6 Corporate-Level Pitfalls to Avoid in GHG Accounting

It’s that time of year when organizations are in the process of consolidating their GHG emissions for reporting under various regulatory frameworks. It’s important for entities to recognize that like financial accounting, GHG accounting and reporting is an ongoing process. Mistakes in GHG accounting can occur at the corporate, reporting, or calculation levels. However, errors made at the corporate level can significantly distort the GHG inventory for the reporting year. To avoid the challenges of re-calculations in future, it’s crucial to address and prevent the following corporate-level mistakes now:

1. Defining an inaccurate Organizational Boundary: 

   
   

   An entity that defines its organizational boundary solely based on its legal structure does not meet the "relevance" principle outlined in the standard. The organizational boundary should be determined not by convenience, but by accurately reflecting the substance and economic reality of the entity’s business relationships. Choosing between the equity share approach and the control approach for setting the organizational boundary should be guided by the company’s structure, its business relationships, and its specific reporting objectives.

   
   

   Example 1: Company A holds a 40% equity stake in Company B and serves as its holding company. If Company A applies the equity share approach, it would account for only 40% of Company B’s GHG emissions. However, this would be incorrect, as Company A exercises full financial control over Company B — including for purposes such as the consolidation of financial statements under Ind AS 110. Accordingly, Company A should adopt the financial control approach and account for 100% of Company B’s GHG emissions, rather than just 40% under the equity share method.

   
   

   Example 2: Company A operates through multiple franchises without holding any equity interest or exercising financial control over them. However, it maintains full control over their operational policies. In this situation, it would be incorrect for Company A to apply the equity share or financial control approach and avoid accounting for the GHG emissions from the franchise locations. Since Company A’s entire business is conducted through these franchises, it should adopt the operational control approach and hold accountability for 100% of the GHG emissions at the franchise locations.

2. Inconsistency in application of Operational Boundary:  

   
   

   After the organizational boundary is established, the operational boundary—covering Scope 1, Scope 2, and Scope 3 emissions—must be defined at the corporate level. All facilities are required to consistently apply this operational boundary. Any inconsistency in its application undermines the “completeness” principle of the standard.

   
   

   For instance, if the corporate level of the entity decides to report on emissions in 5 relevant categories in its value chain for Scope 3 reporting, then every facility must account for emissions under these 5 categories. Facilities cannot skip any category based on size, lack of data or other factors. All relevant emissions must be estimated, regardless of scale.

3. Setting a de minimis threshold for emissions:

   
   

   Under the "completeness" principle, all relevant emissions within the inventory boundary must be accounted for to build a meaningful GHG inventory. However, data limitations or the cost of data collection can sometimes prevent entities from fully capturing certain emission sources. In such cases, entities may be tempted to set a minimum emissions threshold and exclude sources that fall below it. This approach introduces a negative bias and is a mistake to be avoided. Entities should strive to include GHG emissions from all sources and appropriate disclosures if certain emissions have been not estimated or not estimated with a certain level of quality.

    

   For instance, the greenhouse gas (GHG) emissions from individual processes in a pharmaceutical manufacturing facility (such as solvent losses, fermentation, etc.) are generally minimal. However, when these emissions are aggregated, they may reveal potential opportunities for reducing emissions. Entities should calculate emissions using activity data and emission factors when direct measurement is not feasible.

   
   
   
   

   

   
   
   
   

4. Absence of a quality management system: 

   
   

   GHG accounting is not a one-time activity. The absence of (a) standard methodologies for rigorous and detailed activity data collection, (b) established procedures for preparing GHG inventories, and (c) high-quality, transparent documentation practices is a critical mistake that can result in a substandard GHG inventory, unsuitable for periodic reporting. GHG inventories inherently carry a degree of “uncertainty,” which may arise from scientific limitations or estimation challenges. While scientific uncertainty is beyond the entity’s control, estimation uncertainty can be minimized by implementing a strong quality management system that is integrated into the entity’s broader corporate processes.

    

   For instance, failing to periodically review the purchase of new diesel vehicles and update the list of GHG emission sources can result in incomplete reporting of Scope 1 emissions.

   
   

   Similarly, without tracking the number of breakdown maintenance hours for an LPG-fired furnace, any observed reduction in GHG emissions from the furnace cannot be properly explained or justified.

   
   

5. Ignoring base year re-calculations in certain scenarios:

   
   

   It is widely recognized that any acquisition or divestment of a facility necessitates a revision of the base year GHG emissions. However, base year re-calculations also need to be done in certain other scenarios.

    

   Failing to re-calculate the base year GHG emissions when there has been a change in the calculation methodology or an improvement in data accuracy—if such changes result in a "significant" difference in emissions—is an error.

    

   For example, if an entity has been reporting Scope 2 emissions using the grid average emission factor and has now gained access to supplier-specific emission factors (which is more specific) for both current and past years, it should recalculate the base year emissions to maintain consistency with the principle of "comparability."

    

   Similarly, if a process has been newly insourced or outsourced (inter-change of emissions between scope 1 to scope 3 emissions) and the entity previously did not report the indirect emissions from such activities, neglecting to adjust the base year emissions would be a mistake. The base year emissions should be re-calculated to account for structural changes in the organization’s operations.

   
   

   For instance, the entity does not report Scope 3 emissions under transportation and distribution category. In the reporting year, if internal transport operations are outsourced then Scope 1 emissions would significantly decrease, without impacting scope 3 emissions, thus necessitating a re-calculation of the base year emissions.

   
   

6. Limiting GHG accounting to a single reporting requirement:

   
   

   Accounting for GHG emissions only for a specific reporting framework is a half-baked idea. GHG accounting is distinct from GHG reporting. The process of accounting for GHG emissions should be designed to meet multiple reporting requirements, such as BRSR, CDP, for internal management and others. Data should be collected and recorded at a sufficiently detailed level to allow for consolidation in various formats and at different levels, ensuring flexibility to meet the specific needs of different reporting requirements and users.

    

   For example, Emissions reporting in the BRSR framework is at a consolidated entity level. On the other hand, CDP reporting necessitates breaking down GHG emissions by factors like country or region, facility, asset class, or GHG type, depending on materiality. GHG accounting should be able to generate information for reporting as per multiple frameworks.

   
   

   In conclusion, entities continue to evolve in GHG accounting, they should focus on adhering to the core principles of the GHG accounting standards. By identifying and addressing common corporate-level mistakes early on, companies can streamline their processes, avoid costly errors, and improve the accuracy of their emissions data.

   
   

   Reference:

   The GHG Protocol Corporate Accounting and Reporting Standard