Laws and regulations that require companies, both private and public, to disclose their greenhouse gas (GHG) emissions continue to expand in the European Union and in the United States. Under the EU Corporate Sustainability Reporting Directive (CSRD), beginning in 2025, EU-based public companies and large EU-based private companies will be required to report all material Scope 1, 2, and 3 GHG emissions as set forth in the European Sustainability Reporting Standards. In the United States, California recently passed landmark climate-related disclosure legislation that will require U.S. companies that do business in California and have greater than $1 billion in annual revenues to file annual reports publicly disclosing their Scope 1 and 2 GHG emissions beginning in 2026 and Scope 3 GHG emissions in 2027. This legislation is expected to be joined by the U.S. Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rule. Initially proposed in March 2022, if finalized, the SEC rule would require public companies to disclose their Scope 1 and Scope 2 emissions and material Scope 3 emissions. And later this year, world policymakers, activists, and business leaders will convene at COP28 to discuss global progress towards achieving the net-zero GHG emissions targets set by the Paris Agreement.
The Greenhouse Gas Protocol (GHG Protocol) sits at the center of all these efforts. Established by the World Resources Institute and the World Business Counsel for Sustainable Development in 2001, the GHG Protocol establishes comprehensive standards for private and public entities to calculate and report their GHG emissions and track progress towards their emissions targets.
Understanding the GHG Protocol is critical for companies to meet their compliance obligations under the ever-growing ecosystem of climate-related disclosure laws. This post provides a primer on the GHG Protocol and preparations companies should make as they apply the GHG Protocol to their operations.
I. Calculating GHG Emissions
The process of calculating GHG emissions varies based on the type of entity and its GHG emissions goals. For that reason, the GHG Protocol is composed of seven different standards:
The Corporate Standard is the most relevant and widely used standard for companies aiming to calculate their GHG emissions to meet voluntary and mandatory emissions-disclosure requirements. The Corporate Standard breaks this process into two key steps: (1) setting organizational boundaries and (2) setting operational boundaries.
Setting organizational boundaries. One of the first questions a company must answer when calculating their GHG emissions is whether to calculate GHG emissions only for wholly owned operations or to also calculate emissions from joint ventures, subsidiaries, affiliated companies, franchises, or other entities. Companies must also determine how much of the emissions from such operations they should calculate as part of their overall emissions footprint. The Corporate Standard describes this question as “setting organizational boundaries.” The Corporate Standard offers two approaches for consolidating GHG emissions data: the equity-share approach and the control approach.
A company’s data-consolidation approach must align with the requirements of the relevant GHG emissions reporting program. For example, the geographic and operational boundaries of a reporting program may impact the data-consolidation approach a company chooses. The cost of administration and associated liability and risks will also inform the choice of approach. The consolidation approach also has downstream effects; once the parent company has chosen a data-consolidation approach, it must apply that approach to all levels of the organization.
Setting operational boundaries. Once a company determines its organizational boundaries, it then must set its operational boundaries by identifying the emissions that are associated with its operations. Here, the Corporate Standard applies the concept of “scope” to divide emissions into three categories: Scope 1 emissions, or direct GHG emissions; Scope 2 emissions, or emissions from the generation of electricity, steam, heat, or cooling that is purchased and consumed by the company; and Scope 3 emissions, or emissions that occur upstream and downstream from a company as a consequence of the activities of the company, but at sources not owned or controlled by the company. These Scope 3 “value chain” emissions are the most difficult to assess.
The concept of “scope” was pioneered by the GHG Protocol and is used by every major emissions-reporting program, including California’s climate-related disclosure legislation and the EU CSRD. Once a company has determined its operational boundaries, it must calculate its emissions under each category to determine its carbon footprint. This carbon footprint is measured in carbon dioxide equivalent (CO2e), or the number of metric tons of CO2 emissions with the same global warming potential—calculated by the Intergovernmental Panel on Climate Change—as one metric ton of another greenhouse gas. CO2e is calculated by multiplying the business activity, such as the amount of electricity consumed, by an emissions factor. These emissions factors are standardized by organizations such as the US Environmental Protection Agency and CDP.
II. Reporting GHG Emissions
Once a company has determined which parts of its operations it must account for as part of its organizational boundaries, categorized its emissions according to its operational boundaries, and calculated its emissions by multiplying each business activity by an approved emissions factor, it must then report these emissions according to mandatory or voluntary disclosure requirements. This could prove challenging if different jurisdictions with mandatory disclosure obligations have different requirements for reporting GHG emissions data. Some programs may also require that companies validate their emissions data by a third-party auditor at different levels of assurance. And companies must also assess how their reported data aligns with emissions targets and decarbonization commitments made to shareholders and investors.
To prepare for calculating and reporting GHG emissions, Covington recommends companies take the following steps.
Map out the organization. Understanding the organization and its operational components is key to deciding whether to consolidate GHG emissions data based on an equity share or control approach. To inform this decision, companies should map out their subsidiaries, affiliated companies, franchises, and other related operations to create a comprehensive picture of the organization. This map should include the geographic location, equity share, and level of financial and operational control the company has over each operation. In creating this map, companies must also ensure that their consolidation method can meet a wide range of GHG reporting requirements and does not result in double counting of emissions from joint operations and ventures.
Know your emissions data. Accurate, granular data is essential to developing an effective GHG emissions reporting program. But collecting high-quality Scope 1, 2, and 3 emissions data can be a resource-intensive endeavor that, if aspiring to a high degree of accuracy and fidelity to net-zero goals, can involve outreach to a wide group of internal and external stakeholders. Particularly for Scope 3 emissions, reliance upon economy-wide or industry-average emissions factors based on simple metrics (such as dollars of spend for electronic hardware) is rudimentary, and the GHG Protocol accordingly encourages companies to improve the quality and accuracy of their reports through greater outreach throughout their supply chain. To ease the burden of collecting emissions data and preparing disclosure reports, companies should consider engaging with carbon consulting and accounting firms that are independent, experienced in the company’s business and industry, and knowledgeable of the various reporting programs and their requirements.
Consolidate the data collection process. External scrutiny of GHG emissions reports is increasing, which may demand greater oversight and attention by corporate boards concerning the data compilation process and controls put in place to ensure that the data are high quality. To streamline and coordinate this process, companies should vest authority for managing the data collection process into one department or role, such as the chief sustainability officer. Companies should also involve legal counsel, financial reporting, and investor relations in this process to ensure that the data collection process and its outputs aligns with external reporting program requirements and internal GHG emissions targets and net-zero commitments.
Covington’s Carbon Management and Climate Mitigation (CM2) group has extensive experience and capabilities advising on climate mitigation strategies. Our global team is ready to assist clients as they understand and apply the GHG Protocol, implement their corporate net-zero goals, and identify strategic partnerships and funding opportunities to accelerate the energy transition.