REGULATIONS BEING LAID before parliament under the Companies Act 2006 will require quoted companies to report their annual greenhouse gas (GHG) emissions in their directors’ report. These implement a decision under the Climate Change Act 2008 that required the government to introduce regulations or explain to parliament why it had not.
Initially, the regulations will apply only to companies quoted on the main market of the London Stock Exchange for financial reporting years ending on or after 30 September 2013. However, the government has also committed to a review in 2015, with a view to extending the regulations to cover all large companies in 2016. [See Rules.]
GHG reporting is part of a broader move for greater corporate accountability on the environment. Consultation on the draft was timed around the Department for Business, Innovation and Skills (BIS) consultation on proposed changes to reporting provisions under the Companies Act, including a requirement for companies to publish a strategic report setting out the principal risks and uncertainties.
Taken together, and with a further consultation by Defra on environmental reporting key performance indicators, we see a more concerted effort to enhance the legal reporting framework in the UK for companies to demonstrate responsibility for the environment and realise the business benefits of reporting.
So why is this relevant to FDs? The rationale for introducing a public GHG reporting requirement is to provide investors and other stakeholders with the information they need to fully take account of climate change risks in their decisions. There is also evidence that companies that report their emissions, such as Willmott Dixon and insurance group RSA, are able to manage and reduce these. Reporting this in a company’s annual report ensures that emissions are brought to the attention of the board and senior management, acting as a catalyst for emissions reduction and cost saving – about 70% of companies that IEMA surveyed said GHG reporting will deliver cost savings, and 77% said it will lead to environmental benefits.
What do FDs need to consider when reporting? One of the challenges posed by the regulations relates to the boundary for reporting. Although the regulations apply to UK listed companies, they will require reporting of GHG emissions from activities outside the UK. This can be a problem where GHG data management and internal reporting structures are less robust, or where factors for supplied electricity is not available.
FDs will need to liaise with environment and sustainability staff in their companies to determine whether they fall within the scope of the regulations and, if so, the extent of data coverage. Companies covered by the regulations will need to ensure they have a robust data management and reporting framework that covers the GHGs and the full scope of the organisation, based on the emissions for which it is responsible.
The regulations do not include requirements for emissions data to be independently verified. But there will be requirements on the statutory auditor of the financial statement, such as considering if the GHG information is consistent with the financial statement and the information is materially incorrect based on the knowledge acquired by the auditor in the course of performing the audit.
The success of the regulations will depend on the approach companies take to implementing the new requirements. Those that take a proactive approach to catalysing emissions and cost reduction will see the greatest business benefits. ?
GHG reporting at a glance
What is greenhouse gas (GHG) emissions reporting?
Public disclosure of GHG emissions in company directors’ reports. The UK government announced in June 2012 that it will introduce regulations under the 2006 Companies Act.
Who will need to report?
All UK companies quoted on the Main Market of the London Stock Exchange. The government’s initial estimate was that about 1,100 companies would be affected, and it will undertake a review and decide, in 2016, whether to extend the regulations to all large companies, bringing a further 24,000 companies into the regime.
When will they need to report by?
The government’s proposed regulations will bring in a requirement to report for company reporting years ending on or after 30 September 2013. Depending on financial year end, a company might be required to report data on GHG emissions from before the regulations commence.
What will need to be reported?
Companies will need to report annual GHG emissions of Kyoto Protocol gases for which they are responsible, in tonnes of carbon dioxide equivalent (CO2), from the following: combustion of fuel, operation of any facility and emissions resulting from purchase of electricity, heat, steam or cooling. They must express annual emissions using at least one intensity ratio, state the method used to calculate emissions, and state emissions disclosed in the previous year’s directors’ report.
Martin Baxter is executive director, policy at the Institute of Environmental Management and Assessmment