Organizational and Operational Boundaries: Equity Share vs Control

The most debated decision in a company's carbon inventory is usually not the calculation but the boundary: which facilities, which affiliates and which leased assets go into the inventory, and in what proportion? The GHG Protocol resolves this question in two steps. First the organizational boundary is drawn, that is, which operations count as belonging to the company. Then the operational boundary is set, that is, how the emissions from those operations are divided into scopes. Together they form the inventory boundary. For the overall framework of the inventory, see the greenhouse gas inventory guide.

Organizational boundary: three approaches

According to the GHG Protocol Corporate Standard, a company calculates and reports its consolidated emissions using one of two main approaches: equity share or control. A company that chooses the control approach must also choose whether to define control by the financial or the operational criterion. In practice, there are three options.

Equity share approach. The company accounts for an operation's emissions in proportion to its economic interest in that operation. Economic interest usually equals the ownership percentage. Where it does not, economic substance takes precedence over legal form; this is why the inventory team needs to work with the accounting and legal departments.

Financial control approach. A company has financial control over an operation if it can direct the operation's financial and operating policies with a view to gaining economic benefits from it. Where there is financial control, 100% of the emissions are taken. According to the standard, financial control exists if the operation is fully consolidated in the financial statements, that is, treated as a subsidiary. In joint ventures where the partners share financial control jointly, emissions are taken according to equity share.

Operational control approach. Operational control exists if the company or one of its subsidiaries has full authority to introduce and implement its operating policies at an operation. The standard accepts that if a company is the operator of a facility, it also has operational control, except in very rare circumstances. Operational control does not mean being able to make every decision alone; major investments may require the partners' approval. What matters is the authority to set operating policies.

The chosen approach must be applied consistently across all levels of the company. The standard states that the same rules apply to state-owned structures and to structures that mix private and public ownership.

Treatment by financial accounting category

A summary of the GHG Protocol's table of financial accounting categories:

Under the operational control approach, what matters is not the accounting category but who holds the operating authority: 100% if the company holds it, 0% if it does not.

Numerical example: three approaches, three different totals

The holding company structure and emission values below are entirely example values; they are built on the same logic as the GHG Protocol's Holland Industries example.

The amount included in the holding's scope 1 and 2 total under each approach:

The same company can report a scope 1+2 total anywhere between 76,000 and 85,000 tCO₂e purely through its choice of approach. This is why the approach must always be disclosed in the report and applied consistently over the years.

Emissions left outside do not disappear. According to the Scope 3 Standard, under the operational control approach, emissions from assets the company owns but does not control (C and E in the example) are considered in scope 3, in the investments category (Category 15). Conversely, under the equity share approach, an asset the company controls but does not own (for example a leased asset) moves out of scope 1 and into scope 3.

Joint ventures

Joint ventures carry two risks: double counting and undercounting. According to the GHG Protocol, if two companies holding shares in the same joint venture use different approaches, for example one equity share and the other financial control, emissions may be double counted. In voluntary corporate reporting this is usually not a problem as long as the approach is disclosed; but double counting should be avoided in emissions trading systems and some mandatory programmes.

In a structure where the partners share financial control but none of them runs the operation alone, you look at the contract: if one partner has the authority to introduce operating policies, operational control belongs to that partner. If the joint venture sets its own policies, none of the partners reports emissions under operational control. The standard also notes that partners can allocate ownership of emissions or management responsibility by contract, and that this arrangement can optionally be disclosed in the report.

Our practical recommendation: prepare a one-page "boundary decision note" for each joint venture. The ownership percentage, the treatment in the financial statements, who holds the operating licence and the percentage applied should all be written in this note. It is one of the first documents a verifier will ask for.

Leased assets

The GHG Protocol says that the chosen consolidation approach also applies to contractual arrangements such as leased assets, outsourcing and franchises:

• If equity share or financial control is used: The lessee accounts in scopes 1 and 2 only for emissions from leases that are treated in financial accounting entirely as its own assets and recorded on the balance sheet (finance leases).
• If operational control is used: The lessee accounts in scopes 1 and 2 for emissions from the leased assets it operates.

The company's accounting department decides which leases are finance leases and which are operating leases.

Example: A food company leases a cold store in İzmir and operates it with its own staff. The lease is treated in the accounts as an operating lease.

There is a symmetrical rule on the lessor side. Operating emissions from assets that are leased out and not included in the lessor's scopes 1 and 2 are reported by the lessor in Category 13 (downstream leased assets). According to the Scope 3 Calculation Guidance, the calculation methods for Categories 8 and 13 are the same: the asset-specific method, the lessor-specific method and the average-data method (for example average emissions per square metre).

Franchises and outsourcing

Franchises are separate legal entities. According to the GHG Protocol, in most cases a franchisor has no equity interest in or control over its franchises, and in that case franchise emissions are not consolidated. The franchisor reports these emissions in Category 14; the minimum boundary is the scope 1 and 2 emissions of the franchise operations. The franchisee reports the same emissions in its own scopes 1 and 2. If the franchisor does have an equity interest or control, the normal consolidation rules apply.

Outsourcing is handled with the same logic: an outsourced activity goes to scope 3 if it is not covered by the chosen approach. For example, when an automotive supplier outsources its coating work to a contract manufacturer, the contractor's energy consumption goes into the supplier's scope 3 Category 1 (purchased services).

Which approach suits whom?

The GHG Protocol does not recommend any approach for voluntary public reporting; it even encourages companies to calculate separately under both the equity share and the control approach where possible. Criteria that influence the choice:

• Commercial reality: If the view is that the company that gains economic benefit from an activity should also take ownership of its emissions, equity share reflects this best.
• Regulatory reporting and emissions trading: Because compliance responsibility usually falls on the operator, governments mostly base reporting on operational control. In the Turkish Emissions Trading System Regulation too, the obligation is tied to the operator and the installation carrying out the activities in Annex 1 (EK-1). For details, see the Turkish ETS guide.
• Performance management: Because managers can only be held accountable for activities they control, control approaches are better suited to performance tracking.
• Data access and cost: Collecting data from joint ventures you do not control is difficult; the equity share approach can increase the administrative burden.
• Alignment with financial accounting: Equity share and financial control bring GHG accounting closer to financial accounting.
• Demonstrating completeness: Under operational control, demonstrating completeness can be harder because there is no list of financial assets to compare against.

Operational boundary: choosing the scopes

Once the organizational boundary is set, the operational boundary is chosen at corporate level and applied in the same way to every operation. At this stage:

1. Emission sources are listed for each operation and classified as direct or indirect.
2. Scopes 1 and 2 are always included; the GHG Protocol sets them as the minimum requirement.
3. You decide which scope 3 categories to include. In reporting in line with the Scope 3 Standard, all categories are accounted for with the minimum boundaries in Table 5.4; exclusions are disclosed and justified.
4. You plan to collect data disaggregated by facility, country, source type and activity type. The standard stresses that disaggregated data provide flexibility for different reporting needs.

The GHG Protocol's simple example makes these two steps clear: a company that wholly owns operations A and B and holds a 30% non-operated interest in operation C consolidates A, B and 30% of C if it chooses equity share, and only A and B if it chooses financial control. It then decides which scopes to report, and the operations apply this corporate policy. For how sources are divided into scopes, see the scope 1, 2 and 3 guide.

When the boundary changes

An acquisition, a divestment, a change in ownership percentage or a change of consolidation approach may require base year emissions to be recalculated. The SBTi Net-Zero Standard V2.0 also lists changes to the organizational or operational boundary and a change of consolidation approach among the events that require a recalculation assessment for the target base year. For the rules and a worked example, see the base year guide.

Typical boundary questions by sector

Boundary questions we encounter frequently include: a cement company's quarry operation sitting in a separate legal entity, shared oxygen or energy plants in iron and steel, customer-owned tooling used at an automotive supplier's factory, subcontracted fleets and leased warehouses in logistics, and leased stores inside shopping centres and franchise networks in retail. Detailed decisions for each sector: cement, iron and steel, automotive suppliers, logistics and transport, retail.

At Alalëa, we start boundary work from the list of affiliates in the company's consolidated financial statements, tabulate the outcome of each approach for every operation, and tie the decisions to a methodology note that can be presented to the verifier. To clarify your inventory boundary together, take a look at our carbon footprint service or write to us.