2.3 Control Approach
Under the control approach, a reporting company accounts for 100
percent of the GHG emissions from any operation that is under the reporting
company’s control. Therefore, operations in which a reporting company owns an
interest but over which it has no control are not included in the reporting
company’s organizational boundary. In other words, a reporting company does not
include GHG emissions from operations that it does not control, even if it owns a
portion of the company. Under the equity share approach, by contrast, a portion of
an operation’s GHG emissions could be included even if the reporting company does
not control the operation.
The control approach consists of two alternatives: the financial control approach and
the operational control approach. Although financial control often does not differ
from operational control, the two types of control may be dissimilar in companies
with complex organizational structures (e.g., oil and gas companies). When choosing
between the two control approaches, a reporting company would select the approach
that better reflects how an operation’s activities are controlled or influenced so
that it can report the associated GHG emissions, and changes therein, over which it
has the most control.
2.3.1 Financial Control
Chapter 3 of the Corporate Standard describes
financial control as follows:
Corporate Standard, Chapter 3, “Setting Organizational
Boundaries,” Page 17
Control Approach . . .
-
Financial control. The company has financial control over the operation if the former has the ability to direct the financial and operating policies of the latter with a view to gaining economic benefits from its activities. . . . Similarly, a company is considered to financially control an operation if it retains the majority risks and rewards of ownership of the operation’s assets.
Under the financial control approach, a reporting company
accounts for 100 percent of an operation’s GHG emissions when the reporting
company has financial control over the operation and the ability to direct the
operation’s financial and operating policies to gain the economic benefits from
the operation’s activities (unless the operation is a JV [or similar investment
vehicle] under joint financial control, as noted below). Financial control is demonstrated if either (1) the
reporting company retains the majority of the risks and rewards (including
voting rights) of an operation’s assets or (2) the operation is consolidated
into the reporting company’s financial statements. For example, in certain
variable interest entity (VIE) structures, a reporting company may have
financial control over a VIE that it is not required to consolidate.
When applying the financial control approach, a reporting company would
prioritize the economic substance of a business relationship over legal
ownership. Like the equity share approach, the financial control approach makes
the economic substance of the relationship the prevailing determinant of what
percentage of an operation’s GHG emissions would be reported. Accordingly, if a
reporting company owns less than 50 percent of an operation but has financial
control over it, the company would report 100 percent of the GHG emissions from
the operation under the financial control approach.
Connecting the Dots
Whereas the equity share approach is based on a
reporting company’s specified economic interest in an operation, the
financial control approach generally requires a reporting company to
record 100 percent of emissions from an operation that it controls even
if its economic interest in the operation is less than 100 percent. The
only exception is a JV (or similar investment) under joint financial
control. The Corporate Standard provides that in such a case, the GHG
emissions related to the JV (or similar investment) would be reported on
the basis of an equity share even if the financial control approach is
selected. Accordingly, when the financial control approach is applied to
GHG emissions from a JV under joint financial control (e.g., JV1 in
Example 2-2), those emissions
will effectively be reported under the equity share approach.
The determination of whether a reporting company has
joint financial control over another entity for sustainability reporting
purposes would be based on whether the reporting company has joint
control over the other entity for financial reporting purposes under the
accounting standard framework used to prepare the reporting company’s
financial statements (e.g., U.S. GAAP, IFRS® Accounting
Standards).
If the definition of joint control that an entity uses
for financial reporting purposes changes (e.g., if an entity that
previously reported under U.S. GAAP adopts IFRS Accounting Standards),
the entity would assess the impact of the change in definition on its
GHG emissions. If the change in definition results in a change to the
GHG emission inventory boundary, the entity would need to consider
whether recalculation of the base-year emissions is needed (see
Section
4.1.3).
Similarly, if an entity’s conclusion on whether it has joint control over
another entity changes as a result of a change in facts and
circumstances, the reporting entity would need to assess the impact of
the change in conclusion on the reporting of GHG emissions, including
whether it is necessary to recalculate the base-year emissions.
The example below illustrates a
reporting company’s application of the financial control approach.
Example 2-2
Assume the same facts as in Example 2-1. Further
assume the following:
-
Company A and Company E have joint financial control over JV1.
-
Company A has total financial control over JV2 and JV4.
-
Company C has no financial control over JV3.
The table below presents A’s consolidation under the
financial control approach of GHG emissions from the
companies and JVs in which A holds a direct or indirect
economic interest.
Company or JV
|
Legal Structure
|
Economic Interest Held by
Immediate Parent or JV Partners
|
Percentage of GHG Emissions
Consolidated by Company A Under the Financial
Control Approach
|
---|---|---|---|
Company B
|
Wholly owned subsidiary of A
|
100%
|
100%
|
Company C
|
Subsidiary of B
|
90%
|
100%
|
Company D
|
Subsidiary of C
|
80%
|
100%
|
JV1
|
JV in which A and Company E are partners and
over which A and E have joint financial
control
|
50% by A, 50% by E
|
50%
|
JV2
|
JV in which B and Company F are partners and
over which A has total financial control
|
75% by B, 25% by F
|
100%
|
JV3
|
JV in which C and Company G are partners and
over which C has no financial control
|
50% by C, 50% by G
|
0%*
|
JV4
|
JV in which A and Company H are partners and
over which A has total financial control
|
50% by A, 50% by H
|
100%
|
* Since A does not have financial control of
JV3, it would report 0 percent of JV3’s Scope 1
and Scope 2 emissions as part of A’s own Scope 1
and Scope 2 emissions. However, A would consider
its share of JV3’s Scope 1 and Scope 2 emissions
when reporting Scope 3, Category 15,
emissions.
|
The diagram below further illustrates the GHG emission
percentages consolidated by A under the financial
control approach.
2.3.2 Operational Control
Chapter 3 of the Corporate
Standard describes operational control as follows:
Corporate Standard, Chapter 3, “Setting Organizational
Boundaries,” Page 18
Control Approach . . .
-
Operational control. A company has operational control over an operation if the former or one of its subsidiaries . . . has the full authority to introduce and implement its operating policies at the operation.
Under the operational control approach, if a reporting company
or a subsidiary thereof has the full authority to introduce and implement its
operating policies (which may not correlate with the benefits or risks and
rewards) at an operation, the reporting company will report 100 percent of the
GHG emissions from the operation. It is important to note that a reporting
company with operational control does not necessarily have full authority to
implement all of its operating policies concerning an operation, since some
policies, such as the approval of operating budgets, are likely to require the
approval of all owners. However, except in very rare circumstances, if the
reporting company (or one of its subsidiaries) is the operator of a facility,
the reporting company will have the full authority to introduce and implement
its operating policies and, therefore, will have operational control.
Economic substance or economic interest is irrelevant to the determination of
whether a reporting company has operational control. For example, if a general
partner (GP) controls a partnership’s operational decisions but holds only a 1
percent economic interest in the partnership, the GP would consolidate 100
percent of the GHG emissions from the partnership under the operational control
approach.
Operational control does not always coincide with equity
ownership. It can be established through contracts, agreements, or leases that
grant an entity authority to introduce and implement operating policies.
Accordingly, an entity may have operational control over a facility or operation
without having any equity ownership.
Chapter 5 of the Scope 2 Guidance provides an example in which a
third-party financing institution owns but does not operate an energy generation
unit and therefore does not account for any Scope 1, Scope 2, or Scope 3
emissions under the operational control approach because it does not have
operational control (note that the total GHG emissions from the equity
investment of the financing institution may be included in Scope 3, Category
15). It therefore follows from this example that the entity that operates the
energy generation unit may determine that it has operational control even though
it does not own the energy generation unit.
The following are further examples of scenarios that may indicate that an entity
has operational control (without any equity ownership):
-
Scenario 1 — Entity A leases a building from Entity B. To determine whether it has operational control, A assesses, for example, the extent to which it has the authority to determine the energy sources, efficiency measures, maintenance schedules, or other significant operating policies for the leased building.
-
Scenario 2 — Entity C enters into a collaboration agreement to work on a project with Entity D. To determine whether it has operational control, C assesses whether the contractual rights grant it authority to introduce and implement operating policies for the joint project even though C has no equity ownership interest in the joint project.
In each of these scenarios, despite not having any equity
ownership in the operation/asset, the entity may have the contractual and/or
agreed-upon rights to introduce and implement its operating policies, which
correspond to the definition of operational control under the Corporate
Standard. An entity that applies the operational control approach would consider
the specific facts and circumstances of its arrangement(s) to determine whether
it has operational control despite not having any equity ownership in the
arrangement(s).
In the case of an operation under the joint financial control of two or more
partners, the leading practice for determining which partner, if any, has
operational control is to review the partners’ contractual arrangement to
identify the partner with the ability to introduce and implement its operating
policies at the operation. If an operation under joint financial control
introduces and implements its own policies, the partners would not report any
GHG emissions from the operation under the operational control approach.
The example below illustrates a
reporting company’s application of the operational control approach.
Example 2-3
Assume the same facts as in Examples
2-1 and 2-2.
Further assume the following:
-
Company B’s operating policies are under Company A’s control.
-
Company C’s operating policies are under B’s control.
-
Company D’s operating policies are under C’s control.
-
JV1’s operating policies are under A’s control.
-
JV2’s operating policies are under Company F’s control.
-
JV3’s operating policies are under C’s control.
-
JV4’s operating policies are under Company H’s control.
The
table below presents A’s consolidation under the
operational control approach of emissions from the
companies and JVs over which A or a subsidiary thereof
has operational control.
Company or JV
|
Legal Structure
|
Control of Operating
Policies
|
Percentage of GHG Emissions
Consolidated by Company A Under the Operational
Control Approach
|
---|---|---|---|
Company B
|
Wholly owned subsidiary of A
|
Company A
|
100%
|
Company C
|
Subsidiary of B
|
Company B
|
100%
|
Company D
|
Subsidiary of C
|
Company C
|
100%
|
JV1
|
JV in which A and Company E are
partners
|
Company A
|
100%
|
JV2
|
JV in which B and Company F are
partners
|
Company F
|
0%*
|
JV3
|
JV in which C and Company G are
partners
|
Company C
|
100%
|
JV4
|
JV in which A and Company H are
partners
|
Company H
|
0%*
|
* Since A does not have operational control of
JV2 or JV4, it would report 0 percent of their
Scope 1 and Scope 2 emissions as part of A’s own
Scope 1 and Scope 2 emissions. However, A would
consider its share of the Scope 1 and Scope 2
emissions of JV2 and JV4 when reporting Scope 3,
Category 15, emissions.
|
The
diagram below further illustrates the GHG emission
percentages consolidated by A under the operational
control approach.