SME route open for subsidiaries of PE buyout funds?

I wanted to repost my earlier question regarding the SME route ( Definition of an SME in the PE context) and frame the question differently. In section 2.5.3 of the PE guidance, it is stated that “SBTi’s SME route is relevant to PE firms interested in engaging PCs with fewer than 500 employees to set approved scope 1 and 2 emissions targets”. However, the definition of an SME is an independent non-subsidiary entity. What does this mean for PE funds which have SME subsidiaries (> 50% ownership) as well SME affiliates (< 50% ownership)? Does 2.5.3. of the guidance supersede the definition of an SME, so that the SME route is available to > 50% subsidiaries? What about equity stakes of between 25% and 50%? Thank you very much!

Thanks for posting!

The GHGP Scope 3 Standard specifies that companies may decide under which scope investment and lending activities are included, depending on the chosen consolidation approach. For example, if the operational control consolidation approach were chosen by an FI, then the assets and portfolio companies (PCs) under operational control should be reported as the FI’s scope 1 and 2 emissions while the other investments (not under operational control) would then fall under scope 3 category 15. PCs that fall under the FI’s scope 1 and 2 emissions would technically be considered subsidiaries whereas those that fall under scope 3 category 15 would not be considered subsidiaries and could then go through the SME validation route.

Hi Howard - thank you very much for your clear response. Please may I clarify how this reconciles with the fact that the PE guidance asks FIs to set the organizational boundary principles aside and account for all PC emissions as category 15 (footnote on page 23 of the PE guidance)? From your response, it appears that we would set the exception aside and apply core GHGP principles to define what is, and is not, an SME. Please can you confirm? Thank you again.

Thanks for mentioning. The footnote is a recommendation rather than a requirement and likewise, it is also a recommendation that a PE firm’s organizational boundary, as defined by the GHG Protocol Corporate Standard, is consistent with the organizational boundary used in the firm’s financial accounting and reporting procedures. So in practice, the PE firm will just need to disclose its emissions inventory consolidation approach and any other related information in the target submission form and this can be discussed during the validation process. If PCs fall under s3c15, then they would not be considered subsidiaries and could then go through the SME validation route.

Fantastic, thank you Howard. Happy Holidays!