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:
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.
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.
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 is defined as having the complete authority to create and apply operating policies.
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:
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.
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.
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:
Using the equity share approach, a company will account for GHG emissions from operations according to its share of equity in the operation.
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:
Let's connect the dots and pull this all together.
The image below provides a summary of the three consolidation approaches.