GHG Inventory Boundary Setting: Control Approach Transcript

Slide 1

Under the control approach, a company accounts for 100% of the greenhouse gas emissions from businesses and operations which it controls. If a company has economic interest in an operation but has no control over it, the company will not account for any emissions from that operation.

Control over a business or operation could be either in the form of financial control or operational control. If a company decides to use the control approach for consolidating greenhouse gas emissions, it will have to select between either the financial control or operational control approach.

Slide 2

Financial control. A Company has financial control over an operation if it has the ability to direct the financial and operating policies of the operation with a view to gaining economic benefits from its activities. For the purpose of greenhouse gas emissions accounting, a company has financial control over an operation if the operation is considered as a group company or subsidiary for the purposes of financial consolidation. This also means that the operation is fully consolidated in the company’s financial accounts. Where joint venture partners have joint financial control, the greenhouse gas emissions will be accounted for based on the equity share approach.

Slide 3

A Company has operational control over another business or operation if the company has the full authority to introduce and implement  operating policies at that business or operation. When quantifying greenhouse gas emissions, the company accounts for 100% of the greenhouse gas emissions from the entities over which it has operational control.

Slide 4

Boundary setting is key when quantifying and reporting greenhouse gas emissions. By setting organizational and operational boundaries, the company is able to identify and consolidate greenhouse gas emissions from its business activities. Once the greenhouse gas emissions are quantified, the company can then present or report the greenhouse gas emissions data to its stakeholders in their required format.

When setting the inventory boundary, the company must ensure that there is no ‘double counting’ of emissions. If two companies with joint ownership of an operation use different consolidation approaches, then the greenhouse gas emissions could be counted twice.

For example, if company XYZ used the equity share approach and company ABC used the financial control approach they could both account for the same greenhouse gas emissions from their jointly owned operation, thus leading to “double counting”.

Slide 5

The organization selects a consolidation approach based on its goals. The equity share approach is best suited to reflect the organizations true commercial reality. This approach accounts for GHG emissions from all business activities that bring economic benefit to the company. The financial liability and risks from an operation, are the responsibility of the company which has an economic interest in the operation. Hence, the equity share approach enables the company to assess risks and liabilities associated with the operation. Note, the economic profit percentage equals the percentage of greenhouse gas emissions from the activity  that generates the profit.

The control approach is best suited if a company wants to understand its absolute GHG emissions responsibility from an operation. This approach may not assign GHG percentage ownership as per commercial reality, but allocates full ownership of greenhouse gas emissions to one entity.

Since the control approach accounts for emissions from those activities that are under the control of the company, this approach also enables the organization to track the performance of those activities.

Lower administrative costs and access to operational data is another reason a company may select to consolidate its GHG emissions on the basis of the control approach.

Slide 6

A company may sometimes choose to outsource an activity that was previously undertaken in-house. Outsourcing often involves multiple contractual activities. For example, a law firm, which is the principal party, may outsource their IT functions to an external IT company which is referred to as the agent.

If the law firm has delegated total authority to the IT company to implement and conduct all activities in relation to the IT function, the emissions from the IT function will be in included in the law firm’s scope 3 greenhouse gas emissions and not in the law firm’s scopes 1 and 2. The IT company will include these greenhouse gas emissions in their  Scope 1 and Scope 2.

Slide 7

A company may often carry out its business activities using assets it has leased from another entity. A company may also lease out its owned assets to another company. A lease could either be in the form of a finance or a capital lease, or it can be an operating lease. A finance or capital lease is a lease that enables the lessee to operate an asset and also gives the lessee all the risks and rewards of owning the asset.

An operating lease is one that enables the lessee to operate an asset, a building or avehicle, but does not give the lessee any of the risks or rewards of owning the asset. If the company owned the leased assets, they should follow the same consolidation approach for including the greenhouse gas emissions from the leased assets as used for the organizational boundary.

However, the company will need to know what type of lease applies to their assets. 

Slide 8

The selected consolidation approach will determine if the emissions from leased assets will be reported, and will also determine if they should be categorised as scope 1, 2, or scope 3.

As the table indicates, as a lessee the company using financial control approach or the equity share approach should account for emissions from assets under a finance lease. If the asset is under an operating lease, the reporting of emissions from that asset is optional.

As a lessee, the company using operational control approach, should only account for emissions from assets if the operational criteria applies. Generally, under an operating lease, the lessee has operational control, but not ownership or financial control over the asset. Therefore, the lessee should include these emissions if using the operational control.

For the leaser (lessor), as indicated in the second table, a company using the financial control or equity share approach should account for emissions from assets it leased out to another company under an operating lease. This is because the lessee has operational control over the asset but the leaser(lessor) maintains financial control.

The reporting of emissions is optional if the asset is leased out to another company under a finance lease. If the reporting company uses the operational control approach, the reporting of emissions is optional for the leaser (lessor) for assets leased out both under the finance and operating leases.