Business Operations vs. Reporting Boundary: Tips on Determining the Reporting Boundary of the ESG Report

Business Operations vs. Reporting Boundary: Tips on Determining the Reporting Boundary of the ESG Report

Given that each company has its own business nature, the reporting boundary of each ESG Report will be different. However, which business segment should be included, and which can be excluded? What criteria should be applied to determine the reporting boundary? How should companies make the most informed decision regarding their ESG Reports? Companies may pay attention to the following key points when struggling with the reporting boundaries.

General Approaches to Determine the Reporting Boundary

In general, most companies nowadays determine their reporting boundaries with (1) Control Approach, or (2) Equity Share Approach.

1)      Control Approach

This approach determines the reporting boundary by accounting for operations over which the company has control, which further divides into two approaches:

1.1) Operational Control Approach

Companies report all impacts from operations that have operational control, which are full authority to introduce and implement its operating policies at the operation.

1.2) Financial Control Approach

Companies report all impacts from operations that have financial control, which are the ability to direct the financial and operating policies.

2)      Equity Share Approach

This approach determines reporting boundary by accounting for operations under ownership percentage.

Issues to be Aware of when Considering the Reporting Boundary

From the Perspective of Materiality

Control Approach allows companies to reflect their direct impacts from operational or financial control. Operational Control Approach may underreport the impacts of the company when excluding significant impacts from investments, which companies have no operational control but financial impacts.

Meanwhile, Equity Share Approach may not reflect operational reality when companies have a minority stake but full operational control or significant impacts.

From the Perspective of Quantitative and Balance

Both Control Approach and Equity Share Approach have less influences on these two aspects. With key performance indicators (KPIs) and other relevant metrics, a full picture of outstanding ESG performance and improvements can be disclosed in a quantitative manner under each approach.

From the Perspective of Consistency

Operational Control Approach usually allows companies to maintain relatively more consistent reporting boundary, apart from sudden closure of business segments.

For Financial Control Approach, companies may only include major entities representing no less than a certain percentage (e.g., 75%) of the Group’s annual revenue. Under this circumstance, the criteria used to determine the threshold should be carefully selected. Moreover, the comparability of the ESG performance and progress, particularly environmental targets on emissions and resource consumption, disclosed on the ESG Report under the Financial Control Approach over years raises doubts. For instance, companies operating property development business may have entity running projects this year but no projects the next year. The yearly changing operations may lead to inconsistent reporting boundary each year.

Equity Share Approach can also lead to inconsistent reporting boundary when there are significant changes on the ownership percentage of business operations.

Conclusion: Determine the Reporting Boundary with Careful Decisions

Nowadays, companies adopting the Operational Control Approach for ESG reporting tend to have the direct ability to implement ESG policies on its operations for improvement, while companies adopting the Financial Control Approach for ESG reporting usually align with financial reporting.

To make a more informed decision, it is crucial to consider the following key points before determining the reporting boundary:

1.  Understand the pros and cons of each approach;
2. Recognise the business nature and characteristics of the company, including the control, ownership, and influence of the operations;
3. Define the purpose of the ESG Report (e.g., Operational Control Approach emphasises on control and influence, while Financial Control Approach allows investors to assess material financial risks); and
4. Consider data availability and target setting (e.g., Data may be less reliable when depending on partner data sharing under the Equity Share Approach, while the management and implementation of reduction strategies may be less efficient when the company does not directly control/significantly own the business operations).

To have a more comprehensive and transparent ESG disclosure, companies may also refer to stakeholder feedback, industry peers, and international reporting frameworks (e.g., ISSB and GRI) to consider the comparability of the yearly ESG performance under the approach determining the reporting boundary.

GreenCo is a professional ESG advisory firm accredited with ISO 9001 in the Provision of ESG / Sustainability Reporting, Sustainanbility and Climate Disclosures and GHG Accounting Advisory Services. Established in 2016, we were born to tackle ESG and climate risk management challenges. GreenCo has a professional team consists of talents with multiple backgrounds with

• PhD
• Practitioner Member of the Institute of Sustainability and Environmental Professionals (ISEP)
• CFA (the CFA Institute) and Certificate in ESG Investing
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• GRI Certified Sustainability Professional
• Certified Public Accountant (for assurance in accordance with ISAE 3000)
• Member of Global Association of Risk Professionals
• Master’s degree in envirnomental science

GreenCo has solid track record in ESG advisory for over 70 listed companies in Hong Kong, Mainland China, Singapore and Korea, covering all industries under the Hang Seng Industry Classification System.