Academy
[
Chapter 4: Inventory Boundaries
]

Inventory Boundaries: Organizational Boundary

Updated: 
May 18, 2023
  ·  
Published: 
August 30, 2023
  ·  
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inventory boundaries organizational boundary

Lesson Overview

Organizational Boundary

Overview

The organizational boundary is used to determine which components of an organization's operations and structure should be included in the GHG inventory.

It is aligned to the ways in which legal and organizational structures are defined for financial accounting purposes.

Organizational boundaries establish a consistent method to determine which parts of the organizational structure to include in the GHG inventory and how to categorize them.

Due to the complexity of many business structures, boundaries are needed to determine which parts of the company are included in the inventory and at what percentage.

For example, a company's organizational structure might include the following:

  • Wholly-owned operations
  • Subsidiaries
  • Affiliates
  • Joint ventures
  • Franchises

Selecting a Consolidation Approach

A company defines its organizational boundary by selecting a consolidation approach. Basically, the consolidation approach determines the amounts (or percentages) of GHG emissions to include in the company’s GHG inventory.

When defining boundaries and selecting an approach, it is key to keep in mind the goals of an organization’s GHG accounting, reporting, and management. The total amount of emissions that are accounted for — and how they are allocated to each scope — can vary significantly depending on which approach a company goes with.

In selecting an approach, all levels of an organization must follow the same organizational boundaries to ensure consistency and comparability. The parent company should decide on the organizational boundary and apply the same boundary to all operations, subsidiaries, and investments.

Note: Carbon accounting boundaries can often mirror those used for financial accounting and reporting purposes.

When defining an organizational boundary, there are two primary approaches that include 3 ways to define an organization’s emission boundary.

* Where there is joint financial control (e.g. a joint venture situation), the equity share approach will apply.

Control Approaches

Let’s take a look at the control approaches first.

Under the control approach, a company accounts for 100% of the GHG emissions from operations over which it has control.

It does not account for scope 1 and 2 emissions from operations in which it has a financial stake but no control. However, it could still account for them when reporting scope 3 emissions.

Control can be defined in either operational or financial terms.

Note: Under the Partnership for Carbon Accounting Framework (PCAF), a financial institution must select a control approach; it cannot choose the equity share approach. This ensures emissions associated with its ‘investment activities’ flow into scope 3, category 15 “Investments''.

To learn more about PCAF, check out our module on Financed Emissions.

Operational Control Approach

Under the operational control approach, the reporting company accounts for 100% of emissions from all operations over which it or one of its subsidiaries has operating control.

Operating Control

Operating control is defined as having the complete authority to create and apply operating policies.

For example
A retail company who owns and operates all related brands would have operational control over those brands.

This is the most commonly selected organizational boundary approach as it reflects where businesses have the most control to make business decisions which will enable them to reduce their carbon footprint and meet decarbonization targets.

Implications of choosing the operational control approach:

  • The reporting company reports 100% of the emissions where it, or one its subsidiaries, has operational control.
  • The reporting company excludes the emissions of any subsidiaries where it does not have operational control.
  • All leased assets (under a financial, capital, or operating lease) are considered to be wholly owned and operated assets of the business and are accounted for as scope 1 and 2 emissions.

Financial Control Approach

Under the financial control approach, the reporting company accounts for 100% of emissions from operations over which it has financial control. The company does not need to account for emissions from operations over which it owns an interest but has no control.

This approach goes beyond simply owning half of a business — the economic substance of the relationship between the corporation and the operation takes precedence over legal ownership status.

Financial Control

The reporting company has financial control if it bears the majority of risk and benefit associated with an operation’s financial performance. This means that a firm can have financial control over an operation even if it owns less than 50% of the asset.

For example:
The financial control approach may be used by a mining company with sub-contracted operations.

This approach is typically selected for organizations with a high prevalence of non-wholly owned and operated operations within their organizational structure.

Implications of choosing the financial control approach:

  • The reporting company reports 100% of emissions where it — or one of its subsidiaries — has financial control.  
  • The reporting company excludes the emissions of any subsidiaries where it does not have financial control.
  • Emissions from joint ventures where partners have joint financial control are accounted for based on the equity share approach (i.e., emissions from operations are accounted for in line with the percentage of ownership held).
  • Leased assets held under a financial or capital lease are considered to be wholly-owned and operated assets of the business and are accounted for as scope 1 and 2 emissions. Assets held under an operating lease would be included as scope 3 category 8 emissions.

Equity Share Approach

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 the reporting company owns a 65% share in an organization, it would be responsible for 65% of that operation’s emissions.

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 equity share approach is commonly used by companies who have complex ownership structures — such as an oil and gas company with percent ownership in various entities across its assets.

Implications of choosing the equity share approach:

  • The reporting company reports emissions in alignment with the equity share it has in each operation in its business structure.
  • Leased assets held under a financial or capital lease are considered to be wholly-owned and operated assets of the business and are accounted for as scope 1 and 2 emissions. Assets held under an operating lease would accounted for under scope 3 category 8.

The Big Picture

Let's connect the dots and pull this all together.

The image below provides a summary of the three consolidation approaches.

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