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Talking GHG: Determining operational boundaries · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PWC's national office.
• 0:06
  SPEAKER_00: Remember, one of the elements of key elements of emissions reporting is to show the world to you how you manage, how you impact the reductions of emissions, and impacting reduction of your own direct scope one emissions versus indirect scope two and scope three.
• 0:21
  SPEAKER_00: Those are different ways you can do it, and readers of this information look at it differently.
• 0:26
  SPEAKER_00: So this classification is really crucial.
• 0:28
  SPEAKER_03: Hello.
• 0:29
  SPEAKER_03: Today we're back talking ESG, continuing our mini-series which breaks down the building blocks of greenhouse gas, GHG emissions, reporting.
• 0:39
  SPEAKER_03: In today's episode, we focus on step three of the process, determining the operational boundaries.
• 0:46
  SPEAKER_03: This is PWC's The Counting Podcast.
• 0:54
  SPEAKER_03: I'm Heather Horn, and thanks so much for joining us today.
• 0:57
  SPEAKER_03: In today's episode, we'll cover operational boundaries, what they are, how they're determined, and how they affect the calculation of GHG emissions.
• 1:07
  SPEAKER_03: Today I'm joined by Marginal Lewinsky, a national office partner who leads our global technical working group focused on GHG, and Kelsey Paisa, a senior manager in the PwC National Office who also focuses on GHG, and who, together with me and Carolina Cosby, are the lead authors of the GHG reporting chapter of our Global Sustainability Reporting Guide.
• 1:30
  SPEAKER_03: Whether you're preparing for mandatory regulations or considering voluntary reporting, you'll be sure to find some helpful insights in today's episode.
• 1:39
  SPEAKER_03: With that, let's continue the conversation with Marchin and Kelsey.
• 1:43
  SPEAKER_03: March and Kelsey, welcome back to the podcast.
• 1:46
  SPEAKER_03: And we are reuniting this week to continue our conversation on GHG reporting.
• 1:52
  SPEAKER_03: And I highly recommend to our listeners that you go check out the first two episodes, step one, it's where we talked about the various regulatory frameworks and understanding what your reporting requirements are.
• 2:03
  SPEAKER_03: And we talked about that specifically in the context of GHG.
• 2:07
  SPEAKER_03: And then in last week's episode, we talked about organizational boundaries.
• 2:11
  SPEAKER_03: And now we are up to step three, which is determining your operational boundaries.
• 2:16
  SPEAKER_03: All of that said, I will say, even if you haven't listened to the other two, this is a standalone episode, as I often say with books.
• 2:24
  SPEAKER_03: And so you definitely can read this one or read, listen to this one without listening to those other two.
• 2:30
  SPEAKER_03: So with all of that said, Kelsey, can you kick us off by explaining exactly what are operational boundaries and how they interact with organizational boundaries?
• 2:42
  SPEAKER_03: Because I think often people just equate them and assume they're the same thing.
• 2:47
  SPEAKER_02: Yeah, absolutely, Heather.
• 2:48
  SPEAKER_02: So as you mentioned, setting your operational boundaries is our third building block of our emissions reporting.
• 2:55
  SPEAKER_02: So as you mentioned, first step determining your reporting obligations, second step setting organizational boundaries, and third step determining operational boundaries.
• 3:06
  SPEAKER_02: So really setting your organizational boundaries is a distinct step from operational boundaries.
• 3:13
  SPEAKER_02: In your organizational boundaries, your what your company is doing is identifying all the owned or controlled entities and operations that are going to be included in your emissions reporting.
• 3:26
  SPEAKER_02: Whereas the step three, determining your operational boundaries, is where the company identifies all sources of emissions within those entities and operations and classifies these sources between direct and indirect emissions.
• 3:40
  SPEAKER_02: And when we talk about classifying emissions as direct and indirect, we're generally talking about classifying those emissions between scope one, two, and three, which we'll go into a little bit more detail in a number of our miniseries episodes.
• 3:55
  SPEAKER_02: But scope one for the viewers is just it's talking about those direct GHG emissions that are occur in owned or controlled entities and assets, as well.
• 4:07
  SPEAKER_02: And then scope two are those indirect emissions associated with the generation of purchased electricity, steam, heating, and cooling.
• 4:15
  SPEAKER_02: And lastly, scope three are all other indirect emissions within the value chain of the company.
• 4:21
  SPEAKER_03: All right.
• 4:22
  SPEAKER_03: So I Kelsey, I think that's helpful background.
• 4:24
  SPEAKER_03: And I know for Liz Trans Benefit, we are going to be having then our next episodes in the series.
• 4:30
  SPEAKER_03: We'll be talking specifically about scope one, scope two, and scope three measurements.
• 4:34
  SPEAKER_03: So I don't want to get into too much detail, but I do think it might be helpful, Martin, as people are listening to this episode, to give a few examples of what belongs in each of those scopes.
• 4:46
  SPEAKER_00: Thank you, Heather.
• 4:47
  SPEAKER_00: Um, okay, so let's start with scope one.
• 4:49
  SPEAKER_00: So as Kelsey said, the scope one are direct GEG emissions that occur uh from sources that are owned or controlled by the company, and that's the most important distinction.
• 4:59
  SPEAKER_00: So when you talk what are those sources, generally the most common is combustion, right?
• 5:04
  SPEAKER_00: Combustion of fuel.
• 5:05
  SPEAKER_00: So we're talking about stationary or mobile combustion.
• 5:09
  SPEAKER_00: Um stationary combustion is you know, we're talking about fuels that are combusted in fuels such as natural gas, diesel, coal, or gasoline that are combusted in own or controlled sources like boilers, furnaces, or other equipment, right?
• 5:25
  SPEAKER_00: Combusting equipment.
• 5:27
  SPEAKER_00: And um mobile, we're talking about simply cars, right?
• 5:30
  SPEAKER_00: So the fuels combusted in cars.
• 5:34
  SPEAKER_00: Those are the most common that probably everybody heard about it, but this is not all.
• 5:38
  SPEAKER_00: Uh, we also have like two other sources.
• 5:40
  SPEAKER_00: One is uh physical or chemical processing, which we're talking here.
• 5:43
  SPEAKER_00: We're talking about manufacturing or process processing of chemicals or other materials, right?
• 5:49
  SPEAKER_00: Um where it occurs, production of cement, aluminum, um waste processing, right?
• 5:55
  SPEAKER_00: So it's it's it's pretty important source practically primarily in um industrial companies.
• 6:04
  SPEAKER_00: And then last but not least, fugitive emissions.
• 6:06
  SPEAKER_00: So we're talking about intentional or unintentional releases, for example, equipment leaks, um uh methane emissions from coal or pipelines, um, emissions from um air conditioning or coolers.
• 6:20
  SPEAKER_00: So, you know, all these intentional or unintentional releases.
• 6:24
  SPEAKER_00: So this is the scope one.
• 6:25
  SPEAKER_00: Then scope two, um, those are indirect emissions associated with generation of purchase electricity, steam, heating, and cooling, which purchase electricity is probably the most common and significant source that um that um everybody's familiar with, right?
• 6:42
  SPEAKER_00: And last, scope three.
• 6:44
  SPEAKER_00: The main thing with scope three is those emissions are pretty much the same as a scope one and scope two.
• 6:48
  SPEAKER_00: They just occur in a value chain of a company, not you know, within the company itself, right?
• 6:54
  SPEAKER_00: So we're still talking about combustion processing and things like this, it just occurs in the outside of our company in our value chain.
• 7:01
  SPEAKER_03: Well, and one thing I think that's an interesting point on purchase electricity and something, you know, just to remind listeners, I'll reiterate the point you made.
• 7:09
  SPEAKER_03: So scope two includes purchase electricity, steam, heating, and cooling.
• 7:14
  SPEAKER_03: However, in the GHC protocol guidance, they actually just refer to all of those together as purchase electricity.
• 7:21
  SPEAKER_03: They sort of define it that way.
• 7:23
  SPEAKER_03: And so again, I just think it's an important reminder that it includes both.
• 7:26
  SPEAKER_03: The other point then, Marchin, is that when we're thinking about purchase electricity, there can be a huge range in emissions depending on the source.
• 7:36
  SPEAKER_03: So we'll get into that with scope two, but I think it's important for people to know scope two is not just, oh, take your power bill and you're you're done with it.
• 7:43
  SPEAKER_00: Yeah, and I think Heather, the important element here is the whole word purchased, right?
• 7:48
  SPEAKER_00: So we're talking about the electricity and companies purchasing.
• 7:51
  SPEAKER_00: So for example, if um your reporting entity has its own generation in in backup generators or some small power plant within its operations, and although they're gonna be using this electricity, emissions associated with this electricity are gonna be classified as scope one because they self-generate it.
• 8:10
  SPEAKER_00: So it's a very important distinction between the purchase electricity and self-generated.
• 8:14
  SPEAKER_00: Self-generated, we're gonna report as scope one, purchased, we're gonna report as a scope two.
• 8:19
  SPEAKER_00: So I think, and sometimes people get confused because it's electricity, right?
• 8:22
  SPEAKER_00: But the understanding is whether this is purchased or self-generated is critical here because that's gonna impact the classification when you're gonna report those emissions.
• 8:31
  SPEAKER_03: All right.
• 8:31
  SPEAKER_03: So then, Marchin, I know um I jumped in there, you started talking about scope three, but I there's definitely more to say there.
• 8:39
  SPEAKER_03: So again, we're gonna have a separate episode, but to help level set, what else would you say now?
• 8:44
  SPEAKER_00: Well, so um, as I mentioned, scope three, they they the emissions they sound a little bit mysterious, right?
• 8:51
  SPEAKER_00: But when you think about the sources itself, it as I mentioned before, those are the same sources.
• 8:56
  SPEAKER_00: We talk about combustion, processing, you know, um um uh unintentional, intentional releases.
• 9:02
  SPEAKER_00: What is really under important here is to understand your value chain.
• 9:06
  SPEAKER_00: So when we're talking about the source uh scope three, this is value chain of our company, and we distinguish this between upstream or downstream emissions, so emissions that are happening in your value chain upstream of a company or downstream, right?
• 9:19
  SPEAKER_00: Specifically, we're talking about emissions associated with uh uh production of purchased goods and services that we're acquiring, or emissions associated with use of goods that we manufacture and sell or services that we provide to customers, right, that happen downstream of us.
• 9:36
  SPEAKER_00: So again, it's very important to um to think about what is the value chain and think about everything we buy or sell, every service or product, there's emissions associated with this during the manufacturing or provision of those goods or services, and we have to report those emissions uh that are being generated in our value chain.
• 9:59
  SPEAKER_03: All right, I think that's helpful.
• 10:00
  SPEAKER_03: The other point I'd make on scope three versus scope one and scope two, again, we'll get a little more into this, but by order of magnitude, for many companies, scope three is multiple order of magnitudes compared to scope one and two.
• 10:13
  SPEAKER_03: And in particular, I actually interviewed someone from Baker Hughes, and she was describing the fact that their scope three emissions are 97% of their total emissions.
• 10:23
  SPEAKER_03: And so I feel like sometimes short um scope three, to your point, people think it's a little mysterious.
• 10:29
  SPEAKER_03: It seems difficult, it is, it can be difficult, but it is obviously also very important and something that people need to focus on.
• 10:38
  SPEAKER_03: All right.
• 10:39
  SPEAKER_03: So you guys know how much I love a good pop quiz.
• 10:42
  SPEAKER_03: And this is a topic when we were writing the chapter, the sustainability reporting guide, I think is probably one of the areas we got the most questions is understanding the differentiation between organizational boundaries and operational boundaries and why operational boundaries are important.
• 11:00
  SPEAKER_03: And so, Marchin, maybe starting with you, if I have an organization and I have, you know, I've determined my organizational boundaries for this organization, why or how do I use operational boundaries?
• 11:17
  SPEAKER_00: Well, so um I think it's a good question.
• 11:20
  SPEAKER_00: Um I think Kelsey kind of uh touch up on this.
• 11:24
  SPEAKER_00: It's now about the classification of emissions, right?
• 11:27
  SPEAKER_00: So what when you determine organizational boundary, as we said, you're first determining, you know, the entities, operations, and um and assets that you know should be included essentially in your consolidation, right?
• 11:42
  SPEAKER_00: So but when you look at those entities' operations, they all have also a value chain, right?
• 11:46
  SPEAKER_00: So now the next important step is to distinguish, right, how you're gonna qu classify those, because it's a I would call it universe of emissions, right?
• 11:55
  SPEAKER_00: Which is within your organization and outside of your organization.
• 11:59
  SPEAKER_00: Organizational boundaries gonna set the limits where what should be included for direct and indirect, and now key step in operation that setting operational boundaries, how you classify those, right?
• 12:11
  SPEAKER_00: Because it's it it's really important for users of that information to really understand what is your direct, so scope one emissions, and what are your indirect emissions, uh, which is scope two and scope three.
• 12:22
  SPEAKER_00: So this is pretty in, you know, because you can influence those emissions differently.
• 12:26
  SPEAKER_00: Remember, one of the elements of key elements of emissions reporting is to show the world to you how you manage, how you impact the reductions of emissions, and impacting reduction of your own direct scope one emissions versus indirect scope two and scope three.
• 12:41
  SPEAKER_00: Those are different ways you can do it, and readers of this information look at it differently.
• 12:45
  SPEAKER_00: So this classification is really crucial, but organizational boundaries essentially determine your entire kind of a universe of what you should be reporting, you know, in your emissions reporting.
• 12:56
  SPEAKER_03: I do think there's a key, that's a good explanation.
• 12:59
  SPEAKER_03: So good job, March and Goldstar.
• 13:02
  SPEAKER_03: I do think there's one key thing there, though, that we might need to emphasize a little more.
• 13:06
  SPEAKER_03: I'm gonna see if Kelsey is reading my mind, or otherwise I will chime in.
• 13:10
  SPEAKER_02: Yeah.
• 13:10
  SPEAKER_02: So I think one of the key things there is just I, you know, within those entities, assets, and operations is really identifying the sources of emissions.
• 13:19
  SPEAKER_02: And so maybe if just take even a simpler example, like say that entity that's included in your organizational boundary, you just have one warehouse where you are generating something.
• 13:29
  SPEAKER_02: So that however you're whatever machines or something you're using to generate that product or or um service, uh that's going to generally be something in your scope one, right?
• 13:42
  SPEAKER_02: Because that is you gener that is a direct emission you are generating.
• 13:46
  SPEAKER_02: Then you can think about, well, how do I um turn on the lights at that warehouse?
• 13:52
  SPEAKER_02: I right, I'm purchasing electricity.
• 13:54
  SPEAKER_02: That's generally going to be in your scope two.
• 13:57
  SPEAKER_02: And then think about, well, what are the various miscellaneous pieces and parts that I need to purchase to make that machine generate my product that might be in your purchase goods and services and your scope three emissions.
• 14:09
  SPEAKER_02: So just a very simple example, just thinking about within that organizational boundary, what are those sources that generate emissions and then how would I classify it?
• 14:18
  SPEAKER_03: Yeah.
• 14:19
  SPEAKER_03: And I think a key point that you guys both touched on, March and earlier when you were describing the various um sources, is really this idea that even that piece of machinery, there could be fugitive emissions.
• 14:32
  SPEAKER_03: So it's not just the obvious, oh, how I'm operating the machinery, but what other emissions may be created by those operations.
• 14:40
  SPEAKER_00: Well, and I think what is really that's why I mentioned initially, you know, people think scope three is mysterious.
• 14:45
  SPEAKER_00: It is.
• 14:46
  SPEAKER_00: Actually, I said it's not, but it is a little bit mysterious.
• 14:48
  SPEAKER_00: Because, like, think about this identification of sources.
• 14:51
  SPEAKER_00: So, as Kelsey said in her example, if you want to continue with that example, so we look in what parts or equipment, other equipment I'm buying, purchasing from somebody.
• 15:00
  SPEAKER_00: The equipment is being used by me, but then somebody else generated emissions when they created that equipment.
• 15:05
  SPEAKER_00: So then now you have to be thinking, okay, what are the sources of that emissions during the production of this equipment?
• 15:11
  SPEAKER_00: Which is a little bit, I use the words mysterious, but but challenging because you didn't produce it.
• 15:16
  SPEAKER_00: You don't know what you know, what type of uh, you know, um uh how they power their facilities, is it electricity base, is it kind of some other combustion, what other sources they have that impact the emission profile of the equipment that you bought and you're using in your own operation.
• 15:32
  SPEAKER_00: So again, you were right.
• 15:34
  SPEAKER_00: The the the or Kelsey's right, the magic word was identification of sources within the organization, but also also within your value chain.
• 15:41
  SPEAKER_03: Yeah, and I think again, maybe the other piece I would add here is I think it's Kelsey gave an example of one of those category threes, but then you also could have the employees that are driving to work, and then you could have employees that are traveling to this traveling salespeople, and then you could have the downstream use of your product.
• 16:01
  SPEAKER_00: Or transportation of like when you bought it from third party, somebody has to deliver this to your warehouse.
• 16:06
  SPEAKER_00: When you make your product, somebody bought it from you.
• 16:09
  SPEAKER_00: There's a transportation that's gonna deliver that product if we start getting a little bit you know more waste, right?
• 16:15
  SPEAKER_00: When your product you're gonna you know is gonna stop being used, somehow it it's gonna become a waste.
• 16:21
  SPEAKER_00: So you know it has to be utilized somehow.
• 16:23
  SPEAKER_00: Again, it all generates emissions.
• 16:25
  SPEAKER_00: And when you're doing this identification of sources, especially within your value chain, you have to go through this step by step and think through what happens with your product from the gate of your factory or warehouse, as Kelsey said, all the way to the you know, landfill, put it differently.
• 16:41
  SPEAKER_00: And you have to be thinking about this during that journey, each step generates emissions, and you have to identify what is that, what are those steps and what generates emissions during those steps.
• 16:54
  SPEAKER_00: It's good we have a GHG protocol scope three standards because it helps you think through those steps, right?
• 16:59
  SPEAKER_00: It was kind of a design in a way whereby it helps you think what are those standardized, let's call them standardized steps and you know, you know, stops in those in this journey and where those emissions are being generated.
• 17:11
  SPEAKER_00: And there's, you know, there are factors around it.
• 17:14
  SPEAKER_00: So we're gonna talk about this a little bit more, but that's why it's so important fully understand that value chain and understand when these emissions are being generated, right?
• 17:21
  SPEAKER_03: Yeah, so if I can summarize then what you guys have just talked about, what we said is okay, in our last episode, we've identified our organizational boundaries and that can be quite extensive.
• 17:31
  SPEAKER_03: There's lots of different entities that uh can be included there.
• 17:35
  SPEAKER_03: And then once I have those entities, after I identify within the entity all of the different sources of emissions, which can be quite extensive.
• 17:45
  SPEAKER_03: So when you start to think of a large company with a lot of different operations, this can become exponentially quite significant.
• 17:54
  SPEAKER_03: And it's a data wrangling exercise that we will also talk about a bit.
• 17:59
  SPEAKER_03: All right.
• 18:00
  SPEAKER_03: So that's actually, Kelsey, a great example, and I think a perfect lead-in to a question that we get quite a lot is that we were just talking about a case where you have an entity that owns a manufacturing facility.
• 18:13
  SPEAKER_03: However, often you have an entity that is leasing the manufacturing facility.
• 18:19
  SPEAKER_03: And I think then this raises a lot of questions about how you classify the emissions and whether those emissions should be scope one, scope two, or scope three.
• 18:28
  SPEAKER_03: So, Kelsey, do you want to give us some high level and then we can dive in a bit?
• 18:33
  SPEAKER_02: Yeah, you're right, Heather.
• 18:34
  SPEAKER_02: We do get a lot of questions on how do you account for the GHG emissions from leases.
• 18:40
  SPEAKER_02: And this is often a challenging area because you know, leases are not owned but are controlled by a lesie.
• 18:47
  SPEAKER_02: And so it's like, which scope am I putting them in?
• 18:50
  SPEAKER_02: And it kind of also falls in between a little bit organizational boundaries and operational boundaries.
• 18:55
  SPEAKER_02: So um, but really the classification of emissions from leased assets will really depend on one, what sustainability framework you're following, two, what how you define your organizational boundary, and three, the interaction of that, those two items with the applicable accounting guidance.
• 19:14
  SPEAKER_02: Um so then for purposes of today's discussion, we'll highlight how the GHG protocol indicates to account for emissions from leased assets and go through um a number of other considerations.
• 19:28
  SPEAKER_02: So to really address the question about um how to account for emissions from leased assets, the GHG protocol has put forth a model that really tries to align the reporting of GHG emissions with financial accounting um concepts.
• 19:45
  SPEAKER_02: However, I will say that they when they did this, they um linked up the reporting of emissions with the accounting standards that were in place when the protocol was issued, which, if you can recall, that was ASC 840 and IAS 17, which are outdated standards as they were subsequently amended by ASC 842 and IFRS 16.
• 20:07
  SPEAKER_02: And so the model set forth in the GHC protocol for emissions reporting from leased assets is really based on the definitions that were in place under those old standards, which was based on assets being on the balance sheet only for finance and capital leases and not on the balance sheet for operating leases.
• 20:28
  SPEAKER_02: And so, you know, following the guidance in the GHG protocol for reporting GHG emissions for leased assets is often challenging for users today who are reporting under current accounting standards.
• 20:42
  SPEAKER_03: Yeah, and Kelsey, maybe I'll jump in here before you go on.
• 20:45
  SPEAKER_03: And just a reminder to our listeners that we are talking here about the GHG protocol, but this would also apply to reporting for purposes of California 253, which requires reporting in accordance with the GHT protocol, and then also for reporting under the ISSB standards or California 261, both of those with an asterisk.
• 21:06
  SPEAKER_03: And of course, we always have these asterisks, but this one is because uh they do permit use of the jurisdiction or standards measurement standards from a jurisdiction or exchange.
• 21:19
  SPEAKER_03: And so that you know, in some cases may impact this.
• 21:23
  SPEAKER_03: But for today's purpose, we're gonna talk about it without an asterisk.
• 21:27
  SPEAKER_03: And um we will separately talk about ESREST when we finish with this.
• 21:31
  SPEAKER_03: So I think Kelsey, you gave a great summary there.
• 21:34
  SPEAKER_03: Basically, to if I can make the long story short, we have a conflict right now between what is in the GHG protocol and then our current accounting standards.
• 21:43
  SPEAKER_03: And we also have the fact that the GHG protocol went out of its way to say it wants to align emissions accounting with financial accounting.
• 21:52
  SPEAKER_03: And so there's an inherent conflict there.
• 21:54
  SPEAKER_03: And I know um that we've looked at the definition of um leases.
• 22:00
  SPEAKER_03: And the current accounting model.
• 22:01
  SPEAKER_03: So, March and maybe you can jump in and explain how we can reconcile those views.
• 22:07
  SPEAKER_00: Yeah, so um I as Kelsey mentioned, the key for accounting for emissions from leased assets is your organizational boundaries selected and you know financial reporting and accounting for leases.
• 22:20
  SPEAKER_00: So maybe let me kind of um and as Kelsey mentioned, or you mentioned too, the standard was was updated.
• 22:26
  SPEAKER_00: But maybe let's start with uh the simplest scenario.
• 22:29
  SPEAKER_00: So scenario whereby uh our clients are reporting entities using operational control approach.
• 22:35
  SPEAKER_00: That's a simple because it's consistent, it doesn't really matter all the new standard.
• 22:39
  SPEAKER_00: In these situations, LESI is always presumed to have operational, or in most cases it's presumed to have operational control of leased assets.
• 22:47
  SPEAKER_00: Therefore, Lessie reports scope one, scope two, and respective element of scope value chain emissions from leased assets.
• 22:55
  SPEAKER_00: Uh then you reverse to Lessor because Lessor is presumed not to have operational control.
• 23:00
  SPEAKER_00: They're gonna report all the emissions associated with leased assets as the value chain emissions in their scope three.
• 23:07
  SPEAKER_00: So it's kind of a that's the simplest.
• 23:09
  SPEAKER_00: Where it starts getting challenging between old accounting standards, new accounting standards, is um finance um finance or uh financial control and equity um method, because um now you you know there is some kind of uh the difference between how initially old standard worked and versus how the new standard works.
• 23:29
  SPEAKER_00: So for everybody to realize what really changed kind of a host holistically, or one of the key key differences between all the new standards is under new accounting standards, because lessee, right, is presumed to have a control of leased asset during the the term of the lease, this control is re it actually meets the definition of the asset.
• 23:53
  SPEAKER_00: Therefore, lessees or now, under new standards ASC 842 and IFRS 16, Lessee is recording right of use assets on its balance sheet.
• 24:03
  SPEAKER_00: Which under new stand old standards it wasn't the case, especially for you know for operating leases.
• 24:08
  SPEAKER_00: So now following the basic principle of principle in uh of G protocol, in our opinion, right, because this right of use assets is reflected on Lessee's balance sheet always, we believe that under financial control and equity approach, lessees should also, you know, uh report scope one, two, and respective part of scope three emissions of lease assets in all circumstances.
• 24:34
  SPEAKER_00: So long story short, from lessee perspective, doesn't really there's no difference in our opinion, um what kind of a control approach they're using, uh organization boundary they're using, and what type of leases uh they have.
• 24:48
  SPEAKER_00: So lessee should be reporting um um uh emissions associated with lease assets.
• 24:53
  SPEAKER_03: So now And Marcha, maybe forgotten, that's reflecting two things.
• 24:58
  SPEAKER_03: One is the fact that the lessee has operational control, and then two, it otherwise reflecting the right of use asset that the lessee has on the books.
• 25:07
  SPEAKER_03: That results in the accounting that you just talked about.
• 25:10
  SPEAKER_03: But then let's go to Lesour and what this means from a Lesour perspective.
• 25:15
  SPEAKER_00: So um Lesour kind of situation is a little bit more complicated from that perspective you want to follow this uh this model.
• 25:22
  SPEAKER_00: Because Lessor can reflect least assets on its balance sheet in two different ways.
• 25:27
  SPEAKER_00: One, in certain arrangements, Lesour can uh still record the uh fixed asset, physical assets on its books that's being depreciated, like any other PPE or fixed assets.
• 25:39
  SPEAKER_00: Uh or in other scenarios, Lessors can be reflecting the um least receivable, which is not your fixed fixed assets, it's kind of a financial asset least receivable on these books.
• 25:49
  SPEAKER_00: And in our opinion, that drives the um the accounting for emissions from from those assets.
• 25:54
  SPEAKER_00: So in circumstances where Lessors is reflecting physical assets, we believe it should report scope one, two, and respective part of scope three emissions uh in its emissions reporting.
• 26:05
  SPEAKER_00: But in situations when they only reflect the um uh least receivable, right?
• 26:11
  SPEAKER_00: Those all uh all emissions from least assets should be reflected in um scope three, like similar, like you treat it like you know financed emission or something like that.
• 26:20
  SPEAKER_03: And Martin, to be clear, then that is under equity share or financial control.
• 26:27
  SPEAKER_03: So if I can summarize here quickly that under equity share and financial control, if you are the lessor and still recording the physical asset, you would actually still record scope one, scope two, and your respective share scope three.
• 26:43
  SPEAKER_03: If you are reflecting it as this um finance receivable, then you would treat it as another type of financial asset and you would be reflecting the scope three.
• 26:56
  SPEAKER_00: Yes, that's correct.
• 26:57
  SPEAKER_03: All right.
• 26:57
  SPEAKER_03: But then if I'm under operational control, then I would just look at all of them as being scope three because I do not have, as the last or I do not have operational control of the asset.
• 27:08
  SPEAKER_03: Okay.
• 27:09
  SPEAKER_03: So I think you know, this aligns with Kelsey said at the very beginning, the the point in the GSG protocol that they make very strongly is that this should, there should be linkage between accounting for leases and emissions reporting for leases.
• 27:24
  SPEAKER_03: Um, and so, you know, our interpretation is that what we've just described lines up.
• 27:30
  SPEAKER_03: From the molessee perspective, I know there may be other views.
• 27:34
  SPEAKER_03: So how do we think about that?
• 27:36
  SPEAKER_00: Uh yeah, I mean, obviously, when you look at uh the companies might follow what's press specifically written in GHG protocol right now, so that's also would be an acceptable view.
• 27:47
  SPEAKER_00: However, obviously companies are gonna have a have certain challenges because the GHG protocol distinguishes between different types of leases, operational, you know, uh operating lease, uh capital or finance lease, and some of these updated standards do not distinguish those.
• 28:02
  SPEAKER_00: So that's gonna be challenging, but obviously that's one of the ways companies could could go and um and and um apply that.
• 28:09
  SPEAKER_00: It's also very important for um certain jurisdictions where um lease standards were not updated, right?
• 28:16
  SPEAKER_00: Because the obviously I'm not claiming I know every single jurisdiction in the world, but we know of certain jurisdictions whereby the accounting standards were not updated and and those jurisdictions still use the old accounting for leases.
• 28:30
  SPEAKER_00: So this is where existing guidance and GHG protocol may be very helpful because it reconciled with these old models.
• 28:36
  SPEAKER_00: But the main message here is whichever jurisdiction or financial reporting for leases you you are applying, in each case, reporting entities who have to really consider how to reconcile what's the current accounting in the financial reporting and how to reconcile this with uh requirements of GHG protocol and or uh you know some other reporting frameworks.
• 28:57
  SPEAKER_03: All right, I think that's helpful.
• 28:58
  SPEAKER_03: And I I do think for our listeners that want to know more, they can definitely check out the discussion in our um sustainability reporting guide.
• 29:07
  SPEAKER_03: I also think to be clear, one of the questions we've gotten is whether this interpretation that we've discussed we would view as in compliance with the GHG protocol, and we definitely would because the fact that it is alignment with the it is aligned with the principles there.
• 29:22
  SPEAKER_03: But to march in to your point, there are potentially other views.
• 29:27
  SPEAKER_03: Now, that was talking about GHG protocol and the related uh frameworks I mentioned.
• 29:33
  SPEAKER_03: There's new different rules for ESRS.
• 29:36
  SPEAKER_03: So what can we explain there?
• 29:38
  SPEAKER_00: Yeah, um well, other different yeah, I think there are different rules.
• 29:41
  SPEAKER_00: So uh I think the main difference is ESRS has a different approach to organization and boundary, right?
• 29:46
  SPEAKER_00: So if we remember from our um it seems like a remote now, uh our kind of I think part two, right?
• 29:52
  SPEAKER_00: Was it?
• 29:53
  SPEAKER_00: Uh ESRS has this additive kind of uh approach to setting operation uh organization boundary.
• 29:59
  SPEAKER_00: So the first it considers consolidated accounting group, so the assets included in consolidated uh accounting group, and then has a second step is considering you know all unconsolidated entities, assets, and operations whereby the operational control has to be applied.
• 30:15
  SPEAKER_00: So um when you think you know about the first step, you know, the first you um you consider emissions from consolidated accounting groups, so all the assets and operations recorded in your balance sheet.
• 30:26
  SPEAKER_00: So that reconciles with our proposed approach for updated accounting standards because you know, let's look at um um lessees, right?
• 30:36
  SPEAKER_00: So for all lessees, um right of use assets is reflected on their balance sheet.
• 30:42
  SPEAKER_00: So therefore, you know, you fall into this this uh first step.
• 30:46
  SPEAKER_00: So you should be reporting emissions associated with all the assets in your consolidated group.
• 30:50
  SPEAKER_00: Right of use assets is one of those assets, so you should report um emissions from um from those assets, um, irrespective of type of leases or you know accounting guidance that you that that you that you're following.
• 31:03
  SPEAKER_00: Um if you have the if you have uh right of use assets, you should report the um emissions from these assets.
• 31:10
  SPEAKER_00: Then uh you know when you on reverse, when you look at a lessors, similar to what we just talked before, you can have two scenarios.
• 31:16
  SPEAKER_00: Lessors are gonna have either um uh physical assets on the books or financial assets, let's refer to it, least receivable.
• 31:25
  SPEAKER_00: So if you have a financial uh physical assets, you're gonna um uh report um emissions associated with these physical assets as a scope one, uh two, and respective uh part of scope three.
• 31:37
  SPEAKER_00: If you have a AR or least receivable, you're gonna report all the emissions from these least assets as a um scope three emissions.
• 31:45
  SPEAKER_03: Well, and I think key there for both of those, less sour and less C is the fact that you don't have the same issue with you are you using the uh operational control approach, fine, you know, financial control or equity share.
• 32:00
  SPEAKER_03: You are just following this guidance, as you said.
• 32:02
  SPEAKER_03: And that answers your question for less C and less SOAR under IFRS and US GAAP.
• 32:09
  SPEAKER_03: But Marchin, how about those local gap reporters?
• 32:12
  SPEAKER_00: Well, again, the principle stays the same depending on what your local gaps tells you.
• 32:16
  SPEAKER_00: What you're looking at is do you have assets on your books or not?
• 32:19
  SPEAKER_00: And what type of assets you have recorded on your balance sheet.
• 32:23
  SPEAKER_03: So then, Marchin, I think that's helpful, and in some ways, I think more straightforward for companies than what we just were talking about for the GHG protocol.
• 32:31
  SPEAKER_03: I do think there's one point here that I know listeners are going to ask the question, which is what about local gap?
• 32:38
  SPEAKER_03: And so it's interesting for local gap, if we think about the lesse under local gap, in some cases they may not have an asset recognized on their balance sheet, in which case you might be thinking, oh, well, then I don't have to reflect the scope one, scope two, and respect to share scope three emissions.
• 32:56
  SPEAKER_03: However, it I might remind people that if they listen to our prior episode, that you have this two-step approach for determining organizational boundary.
• 33:06
  SPEAKER_03: You start with financial control and then you add in uh assets, entities, operations over which you have operational control.
• 33:12
  SPEAKER_03: So in this particular case, then even if it's not on your balance sheet, you would need to go to step two, say, well, do I have an operational control?
• 33:19
  SPEAKER_03: And since it's a leased asset, inherently the lessee does have operational control.
• 33:24
  SPEAKER_03: So they would need to report it as scope one, scope two, and respective share of scope three.
• 33:30
  SPEAKER_03: And then the lessor would follow the same model, basically, we talked about for ESRS, where basically you would recognize submissions to scope one and two, where you have the least asset on your books.
• 33:43
  SPEAKER_03: And if it's a finance lease receivable, then you would look to scope three.
• 33:47
  SPEAKER_00: Which is uh it's a very good point, Heather.
• 33:49
  SPEAKER_00: I think you caught it.
• 33:50
  SPEAKER_00: So we ending up in the same spot, but we're just getting it.
• 33:53
  SPEAKER_00: Getting a different way.
• 33:54
  SPEAKER_00: That's a great point.
• 33:55
  SPEAKER_00: Yes.
• 33:56
  SPEAKER_03: So under ESRS, irrespective of your accounting model, you're gonna come to the same answer.
• 34:01
  SPEAKER_00: Yeah.
• 34:02
  SPEAKER_00: All right.
• 34:02
  SPEAKER_00: Just slightly differently.
• 34:03
  SPEAKER_03: Slightly differently.
• 34:04
  SPEAKER_03: So I definitely would encourage people to check out our guide if they need more information.
• 34:09
  SPEAKER_03: Okay, we've talked about a lot.
• 34:10
  SPEAKER_03: I think the first section was really reminding people quite a bit about the different meanings of what's included in scope one, scope two, and scope three.
• 34:20
  SPEAKER_03: And then obviously, as Kelsey reminded us, the importance of making sure you identify all the sources of your emissions, because if you don't get that stuff right, well, all these stuff, if you don't get something right, your emissions are not going to be correct.
• 34:34
  SPEAKER_03: But again, I think this identification of sources in talking to people who are involved in reporting emissions, this is one of the places that additional sources are often subsequently identified.
• 34:47
  SPEAKER_03: So it's it's very crucial there.
• 34:49
  SPEAKER_03: And then secondly, for leasing, you really need to make sure you understand uh which framework you're reporting under, whether the less or whether the less C, and then the intersection of the accounting emissions.
• 35:01
  SPEAKER_03: So that's my reminder.
• 35:03
  SPEAKER_03: However, you guys may have some more practical reminders to give.
• 35:05
  SPEAKER_03: So maybe Kelsey, I'll go to you first.
• 35:08
  SPEAKER_03: If someone's dealing with operational boundaries, what should they be thinking about?
• 35:12
  SPEAKER_02: Yeah, I think when it comes to determining operational boundaries, just go back to the basics.
• 35:17
  SPEAKER_02: So, you know, maybe at the beginning of our of our conversation is what are those emissions that are being generated by you, you, the reporting entity, and or are they being indirectly generated by you, maybe on your behalf?
• 35:32
  SPEAKER_02: That's really like the starting point of trying to think about once you've identified these sources, like how to classify them as direct or indirect.
• 35:40
  SPEAKER_02: And then I'll just reiterate what you said on leases.
• 35:43
  SPEAKER_02: Just leases takes um a little bit of time, careful evaluation of your leases.
• 35:48
  SPEAKER_00: So I I do slightly different, you know, uh different take on it.
• 35:52
  SPEAKER_00: I think going back to, I think I keep repeating this quite often, you need to know your organization.
• 35:57
  SPEAKER_00: You need to know your organization, like what you do within your walls, but also what is your value chain.
• 36:03
  SPEAKER_00: Because in this step is going to be really crucial, this this discussions we had about identifying sources of emission.
• 36:09
  SPEAKER_00: When you think about it, it's about knowledge.
• 36:11
  SPEAKER_00: And in practical, you know, example, when we work with a client, um, you know, trying to go through a process of identifying all their sources of emissions within their kind of uh walls, put it that way, and in the value chain, it's a lengthy process.
• 36:28
  SPEAKER_00: You really have to talk to multiple people within an organization.
• 36:31
  SPEAKER_00: Oftentimes we do like good old auditing days, you know, side inspections.
• 36:35
  SPEAKER_00: So you go and look at you know, where do you have potential sources of emissions, you know, uh when we talk about scope one, and then working and talking to people across organizations, purchasing different departments just to map their value chain to understand, you know, to be able to identify those sources of emissions.
• 36:53
  SPEAKER_00: The same applies to leases.
• 36:54
  SPEAKER_00: You need to know your organization, what type of arrangements they have.
• 36:57
  SPEAKER_00: So that's the crucial part that will require for those who are going to be new to emissions reporting, would require really involvement of multiple people from their organizations to get it right.
• 37:07
  SPEAKER_03: Well, and I think Marcia, maybe I'll just add on there, even if you aren't new to emissions reporting, I think this period of transition from voluntary reporting to regulatory reporting is the ideal time to reassess and you know make sure that you have identified all these sources that you've gotten your august organizational boundaries right, and to Kelsey's point that you really think about your lease accounting.
• 37:32
  SPEAKER_03: So all right.
• 37:33
  SPEAKER_03: Well, March and Kelsey, as always, such a pleasure to talk to you.
• 37:36
  SPEAKER_03: Thanks so much for joining me today.
• 37:37
  SPEAKER_03: Thank you, Eden.
• 37:40
  SPEAKER_03: That's our show for today.
• 37:42
  SPEAKER_03: Tune in next week for more fresh episodes so that you never miss any of our audio content.
• 37:48
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• 37:52
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• 38:02
  SPEAKER_03: From Thought Leadership at PwC, I'm Heather Horn.
• 38:06
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