This guide aims to provide Zeroe's users with a clear understanding of the concept of organizational boundary in the context of the Greenhouse Gas (GHG) Protocol and illustrate its application through examples.
In the GHG Protocol, the organizational boundary defines the scope of a company's emissions reporting responsibility. It determines which operations, entities, or facilities are included in the GHG inventory.
Approaches to Define Organizational Boundary
Control Approach
Definition: Under the control approach, a company accounts for 100 percent of the GHG emissions from operations over which it has control. It does not account for GHG emissions from operations in which it owns an interest but has no control.
Example: If your company owns 100% of a manufacturing plant and makes all operational decisions, all emissions from this plant are included under the control approach.
Control approaches are often separated as operational and financial.
Financial Control. The company has financial control over the operation if the former can direct the financial and operating policies of the latter to gain economic benefits from its activities.2 For example, financial control usually exists if the company has the right to the majority of benefits of the operation. However, these rights are conveyed. Similarly, a company is considered to financially control an operation if it retains the majority of risks and rewards of ownership of the operation’s assets.
Operational Control. A company has operational control over an operation if the former or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation. This criterion is consistent with the current accounting and reporting practice of many companies that report on emissions from facilities, in which they operate (i.e., for which they hold the operating license). It is expected that except in very rare circumstances if the company or one of its subsidiaries is the operator of a facility, it will have the full authority to introduce and implement its operating policies and thus has operational control.
Equity Approach
Definition: Here, emissions are accounted for in proportion to the share of equity in the operation. Under the equity share 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
Example: If your company owns 40% of a joint venture, then 40% of the emissions from that joint venture are included in your GHG inventory.
Application in Corporate Context
Selection Criteria: The choice between control and equity approach depends on the company's business model, stakeholder expectations, and reporting goals.
Consistency is Key: Once chosen, the approach should be consistently applied across all reporting periods to ensure data comparability.
Real-World Examples
Company with Multiple Subsidiaries
A multinational corporation with several subsidiaries may opt for the control approach, reporting on emissions from all operations over which it has direct control, regardless of its equity share.
Joint Ventures
For companies with significant investments in joint ventures, the equity approach might be more representative, accounting for emissions proportional to their stake in each venture.
Understanding and correctly applying the organizational boundary as per the GHG Protocol is vital for accurate and meaningful GHG emissions reporting. It helps corporate leaders make informed decisions in their journey towards sustainability and compliance with environmental regulations.