With the recognition of climate risk as financial risk, the implementation of climate disclosure regulations, and increasing concern from stakeholders, the pressure on organizations to measure their greenhouse gas (GHG) emissions is growing. This newly discovered demand for enterprises to measure their carbon emissions has led to an increased interest in how to begin the complicated process.
One of the first steps, as defined by the primary framework for carbon accounting, the Greenhouse Gas Protocol (GHGP), is to ensure your processes are aligned with the relevant calculation methods and reporting frameworks. As such, it is critical to define the organizational and operational boundaries of your carbon measurements, which provide a better understanding of what to measure within the operations of an organization.
An organizational boundary refers to whether an organization is part of an umbrella company or a subsidiary and determines whether the operation is in financial control of company assets or operational control to get a representative share of the emissions an organization creates. Here, we are trying to understand how we would like to structure, analyze, and report on our carbon data.
Whereas an operational boundary defines the scope of direct and indirect emissions within the organizational boundaries. Here, we want to identify what emission sources are in scope for accounting. We'll dig into this a bit further in the following section.
What are organizational boundaries?
Organizational boundaries set the limits that define the extent and scope of an organization's responsibilities concerning their GHG emissions. They delineate the operational purview within which an entity assumes accountability for emissions produced directly or indirectly through its activities. These boundaries serve as critical frameworks, determining the level of control an organization exercises over emissions generated within its operations. The two primary approaches to defining organizational boundaries are the equity share approach and the control approach, each offering distinct perspectives on how emissions responsibility is allocated among associated entities.
Equity share approach
The equity share approach is a method used to determine an organization's accountability for GHG emissions based on its ownership stake or equity share in other entities. Under this approach, the proportion of emissions attributed to an organization is calculated in alignment with its ownership percentage or controlling stake in affiliated companies or subsidiaries. For instance, if Company A holds a 60% stake in Company B, it would be responsible for 60% of the emissions generated by Company B. This methodology assigns emissions responsibility according to the economic interest or equity holdings a company maintains in various operational entities or subsidiaries.
Control approach
Under the control approach, a company is responsible for 100% of the emissions over which it has control. Conversely, they are responsible for 0% of the emissions of companies they have no control over. The control approach is further divided into two approaches:
1. Financial control
A company is considered under the financial control boundary if it retains the majority of risks and rewards of ownership of the operation’s assets and has overall control of financial policies. It does not necessarily mean the company is a majority owner in an organization.
2. Operational control
Operational control boundary is considered when an organization or one of its subsidiaries has full control over the operational day-to-day policies of a company. It extends beyond financial control to encompass direct operational management.
What are operational boundaries?
Operational boundaries in the context of carbon accounting define the extent and parameters within which an organization measures and manages its GHG emissions. These boundaries differentiate between emissions directly produced or controlled by the organization (direct emissions) and those emissions arising indirectly from activities within the organization but occurring at sources beyond its control (indirect emissions). Operational boundaries can help companies in comprehensively identifying, quantifying, and managing their carbon footprint across various emission sources within their business operations and value chains.
Direct and indirect emissions
Direct GHG emissions are emissions from sources that are owned or controlled by the company. Indirect GHG emissions are emissions that are a consequence of the activities of the company but occur at sources owned or controlled by another company.
Scopes
To help further delineate operational boundaries, direct and indirect emissions are broken down into Scope 1, 2, and 3, per the GHGP:
- Scope 1 refers to the direct emissions from an organization's operations, including company vehicles and buildings.
- Scope 2 categorizes indirect emissions from purchased electricity, heating, and cooling.
- Scope 3 comprises all other indirect emissions that exist in a company's value chain, such as upstream material collections or downstream product use.
Before collecting data, your firm has to decide whether they come under the equity share approach or the financial control approach. Then they must decide if they will measure just scopes 1 and 2 or include the scope 3 categories relevant to their business.
How can software help define organizational and operational boundaries?
To automate this process of creating organizational and operational boundaries, carbon accounting software can be used to quickly define what your organizational and operational boundaries should be and to calculate emissions within them. Software enables you to easily share this data with regulatory authorities, stakeholders, and investors in the proper formats.
To learn how carbon accounting software can help simplify the carbon accounting process and enable organizations to define their boundaries, request a demo here.
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