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Understanding Scope 1, 2, and 3 Emissions for Real Estate

For building owners, there is often (understandable) confusion about how to properly manage and report carbon emissions. Specifically, which emissions belong to which parties, and how should they be tracked, accounted for, and reported? Leased assets present even more questions and challenges when it comes to monitoring, allocating, and reporting. 

So how do you answer these questions?  In short, it depends on three primary factors:

  1. Your organization’s reporting boundaries 
  2. The scope of emissions, as defined by the Greenhouse Gas (GHG) Protocol 
  3. The lease structure and metering infrastructure in your building(s) 

Taken together, these factors will allow you to arrive at the correct emissions allocations for your portfolio. 

Drawing Organizational Reporting Boundaries 

To accurately determine how to treat the emissions from assets in your portfolio, it is first important to define your overall approach to carbon accounting – also known as “defining your organizational boundaries.” In other words, you must identify which assets should be included in the overall population of buildings that you own (and therefore report on).

The GHG Protocol is the most widely-used international accounting tool for businesses to understand their greenhouse gas emissions. It recommends that organizations choose one of three approaches:

  1. Equity share 
  2. Operational control
  3. Financial control

The equity share approach requires companies to report emissions from assets in proportion to their percentage they own or control (e.g. if you own 50% of a property you report 50% of its emissions). According to GRESB standards, a building owner is only required to report when they own a 25% or greater share of an asset. 

Under the operational control approach, a company is responsible for reporting 100% of the emissions of assets where they have the authority to implement operating procedures. This is the most widely-used reporting approach in most real estate ownership scenarios. It also aligns emissions accounting with the assets where the company is able to make an impact (i.e. in an operational control scenario, the company would have the authority to make decisions about things like purchasing renewable energy, deploying ESG data capture and analytics, and investing in certain capital improvements, with the caveat that very large capital improvements might require the approval from other partners or stakeholders). 

For the financial control approach, organizations are responsible for reporting 100% of  emissions when they are subject to the majority of financial risks and benefits associated with the operation of an asset. 

It is important to note that having financial control does not necessarily equate to having operational control in all cases; when selecting an organizational boundary, companies should review all agreements with stakeholders and financial partners, including, in some cases, lease agreements with tenants, to ensure that they report accurately. 

Allocating Emissions (Scope 1, 2, and 3) for Real Estate Assets 

After deciding on the organizational boundary that is most appropriate for your portfolio, the next step is to properly categorize and break out emissions at the asset level. The GHG Protocol has defined three categories of emissions: “direct” emissions (Scope 1) and two different types of “indirect” emissions (Scopes 2 and 3). 

Source: The GHG Protocol

Scope 1: “Burn It”

Scope 1 emissions, also known as direct emissions, are defined as emissions from sources that exist “on site” of an asset that is owned or controlled by the organization. These can include emissions from combustion in onsite, owned, or controlled boilers, furnaces and vehicles, where the organization is thought to have “direct” control over the operations of the asset in question. A common example of Scope 1 emissions for real estate is natural gas burned onsite.

Scope 2: “Buy It”

Scope 2 emissions are defined as emissions that are related to purchased electricity, heat, steam or cooling. This energy is consumed by the company but generated offsite. In this case, the organization is thought to have indirect control over the emissions, in that it can affect change by monitoring the demand but not the supply. Depending on the organizational boundary you choose, purchased electricity will often fall under Scope 2, but might fall under Scope 3 – more on that in just a moment. 

Scope 3: “And Beyond…”

Finally, Scope 3 emissions account for other indirect emissions not owned or controlled by the organization. In other words, Scope 3 emissions occur as a consequence of the operations of that organization. Common corporate examples of Scope 3 emissions include emissions from supply chains and transportation; in commercial real estate, Scope 3 emissions might stem from the electricity consumption in leased assets or the embodied carbon in construction materials. However, it generally depends on the structure of the lease and the overarching organizational boundary. Under a commonly-used operational control boundary, a building owner may allocate tenant-purchased electricity into the Scope 3 category.  

Lease Structures and Metering 

Now that we’ve defined organizational boundaries and GHG scope allocation, we’ve arrived at a central question: what about multi-tenant buildings where the building owner may only have partial operational control? How do you separate out the tenant-controlled emissions from the landlord-controlled emissions to place them into their respective GHG emissions scopes? 

As with many things in real estate, the answer will vary depending on the lease structure, the building’s metering infrastructure (and thus the ability to collect tenant data), and the organizational boundary approach a company decides to use. 

As mentioned above, one of the most common examples in real estate is using the operational control approach. From there, owners will typically break out the emissions of an asset by tenant space (Scope 3) vs. common area (Scope 2). 

However, delineating tenant-controlled and landlord-controlled emissions is not always an easy task. You may not have access to tenant bills, or your buildings might not be submetered by tenant, making it impossible to properly allocate energy and emissions. In the absence of submeters, an imperfect but common reporting approach is to estimate usage relative to floor area (tenant-occupied vs. common area). All in all, defining organizational boundaries and allocating emissions, while critical for reporting, remain a sticking point for many real estate owners. 

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To ensure success, here are a few tips from experience: 

1. Make sure you are comprehensively and accurately collecting energy and emissions data across your portfolio

2. Understand the lease structures across your portfolio to ensure you choose the appropriate organizational boundary 

3. Apply uniform rules about how you handle specific asset-level situations when allocating emissions by scope 

By creating guidelines for yourself based on these overarching protocols, you will not only have a documented and consistent approach, you’ll also save yourself headaches down the road.