Whose Carbon Is It?

Companies are increasingly asked by their investors to report on their greenhouse gas emissions either in their mainstream financial reports or through sustainability reporting frameworks such as CDP and GRESB.
The GRESB Real Estate Assessment requires that funds report on their energy, waste and water data as well as their “Scope 1, 2 and 3” greenhouse gas (GHG) emissions within the Performance Indicators Aspect, which is worth a quarter of the overall GRESB score. The significant weighting of this Aspect reflects the importance that GRESB and its investor members place on the availability, accuracy and transparency of sustainability performance data.
In the context of real estate, there is often confusion about whether the landlord or the tenant should report on emissions associated with the leased asset – i.e. uncertainty in whose carbon it is. In this blog, we aim to provide clarity on how landlords and tenants should allocate responsibility for emissions by exploring the concept of “Organisational Boundaries” and “GHG Scopes”.
1. Organisational Boundaries – what is in and what is out?
First published in 2001, The Greenhouse Gas Protocol (GHG Protocol) is the most widely used international accounting tool for businesses to understand their greenhouse gas emissions.
The GHG Protocol requires companies to draw their boundary for GHG reporting according to either the ‘equity share’, ‘operational control’ or ‘financial control’ approach.
Under the equity share approach, a company accounts for emissions from its operations according to the share of its equity in the operation and is typically aligned to the company’s percentage ownership of the operation. In the context of GRESB, the two funds which have a joint venture (JV) in a certain asset will report GHG emissions from that asset apportioned according to their percentage ownership. However, GRESB only requires participants to report on sustainability data from JVs where they have more than, or equal to 25% ownership.
Under the operational control approach, a company reports on the operations on which it has the authority to introduce and implement its operating policies. In reality, in most instances, only one company would have operational control over an asset. However, for the purpose of GRESB, where two funds have more than, or equal to 25% holding in a JV, they will both report 100% of emissions from energy, water and waste use for that asset. While this will lead to double counting of emissions, the purpose of GRESB is to drive sustainability performance improvement, and GRESB considers that JV partners with a stake of 25% or higher have significant influence over operational initiatives and can therefore drive implementation of sustainability initiatives and performance.
Under the financial control approach the organisation should include the operations over which it is able to direct the financial and operating policies with a view to gaining economic benefits from its activities. If a company chooses the financial control approach, emissions from JVs where partners have joint financial control are accounted for based on the equity share approach described above.
2. GHG Scopes – direct and indirect emissions
The concept of GHG “Scopes” was developed by the GHG Protocol help to delineate direct and indirect emissions sources. The delineation of emissions into scopes helps to ensure that two or more companies will not account for the same emissions within the same scope i.e. to avoid double counting and helping us clarify “Whose carbon is it?”
Scope 1 emissions, also known as direct emissions, are defined as emissions from sources that are owned or controlled by the organisation. This might include, for example, natural gas combusted in a boiler at a company’s head office. Scope 1 emissions physically occur in assets owned or controlled by the reporting company.
Scope 2 emissions, also known as indirect emissions, are emissions from purchased electricity, heat, steam or cooling consumed by the company, but generated elsewhere. Conversely to Scope 1 emissions, where the emissions occur at the asset controlled or owned by the reporting company, Scope 2 emissions are released at the facility where the electricity is generated (i.e. the power plant). The power plant would report these emissions as Scope 1, but the organisation purchasing and consuming the electricity would report these as Scope 2. Since 2015, organisations have been encouraged to “dual report” their Scope 2 emissions using the location-based and market-based methodologies which utilise grid-specific or supplier-specific emission factors respectively.
Scope 3 emissions, or other indirect emissions, are emissions that occur as a consequence of the operations of the organisation, but are not directly owned or controlled by that organisation. For example emissions from waste generated by a company’s operations are defined as Scope 3 emissions. It is optional for organisations to report on Scope 3 emissions to GRESB.
The GHG Protocol Scope 3 guidance outlines the 15 different Scope 3 categories and the graph below shows the Scope 3 categories reported to CDP by UK Real Estate companies in 2016.

The GHG Protocol Scope 3 guidance encourages companies to report only on Scope 3 categories which are relevant to their organisations. It is therefore important to consider the following three questions:

• How does each category contribute to the overall emissions?
• What influence does the organisation have over those emissions?
• To what extent do the emissions contribute to the organisation’s risk exposure?

Understanding which Scope 3 emissions are relevant to your organisation is particularly important for organisations that are setting science-based targets as they are required to conduct a “Scope 3 Screening” exercise.
3. How to allocate tenant emissions?
There is often confusion about how landlords should report on emissions from tenant space; whether you categorise these emissions as Scope 1, 2 or 3 depends on which of three organisational boundary options you have chosen as well as the type of lease in place.
The first step is to understand the type of lease in place, whether it is a finance/capital lease or an operating lease. A finance/capital lease enables the lessee to operate an asset and gives them the full risks and rewards of owning the asset. As such, these assets are considered to be wholly owned assets in financial accounting (i.e. it would be recorded on their balance sheet). Operating leases, on the other hand, enable the lessee to operate the asset, but do not give them the risk or reward of owning that asset.
Depending on the type of lease and the organisational boundary chosen, landlords should report on emissions from leased assets in different GHG Scopes as shown in the table below.

Appropriate categorisation of emissions from leased assets by landlords and tenants ensures that GHG emissions are not double-counted. Therefore, if your tenant is reporting the emissions from the use of purchased electricity as Scope 2, the landlord should categorise the same emissions as Scope 3, and vice versa.
Improved accuracy and consistent application of boundaries and scopes will lead to more comparable, better quality data. In order to ensure that you have a good understanding of whose carbon is being reported, it is suggested that:

• The boundary approach is appropriate and well understood
• The asset-level lease types between the tenant and landlord are carefully considered

Remember, allocation of emissions to scopes is executed in view of both the boundary and the lease arrangements!
This article is written by Kyna Huysmans, Senior Analyst.