The Greenhouse Gas (GHG) Protocol is a comprehensive set of standards and guidance for accounting for and reporting greenhouse gas emissions. Developed through a multistakeholder partnership between the World Resources Institute (WRI), a US-based environmental NGO, and the World Business Council for Sustainable Development (WBCSD), a Geneva-based coalition of nearly 200 international companies, the protocol has been under development for more than two decades. It provides a framework for companies and other types of organizations preparing a GHG emissions inventory, addressing the accounting for and reporting of seven specific greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3). The protocol's standards and related guidance provide latitude in application and related judgments, which has led to diversity in practice in how companies report GHG emissions.
The current GHG emissions reporting landscape is evolving, with an increasing number of companies reporting on their emissions. This trend is driven by new climate and sustainability standards and regulations across the globe. Companies within the scope of the European Union’s Corporate Sustainability Reporting Directive (CSRD) are required to report on GHG emissions in accordance with the European Sustainability Reporting Standards (ESRS) or equivalent standards. Applicable climate and sustainability standards and regulations may prescribe organizational boundaries that differ from those delineated in the GHG Protocol. Therefore, if a company is reporting on emissions in accordance with a specific standard or regulation, it would need to carefully consider the organizational boundary requirements of that standard or regulation. While new standards and regulations are driving change, it is also important to recognize the potential business value of monitoring a company’s GHG emissions. Such monitoring may allow companies to identify business and financial risks that arise from their operations and provide management with insight into how to effectively manage those risks.
A fundamental step in preparing a GHG inventory is setting the organizational boundary. This is one of the first and most important steps, as it defines which parts of the organization are included, how much of their emissions must be reported, and where to report them. This decision directly impacts the completeness and accuracy of the GHG inventory. The GHG Protocol defines methods for setting boundaries for a greenhouse gas (GHG) inventory in its Corporate Accounting and Reporting Standard and Corporate Value Chain (Scope 3) Accounting and Reporting Standard. It is critically important to correctly identify the organizational boundary. The organizational boundary determines which entities (e.g., subsidiaries, joint ventures, partnerships) and assets (e.g., facilities, vehicles) will be included in the scope 1 and scope 2 GHG emissions inventory. This is distinct from the operational boundary, which defines the specific emissions sources (e.g., natural gas boilers or purchased electricity) that are included in an organization's scope 1 and 2 inventory. The GHG inventory guidance documents provide information on defining operational boundaries.
In setting organizational boundaries, an organization chooses an approach for consolidating GHG emissions and then consistently applies that approach to define the entities and assets included in scope 1 and scope 2. The GHG Protocol defines three consolidation approaches: equity share, financial control, and operational control. A company may choose any of the three approaches, regardless of whether it has operational or financial control over every entity or not. However, once an approach is selected, it must be applied consistently across your entire organization. If a company is reporting on emissions in accordance with the GHG Protocol rather than a specific standard or regulation, it may choose one of these three approaches. However, once the company selects an approach, it must apply that approach consistently across the organization. All levels of the organization and its subsidiaries need to follow the same approach to allow for consistent reporting. For example, if the parent organization uses the operational control approach, it is not appropriate to use the equity share approach for a subsidiary. Internal financial, accounting, or facilities staff may need to be consulted to define the entities and assets that fall within the boundary.
Equity Share Approach
The equity share approach accounts for GHG emissions from operations and assets according to an organization's share of equity in the operation. The equity share reflects economic interest, which is the extent of rights an organization has to the risks and rewards flowing from an operation. Industries with complex ownership structures may be more likely to follow the equity share approach to align the reporting boundary with stakeholder interests. An organization may choose the equity share or financial control approach to align its GHG reporting with the assets included in its financial reporting.
Financial Control Approach
A company has financial control over an entity if it can direct financial and operating policies with a view to gaining economic benefits. This often aligns with accounting consolidation and includes situations where the company has the ability to direct the financial and operating policies of another entity, typically through ownership of a majority of voting rights or through other contractual arrangements.
Operational Control Approach
The operational control approach is becoming the leading method recommended by CSRD, PCAF, and other major reporting frameworks. Under this approach, an organization accounts for GHG emissions from assets and operations over which it has operational control. This is often the most straightforward approach for many companies, as it aligns with the day-to-day management of facilities and equipment.
Impact on Scope 3 Emissions
After setting the organizational boundary to identify the entities and assets that are included in scopes 1 and 2, an organization can determine which activities fall into scope 3. This affects scope 3 emissions in several different ways, particularly concerning assets and entities. For example, under the operational control approach, emissions from operating leases for facilities or vehicles are typically included in scope 1 and scope 2. Under the equity share approach, these emissions would be included in scope 3, category 8 (upstream leased assets).
Overview of GHG Scopes
The GHG Protocol classifies emissions into three scopes to provide a comprehensive picture of an organization's carbon footprint. Direct emissions are included in scope 1. Indirect emissions are included in scope 2 and scope 3. While a company has control over its direct emissions, it has influence over its indirect emissions. A complete GHG inventory therefore includes scope 1, scope 2, and scope 3.
Scope 1
Scope 1 includes direct emissions from operations that are owned or controlled by the reporting company.
Scope 2
Scope 2 includes indirect emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company. Examples include the use of purchased electricity, steam, heating, or cooling.
Scope 3
Scope 3 includes all indirect emissions not included in scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions. Examples include the production of purchased products, transportation of purchased products, or use of sold products.
Conclusion
Setting the organizational boundary is a foundational step in corporate environmental accounting under the GHG Protocol. The choice between the equity share, financial control, and operational control approaches has significant implications for the scope and composition of a company's GHG inventory. Consistency in the application of the chosen approach is paramount for reliable and comparable reporting. The evolving regulatory landscape, particularly with initiatives like the CSRD, underscores the increasing importance of accurate and transparent GHG reporting. Companies are encouraged to consult internal experts and consider the specific requirements of the standards or regulations to which they are reporting. Properly defining organizational boundaries not only ensures compliance but also provides valuable insights for managing climate-related risks and opportunities.