Two years ago, Products of Change came together with key industry stakeholders to address the need for carbon methodology for the brand licensing industry in the Greenhouse Gas Protocol. The resulting body of work was finished at the end of last year, and has now gone to World Resource Institute for approval before being added to the official guidance where there was the gap.
To take POC Members through this methodology, Sine Moller from the Lego Group, Michelle Papyannakos from Paramount, and Harini Manivannan from South Pole, joined POC founder and CEO, Helena Mansell-Stopher in this exclusive webinar.
Sine explained that the journey began when Lego was trying to figure out its own Scope 3 emissions and where its licensing fit into this. They looked at the GHG protocol, and the closest category was 14, franchises, but this didn’t really fit.
So Sine spoke with Helena and system owners and they decided to write a protocol together for the industry.
Helena’s connections brought 32 brand owners together and 1,500 hours then went into forming this methodology, mainly by Harini and the South Pole team.
Not only did an effective carbon measuring methodology come out of it, but the most thorough description of the licensing model that can be found as they wanted to ensure scholars and accountants understood the license model.
The proposal is to edit the current section in the GHG protocol, Category 4: Franchises, to be called Franchise and Licensing, as it is a business model that is used in lots of industries. It is a true collaborative business model that deserves that clarity of how to account for it, said Sine.
The level of control in licensing is what makes it distinct as it is how all the accounting policies are applied.
“In licensing, we often tell partners what brands to use, what categories to be in, we audit factories, we have to approve everything, nothing goes on without the brand approval,” said Sine. “ So what you control, you account for.”
This can be done in two ways: the comprehensive method, which accounts for full impact, or royalty-based attribution, which is based on financial gain percentage, but then would expose financial data and doesn’t necessarily correlate to impact.
GHG protocol says organisations need to improve their data set each year so will need to improve from spend-based data which is the current industry standard.
As shown in the diagram, the higher up the pyramid, the more accurate and specific the data set for a product’s carbon footprint.
Harini added, “Both methodologies that we’ve come up with are based on product carbon footprint methodology, so both are robust.”
Michelle then continued, “The whole point of measuring carbon emissions is to have verifiable reductions from day 1. The problem with methodology at the minute is it won’t reflect the changes you are making to reduce emissions.”
Meanwhile, the comprehensive method means you calculate the full carbon footprint of a product and the partner then passes data to the brand owner, who accounts for full carbon footprint of the product, explained Sine. The licensee sells the product to a retailer and the retailer also accounts for the full carbon footprint of the product.
This passes on the transparency of how much carbon it took to create the product and also accounts for the use-phase until end-of-life.
The comprehensive model captures everything of the licensed product and gives clear responsibility to the brand owner who harvests the brand value.
It does involve overlapping emission reporting or double counting, which is something we need to get our heads around, said Sine.
However, if you are not using the comprehensive method and using royalty-based method instead, there will be instances where the royalty is so low you would not have full transparency of what it takes to create the product.
Harini added that this is particular evident when there are multi-licensors, which is the main difference since royalty attributes to financial data.
The methodology that has been created, “is the most comprehensive thing we’ve got,” said Sine, “So we are using it as standard at Lego and aligning to it already.”
Harini and the team undertook a lot of groundwork at the beginning to understand different licensing models and scenarios and how the methodologies could be applied.
“This was a great opportunity for South Pole to understand the industry from the ground up,” commented Harini.
They came up with four different example scenarios, distilled from six and at a higher level, identified three different business models that exist within the brand licensing industry.
The first is products, physical or digital, the second is themed entertainment and experiences, and the third is promotions, such as advertising or sponsorship. Each has been broken down into a scenario.
The first is for one licensor and one licensed product. In this example, Disney is the licensor and brand owner, and the agreement is with Lego who is also a brand owner and manufacturer. The product is created by Lego. The licensor is reporting emissions withing their Scope 3 Category 14, while Lego is already reporting but do it across other categories in Scope 3.
The second scenario involves multi-licensors, so more than one licensor, but one product at the end of it. Here, Lego and Warner Bros are both licensors so both take into account and report exact same emissions for licensed product under Category 14. Meanwhile, Microsoft is reporting within Scope 3 in terms of manufacturing.
In scenario three, it is themed entertainment. Nickelodeon is the brand owner which created experiences, that are passed onto the event and merchandising company. Multiple products come out of it, such Nickelodeon land, and physical products/licensed products. In this case, Nickelodeon account for emissions related to licensing, as well as the brand owner in the middle who is the licensee, but from the production side of things. This ensures all the emissions are being captured, by Nickelodeon and not just the licensee.
Scenario four is where it gets more complicated since promotions fall into different categories. In Scenario A, NBC Universal is a licensor and has partnered with MacDonalds which have produced and featured the Trollz on their products. The recommendation is that the licensor should be reporting emissions as their IP is being applied to physical product at the end.
Scenario B involves co-branded physical product. The brand physically shows up on a product itself so the licensor needs to account for those emissions.
Scenario C would be considered non-branded since you wouldn’t say universal produced the banana.
Scenario D is an advertising example, so there are no physical products, but licensor exchanged IP with the licensee. Since there are no physical products, the licensor doesn’t report the emissions. This is something that could change down the line as the methodology develops, however.
Finally, in Scenario E, we look at sponsorship, such as seen in sporting companies. The licensor invests longtime into a licensee, exchanging IP, investments and marketing benefits, such as Wimbledon and Barclays. Wimbledon does not account for marketing side but any products that come out of it they should account for.
“We have worked examples and calculations for every example we’ve talked through for each model so you can see what that would look like,” said Harini.
Michelle then finished with a note about the coming regulations that mean brands need to be responsible for reporting this data. This is mainly from CRSD, as there is still a bit more time for CSDDD.
The CSRD looks at double materiality of both internal and external risks, so organisations need to do double materiality assessments of what’s relevant to their organisation, which varies by region. These have to be audited and assured so can be costly, especially as there are over 1,000 different data points. The assessment demonstrates which are most relevant for your organisation which then need to be reported on.
“It’s a leveller and increases transparency,” said Michelle, and it helps organisations to not only understand the impact of the environment on their organisation, but also their organisation’s impact on the environment.
“There are a lot of benefits to it, but quite a few challenges too. However, it is new to everyone, so we are all finding our feet,” said Michelle.
“We are doing this altogether,” added Helena, and we are putting the tools, resources and education in place to help the industry navigate this.
