With the recognition of climate risk as financial risk, the implementation of climate disclosure regulations, and increasing concern from stakeholders, the pressure on organizations to measure their greenhouse gas emissions is growing. This newly discovered demand for enterprises to measure their carbon emissions has led to an increased interest in how to begin the complicated process.
One of the first steps, as defined by the primary framework for carbon accounting, the Greenhouse Gas Protocol (GHGP), is to ensure your processes are aligned with the relevant calculation methods and reporting frameworks. As such, it is critical to define the organizational and operational boundaries of your carbon measurements, which provide a better understanding of what to measure within the operations of an organization.
An organizational boundary refers to whether an organization is part of an umbrella company or a subsidiary, and determines whether the operation is in financial control of company assets or operational control to get a representative share of the emissions an organization creates.
Whereas, an operational boundary defines the scope of direct and indirect emissions within the organizational boundaries.
What are organizational boundaries?
Equity share approach
The equity share approach of creating an organizational boundary refers to accounting for a proportion of GHG emissions according to the equity share of an operating entity. Therefore if Company A has a 75% controlling stake and company B has a 25% minority stake they will be responsible for the corresponding amount of GHG emissions. The equity share reflects the economic risks shared by each company in their share of emissions boundaries.
Under the control approach, a company is responsible for 100% of the
emissions over which it has control. Conversely, they are responsible for 0% of the emissions of companies they have no control over. The control approach is further divided into two approaches:
A company is considered under the financial control boundary if it retains the majority of risks and rewards of ownership of the operation’s assets and has overall control of financial policies. It does not necessarily mean the company is a majority owner in an organization.
Operational control boundary is considered when an organization or one of its subsidiaries has full control over the operational day-to-day policies of a company.
What are operational boundaries?
Direct and indirect emissions
Direct GHG emissions are emissions from sources that are owned or controlled by the company. Indirect GHG emissions are emissions that are a consequence of the activities of the company but occur at sources owned or controlled by another company.
To help further delineate operational boundaries direct and indirect emissions are broken down into Scope 1, 2, and 3, per the GHGP:
- Scope 1 refers to the direct emissions from an organization's operations, including company vehicles and buildings.
- Scope 2 categorizes indirect emissions from purchased electricity, heating, and cooling.
- Scope 3 comprises all other indirect emissions that exist in a company's value chain, such as upstream material collections or downstream product use.
Scope 1, 2, 3 Emissions
Before collecting data your firm has to decide whether they come under the equity share approach or the financial control approach. Then they must decide if they will measure just scopes 1 and 2 or include the scope 3 categories relevant to their business.
How can software help define organizational and operational boundaries?
To automate this process of creating organizational and operational boundaries, carbon accounting software can be used to quickly define what your organizational and operational boundaries should be and to calculate emissions within them. Software enables you to easily share this data with regulatory authorities, stakeholders, and investors in the proper formats.