Whose Carbon is it? GHG Emissions and Commercial Real Estate

Whose Carbon is it? GHG Emissions and Commercial Real Estate Recommended Best Practices in Accounting for GHG Emissions in the Commercial Real Estate Sector

CONTENTS INTRODUCTION 05 CONTEXT 06 Disclaimer The information contained herein has been compiled by REALpac from sources believed to be reliable, but no representation or warranty, express or implied, is made by REALpac, its affiliates or any other person as to its accuracy, completeness or correctness. Opinions and estimates contained herein constitute REALpac s judgment as of the publication date, are subject to change without notice and are provided in good faith but without legal responsibility. REALpac and its directors, officers, and staff, assume no liability for damage or loss arising from the use of information contained herein. Copyright All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, graphic, digital, electronic or mechanical, including photocopy, scanning, recording or any information storage and retrieval system, without permission in writing from the publisher. Copyright Real Property Association of Canada, 2010. This document is published for information and educational purposes only and should not be considered legal advice. For more information contact: Carolyn Lane, M.A., M.B.A., Vice President, Research and Communications. Robert Campanelli, M.U.P., Vice President, Professional Development and Industry Sustainability Real Property Association of Canada. One University Avenue Suite 1410 Toronto, Ontario Canada M5J 2P1 www. realpac.ca info@realpac.ca T: 416.642.2700 F: 416.642.2727 Acknowledgements REALpac would like to thank the following individuals for being part of the GHG Sub-Committee, donating their time and talent, and providing their invaluable input into this document: Darryl Neate, Director, Sustainability, Oxford Properties Group Inc. Giselle Gagnon, Vice President, National Real Estate Services, Bentall Kennedy Group Karen Jalon, Director, National Sustainable Operations, The Cadillac Fairview Corporation Limited COMMON CONCEPTS IN GHG ACCOUNTING 07 Operational Boundaries 08 Organizational Boundaries 10 RECOMMENDATIONS 12 Owners 12 Managers 13 Tenants 14 APPENDIX 16 Scenario A: Industrial Building 16 Scenario B: Commercial Office Building 17 Scenario C: Commercial Retail Building 18 Report prepared by: Chris Caners and Peter Clarke ICF International 277 Wellington Street West, Suite 808 Toronto, ON M5V 3E4 T. 416-341-0390 F. 416-341-0383 ccaners@icfi.com pclarke@icfi.com About ICF International ICF International (NASDAQ: ICFI) partners with government and commercial clients to deliver consulting services and technology solutions in the energy, climate change, environment, transportation, social programs, health, defense, and emergency management markets. The firm combines passion for its work with industry expertise and innovative analytics to produce compelling results throughout the entire program life cycle, from analysis and design through implementation and improvement. Since 1969, ICF has been serving government at all levels, major corporations, and multilateral institutions. More than 3,000 employees serve these clients worldwide. ICF s Web site is www.icfi.com.

In a multi-tenant building, with multiple owners, and a property manager, and some sub-metering Whose emissions are they? 0 4 GHG Emissions and Commercial Real Estate

1 INTRODUCTION As a result of rising concerns regarding the impact of climate change, many entities have completed a greenhouse gas inventory or carbon footprint effectively accounting for the greenhouse gas emissions that are emitted due to their daily operation. Some of these carbon footprints are required by law for instance, certain facilities in Alberta are compelled to report their greenhouse gas emissions annually, under the Climate Change and Emissions Management Act. Greenhouse gas accounting, like financial accounting, involves many rules that can be complex to navigate. These rules are also open to interpretation, especially in the commercial building sector, where there are infinite combinations of physical and operating characteristics for instance, an industrial building is often built and operated in a very different manner than an office building. Furthermore, there are often numerous stakeholders involved at a given commercial property, each of which may wish to complete a carbon footprint, and each of which could reasonably expect to be responsible for that property s emissions. The goal of this document is to provide guidance to those responsible for quantifying greenhouse gas emissions in the commercial real estate industry. This guidance is not intended to be exhaustive; rather, its aim is to support building professionals in completing greenhouse gas inventories in the absence of specific compliance or voluntary guidance (for instance, a Canadian federal cap and trade system, or The Climate Registry, respectively). Furthermore, there are many different approaches or variations on those recommended here that fit within generally accepted greenhouse gas accounting principles; ultimately, the reporting entity is alone responsible for justifying the greenhouse gas accounting approach employed. With the context above in mind, we recommend that building owners and managers follow the financial and operational control approaches respectively, as described in the following discussion. At the completion of this document, the reader should have an appreciation for the complexities of greenhouse gas accounting, knowledge of the critical factors involved in accounting for greenhouse gases in the commercial building sector, and the ability to apply suggested guidance to their portfolio. GHG Emissions and Commercial Real Estate 0 5

2 CONTEXT Greenhouse gas (GHG) inventorying and accounting is becoming more common, across sectors and geographies. Debate surrounds the question of how best to reduce the concentration of GHG in our atmosphere in particular, the merits of a carbon tax or a cap & trade system are often compared. Efforts to implement a cap and trade system in the United States have stalled since the introduction of two bills (footnote), leaving the development of GHG regulations to the Environmental Protection Agency. The Canadian government has indicated their intention to follow whatever regulatory path the United States adopts. Apart from any regulatory requirements, many stakeholders in the commercial building sector are beginning to complete their GHG inventories. These inventories can be used for a variety of purposes; to assess financial risk associated with a price of emissions, to inform and drive operational improvements, and to benchmark against peer companies. For instance, REALpac itself has recently released an array of research reports on this topic, including A Guide to Corporate Responsibility and Sustainability Reporting in the Canadian Real Property Sector 2. Furthermore, a number of Canadian property management companies have completed their GHG inventories, including Oxford Properties Group, Cadillac Fairview and Bentall LP. While standardized approaches to GHG accounting exist, the field is evolving rapidly, and conflicting or unclear guidance is common. The commercial building sector is particularly complex in this way, due to the number of entities involved, and the operational and physical diversity of commercial buildings. 1 The Waxman-Markey Bill was approved by the House of Representatives in mid-2009, while the substantially similar Boxer-Kerry Bill was released in the fall of the same year. 2 This memorandum may serve to provide further guidance to section ENV3: Emissions of the Guide. 0 6 GHG Emissions and Commercial Real Estate

3 COMMON CONCEPTS IN GHG ACCOUNTING There are a range of documents and standards that provide GHG accounting guidance to organizations that measure, quantify and report their Carbon footprint. Many registries (where an organization can publically post their inventory) have their own specific requirements. These requirements are sometimes called protocols, and provide exact instructions for quantifying GHG emissions; others, such as ISO 14064-1, are more conceptual. The International Organization for Standardization (ISO) is the world s largest developer and publisher of international standards. In 2006, ISO 14064 - an international standard for GHG management activities - was completed, including the development of emission inventories (ISO 14064-1), and the verification of those inventories (ISO 14064-3). It outlines minimum requirements and provides a structure against which auditing of inventories may be performed 3. In general, ISO 14064 provides non-specific guidance and a high-level framework for companies who wish to complete and verify their GHG inventories and projects. ISO 14064-1 itself directs users to the World Business Council for Sustainable Development (WBCSD) / World Resources Institute (WRI) Greenhouse Gas Protocol (GHG Protocol), and encourages the use of this reference for more specific guidance. The WRI was launched in 1982 as a policy research and analysis centre to address global resource and environmental issues 4, and along with the WBCSD, has worked to develop international accounting tools for greenhouse gas emissions, including the authoritative Greenhouse Gas Protocol, Corporate Accounting and Reporting Standard (The GHG Protocol) 5. ISO 14064-1 and The GHG Protocol are consistent with the best-practice GHG accounting principles below: RELEVANT - The carbon footprint appropriately reflects the GHG emissions of the company and serves the decision-making needs of its users. COMPLETE - Accounts for and reports on all GHG emission sources and activities within the chosen inventory boundary. Discloses and justifies any specific exclusions. CONSISTENT - Uses consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently documents any changes to the data, inventory boundary, methods, or any other relevant factors in the time series. TRANSPARENT - Addresses all relevant issues in a factual and coherent manner, based on a clear audit trail. Discloses any relevant assumptions and makes appropriate references to the accounting and calculation methodologies and data sources used. ACCURATE - Ensures 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. Achieves sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information. 3 ISO 14064, International Standard for GHG Emissions Inventories and Verification, Jay Wintergreen and Tod Delaney, First Environment, Inc, Boonton, NJ, presented at 16th Annual International Emission Inventory Conference, Raleigh, NC, 2007. 4 www.wri.org 5 World Business Council for Sustainable Development / World Resources Institute. Greenhouse Gas Protocol, Corporate Accounting and Reporting Standard. April 2004. www.ghgprotocol.org. GHG Emissions and Commercial Real Estate 0 7

In order to understand what emissions sources should be included, and to determine what entity is responsible for their accounting, boundaries must be selected and evaluated. The operational and organizational boundaries work in tandem to define the scope of the carbon footprint. There are three separate categories with respect to allocating emissions from the operation of commercial buildings: owners, managers and tenants. Adding to the complexity of GHG accounting, a company may be more than one of these categorizations concurrently (for instance own, manage and occupy a facility) or across a portfolio (own some buildings, manage others). Furthermore, there may be multiple companies categorized in the same way for a facility (several building owners with separate tenants on each floor, for instance). which are from sources that are not owned or controlled by the company. While optional, quantifying Scope 3 emissions may be a useful tool for increasing the efficiency of company operations. For commercial buildings specifically, Scope 3 may include emissions resulting from the construction of the building or waste generated annually. For company inventories, common Scope 3 emissions include those from air travel and employee commuting. In circumstances where a company owns or manages a facility but does not report the associated emissions as Scope 1 or Scope 2 (because CO 2 SF 6 3.1 Operational Boundaries In GHG accounting, emissions are classified broadly as direct (Scope 1), energy indirect (Scope 2), and indirect emissions from other indirect sources (Scope 3). Direct GHG emissions result from sources that are owned or controlled by the company, while indirect GHG emissions are a consequence of activities of the company, but occur at sources owned or controlled by a different entity. When completing their carbon footprint, companies should separately account for and report on Scope 1 and 2 at minimum (i.e. the emissions that they are responsible for). Purchased Electricity For Own Use SCOPE 2 Indirect Energy related data is the backbone of quantifying GHG emissions for stakeholders in the commercial building sector emissions associated with heating (natural gas, fuel oil, etc), cooling (electricity) and powering (electricity) the building fleet likely make up the majority of the emissions for that stakeholder. Therefore, quality information on the energy use of the buildings themselves is critical to completing a GHG inventory. Scope 3 is an optional category that represents emissions that occur as a consequence of a company s activities, 0 8 GHG Emissions and Commercial Real Estate Scope 2 (Indirect emissions associated with the consumption of electricity): Electricity or steam consumption at the facility (or deep lake water cooling).

for reasons discussed in this document, that company is not considered directly responsible), these emissions may be included under Scope 3, in keeping with the principles of completeness and transparency. Complexities arise in GHG accounting in the commercial building sector for two reasons. First, classifying emissions into Scope 1 or Scope 2 is highly dependent upon the organizational boundary determined by the company, which is in turn dependent upon the consolidation approach used (equity, financial or operational, as described in the next section). However, the selection of the consolidation approach is open to a variety of interpretations, and so a consistent approach may not be used by all building stakeholders. Furthermore, interpretation of guidance must often occur within each consolidation approach. Second, when more than one entity includes the same emissions under Scope 1 or Scope 2, double counting occurs for instance, if both the owner and manager, or co-owners of the same building were to include the GHG emissions due from the same building in their carbon footprints, the same emissions would be counted twice. However, double counting of emissions is not a significant concern unless the emission inventories of each stakeholder are being aggregated, and/or the reporting of emissions is regulated in which case, the appropriate approach would be dictated by the regulatory authority (such as a government). CH 4 N 2 O HFCS PFCS SCOPE 1 Direct SCOPE 3 Indirect Employee Business Travel Company Owned Vehicles Production of Purchased Materials Waste Disposal Product Use Fuel Combustion Outsourced Activities Contractor Owned Vehicles Scope 1 (Direct emissions): On-site combustion of fossil fuels (e.g. natural gas or heating oil for space heating, diesel combustion from emergency generators) Mobile fuel consumed due to the operation and maintenance of the building and property (e.g. fleet and maintenance vehicles) Scope 3 (Other indirect emissions): Waste disposal Building construction

3.2 Organizational Boundaries A company should select an organizational boundary consolidation approach for consolidating GHG emissions and then consistently apply that approach to determine which GHG emissions are included or excluded from their carbon footprint. Once a consolidation approach has been chosen, it should be applied consistently across all company operations included in the carbon footprint. Good practice guidance from The GHG Protocol suggests that the organizational boundary may be defined using either the equity share or control approach (the latter of which is further subdivided into financial control or operational control). For simplicity, we refer to these consolidation approaches as equity, financial and operational; they are summarized in the table below. Consolidation Approach Equity Operational Financial Description Account for percentage of GHG emissions according to equity share ownership of the building Account for 100 percent of GHG emissions where the company has the authority to implement operational policies at the building Account for 100 percent of GHG emissions where the company retains the majority of the risks and rewards of ownership of the building Under the equity consolidation approach, a company accounts for its share of the GHG emissions from a building under Scope 1 and Scope 2, according to its share of financial equity in that building. The equity share reflects economic interest - the extent to which a company has a right to risks and rewards from the building. Under the operational consolidation (control) approach, a company reports 100% of the building emissions under Scope 1 and Scope 2 if it has the full authority to introduce and implement its operating policies at the building. However, having operational control does not mean that a company necessarily has the authority to make all decisions concerning an operation it does mean that a company has the authority to introduce and implement its operating policies. 6 Using the financial consolidation (control) approach, a company should account for 100% of the GHG emissions from a building under Scope 1 and Scope 2 if it has the ability to direct the financial and operating policies of that building a company is considered to have financial control of an operation if it retains the majority risks and rewards of ownership of the building. 7 In practice, the financial control approach means that the entity that is receiving the financial benefit from the operation of the building is, alone, responsible for the emissions from the operation of the building. Several common representative scenarios are described below as further guidance. Because interpretations of GHG accounting guidance will differ, it is critical that sufficient justification and context is provided in the carbon footprint report to allow users of the information to interpret the results correctly, and maintain the best-practice principles of transparency and completeness. 6 Adapted from The GHG Protocol. 7 Ibid. 1 0 GHG Emissions and Commercial Real Estate

but what REALpac recommends is that building owners use the financial consolidation approach, and building managers use the operational consolidation approach. GHG Emissions and Commercial Real Estate 1 1

4 RECOMMENDATIONS As discussed above, companies are free to select the organizational boundary approach that best suits their needs when voluntarily reporting their GHG emissions. Double counting 8 may occur if different consolidation approaches are used, but this factor is not critical in the absence of regulated reporting requirements. When considering which organizational approach best suits your needs it is important to question the level of control you hold over decisions that will influence emissions and consider which approach best reflects your level of control. This section provides recommendations regarding which consolidation approach would ideally be used by each stakeholder category with respect to commercial buildings. Ideally, all stakeholders would utilize the same consolidation approach in order to avoid double counting; however, this is unlikely to occur, given the range and breadth of stakeholders often involved with even one commercial building. The best-practice accounting principles (relevance, completeness, consistency, transparency, and accuracy) should be considered throughout the process of quantifying a carbon footprint. Due to the complexity of the commercial building sector, interpretation of GHG accounting guidelines is often required. When interpretation is required, providing more - rather than less - contextual information and justification (Transparency, Completeness) in the carbon footprint pertaining to the scoping of emissions is always recommended. 4.1 owners In the commercial building sector, we recommend that building owners use the financial consolidation approach, as it is the clearest and most transparent of the available options for the commercial building sector. 9 In addition, due to their similarity (both are subsets of the control approach), and in the context of commercial buildings, there is rarely a distinction between the operational and financial consolidation approaches for owners. As demonstrated by the scenarios appended to this document, there are some instances where a building owner may not have direct financial control over a specific activity in the building - for instance, the building in question could be an industrial facility, where utility costs are paid and operational decisions that affect energy consumption are made directly by the tenant. Where sub-metering of tenants occurs, the party that is directly responsible for the utility costs is a reasonable method for determining control. For instance, if an owner installed electrical sub-metering for each tenant, and the tenants were responsible for payment of the electricity consumed, then it is far less likely that the owner is responsible for any associated emissions (however, in these cases the owner would still be responsible for emissions associated with the operation of common spaces, outdoor lighting, etc.) In a situation where the owner pays for the utility costs directly and does not charge them back to individual tenants based on sub-metered consumption, the emissions belong to the owner. 1 2 GHG Emissions and Commercial Real Estate

In a situation where the management company has the authority to direct the financial and operating policies of the building, it is the manager s emissions. If the manager pays for the utility costs directly and/or can direct the operational policies of the building, the manager most likely has control. 4.2 Managers We recommend that commercial building managers utilize the operational consolidation approach, although this could lead to double counting with owners if the building owners are reporting their emissions using the financial consolidation approach from the same building. However, double counting is a less critical problem than having neither party counting the emissions, in the absence of regulatory requirements. It should be noted that having operational control does not mean that a company necessarily has authority to make all decisions concerning the operation of a building (such as capital spending authority). Operational control does mean that a company has the authority to introduce and implement its operating policies. From a commercial building manager s perspective, it is important to consider to what extent daily management responsibilities can influence building operational and investment decisions, as well as where financial responsibility for utility costs lie. 8 It is important to note that multiple companies may report the same emissions under Scope 3; however, this is not considered double counting as Scope 3 is reserved for those emissions that are not the direct responsibility of that company. 9 For a good description of these GHG accounting approaches, please see Chapter 3 of The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. World Resources Institute/World Business Council for Sustainable Development. The Greenhouse Gas Protocol is widely considered as the benchmark standard in GHG accounting practice. See http://www.ghgprotocol.org/standards/corporate-standard. GHG Emissions and Commercial Real Estate 1 3

4.3 tenants We recommend that owners and managers treat emissions as the tenant s emissions if sub-metered and either paid directly by or charged back to the tenant. Tenants require certain information from building owners and/or managers in order to complete their carbon footprint, such as their electricity consumption. Regardless of the consolidation approach used, individual GHG inventories could then note any possibility of double counting. Ideally, building owners and managers will communicate to their tenants: a) Their consolidation approach (equity, financial or operational) b) Which sources of emissions are treated as Scope 1 and Scope 2 c) Energy consumption (electricity, natural gas, etc) of that tenant (if required, pro-rated based on share of total rentable space) It is important to note that often more than one tenant occupies a given building. In these cases, the reported emissions should correspond with each tenants share of the building s emissions, in the event that a tenant s share of the utilities are sub-metered and charged directly to the tenant or sub-metered by the owner/manager and charged back to the tenant. In a building with sub-metered utilities paid directly by the tenant or charged back to the tenant, the emissions are the tenant s responsibility. The table on the next page provides a summary of the general guidance regarding reporting responsibilities for Scope 1 and Scope 2, based on the perspective of the owner, manager, or tenant. 1 4 GHG Emissions and Commercial Real Estate

Operational Boundaries Scope 1 (Direct) Scope 2 (Indirect) Stakeholder Consolidation Sub-metering Direct: On-site/owned emission Indirect: Imported electricity, Approach of utilities sources (e.g. combustion of fossil steam, other heat or cooling. for occupants? fuels like natural gas, use of fuel (e.g. electricity used byng) in grounds equipment, the building) replacement of refrigerants) Equity No Equity share of all emissions Equity share of all building emissions Yes Equity share of allocated emissions Equity share of allocated emissions Owners Financial No 100% of all emissions 100% of all emissions Yes 100% of allocated emissions 100% of allocated emissions Organizational Boundaries Managers Operational Equity Financial Operational No 100% of all emissions 100% of all emissions Yes 100% of all allocated emissions 100% of all allocated emissions 10 No Yes None None No Yes No 100% of all emissions 100% of all emissions Yes 100% of all allocated emissions 10 100% of all allocated emissions 10 Equity No None None Yes None None Tenants Financial No None None Yes 100% of allocated emissions 100% of allocated emissions Operational No None None Yes 100% of allocated emissions 100% of allocated emissions 10 In cases where a building management company has the authority to introduce and implement operating policies at the building, the owner may not be responsible for the emissions; rather, they would be the responsibility of the building management company. Ideally, the building owners and managers would communicate their intentions on this topic to each other; otherwise double-counting of emissions may occur. GHG Emissions and Commercial Real Estate 1 5

5 APPENDIX 5.1 Scenario A: Industrial Building A company owns a building being used by a single tenant for an energy-intensive manufacturing operation. The tenant receives all utility bills directly and owns the equipment used in the facility. Owner: The owner does not have the authority to introduce and implement its operating policies; therefore, emissions from the operation of this building would not be the responsibility of the owner, other than emissions associated with common areas (for instance, if there are multiple tenants of the building, then emissions associated with common hallways and lighting for parking lots and garages would be the responsibility of the owner). Tenant: Because the tenant is responsible for and receives all of the utility bills associated with this property, the tenant would be expected to report emissions from this building as Scope 1 and Scope 2. The entity responsible for the utility bills can be a useful indicator of control when interpreting the consolidation approaches. In this case, the manufacturing facility uses significant amounts of energy and is financially responsible for the use of the energy, resulting in GHG emissions which are not considered the responsibility of the owner. The utility bill indicator can also be useful when determining responsibility for sources of emissions that may be categorized under Scope 1 or Scope 2, other than those associated with heating, cooling and powering the building itself. For instance, a building owner or manager may hire a landscaping company to cut lawns, plow driveways and collect leaves. In these circumstances, if the building owner or manager is directly responsible for the fuel costs associated with these activities (i.e. they purchase the fuel directly), then the associated emissions are their responsibility. However, if the landscaping company supplies the fuel, then these emissions would be expected to be the responsibility of the landscaping company in this case, the owner or manager may categorize these emissions as Scope 3. Best-practice GHG accounting principles should be kept in mind when interpreting consolidation guidance. In this case, the emissions from this operation do not reflect the GHG emissions of the company (Relevance). To ensure completeness and transparency, the owner should provide a justification for the exclusion of these emissions in their carbon footprint report. In a typical industrial building, the tenant will most often be responsible for the emissions associated with the activities of that building. However, the owner or manager may be responsible for emissions from common areas (such as hallways and parking garages) if those emissions are separately billed to the landlord. 1 6 GHG Emissions and Commercial Real Estate

5.2 Scenario B: Commercial Office Building Three companies, one a majority owner, own an office building occupied by multiple tenants. The individual tenants are not sub-metered, and the majority owner is responsible for the utility bills and has final authority for decisions concerning the building; a management company operates this building on behalf of the owners, but does not have the authority to introduce and implement its operating policies without approval of the majority owner. Owner: The majority owner has the ultimate authority over building decisions, and is responsible for the utility costs; furthermore, no sub-metering occurs. Therefore, the majority owner of the building would be expected to include all emissions from this facility in its carbon footprint, categorized as Scope 1 or Scope 2. Management: While the management company is responsible for the day-to-day operation of the building, it likely does not have operational control, as it does not have the authority to implement its operating policies, and must respond to the needs of its clients, the owners. Therefore, the management company would not be expected to report these emissions as Scope 1 or Scope 2, although they may be categorized as Scope 3, in keeping with the GHG accounting principles of transparency and completeness. However, if the management company was able to introduce and implement its operating policies and/or was responsible for the utility costs, then it may have operational control of the building. In this case, the management company would categorize the emissions from the building as Scope 1 and Scope 2. A management company s control over a building is a judgment call that should be based on the applicable guidance (such as the GHG Protocol). Furthermore, a management company may have operational control over some, but not all of the buildings under its management in this scenario, the management company would only be responsible for reporting those emissions over which it has control under Scope 1 or Scope 2 (similar to the owners). In this case, double counting of these emissions would occur if both the owner and the management company reported building emissions as Scope 1 and Scope 2. Tenant: While the tenants may have some operational control in their space (for instance, the tenant may be able turn the lights in their area on or off) they do not have the full authority to introduce and implement operating policies; therefore, the emissions from this building would be categorized as Scope 1 or Scope 2 and would be the responsibility of the owner, and not the tenant. Interpretation of the operational consolidation approach definition commonly comes into play in this frequently-encountered scenario. For instance, some buildings may provide the occupants with greater control over their environments (turning lights on or off; thermostat set points) others may not. In addition, tenants may or may not be directly responsible to the utility company for those services. In cases where the management company is effectively responsible for the operation and investment decisions for the building, then under the operational consolidation approach, the management company would be considered responsible for those emissions. Ideally, the owner and management company would communicate their intentions regarding the GHG accounting approach in these cases. In addition, it is recommended that emissions from common areas (e.g. hallways) be allocated to the owner or manager (in the case that the management company has operational control), based on the principles of completeness and transparency. Care should be taken to treat buildings (that have similar characteristics) consistently across a portfolio, in keeping with GHG accounting principles. As always, the inclusion of contextual information and justification for allocation decisions in the carbon footprint report, where interpretation is required, is highly recommended. GHG Emissions and Commercial Real Estate 1 7

5.3 Scenario C: Commercial Retail Building One company owns a large retail facility occupied by multiple tenants. The individual retail units are sub-metered for electricity, and each tenant is responsible for their own electricity bills. In addition, each tenant is able to configure and install lighting and other electricity-consuming equipment. A management company operates the building on behalf of the owners, and has the authority to introduce and implement operational policies at the building. Owner: Because the owner does not financially or operationally control the electrical operation of each unit and does not receive the electricity bills, emissions from the use of electricity in the occupied units would not be considered the responsibility of the owner. However, heating for the building is not sub-metered, and is centrally controlled by the manager. Based on the recommended financial consolidation approach, the owner would be expected to report emissions due to the heating of the building as Scope 1. The owner would also be expected to report all emissions associated electricity use in common areas (hallways, outdoor lighting) as Scope 2, as the tenant would be responsible for electricity use based on sub-metering of their rented space. Scope 2, but would not report the emissions associated with building heating under Scope 1 (these emissions may optionally be reported under Scope 3). This scenario can become more complex quite easily; for instance, if the individual units are sub-metered for natural gas consumption, then the tenant would likely be responsible for the associated emissions. In cases with utility sub-metering for individual units, the entity that has financial responsibility for the utility costs is generally a good indicator of responsibility for emissions. It is also worth noting that in situations where the building owner and management are the same company, emissions should be reported using a consistent approach to the organizational boundary selected. For instance, under Scenario C, were the owner and manager the same entity, and that entity uses the financial consolidation approach to report its carbon footprint, the emissions would be reported in the inventory of that entity as the owner of the building. Manager: In this scenario, the management company likely has operational control, and therefore, would be expected to report these emissions using a similar approach as the owners (i.e. report all emissions from building heating and emissions from electricity use in common areas as Scope 1 or Scope 2). This will lead to double-counting of the emissions from this building if the building management company and the owners both report these emissions as Scope 1 and Scope 2. Tenants: Because their individual areas are sub-metered for electricity, but not for heating, the tenant would be responsible for the emissions due to the amount of electricity consumed in their unit, but not for the heating of that unit, as that is not individually sub-metered. Therefore, the tenants would report their electricity emissions under 1 8 GHG Emissions and Commercial Real Estate

In a commercial retail building with electrical sub-metering, tenants will be responsible for the emissions associated with their electricity use. The owner and/or manager (if the manager has operational control) will be responsible for the emissions associated with utilities that are not directly attributed to a tenant (such as natural gas), and the emissions associated with electricity use in the common areas of the building. Double counting will occur if the owners and managers both report these emissions. GHG Emissions and Commercial Real Estate 1 9

One University Avenue Suite 1410 Toronto, Ontario Canada M5J 2P1 www. realpac.ca info@realpac.ca T: 416.642.2700 F: 416.642.2727 277 Wellington St. W, Suite 808 Toronto, ON M5V 3E4 www. icfi.com T: 416-341-0390 F: 416-341-0383