Organizational and Operational Boundaries
Environmental Defense Fund
Organizational boundaries determine which of your company’s business operations will be included in scope for its greenhouse gas (GHG) inventory and reporting. Operational boundaries further categorize emissions into either direct or indirect emissions, commonly referred to as Scope 1, Scope 2, and Scope 3 emissions.
To create a greenhouse gas (GHG) inventory, you need to quantify and account for your company’s GHG emissions. Specifically, you need to determine which emissions to account for as part of your business activities and which emissions are out of scope for your company. There are two key steps to determine boundaries for a GHG inventory:
- Organizational boundaries: Define which operations will be part of the inventory
- Operational boundaries: Determine emissions that are generated as part of a company’s operations and emissions that are generated due to the company’s activities, but not directly through its operations. These are commonly broken down into Scope 1, 2, and 3 emissions:
- Scope 1: direct emissions due to operations. For example, emissions from the production of your product in your factory
- Scope 2: indirect emissions generated through a company’s energy use. For example, your utility’s emissions required to generate the power you use for your factory.
- Scope 3: indirect emissions generated through a company’s value chain, such as upstream processing and downstream customer use. For example, your customer’s emissions through the use of your product.
How Do Companies Define Organizational Boundaries?
If your company wholly owns and controls all its operations, then the company is 100% responsible for emissions from those operations. However, in case of partial ownership, you must determine the extent of responsibility for those emissions.
The GHG Protocol has set two approaches that companies can use to determine organizational boundaries:
Under the control approach, a company is responsible for 100% of GHG emissions over which it has control. Conversely, a company is not responsible for emissions over which it has no control, even if it has an equity stake.
Two different types of control can be used to set boundaries:
- Operational Control is established when a company has authority to implement day-to-day operations. Typically, if your company has financial control, it has operational control, but this is not always the case; oil & gas businesses, for example, can have complex arrangements separating these functions.
- Financial Control is established when a company has control of an operation’s economics and financial policies, even if your company does not have majority ownership. For example, if your company owns 20% of another entity but maintains control of that entity’s operations and finances, your company would still assume responsibility for 100% of the emissions.
Equity Share Approach
Under the equity share approach, a company is responsible for emissions based on its economic interest in an operation. Emissions counted should be based on economic interest in the operation (percentage of profit/losses) and not necessarily ownership. For example, if ownership in an operation and share of profit/loss are not proportionate, then your company’s economic interests determine the counted emissions.
All levels of your organization should use the same approach to maintain consistency.
Your organization should select the approach based on your needs, goals, and requirements. The GHG Protocol and ISO standards make no recommendation as to which approach should be used.
Once your company has established the limits of its organizational boundaries, the next step is to establish its operational boundaries. This process involves identifying the emissions linked to your company’s operations by distinguishing between direct and indirect emissions and selecting the appropriate scope for reporting indirect emissions.
Direct emissions refer to emissions from sources owned or controlled by the company, while indirect emissions are those resulting from the company’s activities, but which occur at sources controlled by another company.
Emissions are delineated into Scope 1, 2, and 3 categories. Direct emissions are Scope 1. Indirect emissions generated through the company’s energy use are Scope 2. All other indirect emissions, such as emissions from upstream processing and downstream use, are Scope 3. The scopes help delineate direct and indirect emission sources and improve transparency.
The operational boundary (Scope 1, Scope 2, Scope 3) should be decided at the corporate level after setting the organizational boundary. The selected operational boundary is then uniformly applied to identify and categorize direct and indirect emissions at each operational level. The established organizational and operational boundaries together constitute your company’s reporting boundary.