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Talking GHG: How organizational boundaries shape reporting · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PwC's National Office.
• 0:06
  SPEAKER_00: On the surface it all looks similar, but lots of these concepts might be new.
• 0:11
  SPEAKER_00: So thorough understanding of what you know what is consolidated, how the consolidation in financial statements, how the consolidation conclusions were reached, what type of arrangements we have that could impact our operational control assessment.
• 0:24
  SPEAKER_00: So having that thorough understanding of your company, its structure and arrangements that it has is going to be really critical, especially in a year one.
• 0:32
  SPEAKER_03: Hello.
• 0:33
  SPEAKER_03: Today we're back talking ESG.
• 0:36
  SPEAKER_03: This week, continuing our series Breaking Down the Building Blocks of Greenhouse Gas Emissions Reporting.
• 0:41
  SPEAKER_03: In today's episode, we focus in on a critical step in the process, establishing your organizational boundaries.
• 0:48
  SPEAKER_03: This is PWC's Seconding Podcast.
• 0:54
  SPEAKER_03: I'm Heather Horn, and thanks so much for joining us today.
• 0:58
  SPEAKER_03: In today's episode, we'll explore step two, walking through how to establish organizational boundaries and discuss how they affect the calculation of GHG emissions.
• 1:07
  SPEAKER_03: Our guests will cover some of the similarities and differences in approaches to establishing organizational boundaries.
• 1:13
  SPEAKER_03: And spoiler alert, the approach does matter.
• 1:16
  SPEAKER_03: You'll definitely also want to stay tuned for the pop quiz I give them in the middle of the podcast.
• 1:21
  SPEAKER_03: That was definitely unexpected, but there's some key learnings there.
• 1:24
  SPEAKER_03: I'm joined again this week by Marchin Alowinsky, an assurance partner who also leads our global technical working group, focused on GHG, and Kelsey Paisa, who's a senior manager in the PWC National Office, and the secretary of our GHG Global Working Group, also focusing in on GHG.
• 1:41
  SPEAKER_03: And together with me and Carolina Cosby, we are the primary authors of our chapter in the sustainability reporting guide on GHG emissions.
• 1:49
  SPEAKER_03: So definitely a lot to share.
• 1:51
  SPEAKER_03: And I'm getting excited, even thinking about our episode.
• 1:54
  SPEAKER_03: No matter where you are in your GHG emissions reporting journey, you won't want to miss today's episode.
• 1:59
  SPEAKER_03: So with that, let's continue the conversation with Marchin and Kelsey.
• 2:03
  SPEAKER_03: March and Kelsey, welcome back for the second episode in our podcast series on GHG emissions.
• 2:09
  SPEAKER_03: And hopefully it will be no surprise to listeners that today's second episode will cover step two of our process for reporting GHG emissions, which is all about determining your organizational boundaries.
• 2:21
  SPEAKER_03: So if you didn't listen in to last week's episode from a listener point of view, highly encourage you to check that out because that'll give you some foundational information about the various standard setters or the various standards and reporting requirements.
• 2:34
  SPEAKER_03: That said, as they say sometimes in books, this is also standalone.
• 2:38
  SPEAKER_03: So you can listen to this without reading or listening in this case to that one first.
• 2:43
  SPEAKER_03: So, Marchin, can you kick things off and just remind people when we say organizational boundaries, what does that mean?
• 2:50
  SPEAKER_00: Uh thank you, Heather.
• 2:51
  SPEAKER_00: Um so the basically when we're talking about organizational boundary, it's we're talking about a scope of entities, assets, and operations that need to be included in reporting entities emissions reporting, right?
• 3:03
  SPEAKER_00: So for accountants on the on the you know, listening to us, it basically is a methodology to consolidate and report GEGG emissions, right?
• 3:12
  SPEAKER_00: Equivalent of financial statements, consolidations.
• 3:15
  SPEAKER_00: Um and although the definitions might seem very straightforward and simple, oftentimes it's not.
• 3:20
  SPEAKER_00: It requires a lot of judgment.
• 3:22
  SPEAKER_00: Just as an example, um GEGG protocol outlines three allowable methods to determine organizational boundaries, and those rules are not exactly the same or oftentimes similar to financial reporting consolidation rules.
• 3:37
  SPEAKER_00: So it's really crucial and foundational step in uh in reporting emissions to set those organization boundaries correctly because that determines what data you need to gather, what do you really need to report, and has a lot of implications uh later on.
• 3:54
  SPEAKER_03: All right.
• 3:54
  SPEAKER_03: So then that said, as we talked about in last week's episode, a lot of our GHG reporting is foundationally based on uh the GHG protocol and specific when it comes to organizational boundaries.
• 4:07
  SPEAKER_03: I'll just remind listeners that under the IFRS sustainability disclosure standards, or if you're reporting under California 253, so you're reporting in accordance with GHG protocol, you will actually follow one of the three methods allowed by the GHG protocol.
• 4:23
  SPEAKER_03: And even for ESRS reporters, where it has its own organizational boundaries, you need to understand the GHG protocol's approaches in order to apply that.
• 4:32
  SPEAKER_03: So, with all of that said, I thought we could kick things off today talking about the three approaches under the GHG protocol, and then we'll dive in a little more.
• 4:40
  SPEAKER_03: So, Kelsey, over to you.
• 4:42
  SPEAKER_02: Yeah, so I'll highlight those three approaches, starting with the first one, which I think is easiest for most listeners to grasp, is financial control approach.
• 4:50
  SPEAKER_02: As this one is really, you know, follows the consolidated accounting principles.
• 4:55
  SPEAKER_02: And so under the financial control approach, a company will have financial control over any entities and assets or operations that are in its consolidated financial statements.
• 5:06
  SPEAKER_02: And so if a company has financial control over an entity or asset, it will include 100% of its emissions and its reporting boundary.
• 5:14
  SPEAKER_02: The second control approach is the operational control approach.
• 5:18
  SPEAKER_02: This one is different from the financial control in that it is really founded on the authority to implement operating policies and direct operating decisions.
• 5:27
  SPEAKER_02: And so a company that has operational control over an entity asset or operation will also report 100% of its um that entity or asset or operation in its reporting boundary.
• 5:41
  SPEAKER_02: And the third approach is the equity share approach, which is a little bit more obvious, but um emissions from an entity or asset are going to be included in your inventory based on the percentage equity ownership share.
• 5:55
  SPEAKER_02: And so those are the three methods under the protocol.
• 5:57
  SPEAKER_02: And as you mentioned, Heather, any of the companies reporting under GSU protocol or under California or IFRS would select one of these methods and apply that method consistently.
• 6:10
  SPEAKER_02: And certainly under whether you're reporting under one of those frameworks, you have to disclose which approach you choose.
• 6:17
  SPEAKER_03: So, Kelsey, before you go on, I have a follow-up question.
• 6:20
  SPEAKER_03: I will give a little asterisk that we talked about last week, which is that if you are reporting under IFRS following S2, then if you have operations in its jurisdiction that requires a different approach.
• 6:33
  SPEAKER_03: So there's a jurisdictional or exchange requirement, then there is, I'll, like I said, this asterisk that would allow you to follow that approach for organizational boundaries and measurement.
• 6:43
  SPEAKER_03: So keep that in mind, but we won't go into that further here.
• 6:47
  SPEAKER_03: Now, Kelsey, sticking with you for the follow-up question, the question we often get is as Marchin earlier said, this is similar to the concept of consolidation under financial reporting.
• 7:00
  SPEAKER_03: So, how do we big picture line up these three approaches against financial reporting?
• 7:05
  SPEAKER_02: Yeah.
• 7:06
  SPEAKER_02: And so I think as I mentioned before, the first approach I mentioned, financial control, that one, as well as equity share, aligns most closely with financial reporting.
• 7:15
  SPEAKER_02: And that's maybe because they're based on financial accounting and reporting concepts.
• 7:20
  SPEAKER_02: And so if you if your objective is to align most closely with your financial statements and you have the option to select between these three approaches, a company might select financial control or equity share to most closely align with their financial statements.
• 7:35
  SPEAKER_02: Operational control, again, is different because it's founded on those the ability to implement operating policies versus financial policies.
• 7:45
  SPEAKER_03: Yeah, and I think this is a place where it can get very tricky for us accountants because this idea that you could have a different type of control that is other than financial control, I think there's a tendency to think, well, that must be aligned.
• 7:58
  SPEAKER_03: If you have financial control, it must mean operational control, slash vice versa.
• 8:02
  SPEAKER_03: But that is definitely not the case always.
• 8:05
  SPEAKER_03: It's often, but not always the case under the GHG protocol and under these approaches.
• 8:09
  SPEAKER_03: So maybe March, and you can give a little more color.
• 8:12
  SPEAKER_03: If you're applying operational control, what are some of the key things that you think about and and really how does this differ from financial control?
• 8:21
  SPEAKER_00: Well, so as Kelsey mentioned, it the the main difference is type of policies that you can um that you can um have a right to uh implement, right?
• 8:30
  SPEAKER_00: Financial controls, we're talking about financial policies, which as Kelsey said, it's more in line with with financial consolidation concepts.
• 8:38
  SPEAKER_00: Operational control, it's more of operating policies.
• 8:41
  SPEAKER_00: There are multiple indicators that um that you can take into account when you're making that decision.
• 8:46
  SPEAKER_00: You have to clearly identify what are those policies that are more meaningful and how to determine who holds the right and authority to implement those policies.
• 8:55
  SPEAKER_00: And uh there are, as I mentioned, the things like holding operating license, um having to report to uh environmental regulators might be um might be indicative of having the operational control.
• 9:09
  SPEAKER_00: Um having to ability to select the fuel supplier or provider, right?
• 9:14
  SPEAKER_00: So those are the kind of uh indicators or you know of operational control, which as uh Kelsey mentioned before, they differ than financial control.
• 9:24
  SPEAKER_00: So these two might be oftentimes equal, but they don't have to, right?
• 9:29
  SPEAKER_00: So I think it's a it's a key concept there.
• 9:31
  SPEAKER_03: So Marchin, I think that's helpful clarification, but I think it does help to probe a little deeper into um how you differ between operational control and financial control.
• 9:43
  SPEAKER_03: Because I think some of what you were talking about are indicators, right?
• 9:47
  SPEAKER_03: Indicators that you may have operational control.
• 9:49
  SPEAKER_03: But what we really need to do is understand this idea of what having the authority to make these decisions, like what that really looks like.
• 9:58
  SPEAKER_03: So maybe Kelsey, you can go uh a little deeper on that.
• 10:01
  SPEAKER_02: Yeah.
• 10:01
  SPEAKER_02: And so I think, you know, as you mentioned, having the authority often might come into play by making those day-to-day decisions.
• 10:09
  SPEAKER_02: Sometimes we refer to it as having like the boots on the ground approach.
• 10:13
  SPEAKER_02: But I really think it's well, what are those decisions that are being made that are affecting operating policies?
• 10:20
  SPEAKER_02: And so I think, you know, a lot of the decisions when you're looking at operational control that are determinative of operational control might be different than those key decisions that you think about when you're normally doing your financial control or financial accounting assessments.
• 10:36
  SPEAKER_02: So, you know, for example, if you are looking at financial reporting or consolidation concepts under ASC 810 or IFRS 10, a lot of times companies will use in that consolidation analysis, they will use the existence of kick out rights as a substantive right that if one company holds um substantive kick out rights, they would have control and ultimately consolidate the entity.
• 11:01
  SPEAKER_02: Whereas substantive kick out rights is not a key right or decision that is influential in determining operational control, but rather some of the decisions that Marchin mentioned, determining fuel supplier, choosing when and how to operate a machine, you know, choosing a vendor or specific thing, those are the types of decisions and making those day-to-day decisions of actually operating the asset that are critical in the operational control assessment.
• 11:29
  SPEAKER_00: Yeah, and also I think that Kelsey, you're absolutely right.
• 11:32
  SPEAKER_00: It's it's kind of a who has those rights and ex exercises those rights to date, who sets the health, safety, and environmental policy and whose whose policies policies are being followed on a day-to-day basis while operating the asset.
• 11:46
  SPEAKER_00: So um, and that can change, right?
• 11:48
  SPEAKER_00: So you can have situations whereby, you know, one party has it, and then based on contractual arrangements, they stop doing the operational, and then you have to say who who who takes over, who has this operational control after the contract expired.
• 12:00
  SPEAKER_03: Yeah, and I think uh the one of the key words you use there, and I want to make sure um that that our listeners caught it, is today.
• 12:08
  SPEAKER_03: Because to the point Kelsey, you made about kick out rights and financial control, I think a lot of that is about what rights do you have, what rights could you exercise versus operational control under uh evaluating organizational boundaries is all right who all is all about who is exercising those rights.
• 12:29
  SPEAKER_03: So the fact that, you know, Kelsey, if you and I have a joint venture and you could kick me out, it doesn't matter because that means today that I have operational control.
• 12:38
  SPEAKER_03: Now that might be different for financial control.
• 12:41
  SPEAKER_03: And I do think, you know, this series is designed to supplement our uh sustainability reporting guide and give some more color about things we talk about in there.
• 12:50
  SPEAKER_03: But I do think there's some good examples in there that I would encourage our listeners to check out in terms of how you think about some of these decisions, because it is something we spent quite a lot of time talking about, evaluating, reading all the guidance available, because it is for financial accountants something that can be difficult to get your head around.
• 13:09
  SPEAKER_00: Yeah, and ahead of, I agree.
• 13:11
  SPEAKER_00: There's one more thing I said, like we meant Kelsey mentioned that before.
• 13:13
  SPEAKER_00: I just want to make sure that our listeners, you know, noted that subtle difference.
• 13:17
  SPEAKER_00: Another element, like for control approaches that Kelsey mentioned before, once one party determines that they have either financial or operational control, irrespective of percentage ownership, the company says to report 100% of emissions of control assets and operations, which is slightly different for financial accounting because we have in financial accounting the concept of non-controlling interest that essentially does not exist in emissions reporting.
• 13:42
  SPEAKER_00: So that's also kind of it's important to remember when when it comes to emissions reporting.
• 13:46
  SPEAKER_03: Yes.
• 13:46
  SPEAKER_03: And I think Martin, that's actually a great lead into a small pop quiz that I want to give you and Kelsey.
• 13:52
  SPEAKER_03: Now, I want to remind our listeners that we are going to get into additional guidance for ESRS reporters.
• 13:59
  SPEAKER_03: And so that will come soon after this quiz.
• 14:02
  SPEAKER_03: However, again, understanding these foundational requirements, I think is helpful for anyone, no matter which one you're reporting under.
• 14:10
  SPEAKER_03: But I think it's also important to understand how these concepts applied and what percentage you're going to be reporting for different types of entities.
• 14:18
  SPEAKER_03: So I'm going to go back and forth.
• 14:19
  SPEAKER_03: March, I'm probably giving you the easy one to start with.
• 14:22
  SPEAKER_03: So I'm a reporting entity and I have a wholly owned subsidiary.
• 14:26
  SPEAKER_03: In general, how do you think about those three financial and operational control and equity share?
• 14:32
  SPEAKER_00: So uh starting with financial control, that's probably the easiest.
• 14:34
  SPEAKER_00: It's wholly owned subsidiary.
• 14:36
  SPEAKER_00: It's probably fully consolidated in your in your financial statements.
• 14:39
  SPEAKER_00: Therefore, you're going to be reporting 100% of emissions uh from that subsidiary.
• 14:43
  SPEAKER_00: Then let's move to equity share.
• 14:45
  SPEAKER_00: Similar, right?
• 14:46
  SPEAKER_00: Um you're going to report how it's wholly owned, so you're going to report 100% of emissions.
• 14:50
  SPEAKER_00: When it's getting a little bit tricky is operational control.
• 14:53
  SPEAKER_00: Again, for wholly owned subsidiary, most likely you also have operational control.
• 14:58
  SPEAKER_00: Uh there might be some circumstances, some contractual arrangements that you're going to pass on this operational control to third party, but let's presume we do, because most of the cases, you know, wholly owned subsidiary, you're going to have both financial and operational control.
• 15:12
  SPEAKER_00: So under operational control, you also will report 100% of emissions.
• 15:17
  SPEAKER_00: Unless you determine that some other party based on contractual arrangement has operational control.
• 15:22
  SPEAKER_00: In this case, you wouldn't report any.
• 15:24
  SPEAKER_03: Right.
• 15:24
  SPEAKER_03: And I do think it's a good point there.
• 15:26
  SPEAKER_03: I should have said in my fact pattern that this is a wholly owned subsidiary that you consolidate, and that is reported in your consolidated financials.
• 15:34
  SPEAKER_03: Now we know under US GAAP, you could have a variable interest entity that maybe I own 100% of the equity shares of, but perhaps Marchin is consolidating.
• 15:43
  SPEAKER_03: And so then you'd have to look, well, in that case, Marchin would have financial control if he's the consolidator.
• 15:49
  SPEAKER_03: And then we'd have to see who has operational control.
• 15:52
  SPEAKER_03: So even for that whole own subsidiary, it's not always as straightforward as it looks.
• 15:56
  SPEAKER_00: That's what I said at the beginning.
• 15:59
  SPEAKER_03: Yeah.
• 15:59
  SPEAKER_03: All right.
• 15:59
  SPEAKER_03: So Kelsey, this is a variant on that question.
• 16:02
  SPEAKER_03: Again, let's assume this is an entity I consolidate in my financial statements, but I only own, for example, 75% of this entity.
• 16:10
  SPEAKER_03: How do I think about it in the three scenarios?
• 16:13
  SPEAKER_02: Yeah.
• 16:13
  SPEAKER_02: So similarly with financial control, if it's um fully consolidated in your or you consolidate the entity under financial control, you're going to include 100% of that entity's emissions in your reporting.
• 16:27
  SPEAKER_02: Um for equity share, it's going to be based the emissions you're going to report is going to be based on your equity um percentage.
• 16:35
  SPEAKER_02: So based on that 70%.
• 16:37
  SPEAKER_02: And then for operational control, again, you have to evaluate do you have operational control over the entity?
• 16:43
  SPEAKER_02: Maybe similar to margin scenario, you likely might if you are consolidating it, but there could be other contractual arrangements that um, or you could be in a VIE situation where another entity may have operational control over it.
• 16:56
  SPEAKER_03: Yeah.
• 16:56
  SPEAKER_03: And I think the key point there that where we really do get people who are tripped up is they say, like, okay, but well, I I it's consolidated, but I only own 75%.
• 17:06
  SPEAKER_03: So that means because of non-controlling interests, et cetera, at the at the end of the day, I only get 75% of the net income, the assets, the liabilities, et cetera.
• 17:15
  SPEAKER_03: So why do I have to take 100% of the emissions?
• 17:17
  SPEAKER_03: Or and same for operational control, like why am I taking 100% of the emissions?
• 17:22
  SPEAKER_03: And happy for you guys to add on to this, but really it's the theory that if I control this entity, I also control its emissions.
• 17:31
  SPEAKER_03: So I'm sure Martin, you've had these conversations with companies.
• 17:33
  SPEAKER_00: Yeah, in those situations, it's all or nothing, right?
• 17:35
  SPEAKER_00: So if you control, you control you you you're responsible for reporting those emissions in your organization and boundary.
• 17:41
  SPEAKER_00: So again, might be confusing.
• 17:43
  SPEAKER_00: There are some exceptions to this and some you know, um different consolidation scenarios or joint ventures, but in general, you know, that's how you'd think about it.
• 17:51
  SPEAKER_03: All right.
• 17:51
  SPEAKER_03: So going back to you, Martin, you can probably guess what's next, but let's do an equity method investment.
• 17:57
  SPEAKER_03: So just a reminder for our listeners, uh, especially because I know some of you may not come from a financial reporting background.
• 18:03
  SPEAKER_03: So this would be a case where I do not have financial control, but I conclude I do have significant influence over the entity.
• 18:10
  SPEAKER_03: And generally that would mean I own between 20 and 50 percent of the equity, although that can vary depending on the specific arrangement.
• 18:18
  SPEAKER_00: Yeah, so um, as we said, it's equity method investment, so you don't consolidate, you don't have financial control, you don't consolidate asset and liabilities for the purpose of financial reporting, but you still show your share of you know operations and assets and liabilities you have.
• 18:31
  SPEAKER_00: Uh but for emissions reporting, we said it's all or nothing.
• 18:34
  SPEAKER_00: So you conclude that you do not have financial control, and significant influence concept does not exist uh uh per se for emissions reporting.
• 18:41
  SPEAKER_00: Therefore, you know, you wouldn't report any emissions, so zero emissions for financial control.
• 18:47
  SPEAKER_00: Going back to equity share, right?
• 18:49
  SPEAKER_00: It's um similar to what we talked before.
• 18:52
  SPEAKER_00: Uh you report your effective share.
• 18:54
  SPEAKER_00: So if you own, let's say, between 20 and 50% of that entity, you're gonna report between 20 and 50% of their emissions.
• 19:01
  SPEAKER_00: And then operational control, again, the answer is it depends.
• 19:04
  SPEAKER_00: So you have to go through analysis who actually holds the operational control uh of this joint venture or equity method investment.
• 19:12
  SPEAKER_00: And it could be anybody, it could be one of the partners, could be third party that is operating this on behalf of the partners.
• 19:18
  SPEAKER_00: So you have to go through the analysis and determine.
• 19:20
  SPEAKER_00: If you determine that you do have operational control, again, 100% of these emissions.
• 19:25
  SPEAKER_00: If you determine somebody else has operational control, you just you report zero.
• 19:30
  SPEAKER_03: Yeah, and maybe one point I should make here that we did slightly oversimplify the equity share because we went exactly to saying, okay, you follow your equity ownership.
• 19:40
  SPEAKER_03: Now, technically, because your economics for the entity may not always exactly align with your equity ownership, you actually should be reflecting based on your share of economics, not equity.
• 19:50
  SPEAKER_03: We go into that some more in the guide, but it's something at least that's worth highlighting here.
• 19:54
  SPEAKER_00: Yes, and we love to simplify.
• 19:56
  SPEAKER_00: So we we did simplify a lot.
• 19:58
  SPEAKER_03: Exactly.
• 19:59
  SPEAKER_03: So, all right, so next scenario where we're getting starting to get, or we already are, in some of the complicated ones.
• 20:04
  SPEAKER_03: So, Kelsey, um, we have two more that I can think of at least.
• 20:08
  SPEAKER_03: You guys can tell me if I've missed any, but let's move next to a true joint venture.
• 20:12
  SPEAKER_03: So 50-50 ownership between the two parties, and that no one uh has financial control of.
• 20:19
  SPEAKER_03: Yes.
• 20:19
  SPEAKER_03: Well, so you answered the first one.
• 20:21
  SPEAKER_03: Well, a bit, a bit, but for fin I meant for financial reporting.
• 20:25
  SPEAKER_02: So in a joint venture where it's 50-50, you do not have financial control.
• 20:30
  SPEAKER_02: And so again, you would report zero um percent of those emissions from that joint venture.
• 20:36
  SPEAKER_02: Equity share, again, it would be based on the percentage of economics or your equity ownership.
• 20:41
  SPEAKER_02: So you would include 50% of that joint venture's emissions in your GHG report.
• 20:47
  SPEAKER_02: And then lastly, for operational control, you would also do your operational control assessment and evaluate do you or the other party have you know operational control?
• 20:58
  SPEAKER_02: And if it and it could be the case where ne neither of you have operational control and the joint venture itself is making all the operating decisions.
• 21:07
  SPEAKER_02: And so they would report, but you would not report any of the emissions from that joint venture.
• 21:13
  SPEAKER_03: Well, and and we should have clarified all along here that we're actually really talking about scope one and scope two considerations for scope three reporting.
• 21:21
  SPEAKER_03: We will talk about when we get to that episode.
• 21:23
  SPEAKER_03: So again, another asterisk I should have given.
• 21:25
  SPEAKER_03: And I think what's interesting, Kelsey, about your answer there is that I often when people are running through these scenarios, they want a joint venture to be different than it's just a I'll use the word regular equity method investive.
• 21:39
  SPEAKER_03: But in fact, your answer is no different between just a quote regular equity method or if it's a joint venture in this case, there would be no difference in that answer.
• 21:49
  SPEAKER_03: All right.
• 21:50
  SPEAKER_03: So the next one I'm gonna ask Martin, but he may need you to assist, Kelsey.
• 21:54
  SPEAKER_03: So pay attention because this is again gets complicated, very complicated very quickly.
• 21:58
  SPEAKER_03: And this is a scenario.
• 22:00
  SPEAKER_03: That we would call under US GAAP, we would say proportionate consolidation.
• 22:04
  SPEAKER_03: So you have an unincorporated venture that each of the parties holds undivided interests in the underlying assets and liabilities of this venture, again, unincorporated, or under IFRS.
• 22:18
  SPEAKER_03: These are IFRS 11 arrangements that are joint operations that are not accounted for as joint arrangements.
• 22:26
  SPEAKER_03: So very complicated there.
• 22:28
  SPEAKER_03: So for our purposes, we're going to say proportionate consolidation.
• 22:32
  SPEAKER_03: Margin.
• 22:33
  SPEAKER_00: Yes.
• 22:33
  SPEAKER_00: So I I I would agree that's a complicated task to analyze that.
• 22:39
  SPEAKER_00: But I think if we're talking about proportional consolidation, it means that both partners have a financial control.
• 22:46
  SPEAKER_00: So it's equal, they share financial control.
• 22:48
  SPEAKER_03: And I guess just to clarify, there could be more than two.
• 22:52
  SPEAKER_00: Yes, multiple.
• 22:52
  SPEAKER_00: They share the control based on the percentage that they own, which, as we said, it results in each partner picks up their share of assets, liabilities, revenues, and expenses in their financial statements.
• 23:03
  SPEAKER_00: So for emission reporting, you follow that logic.
• 23:06
  SPEAKER_00: You basically says that each partner share financial control and should report their effective share of emissions if they account for emissions using financial control.
• 23:16
  SPEAKER_00: Equity share, pretty much the same.
• 23:18
  SPEAKER_00: That's why equity share to me is like almost the easiest.
• 23:21
  SPEAKER_00: You also pick up your share of emissions.
• 23:24
  SPEAKER_00: And I'm gonna, we sound like a broken record.
• 23:27
  SPEAKER_00: Operational control, it depends.
• 23:28
  SPEAKER_00: It depends.
• 23:29
  SPEAKER_00: You have to do the analysis.
• 23:31
  SPEAKER_00: Oftentimes, in those arrangements, and they're pretty prevalent in oil and gas industry, for example, one of the partners is operator and has operational control.
• 23:39
  SPEAKER_00: But again, we shouldn't be jumping to this conclusion.
• 23:41
  SPEAKER_00: It has to be analyzed in detail to determine who does have operational control.
• 23:46
  SPEAKER_00: That party will report 100% of emissions, all the other partners will report zero emissions.
• 23:51
  SPEAKER_03: Yeah, so I was gonna say this is uh almost an exception to our 100% uh rule for financial control, except in fact you are actually reporting 100% of your interest in this unincorporated entity.
• 24:05
  SPEAKER_03: So it does get you there.
• 24:06
  SPEAKER_03: But I don't know, Kelsey, I know you spent a lot of time on this.
• 24:08
  SPEAKER_03: Just any other thoughts on these types of arrangements?
• 24:11
  SPEAKER_02: Yeah, I'll just say that they are unique or different from our equity method and joint venture examples here.
• 24:17
  SPEAKER_02: And because it follows proportionate consolidation, you know, the GHG protocol actually, you know, has a little excerpt for this.
• 24:24
  SPEAKER_02: Like for so if you are following financial control and you have proportionate consolidation, okay, here's your out to go follow equity share in this one rare instance.
• 24:35
  SPEAKER_02: So um folks should definitely look at the GHE protocol for that too.
• 24:39
  SPEAKER_03: All right.
• 24:39
  SPEAKER_03: So I think that's a perfect segue uh because these types of arrangements are one of the more difficult types of arrangements for us to deal with under ESRS.
• 24:48
  SPEAKER_03: But first we should understand the approach.
• 24:50
  SPEAKER_03: So, Marchin, this is a hybrid approach.
• 24:53
  SPEAKER_03: I'll let you start and then I'm gonna have Kelsey chime in.
• 24:56
  SPEAKER_03: But can you give us the overall approach for if you are determining your organizational boundaries under ESRS?
• 25:02
  SPEAKER_00: Okay.
• 25:03
  SPEAKER_00: Yes, so I I think you you you phrased it really uh correctly.
• 25:06
  SPEAKER_00: It's uh it's a hybrid approach.
• 25:08
  SPEAKER_00: Uh uh we said it, it's not like in a in a standard or anything like that, but it's true hybrid approach.
• 25:14
  SPEAKER_00: So starting point is like you, as Kelsey mentioned before, you have to understand the you know financial control approaches from uh GEG protocol because it's gonna be helpful doing this assessment.
• 25:24
  SPEAKER_00: So but let's go back to ESRS.
• 25:26
  SPEAKER_00: So they're basically based on uh ESRS guidance, it's a two-step approach.
• 25:30
  SPEAKER_00: First, right, you have to report 100% of emissions from all the assets and operations that are consolidated within your consolidated financial statements.
• 25:38
  SPEAKER_00: So whatever is consolidated in there, you report 100% of emissions.
• 25:42
  SPEAKER_00: So this is akin to financial control.
• 25:44
  SPEAKER_03: But then Well, it is financial Yes.
• 25:48
  SPEAKER_00: Yeah Yeah, okay.
• 25:49
  SPEAKER_00: Uh I would agree.
• 25:50
  SPEAKER_00: Yes.
• 25:50
  SPEAKER_00: Um So this is financial control.
• 25:52
  SPEAKER_00: So then you do the you go to step two and you have to determine for the you know um assets and operations that not that are not fully an arrangement that are not fully consolidated in your financial statements, you have to determine whether you have operational control over those assets, operations, or investments.
• 26:10
  SPEAKER_00: So we're talking about equity method investments and other arrangements because it's not only limited to investments.
• 26:16
  SPEAKER_00: If you determine you have operational control or uh over those uh operations, assets and arrangements, you're gonna also report 100% of emissions from from those uh type of arrangements.
• 26:28
  SPEAKER_00: So that's kind of a two-step hybrid approach, which is gonna result in oftentimes in higher emissions reported under ESRS versus any single approach that uh is uh required or allowed under GEG protocol.
• 26:44
  SPEAKER_02: Yeah, and I would just maybe jump in here.
• 26:46
  SPEAKER_02: So under GHG protocol, you're following one of those approaches exclusively, whereas this you're following an we said a hybrid approach.
• 26:55
  SPEAKER_02: I sometimes use the term additive approach because you are you are doing financial control and operational control potentially.
• 27:02
  SPEAKER_02: And so as Martin mentioned, you're oftentimes um the result of reporting under ESRS would be likely including more emissions from an entity asset or operation because it's that additive approach.
• 27:15
  SPEAKER_03: Okay, so I agree with both of you.
• 27:17
  SPEAKER_03: I do think it's important here to use some precise language that they use in ESRS because they have quite a list of types of entities that you need to consider.
• 27:28
  SPEAKER_03: But then in addition, there's a little small twist that we got in the implementation guidance that I'd like to highlight.
• 27:33
  SPEAKER_03: But these entities are listed in paragraph 46.
• 27:37
  SPEAKER_03: Uh, they're also listed in various places in the ARs.
• 27:41
  SPEAKER_03: But the entities that you need to consider for operational control are associates, joint ventures, unconsolidated subsidiaries, investment entities, and contractual arrangements that are joint arrangements not structured through an entity.
• 27:54
  SPEAKER_03: So that is jointly controlled operations and assets, those last category we were talking about earlier.
• 28:00
  SPEAKER_03: And we'll go through again how you think about each of these.
• 28:03
  SPEAKER_03: All of those entities need to be considered for operational control.
• 28:08
  SPEAKER_03: However, uh FREG issued at the end of May implementation guidance, specifically IG2, talks about the value chain.
• 28:16
  SPEAKER_03: And Marchin, they they addressed this question of operational control and they highlighted uh the fact that it's not limited to these entities.
• 28:25
  SPEAKER_03: So can you just explain that a bit?
• 28:27
  SPEAKER_00: Yeah, so they clarify that it's not only for you know, not only as it relates not only for entities or joint ventures or you know, and investments, it expands to other types of arrangements.
• 28:38
  SPEAKER_00: And specifically, they pointed out, for example, leases.
• 28:41
  SPEAKER_00: You should uh analyze the lease arrangements under the same um kind of a framework.
• 28:46
  SPEAKER_00: So it doesn't have to be investments or entity structure with, you know, as a corporation or or joint venture.
• 28:52
  SPEAKER_02: Yeah, and they also and I'll also add the FRAG um implementation guidance also highlighted that operational control under um ESRS is is the same or should be interpreted the same as operational control under the GSG protocol.
• 29:08
  SPEAKER_03: All right, good add there to both of you.
• 29:10
  SPEAKER_03: And I I think that point that Martin was making is basically you don't have to have an equity interest in the entity in order to assess it necessarily for operational control.
• 29:20
  SPEAKER_03: So from that point of view, also that actually is the same is as the GSG protocol that that operational control uh assessment is not based on equity ownership.
• 29:29
  SPEAKER_03: Now, I'm going to do my same scenarios again, and then I have even a different twist, but we'll do my scenarios first.
• 29:37
  SPEAKER_03: So I'm gonna start the opposite direction, just to make things a little more interesting.
• 29:40
  SPEAKER_03: So, Kelsey, to you first, for those wholly owned subsidiaries, how would you uh consider them for your organizational boundaries under ESRS?
• 29:49
  SPEAKER_02: Yeah, and so again, starting with step one of your organizational boundary, if it's you look at what's in your consolidated group and you include 100% of the emissions of the entities or assets in your consolidated group.
• 30:01
  SPEAKER_02: So because you fully own and wholly consolidate this entity, 100% of its emissions are included in your organizational boundary.
• 30:08
  SPEAKER_03: All right, gold star for that.
• 30:09
  SPEAKER_03: Marchin, now I have I think hopefully this one you will also find easy.
• 30:14
  SPEAKER_03: It is a consolidated subsidiary in your financial statements that you do not wholly own.
• 30:19
  SPEAKER_00: Well, that's a pretty pretty similar to scenarios we talked before.
• 30:23
  SPEAKER_00: So um when you look at uh ESRS guidance, so because it's uh fully consolidated, you have to report 100% of emissions irrespective of interest held held.
• 30:33
  SPEAKER_03: All right.
• 30:34
  SPEAKER_03: So following the same order we did last time, uh Kelsey, we're going to talk about equity method investees next.
• 30:40
  SPEAKER_03: Yeah.
• 30:40
  SPEAKER_02: And so step one, is it consolidated?
• 30:43
  SPEAKER_02: It's not, it's equity method, and so it's not in your consolidated group.
• 30:47
  SPEAKER_02: So then I go to step two, do I have operational control over it?
• 30:50
  SPEAKER_02: And if you do have operational control over the entity, the equity method investment, you will include 100% of its emissions in your GHG report.
• 30:58
  SPEAKER_02: If not, then you will include zero.
• 31:01
  SPEAKER_03: Right.
• 31:01
  SPEAKER_03: And again, I think it's important to clarify.
• 31:03
  SPEAKER_03: I know I said we wouldn't keep repeating this, but you would include 100% of your scope one or the entities, scope one and scope two, irrespective of this operational control conclusion, then you would need, um, or if you don't have operational control, then you would need to include as appropriate in your scope three emissions.
• 31:22
  SPEAKER_03: That's another episode.
• 31:23
  SPEAKER_03: Again, we are not going into that here.
• 31:26
  SPEAKER_03: So all right, Marchin, next to you will be these proportionate, no, no, no, sorry.
• 31:32
  SPEAKER_03: You get the easy one this time.
• 31:34
  SPEAKER_03: Next to you will be joint ventures.
• 31:36
  SPEAKER_00: Well, so like uh pretty much similar to what we talked when we talked about um what Kelsey talked about.
• 31:41
  SPEAKER_00: So the first you have to determine like so first determination is you you do not consolidate those joint ventures in your financial statements.
• 31:48
  SPEAKER_00: Therefore, in step one, you have to include zero emissions, or you don't have to include any emissions uh in step one, but then you still have to go to step two and you do determinate determination, do you have operational control?
• 31:57
  SPEAKER_00: And depending on the answer, you might report zero or 100%.
• 32:01
  SPEAKER_03: Right.
• 32:01
  SPEAKER_03: And then scope three as well.
• 32:03
  SPEAKER_03: Yes.
• 32:03
  SPEAKER_03: Now the last one is is to Kelsey, and this time I have the words right in front of me, so I'll use them.
• 32:09
  SPEAKER_03: So contractual arrangements that are joint arrangements not structured through an entity, so jointly controlled operations and assets.
• 32:16
  SPEAKER_03: And again, US GAAP, we would call this proportional consolidation under IFRS.
• 32:21
  SPEAKER_03: These would be IFRS one type of arrangements under IFRS 11.
• 32:25
  SPEAKER_03: How do we think about these?
• 32:26
  SPEAKER_02: Yeah, and so again, thinking about ESRS is that additive approach.
• 32:30
  SPEAKER_02: So for the um proportion of the joint operation that you proportionally consolidate, um, you're going to include that proportion of the emissions in your GHG emissions reporting.
• 32:42
  SPEAKER_02: Then you would go to step two and look, do you have operational control over this joint operation?
• 32:47
  SPEAKER_02: If you have operational control over that joint operation, you're going to actually include 100% of the joint operations emissions in your scope one and two in your GHG emissions reporting.
• 33:00
  SPEAKER_02: If you do not have operational control over that joint operation, it'll just be that amount that you proportionally consolidate.
• 33:08
  SPEAKER_02: So the difference here between what we talked about with GHG protocol is again, because it is an additive approach under ESRS, you might be including 100% of the joint operations emissions in your sustainability report, whereas under GHC protocol, it could just be based on your percentage ownership share.
• 33:27
  SPEAKER_03: So that's ESRS at a high level.
• 33:30
  SPEAKER_03: Martin, I'll go to you.
• 33:32
  SPEAKER_03: How about SEC?
• 33:33
  SPEAKER_00: So I think SEC is interesting because I think we keep mentioning uh across our various um you know podcasts, SEC is designed to provide a certain level of flexibility.
• 33:42
  SPEAKER_00: So um as it relates to organizational boundary, SEC does not mandate any specific uh approach, right?
• 33:49
  SPEAKER_00: Um the only guidance that SEC includes is you know, company has to describe what type of organizational boundary approach they selected for the reporting, and they have to describe the differences between approach selected and consolidated financial statements.
• 34:04
  SPEAKER_00: So, you know, um if you have a different kind of entities operations that you that are reflected in your consolidated financial statements versus what you including in your sustainability emissions reporting, you would you would have to explain those and disclose what those differences are.
• 34:20
  SPEAKER_03: All right.
• 34:21
  SPEAKER_03: Very helpful there, March.
• 34:22
  SPEAKER_03: And I think this is a good lead-in to my next question.
• 34:26
  SPEAKER_03: So just a reminder to listeners, we've said this a few times now, but under the GHG protocol or reporting under IFRS2, with the exception of if you are reporting following a jurisdictional requirement, or if you're reporting for your California requirements, you're going to be able to select an organizational boundary approach consistent with what Marchin just said for SEC.
• 34:48
  SPEAKER_03: So, Kelsey, I know one of the other areas we spend time on in the guide is if you're in this scenario where you can choose, what are the factors?
• 34:56
  SPEAKER_03: Again, I will for my uh EU colleagues that are telling me right now, but there's no choice under ESRS.
• 35:02
  SPEAKER_03: I will remind our listeners, there is no choice under ESRS.
• 35:06
  SPEAKER_03: But some reporters will have a choice.
• 35:08
  SPEAKER_03: So, what are some of the things you think about?
• 35:10
  SPEAKER_02: Yeah, and I'll definitely say this is a you know non-exhaustive list and and certainly um there's no you know best approach or or you know number one recommended approach, but the GHG protocol does list some um indicators or factors to consider that that a reporting company might consider that helps them find the most efficient and and sufficient way to report their GHG emissions.
• 35:35
  SPEAKER_02: And so I really think it'll vary based on the nature of the company, its industry, and its objective of sustainability reporting.
• 35:43
  SPEAKER_02: So, like I mentioned, there's a a list in the GHG protocol, but a couple of key ones that I typically consider are you know, what are your government or um governmental or other regulatory or jurisdictional reporting requirements as one approach, potentially operational control, if that's how you are reporting for those specific regulations might better align with that approach.
• 36:07
  SPEAKER_02: And so you can have an efficient reporting method.
• 36:10
  SPEAKER_02: And then alignment with financial reporting.
• 36:12
  SPEAKER_02: If your objective is to align your sustainability report with your financial reporting, financial control or equity share generally is you know going to be aligned closely with your financial statements.
• 36:26
  SPEAKER_02: And then another indicator is access to the data.
• 36:29
  SPEAKER_02: If you have ready access to the data, that might be it might be easier for you to leverage the operational control approach and then as you'll be able to gather that data quickly and report your emissions accordingly.
• 36:46
  SPEAKER_03: Yeah, and maybe just a point to add there, we talked about the fact for uh SEC reporting, you actually have to disclose if you're they have differences, so that may lean you towards financial control.
• 36:57
  SPEAKER_03: In addition, one of the sort of foundational concepts within the IFRS sustainability disclosure standards, like one of the qualitative characteristics of information is the interconnectivity with the financial statements.
• 37:09
  SPEAKER_03: So, not to say that that would mean that's the only factor you should consider, but that is a factor to consider in disclosing under your ISSB or selecting an approach under ISSB.
• 37:21
  SPEAKER_03: Now, another question that we get is that there's many companies that have been reporting voluntarily, and they may be following one of these GHG protocol approaches exactly.
• 37:32
  SPEAKER_03: They may have their own variant on it.
• 37:35
  SPEAKER_03: But for many of these companies, as they're approaching required reporting, and in particular not ESRS reporting.
• 37:44
  SPEAKER_03: How do we talk to them or how can they think about is it okay to change methods when you're reporting under a required framework for the first time?
• 37:52
  SPEAKER_00: I think, and it's our our opinion, I think it's you know, move from voluntary to um regulatory uh reporting requirements could be good uh you know reason to change the methods.
• 38:04
  SPEAKER_00: Um that's a you know, in our opinion, justifiable change to do this.
• 38:08
  SPEAKER_00: And the other thing is that you mentioned before, you know, especially when companies are using some variant of one of the organization boundary selection approaches, um, it might be a good time to kind of bring it up to to one of the you know allowed.
• 38:20
  SPEAKER_03: Well, in fact, they would be required to align with the allowed.
• 38:24
  SPEAKER_03: And I think it's a key point because if you let's say after the first year of reporting, or if you're just reporting voluntarily and continuing to report voluntarily, then we would typically expect a company to justify the reason for making a change and you know why it's providing better information to the users.
• 38:45
  SPEAKER_03: However, again, in this first year, I would say it's like I'll say free pass, but you can really think about what makes most sense for your entity in the current reporting environment.
• 38:56
  SPEAKER_01: Yeah.
• 38:57
  SPEAKER_03: So one other reminder I'd want to give uh listeners, and this will give you a chance to think of your final answer, is that we do go through this in detail in the sustainability reporting guide.
• 39:07
  SPEAKER_03: And in there, we actually have what I think is probably one of the best examples we've done in the whole guide, which is that it runs through for a certain structure all the different approaches and compares the results of emissions that the company is reporting.
• 39:23
  SPEAKER_03: So it really illustrates the differences that you can come to under these different approaches.
• 39:28
  SPEAKER_03: So again, if you're selecting a method, I encourage you to check that out.
• 39:32
  SPEAKER_03: So we've gone through a lot today.
• 39:34
  SPEAKER_03: There's a lot to think about, and in some ways, we only skimmed the surface on some of the issues here.
• 39:40
  SPEAKER_03: But I always like to wrap things up by asking for advice for our listeners.
• 39:44
  SPEAKER_03: So, Kelsey, I'll go to you first.
• 39:46
  SPEAKER_03: When dealing with organizational boundaries, what do you recommend?
• 39:49
  SPEAKER_02: Yeah, I think it's well, your starting point is understand what the organizational boundary approaches are and how and how they operate, I guess, within each framework.
• 40:00
  SPEAKER_02: And so to your point, that example that we have in our guide is is one of the best.
• 40:04
  SPEAKER_02: And I'll also clarify that we not only show what it what would be included under each approach, but also under each standard.
• 40:12
  SPEAKER_02: So if you're reporting under CSRD, or you might actually be reporting under CSRD and GHG protocol for California California operations.
• 40:21
  SPEAKER_02: And so understanding what the approaches are and what you have to report under for the different frameworks is very important because you might need to keep potentially two sets of books just uh um because they neither of them completely overlap um cleanly.
• 40:39
  SPEAKER_00: Okay, so since uh Kelsey sort of took my standard point uh of interoperability, I'm gonna uh you know approach it from a different direction.
• 40:46
  SPEAKER_00: I think what's gonna be really important because we're talking about a lot of new required or regulatory uh sustainability reporting um uh frameworks.
• 40:55
  SPEAKER_00: Um so a lot of companies are gonna go through the process of analyzing how to report, what to report, what organization boundary to select.
• 41:03
  SPEAKER_00: So my angle on that would be it's really important that people responsible for those determinations they really understand the nature of the operations and contractual arrangements the company has.
• 41:14
  SPEAKER_00: Um, which means the the the the the people would have to be collaborating throughout the organization to make sure they don't miss and they have a proper understanding.
• 41:23
  SPEAKER_00: Because as I mentioned, on the surface it all looks similar, but lots of these concepts might be new.
• 41:29
  SPEAKER_00: So thorough understanding of what you know what is consolidated, how the consolidation in financial statements, how the consolidation conclusions were reached, what type of arrangements we have that could impact our operational control assessment.
• 41:41
  SPEAKER_00: So having that thorough understanding of your company, its structure and arrangements that have is gonna be really critical, especially in a year one, because that will allow companies to determine what approach to take under volunt or under frameworks they allow to select.
• 41:57
  SPEAKER_00: But under frameworks that mandate, like ESRS, they give you approach that you need to take.
• 42:02
  SPEAKER_00: It's also gonna be critical to make the determination where you have financial control and where you have operational control.
• 42:08
  SPEAKER_03: Yeah, and I think I'd echo what both of you said.
• 42:10
  SPEAKER_03: Uh but maybe the final point, and it's similar to what Martin's saying, I think you have to give this time.
• 42:17
  SPEAKER_03: So for many companies, you've been reporting your missions, you think you have a method, and you maybe are thinking, well, this is going to be quick or this is something can skip over.
• 42:27
  SPEAKER_03: But I do think it's critically important to really go meth methodically through, make sure you know what your approach is, make sure you know what's required by your standards, and then that you have evaluated each different entity.
• 42:40
  SPEAKER_03: And in particular with operational control, we we talked about those examples.
• 42:44
  SPEAKER_03: It can change over time.
• 42:45
  SPEAKER_03: I think that's also something that's important.
• 42:48
  SPEAKER_03: So again, this is a critical step because if you have a wobbly foundation to your GHG reporting, it is going to be impossible to get your information right.
• 42:56
  SPEAKER_03: So with that, Kelsey Marchin, such a pleasure to talk to you.
• 42:59
  SPEAKER_03: Thanks so much for joining me today.
• 43:01
  SPEAKER_00: Thank you very much.
• 43:02
  SPEAKER_03: Thank you.
• 43:03
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• 43:25
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