What are Organisational Boundaries for Carbon Reporting?

What’s holding back your carbon reporting efforts? Could it be your organisational boundaries?  Did you know that only 9% of organisations worldwide can comprehensively measure their total greenhouse gas (GHG) emissions as per a recent BCG GAMMA survey?  This finding underscores the critical role of organisational boundaries in carbon reporting, as the inability to measure total greenhouse gas emissions comprehensively large manoften stems from unclear definitions of boundaries.   This statistic isn’t just a number—it’s an indicator of how businesses worldwide are grappling with the foundational aspects of carbon accounting.  Think about it: You can’t measure what you can’t define. And when it comes to emissions reporting, the lines defining your organisational boundaries can be as blurry as a foggy morning.  In this blog, we’ll unravel the complexities behind organisational boundaries, explore why they’re the backbone of accurate carbon reporting, and give you the tools to define them with confidence. Whether you’re a seasoned sustainability officer or just dipping your toes into ESG, understanding this critical concept will empower your reporting and future-proof your compliance. Ready to clear the fog? Let’s dive in! 

What Are Organisational Boundaries? 

Organisational boundaries in carbon reporting define the limits of a company’s operations for which it is accountable when calculating and reporting greenhouse gas (GHG) emissions. Simply put, they determine “who owns what” and “who is responsible for what” in the emissions reporting process.  These boundaries help organisations decide which facilities, business units, or activities should be included in their GHG inventory. By clearly defining organisational boundaries, companies can ensure their carbon accounting aligns with internationally recognised frameworks like the GHG Protocol.  Fact Check  According to the Global Reporting Initiative (GRI), as of 2022, approximately 68% of the top 100 businesses across 58 countries (5,800 companies) have adopted the GRI Standards for sustainability reporting.   These standards specifically require organisations to define their organisational boundaries as a foundational step in transparent and accountable emissions reporting. 

Why Are Organisational Boundaries Important? 

Defining organisational boundaries is essential because it lays the groundwork for accurate and transparent GHG reporting.   Without this clarity, businesses risk underreporting or double-counting emissions, leading to compliance issues, reputational risks, and even financial penalties. For instance, a company that fails to account for emissions from its joint ventures or subsidiaries might present an incomplete picture of its carbon footprint.   Conversely, overly broad boundaries could result in unnecessary complexity, deterring stakeholders from understanding the real picture. Data quality plays a pivotal role in avoiding such pitfalls. Learn more about overcoming data challenges in carbon reporting by visiting Data Quality in Carbon Accounting. 

Key Approaches to Defining Organisational Boundaries  

Defining organisational boundaries in carbon reporting is an essential process that shapes how a company identifies and accounts for its greenhouse gas (GHG) emissions. To standardise this process, the GHG Protocol outlines two main approaches: the Equity Share Approach and the Control Approach. These methods help organisations decide which emissions to include in their GHG inventory based on ownership, influence, and operational responsibilities.

1. Equity Share Approach: Ownership Equals Responsibility

Under the equity share approach, a company accounts for GHG emissions based on its share of economic ownership in an operation. This means that if a company owns 30% of a joint venture, it reports 30% of the associated emissions, regardless of its operational or financial control.  This approach reflects the economic interest a company has in a venture and is particularly useful for organisations with extensive investments or partnerships. It ensures emissions reporting aligns with the financial benefits and risks the company derives from its ownership stake.  Let us understand it better with an example  Consider Company A, which holds a 30% equity stake in Company B, a manufacturing firm. Under the equity share approach, Company A would account for 30% of Company B's greenhouse gas (GHG) emissions in its own GHG inventory. This method aligns with the company's economic interest, ensuring that its carbon reporting reflects its share of ownership and associated emissions.

2. Control Approach: Responsibility Lies with Authority

The control approach shifts the focus from ownership to authority over operations. It includes all emissions from entities or activities that the company controls, regardless of the ownership percentage. This method can be further divided into: 

               a. Financial Control Approach: 

In the context of carbon reporting, the financial control approach require a company to account for 100% of the greenhouse gas (GHG) emissions from operations over which it has financial control. This means the company has the ability to direct the financial and operating policies of the operation to gain economic benefits. Typically, this applies to entities where the company owns more than 50% of the operation. 

                b. Operational Control Approach: 

This focuses on day-to-day operational authority. A company has operational control if it can implement environmental, health, and safety policies. Ownership percentage doesn’t matter here—what counts is who makes the operational decisions.  Which Approach Should You Choose?  The choice depends on the organisation’s structure, reporting goals, and stakeholder needs: 

• The equity share approach is more common for financial reporting alignment, especially when joint ventures are involved. 
• The control approach (especially operational control) is favoured for regulatory compliance and sustainability initiatives, as it captures emissions tied to direct operational influence. 

Challenges While Implementing Organisational Boundaries 

Implementing organisational boundaries isn’t without its hurdles. From handling complex ownership structures to managing Scope 3 emissions across supply chains, businesses face significant obstacles like; 

Complex Ownership Structures: 

Determining boundaries for joint ventures, subsidiaries, and partnerships can be challenging, especially when choosing between equity share and control approaches. 

Regulatory Variations: 

Differing carbon reporting regulations across countries require tailored approaches, complicating consistency in global reporting. 

Data Collection Difficulties: 

Gathering accurate emissions data across facilities, especially for indirect GHG emissions and Scope 3 categories, is resource-intensive. 

Unclear Financial or Operational Control: 

Ambiguities in defining financial control over the operation or operational authority can lead to discrepancies in emissions reporting. 

Supply Chain Integration: 

Extensive supply chains in industries make it difficult to account for all emissions, especially upstream and downstream activities.  To simplify and align your reporting efforts with global frameworks, you can leverage insights from Best Carbon Accounting Software where we share efficient platforms that offer AI-driven solutions to all carbon emissions-related concerns.  

Organisational Boundaries for SME Manufacturing Carbon Reporting 

Defining organisational boundaries is essential for Small and Medium-sized Enterprises (SMEs) in the manufacturing sector to accurately report greenhouse gas (GHG) emissions.   Small and Medium-sized Enterprises (SMEs) in Ireland and across Europe are increasingly subject to regulatory frameworks aimed at enhancing sustainability and transparency. Beyond the Corporate Sustainability Reporting Directive (CSRD), here are three additional regulatory considerations: 

1. The EU's Corporate Sustainability Reporting Directive (CSRD) mandates comprehensive sustainability reporting for large companies. While SMEs are currently exempt, those listed on regulated markets will be required to report from 2026 onwards. KPMG  
2. The Irish government has transposed the CSRD into national law, aligning with EU directives. This means that Irish SMEs listed on regulated markets will also need to comply with these reporting requirements by 2026 
3. The EU ETS is a cornerstone of the EU's policy to combat climate change by reducing greenhouse gas emissions. While traditionally targeting large emitters, certain SMEs, particularly in the manufacturing sector, may fall under its scope if their emissions exceed specific thresholds. This system requires companies to monitor and report their emissions and to surrender allowances equal to their emissions each year. 

Organisational Boundaries for Large Manufacturers 

Large manufacturers face additional complexities when defining organisational boundaries, especially with increasing regulatory demands such as the EU’s Corporate Sustainability Reporting Directive (CSRD). 

Corporate Sustainability Reporting Directive (CSRD): 

1. This applies to large manufacturers operating in the EU. Companies must report on sustainability, including emissions across their organisational boundaries. 
2. Reporting includes Scope 1, 2, and relevant Scope 3 emissions, requiring clear boundary definitions.  

UK Streamlined Energy and Carbon Reporting (SECR): 

1. Large UK manufacturers are required to report on energy use and GHG emissions, covering emissions within their defined organisational boundaries. 
2. Applies to companies with over 250 employees, a turnover exceeding £36 million, or a balance sheet over £18 million.  

EU Emissions Trading System (EU ETS): 

1. Large manufacturing facilities emitting over a specified threshold must participate in the EU ETS, which requires monitoring, reporting, and purchasing allowances for emissions.  

For organisations navigating these challenges, solutions like Carbon Accounting Software & CSRD can provide valuable guidance and support for compliance. 

How Can Carbon Accounting Software Help Define Organisational Boundaries? 

Effective carbon accounting software can help streamline the process of defining organisational boundaries by automating emissions data collection, aligning with GHG Protocol standards, and efficiently tracking Scope 3 emissions. 

1. Automates Emissions Data Collection: 

Consolidates data across facilities and supply chains to streamline boundary definition for a comprehensive greenhouse gas (GHG) inventory. 

2. Supports Operational Boundaries Mapping: 

Clearly identifies emissions tied to operational boundaries, including direct operations and facilities where the company has financial control or operational authority. 

3. Provides Real-Time Compliance Insights: 

Aligns organisational boundary definitions with frameworks like the GHG Protocol, ensuring accurate reporting of both direct and indirect GHG emissions across all levels. 

4. Simplifies Complex Ownership Structures: 

Handles financial control over the operation and equity share approaches, ensuring accurate inclusion of emissions from joint ventures and subsidiaries. 

5. Tracks Scope 3 Emissions Efficiently: 

Integrates upstream and downstream emissions within Scope 3 categories, essential for capturing a full picture in industries with extensive supply chains. If your organisation struggles with Scope 3 categories or operational boundary mapping, concepts discussed in our blog, What are Scope 3 Carbon Emissions and 7 Effective Ways to Reduce it can make the process significantly more manageable. 

How Can Mavarick Help? 

Discover Mavarick today to revolutionise your carbon accounting process. Mavarick offers a suite of features designed to streamline and enhance your emissions reporting: 

• Automated Data Collection: Eliminates manual data entry by integrating with your existing systems, ensuring accurate and up-to-date emissions data. 
• Scope 3 Emissions Tracking: Provides comprehensive tools to capture and report on Scope 3 emissions, offering full visibility into your supply chain's carbon footprint. 
• Regulatory Compliance Reporting: Generates audit-ready reports aligned with global standards, simplifying adherence to frameworks like the GHG Protocol. 

With Mavarick, defining your organisational boundaries becomes a seamless process, empowering your organisation to take control of its GHG inventory with precision and confidence. 

Global Trends and Adoption Practices  

The global trend towards standardised and mandatory carbon reporting underscores the importance of clearly defining organisational boundaries. Companies are increasingly adopting structured approaches to accurately measure and report their GHG emissions, aligning with international standards and responding to regulatory demands. 

• The Greenhouse Gas Protocol provides comprehensive guidelines for setting organisational boundaries, offering approaches such as equity share and control methods.  
• According to KPMG's 2022 survey, 96% of the world's top 250 companies report on sustainability, indicating widespread adoption of standardised reporting frameworks. 
• Companies are increasingly incorporating sustainability data, including GHG emissions, into annual financial reports. In 2022, 60% of N100 companies included sustainability information in their annual financial reports, reflecting a trend towards integrated reporting. 

Globally, the trend toward standardised reporting practices reflects the importance of robust boundary definitions. For a deeper understanding of how ESG impacts carbon reporting and how businesses can adapt, explore Everything You Need to Know About ESG and Its Impact on Carbon Reporting. 

Conclusions

Defining organisational boundaries in carbon reporting is not just a regulatory necessity—it’s a strategic imperative for businesses aiming to achieve transparency, accuracy, and sustainability. By clearly identifying organisational and operational boundaries, companies can ensure they account for the right emission sources, whether from direct operations, controlled entities, or partnerships. This clarity simplifies compliance with global standards like the GHG Protocol and helps organisations build a credible greenhouse gas inventory.  Contact Mavarick today to discover how our innovative solutions can streamline your emissions reporting process. With tools designed to align with your operational realities and sustainability goals, Mavarick is your trusted partner in achieving accurate and efficient carbon reporting. 

Frequently Asked Questions (FAQs) 

What are organisational boundaries in carbon reporting? 

Organisational boundaries define which parts of a company’s operations are included in its greenhouse gas (GHG) inventory, helping to identify relevant emission sources based on ownership or control. 

What is the difference between organisational and operational boundaries? 

Organisational boundaries refer to the structural scope of an entity (e.g., subsidiaries, joint ventures), while operational boundaries determine which emissions are categorised as Scope 1, Scope 2, or Scope 3 based on direct and indirect activities. 

What approaches are used to define organisational boundaries? 

The equity share approach and the control approach (financial and operational) are the two main methods recommended by the GHG Protocol to define organisational boundaries.

Why are organisational boundaries important for carbon reporting?

Clear boundaries ensure that all relevant operations and emissions are included, enhancing accuracy, compliance with global standards, and transparency in reporting.

How can Mavarick help in defining organisational boundaries?

Mavarick provides tools to automate emissions data collection, map operational boundaries, and integrate Scope 1, Scope 2, and Scope 3 emissions, ensuring accurate reporting aligned with frameworks like the GHG Protocol. Contact Mavarick today to learn more!