Organisational boundaries

Author

Shel

A key step in corporate GHG accounting is setting the organisational boundary. This is the process of determining which operations from joint ventures, subsidiaries, or partially owned entities are included in an organization’s GHG inventory and how emissions from each operation are consolidated by the reporting company.

The method used to set the organisational boundary is called the consolidation approach.

There are three primary consolidation approaches recognized in GHG accounting:

  1. Equity share approach

    Under this approach, a company accounts for GHG emissions from operations according to its share of equity in the operation. The equity share reflects economic interest, which is the extent of rights a company has to the risks and rewards flowing from an operation.

    The company multiplies the total emissions of a facility or operation by its equity share to determine the portion of emissions to include in the GHG inventory.

  2. Financial control approach

    Under this approach, a company accounts for 100 percent of the GHG emissions over which it has financial control, regardless of its ownership percentage. It does not account for GHG emissions from operations in which it owns an interest but does not have financial control.

  3. Operational control approach

    Here, a company accounts for 100 percent of the GHG emissions over which it has operational control. It does not account for GHG emissions from operations in which it owns an interest but does not have operational control.

Companies should use a consistent consolidation approach across the scope 1, scope 2 and scope 3 inventories. The selection of a consolidation approach affects which activities in the company’s value chain are categorised as direct emissions (scope 1) and indirect emissions (scope 2 and scope 3).

Operations or activities that are excluded from a company’s scope 1 and scope 2 inventories as a result of the organisational boundary definition (e.g., leased assets, investments, and franchises) may become relevant when accounting for scope 3 emissions.

If a company selects the equity share approach, emissions from any asset the company partially or fully owns are included in it’s direct emissions (i.e., scope 1), but emissions from any asset that the company controls but does not partially or fully own (e.g. a leased asset) are excluded from its direct emissions and should be included in its scope 3 inventory.

In a similar manner, if a company selects the operational approach, emissions from any asset the company controls are included in its direct emissions (scope 1), but emissions from any asset the company partially or fully owns but does not control (e.g., investments) are excluded from its direct emissions and should be included in its scope 3 inventory.

A reporting company has equity share in four entities (Entities A, B, C and D) but only has operational control in Entities A, B and C.

Assuming the company selects the operational control approach to define its organizational boundary:

  • Emissions from sources controlled by Entities A, B and C are included in the company’s scope 1 inventory.

  • Emissions in the value chain of Entities A, B and C are included in the company’s scope 3 inventory.

  • Emissions from sources controlled by entity D are excluded from the reporting company’s scope 1 inventory.

  • Emissions from the operation of Entity D are included in the reporting company’s scope 3 inventory as an investment.

Source: GHG Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Source: GHG Corporate Value Chain (Scope 3) Accounting and Reporting Standard

If the company instead chooses to use the equity share approach to define its organisational boundary, the company would instead include emissions from sources controlled by Entities A, B, C and D in its scope 1 inventory, according to its share of equity in each entity.

Source: GHG Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Source: GHG Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Companies should follow the five accounting and reporting principles when deciding whether to exclude any activity from the scope 3 inventory. They should not exclude any activity that is expected to contribute significantly to the company’s total scope 3 emissions. They should ensure that the scope 3 inventory appropriately reflects the GHG emissions of the company, and serves the decision-making needs of both internal and external stakeholders. Any exclusion should be disclosed and justified in the public report.

The GHG Protocol outlines the following criteria for identifying relevant scope 3 activities.

  1. Size: The activity contributes significantly to the company’s total anticipated scope 3 emissions.

  2. Influence: There are potential emissions reductions that could be undertaken or influenced by the company.

  3. Risk: The activity contribute to the company’s risk exposure e.g., climate change related risks such as financial, regulatory, supply chain, product and customer, litigation, and reputational risks1.

  4. Stakeholders: The activity is deemed critical by key stakeholders e.g., customers, suppliers, investors or civil society.

  5. Outsourcing: It is an outsourced activity previously performed in house or activities outsourced by the reporting company that are typically performed in-house by other companies in the reporting company’s sector.

  6. Sector guidance: The activity has been identified as significant by sector-specific guidance.

  7. Other: The activity meets an additional criteria for determining relevance developed by the company or industry sector.

Next: Defining business goals

Footnotes

  1. These risks have been discussed in this post.↩︎