What are the main approaches used to define organizational boundaries?
The choice between the financial control and operational control approaches can significantly impact how a business reports its greenhouse gas (GHG) emissions. Choosing the appropriate approach depends on the company’s goals, reporting requirements, and alignment with existing practices.
Under financial control, a company uses its ownership and financial authority to set rules: it can require facilities to follow certain efficiency or emissions policies because it controls the budgets and financial decisions. Under operational control, the company doesn’t need to own the operation; what matters is that it runs the day-to-day activities, such as deciding how equipment is used, what fuel is purchased, or how maintenance is carried out. In both cases, the company can directly affect operational policies that influence emissions — one through money and strategic direction, and the other through hands-on management.
How does each approach affect GHG emissions reporting?
| Financial Control Approach | Operational Control Approach | |
| Definition | A company accounts for 100% of the GHG emissions from operations over which it has financial control. | A company accounts for 100% of the GHG emissions from operations over which it has operational control. |
| Criteria | A company is considered to have financial control if it has the authority to direct the financial and operating policies of the company with a view of gaining economic benefits from its activities. | A company is considered to have operational control if it has the authority to introduce and implement operating policies at the operation. |
| Source of Authority | Financial governance: Control of budgets, investments, and strategic financial decisions | Operational governance: Control of day-to-day management, staff, and technical operations |
| Application | Typically used by companies that consolidate their financial statements based on financial control.
It aligns with financial accounting practices, making it easier to integrate GHG reporting with financial reporting. |
Focuses on the ability to manage and reduce emissions, making it more relevant for companies looking to implement emission reduction strategies.
It is often preferred for environmental management purposes. |
| Scope of Reporting | The company includes emissions from all operations where it has the authority to direct financial and operating policies to gain economic benefits. | The company includes emissions from all operations where it has the authority to introduce and implement operating policies. |
| Inclusion Criteria | Emissions from joint ventures, subsidiaries, and other entities where the company has financial control are included in the GHG inventory.
However, emissions from operations where the company has an equity stake, but no financial control, are excluded. |
Emissions from facilities, equipment, and other assets that the company operates are included in the GHG inventory, regardless of ownership percentage.
Emissions from operations where the company does not have operational control are excluded. |
| Often Used By | Investment firms that have financial control over various portfolio companies.
Real estate companies that own multiple properties and have financial control over their operations. Holding companies with financial control over subsidiaries in different industries. Private equity firms with financial control over the companies they invest in. Businesses that own multiple franchise locations and have financial control over their operations. |
Manufacturing companies that operate their own facilities and have control over production processes.
Retail chains that operate their own stores and manage day-to-day operations. Logistics firms that operate their own fleet of vehicles and control transportation operations. Hotel chains that manage and operate their own properties. Farms that control their own agricultural operations and processes. |
For more information, see Section 3.3 of the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition, 2004). https://ghgprotocol.org/corporate-standard
