Intro – Organisational Boundaries for Carbon Reporting 

Reporting on your manufacturing operation’s carbon emissions will be standard practice moving forward. For larger enterprises, your organisational boundaries can have large impacts on the way you report emissions.By “organisational boundaries” we mean the way in which your enterprise divides and subdivides itself, for command and control purposes, or for financial accounting purposes. The carbon reporting regulations in the CSRD have been crafted to make this burden as light as possible. But with larger enterprises, it can still get complicated. For smaller operations, organisational boundaries are fairly straightforward. This isn’t to say that there won’t be growing pains. All organisations face a learning curve. For larger manufacturing organisations, your path may be more complicated.

 

For example:

 

• How do you account for carbon emissions from a subsidiary company?
• How do you account for carbon emissions in a joint venture?
• Or from franchises?

 

In this article, you’ll learn:

 

1. Different approaches for accounting for carbon emissions, for large manufacturing organisations
2. Examples of the different carbon accounting approaches

 

For a complete high-level view of sustainability in manufacturing, see our Complete Guide to Sustainability and Carbon Reporting in Manufacturing.

Organizational Boundaries for SME Manufacturing Carbon Reporting

If you don’t have any subsidiaries, and you aren’t a subsidiary yourself, your organisational boundaries are fairly straightforward. All scope 1 and scope 2 carbon emissions are 100% owned by you, and reported as emanating from your operation. Emissions that arise directly from your manufacturing operations are classed as Scope 1 emissions. All energy consumption involved in the maintenance of your manufacturing organisation are classed as Scope 2. Any emissions that are generated along the value chain of the products you produce – that are not directly involved with the operation or maintenance of your organisation – are classed as Scope 3. Of course there is more to the story, but it’s nearly as simple as that. See our deep dive (with examples) for Scope 1 and Scope 2 emissions here: Understanding Scope 1 and Scope 2 Emissions in Manufacturing.  And you can find our Scope 3 deep dive, with examples here: Understanding Scope 3 Emissions in Manufacturing. 

Carbon Reporting Organisational Boundaries for Larger Manufacturers

For larger manufacturers, carbon reporting can be trickier. Large manufacturing organisations sometimes have complicated relationships with different portions of the company. For example, some divisions within a large manufacturer might be joint ventures. Or they could be subsidiary companies that are not wholly owned by the larger entity. Tracking and capturing carbon emissions data for these types of sub-divisions can be straightforward. The tricky part is determining which carbon emissions – or what percentage of carbon emissions – should be accounted for on your own organisation’s ledgers versus some other ledger. We’ll explore some methods for determining this – with examples – below.

Carbon Emissions Consolidation Approaches

If you’re a large manufacturing operation, you’re going to need to aggregate carbon emissions data from different wings of your company. The method you utilise, in aggregating these emissions, is referred to as a “consolidation approach”.

There are two different Consolidation Approaches according to the GHG Protocol, with one approach having two sub-categories:

 

1. Equity Share
2. Control
   • Financial Control
   • Operational Control

Carbon Reporting for Large Manufacturers – Equity Share Method 

The Equity Share method for determining carbon emissions  involves using ownership stakes to determine responsibility for reporting emissions. The equity share method can be used for joint ventures, subsidiaries, and for franchises. The percentage of carbon emissions that are reported on your company’s ledger is determined by the percentage of equity ownership your company has in the subsidiary.

Equity Share Method Example – Automotive Manufacturing

Let’s say you’re an auto manufacturer, and that your company is associated with several subsidiaries and joint ventures, e.g.

 

• Subsidiary 1: Maker of Car Interiors (60% ownership)
• Subsidiary 2: Drivetrain (full ownership)
• Joint Venture: Car batteries (30% ownership)

 

With the Equity Share method, a company is responsible for reporting emissions from subsidiaries and joint ventures based on the company’s equity position in these entities. In the example above, since the parent company has a 60% ownership stake in the interior  subsidiary, it is responsible for reporting 60% of the interior company’s emissions as its own. The remaining 40% of emissions would be reported as belonging to the subsidiary itself, or to any other entities with an ownership stake. The drivetrain subsidiary is fully owned by the parent company. This happens sometimes when an acquisition is still in the process of being integrated. Or if the parent company wants the subsidiary to continue to maintain a separate brand entity. Whatever the rationale for keeping the subsidiary separate, the parent company would report 100% of its carbon emissions as its own. Joint ventures operate, with respect to carbon accounting, just like subsidiaries. In the example, the parent company would be required to report 30% of the JV’s carbon emissions as their own – since their ownership stake in the JV is 30%.

Carbon Emissions for Large Manufacturers – Financial Control Method 

Under the Financial Control method, a parent company either has 100% ownership of a subsidiary’s carbon emissions, or 0%. Where the Equity Share method provides a continuous spectrum of potential carbon reporting possibilities, the Financial Control method is all or nothing. 100% or 0%. If the parent company has “financial control” of the subsidiary or joint venture, then it is responsible for reporting 100% of that subsidiary emissions. If the parent company does not have financial control, then it is not responsible for reporting any carbon emissions. JVs are typically characterized by shared ownership, shared resources, and shared decision-making among multiple parties. As such, it’s rare for one party to have unilateral financial control over a JV entity. In JVs, the equity share approach may be more suitable if there is no clear assignment of financial control. However, if there is a clear assignment of who directs financial and operating policies to gain economic benefits then a % may be assigned.

What does it Mean to have “Financial Control” of an Entity?

If a parent company has “financial control” over an entity, then it has the sole responsibility for determining financial budgeting and cash management for the entity. In finance and accounting, the budgeting and cash management for any enterprise must have clear and direct accountability. Revenue and spends are assigned to one and only one owner. The Financial Control method of carbon reporting takes the ethos of “one-and-only-one” owner, and applies it to carbon emissions.

Financial Control Method Example – Automotive Manufacturing 

Let’s take the same example of the automotive manufacturer above and look at the financial reporting lines:

 

• Subsidiary 1: Maker of Car Interiors (100% financial control)
• Subsidiary 2: Drivetrain (0% financial control)

 

If our auto manufacturer uses the Financial Control method for their consolidation approach, then they would report 100% of the “interiors” subsidiary’s carbon emissions as their own. The drivetrain subsidiary would not be on their books for carbon reporting at all, as they have zero financial control over that entity. Carbon Reporting for Large Manufacturers – Operational Control Method. Like the Financial Control method, the Operational Control method is binary. A parent company either controls 100% of the subsidiary’s carbon emissions or controls none of them. An enterprise’s command and control structure is like its financial accounting structure: Lines of reporting are usually binary. People and departments are typically under the direct control of one person. Carbon reporting under the Operational Control method mimics the command and control structure. Where there is command and control, there is ownership of carbon emissions. Under the Operational Control method, If an entity does not have operational control over a subsidiary, it is not responsible for reporting that entity’s emissions.Operational Control Method Example – Automotive Manufacturing

 

Continuing with our automotive manufacturer example, here is how operational control of these entities break down:

 

• Subsidiary 1: Maker of Car Interiors (0% operational control)
• Subsidiary 2: Drivetrain (100% operational control)
• Joint Venture: Car batteries (100% operational control)

 

If the parent auto manufacturer chose to use the Operational Control method for consolidation, they would report 0% of the “interiors” manufacturer’s emissions as their own. However, since they have operational control over the drivetrain subsidiary and car battery joint venture, they’d report 100% of emissions from each entity under their own reporting. Summary of Different Consolidation Approach Examples. The consolidation method you choose to deploy for reporting on your subsidiary, joint venture or partner emissions can have significant impacts on your total reported carbon emissions. The below chart provides an illustration of what carbon reporting would look like under the different consolidation approaches.

Conclusions the Greenhouse Gas Protocol recommends choosing one consolidation method and sticking with it. Like financial accounting, carbon accounting can become unwieldy if an organisation does not approach the space with consistency. Of course, this isn’t always possible with joint ventures. With joint ventures, the recommendation is to determine methods for carbon reporting as part of the overarching management agreement. Contact Mavarick Today to learn how our carbon reporting solutions can help you turn sustainability into a competitive advantage.