Chapter 2 — Identification of a Company’s Organizational Boundary

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.