Thursday, 27 June 2013

Mandatory Carbon Reporting

By Victoria Joy, Consultant

The prospect of larger UK companies having to report their greenhouse gas (GHG) emissions has been on the cards for a while, but it has now become a lot more certain.  Draft legislation, the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, was laid before Parliament on 10th June.  The regulations are subject to the affirmative resolution procedure, meaning that approval by both Houses of Parliament is required before they take effect, but this process is little more than a formality and is likely to be concluded soon. 

From 1st October this year, the new regulations will amend the existing directors' annual reporting requirements (as set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008) to oblige UK quoted companies to include reporting on their GHG emissions.  This affects all UK incorporated companies listed on the LSE's main market as well as those listed on a market within the EEA or whose shares are traded on the NYSE or NASDAQ.  The requirement applies to each company starting from its annual report covering the financial year ending on or after 30th September 2013.

For the purposes of this new reporting requirement, GHG means the six Kyoto Protocol gases, namely carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.  Emissions from activities for which a company is responsible and that are due to human activity must be reported, as tonnes of carbon dioxide equivalent.  The requirement applies only to emissions resulting from the combustion of fuel, the operation of the company's facilities and the purchase of electricity, heat, steam or cooling by the company for its own use, i.e. scope 1 and scope 2 emissions under the widely used GHG Protocol.  Transport emissions are caught (since they involve the combustion of fuel), but scope 3 emissions (such as those arising from supply chain activities and emissions from the company's products once they have been sold) are not. 

Any company that finds it is impractical to obtain the required information will not be in breach of the new regulations provided that its annual report states what information is not included and why. In practice, pressure from shareholders and other stakeholders is likely to make incomplete reporting under this "comply or explain" provision increasingly rare as time passes. 

There is no requirement for independent verification, but in an effort to eliminate "greenwashing" annual reports must state the methodologies used to calculate the emissions.  The company's auditors will have to carry out a very basic check on the reported information to assess it for consistency with the financial statements and their knowledge of the business.  Also, at least one intensity ratio must be included to express the company’s annual emissions in relation to its activities, such as tonnes of carbon dioxide equivalent per tonne of production, per 1,000 hours of operation or per £million of sales revenue.  This may make it easier to compare one company's performance with another's, as will the requirement that, after the first year's report, the previous year's figures must be included as well as the current year's. 

Defra updated its environmental reporting guidance this month (Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance) to help UK companies subject to the new requirements as well as those organisations that wish to report voluntarily on their environmental performance.  It gives a single page corporate GHG report as an example, but companies are free to choose whatever format they like.  The guidance goes into detail on such matters as how to set about scoping the reporting requirement and deciding which methodology to use. 

Although the new regulations are made under the Companies Act 2006 and therefore only affect companies, some public bodies such as Government departments and local authorities are otherwise required, or are strongly encouraged, to report their GHG emissions.  There are overlaps too with existing emissions reporting requirements under the CRC, Climate Change Agreements and the EU Emissions Trading System.  The areas of overlap may increase in the future because, while only about 1,100 companies will be affected by the new reporting requirements for quoted companies from this autumn, the Government has stated that it will carry out a review after the first two years of reporting and then decide in 2016 whether to extend the requirements to all UK companies defined as "large", of which there are estimated to be between 17,000 and 31,000.

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