How to Define Boundaries for GHG Reporting


Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position. Please refer to official GRESB documents for assessment-related guidance.

Environmental management and sustainability reporting have become crucial for companies, investors, and governments around the world as countries strive to achieve the Paris Agreement target of net-zero emissions by 2050.

Governments are developing national strategies to address this issue, which include emissions trading schemes, voluntary initiatives, carbon or energy taxes, as well as regulations and standards on energy efficiency and emissions. In turn, companies must discern their position on greenhouse gas (GHG) emissions as they work toward carbon neutrality in order to comply with these new restrictions.

To accurately report on GHG emissions via GRESB, TCFD, CDP, and other disclosure frameworks, a company must first define its organizational and operational boundaries.

Defining your organizational boundary

Organizational boundaries help companies determine their direct carbon footprint. In their study on carbon accounting, the World Resources Institute and the World Business Council for Sustainable Development established two distinct boundary-setting methodologies termed the WRI/WBCSD GHG Protocol to help corporations understand and determine organization boundaries for GHG reporting. Those approaches are the equity share approach and the control approach.

The equity share approach

The equity share approach is the simplest and most straightforward accounting method. Using the equity share approach, a company will account for GHG emissions from operations according to its share of equity in the operation. For example, if a company owns 18% of a hotel, they will report on 18% of that hotel’s emissions. 

The equity share represents a company’s exposure to the risks and rewards of a specific operation. This suggests that a company’s economic risks and rewards are proportional to its ownership interest. The ownership proportion and the equity share are normally the same, however this isn’t always the case.

The economic substance of a company’s connection to the business takes precedence over its formal ownership structure, ensuring that equity shares appropriately reflect economic interest and comply with international financial reporting standards. A business may need to consult with accounting or legal professionals while developing inventory to ensure that the proper equity share proportion is applied.

The two-control approach

Under the control approach, a corporation accounts for 100% of GHG emissions from operations over which it has control. It does not account for Scope 1 and 2 GHG emissions from operations over which it has a financial stake but no control; however, it could still account for them when reporting Scope 3 emissions. The two control approach can be classified as either financial or operational control, and businesses will select between operational or financial control criteria.

When making this decision, companies should consider how GHG emissions accounting can be adjusted and linked to financial and environmental reporting requirements, as well as which criterion best reflects the company’s actual power of control. Make sure to note the potential for double-counting if two or more companies hold mutual interests but use different approaches.

Financial control

Using the financial control approach, companies will report on 100% of anything in which they bear the majority of risk and benefit from the operation’s financial performance. This approach goes beyond simply owning half of a business; a corporation has financial control if it has the capacity to direct the operation’s financial and operating policies and profit from those operations. Financial control usually exists when a corporation has the right to the majority of the operation’s advantages and/or retains the majority of risks and rewards associated with asset ownership.

The economic substance of the relationship between the corporation and the operation takes precedence over legal ownership status under this criterion. This means that a firm can have financial control over an operation even if it owns less than 50% of the asset. The influence of potential voting rights should be considered when evaluating the economic substance of the connection.

For GHG accounting reasons, a company has financial control over an operation if the operation is considered as a group company or subsidiary for financial consolidation purposes, i.e., if the operation is fully consolidated in financial accounts. The financial accounting categories are defined as follows:

  • Group companies/subsidiaries – The parent business has the power to direct the company’s financial and operating policies with the goal of profiting from its operations. In most cases, this category also covers incorporated and non-incorporated joint ventures and partnerships that are financially controlled by the parent firm.
  • Associated/affiliated companies – The parent business has a lot of say in the company’s operating and financial practices, but it doesn’t have financial control. This category often comprises both incorporated and non-incorporated joint ventures and partnerships over which the parent firm has significant influence but not financial control.
  • Non-incorporated joint ventures/partnerships/operations where partners have joint financial control – Joint ventures, partnerships, and activities are proportionally consolidated, which means that each partner accounts for their share of the joint venture’s income, expenses, assets, and liabilities.
  • Fixed asset investments – The parent corporation has no major financial or political clout. This category also covers incorporated and non-incorporated joint ventures and partnerships over which the parent firm has no major control or influence.
  • Franchises – Franchises should not be included in GHG emissions data aggregation. If the franchisee has equity rights or operational/financial control, the same consolidation principles apply as with the equity or control alternatives.

If the financial criterion is chosen to determine control, emissions from joint ventures where partners have joint financial control are accounted for based on the equity share approach.

Operational control

When a corporation uses the operational control approach, it will report on everything where it or one of its subsidiaries has complete authority to create and apply operating policies. This is the most typical method for establishing boundaries.

If a company or one of its subsidiaries operates a facility, it is assumed that it will have complete ability to propose and apply its operating policies and so maintain operational control. However, it is important to note that having operational control does not imply a company has the authority to make all decisions concerning an operation. For example, big capital investments will likely require the approval of all the partners that have joint financial control.

Presenting the hypothetical questions “Would you require permission to install solar panels?” or “Could you switch utility providers?” is a straightforward way to establish if a corporation has operational control.

A company may have joint financial control over an operation but not operational control in some cases. In such instances, the business must examine the contractual arrangements to see if any of the partners has the authority to develop and implement its operating procedures at the facility. If the operation establishes and implements its own operational policies, the partners with joint financial control over the operation will not report any emissions under operational control.

The advantage of an operational control approach is that it focuses on your ability to make a difference. You may own a building, but if you don’t have operational control, you can’t influence or minimize the carbon emissions it produces.

Defining your operational boundary

Understanding and articulating the scope of your direct influence is crucial to achieving carbon neutrality. After determining its organizational boundary, an organization must develop an operational boundary, which will determine the scope of three types of GHG emissions within that organizational boundary.

  • Scope 1: Direct emissions

A corporation must report under Scope 1 if it has direct control over energy generation or uses fossil fuels in its operations. Direct GHG emissions come from sources that the company owns or controls, such as combustion in owned or controlled boilers, furnaces, cars, and so on, and emissions from chemical manufacture in owned or controlled process equipment.

  • Scope 2: Emissions from purchased electricity, heat, and steam

When a company consumes energy, it is required to report the emissions associated with that consumption under Scope 2. The scope of emissions is generally simple to identify, often using meters as a guide. Indirect GHG emissions can result from the company’s use of purchased electricity in its own or controlled equipment or processes.

Despite the fact that Scope 2 emissions (bought power) are generated off-site by utility providers, they are considered part of a company’s operating footprint and must be accounted for when developing a carbon neutrality strategy. Market-based Scope 2 calculations are a great way to highlight where you might be able to operate in a more environmentally friendly manner than the grid currently allows (e.g., power purchase agreements).

  • Scope 3: Other indirect/supply chain emissions

When it comes to Scope 3 emissions, reporting is still considered optional. These emissions are a result of the firm’s activity, but they come from sources that the company does not own or control, such as supplier activities.

Companies will almost certainly be required to conduct a lifecycle study and identify the complete supply chain in order to determine the scope of emissions related with their operations. Even if you’re not offsetting Scope 3 categories, it’s still a good idea to think about how to calculate them and which ones would be the most useful.

Extraction and manufacturing of purchased materials, transportation of purchased fuels, and use of sold products and services are all instances of Scope 3 activities. Scope 3 can also account for leased assets, outsourcing, and franchising, which are supply chain emissions that look both upstream and downstream.

The importance of all three emission scopes

Now comes the critical part: all of these pollutants are relevant to operational companies and must be understood by them. Operating companies should be putting systems in place to figure out their direct footprint, in addition to key Scope 3 categories where they’re likely to have impact. When considering data collection with portfolio companies, asking just for Scope 1 and 2 is more than sufficient. However, portfolio companies should consider their Scope 3 emissions and comprehend the direct and indirect implications when it comes to climate risk.

Within an organization, there may be multiple operational levels, and it is up to the operation directors to create operational boundaries for the three emission scopes. The operational boundary must be used consistently throughout the organization once it has been created.

Identification and categorization of all emission scopes, whether direct, indirect, or voluntary, can be a difficult task that requires the involvement of senior management. While reporting obligations may appear to be optional at first, they can quickly become mandatory.

Creating a carbon-neutral goal

The most important aspect of determining your carbon inventory is that you are able to share your approach. It’s fine if there are data gaps, but they must be identified and stated.

Ultimately, a carbon-neutral goal should include the following:

  • Establish a solid, transparent GHG inventory and IMP that covers all emission sources included in the organization’s target, including important Scope 3 sources.
  • Look for ways to minimize the reporting organization’s emissions, such as through energy efficiency, the installation of onsite renewable energy, or the implementation of staff commuting programs. To encourage the organization to make these adjustments, set an absolute or intensity-based internal reduction goal.
  • Purchase green power, renewable energy certificates (RECs), and/or offsets for emissions not lowered through internal programs at the reporting organization. To minimize its market-based Scope 2 energy emissions, the reporting organization can purchase RECs or REC-based green power. The leftover emissions can then be offset by purchasing project offsets. Market-based emissions must be disclosed if this is part of the goal strategy.

This article was written by Kylie Ford, Principle ESG Consultant at Conservice ESG.