on strategy and carbon performance: a CDP analysis. Journal of Management Control, 33(4), 483-524. https://doi.org/10.1007/s00187-022-00346-7

Cappucci, M. (2018). The ESG Integration Paradox. J. Appl. Corp. Financ., 30, 22–28.

https://doi.org/10.1111/jacf.12296

Chen, Y., & Jin, S. (2023). Artificial Intelligence and Carbon Emissions in Manufacturing Firms: The

Moderating Role of Green Innovation. Processes 2023, 11, 2705. https://doi.org/10.3390/pr11092705

Deloitte (2023). Persefoni CEO: How carbon accounting advances climate strategy, disclosure. The Wall Street Journal. Available at: https://deloitte.wsj.com/articles/persefoni-ceo-how-carbon-accounting-advances-climate-strategy-disclosure-493900c0?tesla=y (Accessed: 22 August 2023).

Duuren, V. E., Plantinga, A., & Scholtens, B. (2015). ESG Integration and the Investment Management Process: Fundamental Investing Reinvented. J. Bus. Ethics, 138, 525–533.

https://doi.org/10.1007/s10551-015-2610-8

Frey. S., Jordan B.A., Doshi, V., Malik, A., & Noble, S. (2023). Consumers care about sustainability—and back it up with their Wallets. [Online] Available at: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/consumers-care-about-sustainability-and-back-it-up-with-their-wallets [Accessed 04 October 2023].

Frost, G., Jones, S., & Yu, M., (2023). Voluntary Carbon Reporting Prediction: A Machine Learning Approach. Abacus, 1-51. https://doi.org/10.1111/abac.12298

Ghose, B., Makan, L. T., & Kabra, K. C. (2023). Impact of carbon productivity on firm performance: the moderating role of industry type and firm size. Managerial Finance, 49(5), 866-883. https://doi.org/10.1108/MF-07-2022-0319

Gipper, B., Ross, S., & Shi, S. (2022). ESG Assurance in the United States. Stanford University Graduate School of Business Research, Paper No. 4263085. https://doi.org/10.2139/ssrn.4263085

Hamrouni, D., Zohra, K., & Ayidth, A. (2019). Foreign Direct Investment and Employment in Saudi Arabia: Reality and Challenge of the Saudi Vision 2030. International Journal of Economics, Commerce and Management, VII(2), 236-251.

Hazaea, S.A., Al-Matari, E.M., Alosaimi, M. H., Farhan, N. H., Abubakar, A., & Zhu, J. (2023). Past, present, and future of carbon accounting: Insights from scholarly research. Frontiers in Energy Research, 10, 958362. https://doi.org/10.3389/fenrg.2022.958362

He, R., Luo, L., Shamsuddin, A., & Tang, Q. (2022). Corporate carbon accounting: A literature review of carbon accounting research from the Kyoto Protocol to the Paris Agreement. Accounting & Finance, 62(1), 261-298. https://doi.org/10.1111/acfi.12789

Helfaya, A., Morris, R., & Aboud, A. (2023). Investigating the Factors That Determine the ESG Disclosure Practices in Europe. Sustainability, 15(6), 5508. https://doi.org/10.3390/su15065508

Hossain, M. M. (2019). Environmental accounting challenges of selected manufacturing enterprises in Bangladesh. Open Journal of Business and Management, 7(02), 709. https://doi.org/10.4236/ojbm.2019.72048

Isayan, N. (2019). UN Environment and Saudi Arabia sign deal to strengthen environmental protection. [Online] Available at: https://www.unep.org/news-and-stories/press-release/un-environment-and-saudi-arabia-sign-deal-strengthen-environmental [Accessed 24 June 2023].

Kovalenko, S. N., Kalutskaya, N. A., Bolvachev, A. I., & Prodanova, N. A. (2021). Artificial Intelligence in the Accounting Profession. LAplage Em Revista, 7, 378. https://doi.org/10.24115/S2446-622020217Extra-B938p.378-383

Lu, P., Hamori, S., & Tian, S. (2023). Can ESG investments and new environmental laws improve social happiness in China? Frontiers in Environmental Science, 11, 1089486. https://doi.org/10.3389/fenvs.2023.1089486

Maama, H., & Gani, S. (2022). Carbon Accounting, Management Quality, and Bank Performance in East Africa. Environmental Economics, 1, 114-125. https://doi.org/10.21511/ee.13(1).2022.10

Mati, A., & Rehman, S. (2022). Saudi Arabia to Grow at Fastest Pace in a Decade. [Online] Available at: https://www.imf.org/en/News/Articles/2022/08/09/CF-Saudi-Arabia-to-grow-at-fastest-pace [Accessed 23 June 2023].

Miah, M. D., Hasan, R., & Usman, M. (2021). Carbon emissions and firm performance: evidence from financial and non-financial firms from selected emerging economies. Sustainability, 13(23), 13281. https://doi.org/10.3390/su132313281

Nassef, A. M., Olabi, A. G., Rezk, H., & Abdelkareem, M. A. (2023). Application of Artificial Intelligence to Predict CO2 Emissions: Critical Step towards Sustainable Environment. Sustainability, 15(9), 7648. https://doi.org/10.3390/su15097648

Ong, T. S., Kasbun, N. F. B., Teh, B. H., Muhammad, H., & Javeed, S. A. (2021). Carbon accounting system: the bridge between carbon governance and carbon performance in Malaysian Companies. Ecosystem Health and Sustainability, 7(1), 1927851. https://doi.org/10.1080/20964129.2021.1927851

Page, M. J, McKenzie J. E, Bossuyt, P. M, Boutron, I., Hoffmann, T.C., & Mulrow, C. D. (2021). The PRISMA 2020 statement: an updated guideline for reporting systematic reviews. BMJ, 372, n71. https://doi.org/10.1136/bmj.n71

Popescu, C., Hysa, E., Kruja, A., & Mansi, E. (2022). Social Innovation, Circularity and Energy Transition for Environmental, Social and Governance (ESG) Practices—A Comprehensive Review. Energies, 15, 9028. https://doi.org/10.3390/en15239028

Ritchie, H., Rosado, P., & Roser, M. (2020). Emissions by Sector. [Online] Available at: https://ourworldindata.org/emissions-by-sector [Accessed 14 Nov 2023].

Saini, N., Singhania, M., Hasan, M., Yadav, M. P., & Abedin, M. Z. (2022). Non-financial disclosures and sustainable development: A scientometric analysis. J. Clean. Prod., 381, 135173. https://doi.org/10.1016/j.jclepro.2022.135173

Sharma, U., Gupta, A., & Gupta, S. K. (2022). The pertinence of incorporating ESG ratings to make investment decisions: a quantitative analysis using machine learning. Journal of Sustainable Finance & Investment, 1-15. https://doi.org/10.1080/20430795.2021.2013151

Shrestha, P., Choi, B., & Luo, L. (2023). Carbon Management System Quality and Corporate Financial Performance. The International Journal of Accounting, 58(01), 2350001. https://doi.org/10.1142/S1094406023500014

Savio, R., D’Andrassi, E., & Ventimiglia, F. A. (2023). Systematic Literature Review on ESG during the COVID-19 Pandemic. Sustainability, 15, 2020.

Taylor, M., & Watts, J. (2019). Revealed: the 20 Firms behind a Third of All Carbon Emissions. [Online] Available at:

https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions [Accessed 23 June 2023].

Tiseo, I. (2021). Saudi Aramco's Greenhouse Gas Emissions 2019-2021. [Online] Available at: https://www.statista.com/statistics/1385616/saudi-aramco-gas-emissions/ [Accessed 14 Nov 2023].

Tóth, Á., Szigeti, C., & Suta, A. (2021). Carbon accounting measurement with digital non-financial corporate reporting and a comparison to European automotive companies statements. Energies, 14(18), 5607. https://doi.org/10.3390/en14185607

Tsang, A., Frost, T., & Cao, H. (2022). Environmental, Social, and Governance (ESG) Disclosure: A Literature Review. The British Accounting Review, 101149. https://doi.org/10.2139/ssrn.4270942

Üçoğlu, D. (2022). Challenges and threats to environmental accounting and reporting. In T. Eugénio, G. Azevedo, & A. Fialho (Eds.), IGI Global, Modern Regulations and Practices for Social and Environmental Accounting, 1-25. https://doi.org/10.4018/978-1-7998-9410-0.ch001

Wang, Q. (2023). Financial effects of carbon risk and carbon disclosure: A review. Accounting & Finance, 00, 1-45. https://do i.org/10.1111/acfi.13090

Xia, J. A. (2022). Systematic Review: How Does Organisational Learning Enable ESG Performance (from 2001 to 2021), Sustainability, 14, 16962.

Wang, N., Pan, H., Feng, Y., & Du, S. (2023). How do ESG practices create value for businesses? Research review and prospects. Sustain. Account. Manag. Policy J. Vol. ahead-of-print No. ahead-of-print. https://do i.org/10.1108/sampj-12-2021-0515

Yao, P., Yu, Z., Zhang, Y., & Xu, T. (2023). Application of machine learning in carbon capture and storage: An in-depth insight from the perspective of geoscience. Fuel, 333, 126296. https://doi.org/10.1016/j.fuel.2022.126296