So companies can accurately report combined emissions, "consolidation" combines the greenhouse gas emissions from an organization’s various sub-entities (“child” entities) according to specific rules, so companies can accurately report combined emissions.
Updated: February 2023
Consolidation in emissions accounting
Consolidation in emissions accounting is the process of combining emissions data from business entities—subsidiaries, franchises, and joint ventures—and rolling them up to the parent company for reporting purposes. In complex owner or operatorship structures, legal and accounting teams can help align the organization's emissions consolidation approach with its financial consolidation approach. All companies preparing an emissions inventory should select a consolidation method prior to developing an emissions inventory.
Why choose a consolidation method?
As in financial accounting, there are rules in emissions accounting to ensure accuracy when reporting combined results. Selecting a consolidation approach is part of setting organizational boundaries. When that approach is consistently applied to all entities, your emissions will be properly categorized without double-counting. If your organization wholly owns its entity or entities, select either approach (control or equity share) to get the same results. In these cases, operational control is the most common method.
Selecting a consolidation approach is a lasting decision. Although the approach may be changed, and indeed should change if the business structure changes, the same approach should be used year after year to allow for consistent emissions performance tracking over time. Changing your consolidation approach in the future may require recalculation of previous years’ inventories.
Based on the structure of the organization and the consolidation approach, different sources of emissions may be categorized under different scopes or be left uncounted entirely. When you select a consolidation approach, Sustain.Life uses that information to select the proper emissions category for you.
1. Control approach
As the name implies, this approach indicates that you have control over an entity’s operations. The control approach is further divided into: a.) Operational control, and b.) Financial control
For wholly-owned companies that direct financial and operating policies, it’s recommended to select operational control. Financial control indicates the ability to direct financial policies in return for potential economic benefits. Companies with operational control have full authority to introduce and implement operating policies, including environmental policies.
2. Equity share approach
This approach is common in organizations that hold shares of equity in one or more entities. For example, a company that holds a 50% share in a joint venture is only responsible for 50% of its emissions.
To select your consolidation method, go to the settings in the top right corner of the screen, then select “Company profile” and scroll down to the bottom of the page.
Picking your consolidation approach
Choose the emissions accounting consolidation approach for the parent company (meaning the company that controls any subsidiaries, if applicable) and apply it consistently across all child entities (again, any subsidiaries of the company). You can select only one option. If you’re unsure, use the following guidance to decide.
How does the consolidation method impact my emissions inventory?
Selecting a consolidation method is an emissions accounting principle that supports transparency and accuracy. In many cases, the consolidation approach you select won’t impact your greenhouse gas emissions inventory. But if you lease assets, have partial ownership in entities, or have financial interest (even minority interest) in an entity that affords you control, the consolidation approach may determine the percentage of emissions included in your inventory and the categorization of certain emissions in either scope 1 and 2, or in scope 3.
How is our equity share reflected in emissions outputs?
Sustain.Life simply multiplies an entity’s total emissions by your equity share to create your inventory. When you have multiple entities, Sustain.Life rolls up the appropriate percentage of emissions from each entity into your total organizational emissions inventory.
What if our equity share fluctuates?
For year-over-year fluctuations, update your share in Sustain.Life each year. Your emissions outputs will fluctuate accordingly. For fluctuations throughout the year, develop an annual average.
We’re an LLP with too many partners to break them all out as separate entities under the equity share approach. What should we do?
Keep in mind that the purpose of an emissions inventory is to provide your stakeholders with impact data. If you’re an LLP with dozens or hundreds of partners (e.g., a large law firm), each partner probably doesn’t have separate investors who are all asking for separate inventories. In these cases, it makes sense to report emissions for 100% of the LLP and explain the organizational structure for context.
What if one or more entities in our organization have already selected a consolidation approach, but we want to use a different one?
If your parent company has adopted an approach, apply the same approach to your entity, even if you disagree with it. If entities other than the parent have chosen one or more approaches you disagree with, the best course of action is to discuss it with legal and accounting teams at the parent level and ensure that the entire organization agrees to and adopts the same approach. This will also prepare you for external verification of your companywide emissions inventory down the road.
What are the advantages of each approach?
You take full ownership of emissions you can directly influence and control
The ability to hold managers accountable for their respective operations (under the operational control approach)
The ability to meet minimum operational data quality standards
Equity share approach:
What are the disadvantages of each approach?
What percentage of emissions are accounted for in the financial control approach by company type and how does this compare to equity share?
|Entity type||Emissions allocated under equity share approach||Emissions allocated under financial control approach|
|Group companies, subsidiaries||Equity share||100%|
|Affiliated/associated companies||Equity share||0%|
|Joint ventures/partnerships||Equity share||Equity share|
|Fixed asset investment||0%||0%|
Franchises are legally separate entities and should not be included in franchisor’s consolidation unless the franchisor has equity rights or financial/operational control (as assumed in the table above).
For which scenarios is choosing the right consolidation approach most important?
Partially owned entities
Complex organizational structures (e.g., subsidiaries of subsidiaries not wholly owned, oil and gas companies, financial institutions)
Entities that lease assets (e.g., building space, vehicles)
Uncommon franchise structures where the franchisor exerts control over finances or operations or holds equity
Public sector organizations
PCAF-aligned financial institutions
Which approach is easiest to align with our financial accounting practices?
The financial control approach and the equity share approach can both be aligned with your financial accounting consolidation approach.
If I change my consolidation method after entering data in Sustain.Life, what will happen to my previous entries?
If you change your consolidation method at any point, that will only impact data entries from that point going forward. Any previously entered data will not be updated. If you’d like historical data to update as well, reach out to Customer Support.
What stakeholders in a business typically decide the consolidation method? When would a client typically engage a consulting professional to make this decision?
In companies with complex organizational structures (e.g., several subsidiaries, complex ownership or operatorship), this is typically a multi-stakeholder executive decision, involving legal counsel and accounting leaders. But even in simple organizational structures, it’s common to have a senior leader confirm the approach. It’s always advisable to involve someone who prepares the company’s consolidated financial statements.
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