Key Concepts for Corporate Value Chain (Scope 3) GHG Accounting and Reporting

The following text is intended to provide a (brief and incomplete) overview of the key concepts for Corporate Value Chain (Scope 3) GHG Accounting and Reporting. These Key Concepts are listed in accordance with the Greenhouse Gas Protocols Corporate Value Chain (Scope 3) Standard, herein referred to as "the Standard".

Guiding Principles

There are five guiding principles in Corporate Value Chain GHG accounting and reporting:

• Relevance: Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users - both internal and external to the company.

• Completeness: Account for and report on all GHG emission sources and activities within the inventory boundary. Disclose and justify any specific exclusions.

• Consistency: Use consistent methodologies to allow for meaningful performance tracking of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.

• Transparency: Address and document all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the methodologies and data sources used.

• Accuracy: Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable confidence as to the integrity of the reported information.

Companies & practitioners shall follow these principles, as they are intended to underpin and guide the process of accounting and reporting corporate value chain emissions. These five guiding principles arte especially important when application of the standard in specific situations is ambiguous, as they ensure the reported inventory represents a faithful, true, and fair account of a company's GHG emissions.

Standard Terminology

The Standard also uses precise language to indicate which provisions are:

• Requirements
• Recommendations
• Permissible or allowable options

For example, the word 'shall' is used when something is required, 'should' when something is a recommendation, 'may' to indicate an option that is allowable or permissible.

The Standard Terminology is as follows:

1. 'Shall' - indicates a required option.
2. 'Should' - indicates a recommended option.
3. 'May' - indicates an allowable or permissible option.
4. 'Required' - refers to requirements in the GHG Protocol Corporate Standard.
5. 'Needs', 'can', 'cannot' - provides guidance on implementing a requirement or indicates when an action is or is not possible.

Seven Greenhouse Gases

GHG stands for 'greenhouse gases' and it includes gases that trap the heat in the atmosphere. Companies should include any other relevant GHGs in their report. When accounting and reporting scope 3 emissions, companies shall account for the 7 greenhouse gases shown below.

1. Carbon Dioxide (CO2): enters the atmosphere through burning fossil fuels (coal, natural gas and oil), solid waste, trees and wood products, and also as a result of certain chemical reactions (e.g., manufacture of cement). Carbon dioxide is removed from the atmosphere (or "sequestered") when it is absorbed by plants as part of the biological carbon cycle.

2. Nitrous oxide (NO2): is emitted during agricultural and industrial activities, as well as during combustion of fossil fuels and solid waste.

3. Methane (CH4): is emitted during the production and transport of coal, natural gas, and oil. Methane emissions also result from livestock and other agricultural practices and by the decay of organic waste in municipal solid waste landfills.

4. Fluorinated Gases (4-7): Hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifloride (NF3) are synthetic, powerful greenhouse gases that are emitted from a variety of industrial processes. Fluorinated gases are sometimes used as substitutes for stratospheric ozone-depleting substances (e.g., chlorofluorocarbons, hydrochlorofluorocarbons, and halons). These gases are typically emitted in smaller quantities, but because they are potent greenhouse gases, they are sometimes referred to as High Global Warming Potential gases ("High GWP gases").

BioGenic Emissions

Biogenic CO2 emissions result from the combustion or biodegradation of biomass. Biomass is defined as any material or fuel produced by biological processes of living organisms, including organic non-fossil material of biological origin (such as plant material), biofuels (such as liquid fuels produced from biomass feedstocks), biogenic gas (such as landfill gas), and biogenic waste (such as municipal solid waste from biogenic sources).

To be in conformance with The Standard, it is a requirement that companies report biogenic CO2 emissions, but they shall be reported separately from the scopes. This does not apply to:

• Emissions of any other GHGs, like CH4 and N2O

• Any GHG emissions that occur in the life cycle of biomass other than from combustion or biodegradation, like GHG emissions from processing or transporting biomass.

• Scope 1, scope 2, and scope 3 inventories include only emissions, not removals. Any removals (such as biological GHG sequestration) may be reported separately from the scopes.

In short, Biogenic CO2 emissions that occur in the reporting company’s value chain shall not be included in the scopes, but shall be included and separately reported in the public report.

Direct or Indirect & SCOPE of Emissions

Emissions can be categorized into two different classes:Direct or Indirect

• Direct emissions are emissions from sources that are owned or controlled by the reporting company.

• Indirect emissions are emissions that are a consequence of the activities of the reporting company, but occur at sources owned or controlled by another company.

For GHG accounting and reporting, emissions are further divided into Three Scopes: direct emissions are included in Scope 1, and indirect emissions are included in Scope 2 and Scope 3.

While a company has control over its direct emissions, it also has some influence over its indirect emissions, which is why a complete GHG inventory includes all three scopes. Scope 2 includes emissions from electricity, steam, heating and cooling purchased and consumed by the reporting company. Scope 3 includes all other emissions that occur in the company's value chain. By definition, scope 3 emissions occur from sources owned or controlled by other entities in the value chain .

By properly accounting for emissions as scope 1, scope 2, and scope 3, companies avoid double counting within scope 1 and scope 2. Combined, a company's scope 1, scope 2, and scope 3 emissions represent the total GHG emissions related to company activities.

Specifics of the Three Scopes

There are several specific peculiarities practitioners must take into consideration when defining scopes. For instance, a company's scope 3 inventory does not include any emissions already accounted for as scope 1 or scope 2 by the same company. Combined, a company's scope 1, scope 2, and scope 3 emissions represent the total GHG emissions related to company activities.

In certain cases, two or more companies may account for the same emission within scope 3. For example, the scope 1 emissions of a power generator are the scope 2 emissions of an electrical appliance user, which are in turn the scope 3 emissions of both the appliance manufacturer and the appliance retailer. Each of these four companies has different and often mutually exclusive opportunities to reduce emissions. The power generator can generate power using lower-carbon sources. The electrical appliance user can use the appliance more efficiently. The appliance manufacturer can increase the efficiency of the appliance it produces, and the product retailer can offer more energy-efficient product choices.

By allowing for GHG accounting of direct and indirect emissions by multiple companies in a value chain, scope 1, scope 2, and scope 3 accounting facilitates the simultaneous action of multiple entities to reduce emissions throughout society. Because of this type of double counting, scope 3 emissions should not be aggregated across companies to determine total emissions in a given region. Note that while a single emission may be accounted for by more than one company as scope 3, in certain cases the emission is accounted for by each company in a different scope 3 category, as scope 3 emissions are sub-divided into 15 different categories. A complete overview of these sub-categories is listed in sections 5.4 and 9.6 of the Standard.

Organizational Boundaries

Defining organizational boundaries is a crucial step in corporate GHG accounting & reporting. This step determines which operations are included in the company's organizational boundary and how emissions from each operation are consolidated by the reporting company.

By setting organizational boundaries, a company selects an approach for consolidating GHG emissions. It then consistently applies the selected approach to define those businesses and operations that constitute the company for the purpose of accounting and reporting GHG emission.

The selection of a consolidation approach affects which activities are included in a company's scope 1, scope 2, or scope 3 report.

Organizational boundaries are important to measure emissions consistently throughout a company, and for: - Complex business structures - Subsidiaries - Joint ventures - Franchises

Depending on the organizational boundary a company selects, some activities or operations might be excluded from its scope 1 and scope 2 inventories, and instead be included in its scope 3.

Consolidation Approachs to Organizational Boundaries

There are three organizational boundaries a company can use, the table below shows an overview of these three types of boundaries.

Regarding Consolidation Approaches, please note the following:

1. Companies shall account for and report their consolidated GHG data according to either the equity share or control approach.

2. If the reporting company wholly owns all its operations, its organizational boundary will be the same whichever approach is used.

3. For companies with joint operations, the organizational boundary and the resulting emissions may differ depending on the approach used. In both wholly owned and joint operations, the choice of approach may change how emissions are categorized.

As can be seen, there are specific formulas used to calculate emissions if the operational control, equity share, or financial control approach is used. In general, these formulas are:

• If the Equity Share Approach is used, the reporting company uses the percentage of ownership as the percentage of emission to calculate the emissions to report in scope 1, scope 2, and scope 3.

• If the Operational Control Approach is used, the emissions reported depend on whether the reporting company has operational control:

If the company has operational control, 100% of scope 1, scope 2, and scope 3 emissions are reported. If the company does not have operational control, no emissions are reported in scope 1 or scope 2. The emissions reported in scope 3 are a proportional share of scope 1 and scope 2 emissions. These emissions are reported in category 15. The reporting company can also optionally report scope 3 emissions in this category.

• If the Financial Control Approach is used, the emissions reported depend on whether the company has any financial control:

If the company has financial control, 100% of scope 1, scope 2, and scope 3 emissions are reported.If the company has part financial control, the percentage of financial control is used to calculate the percentage of the emissions to be reported. If the company has no financial control, no emissions are reported in scope 1 and scope 2. The emissions reported in scope 3 are a proportional share of scope 1 and scope 2 emissions. These emissions are also reported in category 15.

Double Counting in Scope 3

Scope 3 emissions are by definition the direct emissions of another entity. Double counting can occur when two companies account for the same emissions within the same scope. One company should not double count the same activity within its scope 1, scope 2, or scope 3 inventory. In addition, scope 1 and scope 2 are defined to ensure that two companies do not account for the same emissions within the same scope.

Double counting does happen between companies within scope 3: two or more companies may account for the same emissions within scope 3. This double counting is an inherent part of scope 3 accounting. Double counting does mean that each company has some degree of influence over emission reductions, and they can work together to reduce emissions. It also means that scope 3 emissions should not be aggregated across companies.

Companies may find double counting within scope 3 to be acceptable for purposes of: - Reporting scope 3 emissions to stakeholders - Driving reductions in value chain emissions - Tracking progress toward a scope 3 reduction target

Companies should acknowledge any double counting when making claims about scope 3 reductions to ensure transparency and avoid misinterpretation of data. For example, a company may claim that the company is working jointly with partners to reduce emissions, rather than taking exclusive credit for scope 3 reductions.

If GHG reductions have a monetary value or receive a GHG reduction program credit, companies should avoid any double counting of scope 3 reductions. To avoid double counting, companies should specify exclusive ownership of reductions through contractual agreements, when possible.

For additional information on these key concepts, be sure to check out the Greenhouse Gas Protocols Corporate Value Chain (Scope 3) Standard.