Determine Organizational Boundaries
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.
Note that this page focuses on organizational boundaries: these determine 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. Operational boundaries, on the other hand, define 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 (Table 1 below).
| Consolidation Approach | Description |
|---|---|
| Equity share | An organization accounts for GHG emissions from operations and assets according to its 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. |
| Financial control | An organization accounts for 100 percent of the GHG emissions over which it has financial control. It does not account for GHG emissions from operations it owns equity in but does not have financial control over. The organization has financial control over the operation if it can direct the operation's financial and operating policies with a view to gaining economic benefits from the operation's activities. The organization may have financial control over the operation even if it has less than a 50 percent equity in that operation. |
| Operational control | An organization accounts for 100 percent of the GHG emissions over which it has operational control. It does not account for GHG emissions from operations it owns equity in but does not have operational control over. An organization accounts for 100 percent of emissions from operations over which it or one of its subsidiaries has operational control. Generally, if the organization is the operator of a facility, it will have the full authority to introduce and implement its operating policies and thus has operational control. |
Table 2 below shows several types of entities and assets and how they are included in the scope 1 and scope 2 inventory under the three different approaches. Each box represents the percent of emissions included in the boundary.
| Entity or Asset | Equity Share | Financial Control | Operational Control |
|---|---|---|---|
| Wholly owned asset | 100% | 100% | 100% |
| Group company/subsidiary/ franchise | Equity share | 100% if controlled; 0% if not | 100% if controlled; 0% if not |
| Joint venture/partnership | Equity share | Equity share | 100% if controlled; 0% if not |
| Associated/affiliated company | Equity share | 100% if controlled; 0% if not | 0% |
| Leased asset—finance/capital lease | 100% | 100% | 100% |
| Leased asset—operating lease | 0% | 0% | 100% if controlled; 0% if not |
In practice, these three approaches differ most for leased facilities or vehicles where there is an operating lease. These assets are not included in the inventory under the equity share or financial control approaches, but they are generally included in the inventory under the operational control approach. For more information on treatment of leased assets, see GHG Protocol, Appendix F, Categorizing GHG Emissions Associated with Leased Assets.
The equity share and financial control approaches are similar with nuanced differences, as explained in detail in the GHG Protocol's Corporate Standard and Corporate Value Chain Standard.
The operational control approach is the most common: it typically aligns best with what an organization feels it is responsible for, and it also often leads to the most comprehensive inclusion of assets in the inventory. 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.
Once an organizational boundary is chosen, 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.
Organizational Boundaries and 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.
- Assets (e.g., facilities, vehicles). 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).
- Entities (e.g., subsidiaries, joint ventures, partnerships). Scope 3 includes the value chain emissions of the entities included in scope 1 and scope 2 and does not include value chain emissions of entities outside the organizational boundary. For example, if a subsidiary is included in the scope 1 and 2 boundary and a joint venture is not, upstream scope 3 categories will include emissions associated with the purchases of the subsidiary but not the purchases of the joint venture. Likewise, downstream scope 3 categories will include emissions from the subsidiary's products, but not from the joint venture's products. When a joint venture is excluded from the scope 1 and 2 boundary, its emissions will be included in scope 3, category 15 (investments).
- Emissions calculation. Two scope 3 categories are based on the boundaries of the assets included in scope 1 and scope 2:
- Category 3 (fuel- and energy-related activities) includes emissions associated with the fuels and electricity consumed only in facilities and vehicles included in scope 1 and scope 2.
- Category 5 (waste generated in operations) includes emissions associated with waste generated only in facilities or vehicles included scope 1 and scope 2.