GHG Protocol: Setting Organizational Boundaries
This is the second article in our series about on the Greenhouse Gas Emissions Corporate Standard and the methodology behind it.
This is the second article in our series, the first one can be found here, about on the Greenhouse Gas Emissions Corporate Standard and the methodology behind it.
Setting Organizational Boundaries
Setting organizational boundaries for the GHG Protocol Corporate Standard is possibly the most important step in the corporate accounting and reporting of greenhouse gas emissions.
The Corporate Standard outlines two distinct approaches for defining the organizational boundaries used to consolidate the GHG emissions. Choosing which approach best defines your business operations is necessary due to the wide variety of legal and organizational structures.
Keep in mind that both approaches may apply in certain situations. Nonetheless, it is highly advisable to choose one approach and stick with it. This creates consistency with GHG emissions inventory tracking and reporting over time.
Business operations may include:
- Wholly owned operations
- Incorporate / Non-incorporated
- Joint ventures
In the first article we briefly explained the GHG Protocol Corporate Standard and the essence of the Corporate Standard is the GHG Emissions Inventory. Determining the organizational, operational, and temporal boundaries for the GHG Emissions Inventory in the early stages establishes what asset emission sources must be identified and accurately tracked.
Over time the organizational boundaries may evolve as the business expands. A recent example of this is Google, which created a parent company, Alphabet, in 2015. The company Google became a subsidiary of the company Alphabet. Google would continue to focus on business drivers of search (advertising), Chrome, and Android, while Alphabet could start new subsidiary companies for more ambitious projects, such as self-driving cars, artificial intelligence and smart contact lenses.
In 2019 Google, now being a separate company from Alphabet and its subsidiaries, still reports for the entire Alphabet corporation. Google has kept consistent organizational boundaries since 2013.
Selecting the Approach
The equity share approach is defined by the percentage stake of the equity of a company in order to calculate the share of the GHG emissions.
Another way to look at this approach is that the organization’s economic interest, or the extent of rights to the risk and rewards generated from an operation, dictates the share of GHG emissions an organization is responsible for in other entities. The equity share approach may require alignment with the organization’s accounting or legal departments to determine the appropriate equity share percentage for each joint ventures
The control approach seems to have a simpler way of defining organizational boundaries; the organisation accounts for 100 percent of the GHG emissions from operations over which it has control or benefits from economically. Here there are, however, two different choices of control approach; financial control and operational control.
The financial control approach is just that – the organization has the ability to direct the financial and operating policies of an operation in an effort to gain economic benefits. Therefore, the organization should account for the GHG emissions form said operation.
The operational control approach is different – the organization has the authority to introduce and implement operating policies at an operation, but ownership is a joint financial venture. To go back to the previous Google example, Alphabet is a publicly traded company with millions of shares owned by millions of people. The organization implementing operating policies should account for 100% of GHG emissions, as they have been given operating control by the shareholders.
Best practice tip: When selecting which approach to use when setting the organizational boundaries, it is best to consider what asset emissions the organization should be held accountable for. At this stage, seeking outside professional assistance is a smart business decision, due to the critical nature in establishing the correct organizational boundaries. Investing in the time and professional assistance to accurately determine the organizational boundaries will result in minimal resetting of boundaries and inaccuracy of the data collected and measured.
The guidance for setting organizational boundaries states that “companies may need to account for their GHG emissions using both the equity share and the control approaches” depending on different inventory reporting goals. Organizations with multiple subsidiaries can find themselves in this sort of a bind in determining the best approach for consolidating GHG data.
Double counting is when two or more companies share the same joint operation and use different consolidation approaches. Double counting may not matter with voluntary corporate public reporting, but it must be avoided in trading schemes and certain government reporting programs. We will explore double counting more in the next article about the setting of operational boundaries when we dive into the three different scopes.
Klappir Green Solutions
Our Sustainability platform is specifically designed for managing the GHG Protocol and processing the data for timely, accurate reporting. We also have a team of excellent advisers in the field of accounting and reporting greenhouse gas emissions. We want to assist you in setting organizational boundaries through education and guidance on selecting the best approach for accounting and reporting GHG emissions.
Contact us today for your personal tour of the Sustainability platform and learn how we want to enhance your capabilities for conformance with GHG Protocol standards.