Chapter 7 — Accounting for GHG Emissions From Leased Assets

7.2 Scope 3 Emissions From Leased Assets

7.2.1 Overview

Chapter 5 of the Scope 3 Standard discusses the difference between upstream and downstream Scope 3 emissions:

Scope 3 Standard, Chapter 5, “Identifying Scope 3 Emissions,” Page 29 (Page 31 in E-Reader Version)

5.3 Upstream and Downstream Scope 3 Emissions

This standard divides scope 3 emissions into upstream and downstream emissions. The distinction is based on the financial transactions of the reporting company.

Upstream emissions are indirect GHG emissions related to purchased or acquired goods and services.
Downstream emissions are indirect GHG emissions related to soldFN2 goods and services.

In the case of goods purchased or sold by the reporting company, upstream emissions occur up to the point of receipt by the reporting company, while downstream emissions occur subsequent to their sale by the reporting company and transfer of control from the reporting company to another entity (e.g., a customer). Emissions from activities under the ownership or control of the reporting company (i.e., direct emissions) are neither upstream nor downstream.

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FN2 Downstream emissions also include emissions from products that are distributed but not sold (i.e., without receiving payment).

Determining whether Scope 3 emissions related to a leased asset are upstream or downstream requires a clear understanding of the transaction and who has control (i.e., the landlord/lessor or customer/lessee). For example, emissions from a leased asset are only considered downstream emissions from the lessor’s perspective since the emissions occur after the lessor transfers control of the asset to the customer (i.e., the lessee).

Example 7-1

Company A leases a fixed asset from Company B and applies the equity share approach to consolidate its GHG emissions. It does not obtain substantially all of the risks and rewards of owning the leased asset, and it accounts for the lease as an operating lease (in a manner consistent with both ASC 842 and the GHG Protocol) in its audited financial statements.

Because A applies the equity share approach and accounts for the lease as an operating lease, GHG emissions from the leased asset that are associated with the use of purchased electricity are considered emissions in Scope 3, Category 8 (upstream leased assets). See Table 7-2, Case C, for details.

Example 7-2

Lessor leases a fixed asset to Lessee. Both Lessor and Lessee apply the equity share approach to consolidate their respective GHG emissions. Lessor accounts for the lease as a sales-type lease (the equivalent of a finance/capital lease as defined in the GHG Protocol) in its audited financial statements. Similarly, Lessee accounts for the lease as a finance lease (in a manner consistent with both ASC 842 and the GHG Protocol) in its audited financial statements.

As defined in the GHG Protocol, a finance lease gives a lessee accounting ownership of a leased asset (i.e., the leased asset is treated as wholly owned under the equity share approach). Consequently, Lessor does not retain substantially all of the risks and rewards of owning the asset it leased to Lessee. Since GHG emissions associated with the use of purchased electricity occur after Lessor transfers control of the asset to Lessee, Lessor recognizes those emissions in Scope 3, Category 13 (downstream leased assets); see Table 7-3, Case A, for details. However, Lessee recognizes GHG emissions from the leased asset in Scopes 1 and 2 since Lessee has control of the leased asset; see Table 7-2, Case A, for details.

As discussed in Chapter 6 of this Roadmap, Categories 1 through 8 represent Scope 3 upstream emissions, and Categories 9 through 15 represent Scope 3 downstream emissions. For leased assets, depending on where in the value chain the financial transaction occurs, the related Scope 3 emissions are recorded in either Category 8 (upstream leased assets) or Category 13 (downstream leased assets).

The table below, which is adapted from a portion of Table 5.4 of the Scope 3 Standard, describes Scope 3, Categories 8 and 13.

Table 7-1 Description of Scope 3, Categories 8 and 13

Category	Category Description
8. Upstream leased assets	Operation of assets leased by the reporting company (lessee) in the reporting year and not included in Scopes 1 and 2. Reported by lessee.
13. Downstream leased assets	Operation of assets owned by the reporting company (lessor) and leased to other entities in the reporting year. Not included in Scopes 1 and 2. Reported by lessor.

For both Categories 8 and 13, if the reporting company is the lessee or lessor of the asset for only part of the year, it would need to account for emissions for only the portion of the year during which the asset was leased.

Example 7-3

Company A, a calendar-year-end company, leases equipment from another entity for a term beginning on February 1, 20X1. Consequently, for the 20X1 reporting year, A will only evaluate emissions related to the leased equipment from February 1, 20X1, through December 31, 20X1.

When calculating Scope 3 emissions, companies may use two types of data: primary and secondary (see Section 6.5 for more information). As noted in the Scope 3 Standard, primary data include “[s]ite-specific energy use data collected by utility bills or meters,” and secondary data include industry-average data (e.g., proxy data from published databases, government statistics, or industry associations) that may be used to estimate “energy use per floor space by building type.” Therefore, energy use data collected from utility bills or meters related to a leased asset (e.g., equipment, facility, office space, or building) can be used to account for a company’s Scope 3 emissions.

Further, as discussed in Section 6.5, various allocation methods may be used to account for emissions in Scope 3 categories. The Scope 3 Standard indicates that for Categories 8 and 13, physical allocation is “expected to yield more representative emissions estimates” and therefore would be considered for shared facilities to appropriately allocate energy data collected by utility bills or meters (see Section 6.5.2.3 for more information). Companies can use physical factors such as volume or area — whichever physical factor is most closely correlated with energy use and emissions — to best reflect the emissions related to leased assets.

7.2.2 Category 8 (Upstream Leased Assets)

As stated in the Scope 3 Standard, emissions to be accounted for in Category 8 (upstream leased assets) include those related to “the operation of assets that are leased by the reporting company in the reporting year and not already included in the reporting company’s scope 1 or scope 2 inventories” (emphasis added). Emissions already included in a lessee’s Scope 1 and Scope 2 inventories are (1) direct emissions (Scope 1) and (2) indirect emissions related to the lessee’s use of purchased electricity (Scope 2); the Scope 1 and Scope 2 classifications depend on the lessee’s lease type (i.e., finance or operating, as defined in the Scope 3 Standard) and chosen consolidation approach. The lessee must have accounting ownership, financial control, or operational control of the leased asset to include emissions related to the leased asset in its Scope 1 or Scope 2 inventory.

Category 8 emission reporting is for lessees that have an operating lease and apply the equity share or financial control consolidation approach. Since these lessees do not have accounting ownership or financial control with an operating lease, they do not report emissions in a Scope 1 or Scope 2 inventory; rather, they report emissions in Scope 3, Category 8. See Table 7-2, Case C.

7.2.3 Category 13 (Downstream Leased Assets)

As stated in the Scope 3 Standard, emissions to be accounted for in Category 13 (downstream leased assets) are applicable to lessors and include those related to “the operation of assets that are owned by the reporting company (acting as lessor) and leased to other entities in the reporting year that are not already included in scope 1 or scope 2” (emphasis added). Category 13 emission reporting is for lessors that (1) have a finance/capital lease as defined in the Scope 3 Standard and apply the equity share or financial control approach, (2) have a finance/capital lease as defined in the Scope 3 Standard and apply the operational control approach, or (3) have an operating lease as defined in the Scope 3 Standard and apply the operational control approach. See Table 7-3, Cases A, B, and D.

Preparers will need to understand where in the value chain the financial transaction occurs to correctly identify the appropriate Scope 3 category in which to report emissions. However, as the Scope 3 Standard indicates, it may sometimes be appropriate to treat downstream leased assets as if they were products sold to customers and accordingly report Scope 3 emissions from those assets in Category 11 (use of sold products) instead of Category 13:

Scope 3 Standard, Chapter 5, “Identifying Scope 3 Emissions,” Page 50 (Page 51 in E-Reader Version)

5.5 Descriptions of Scope 3 Categories . . .

Category 13: Downstream Leased Assets . . .

In some cases, companies may not find value in distinguishing between products sold to customers (accounted for in category 11) and products leased to customers (accounted for in category 13). Companies may account for products leased to customers the same way the company accounts for products sold to customers (i.e., by accounting for the total expected lifetime emissions from all relevant products leased to other entities in the reporting year). In this case, companies should report emissions from leased products in category 11 (Use of sold products), rather than category 13 (Downstream leased assets) and avoid double counting between categories.

A reporting company’s scope 3 emissions from downstream leased assets include the scope 1 and scope 2 emissions of lessees (depending on the lessee’s consolidation approach).

In acknowledgment of the “may” and “should” statements in the guidance above, when a company chooses to account for the products leased to customers the same way it accounts for products sold to customers, the company would report emissions from leased products in Category 11 rather than Category 13. Since the downstream emissions related to a leased asset occur after the reporting entity (the lessor) transfers control of the leased asset to the customer (the lessee), the lessor no longer has accounting ownership, financial control, or operational control of the leased asset, just as an owner would no longer have accounting ownership, financial control, or operational control of a product it sold. Therefore, some companies may elect to record the downstream emissions related to the leased asset in Category 11 rather than Category 13. It is important for companies that make this election to disclose it clearly in a manner consistent with Scope 3 disclosures.

As noted in the excerpt above from the Scope 3 Standard, reporting companies are advised to “avoid double counting between categories.” See Section 6.6 for more information about how to avoid double counting of Scope 3 emissions.