Risk & Economy » Climate change » Why it’s time for FDs to get serious about energy reporting

As the end of 2019 draws closer, it is becoming clear that boardrooms are facing increasing pressure from investors and stakeholders to demonstrate a meaningful and sustainable approach to managing their carbon impact. A recent confirmation of this comes with the news that hedge fund TCI has written to several companies warning them that if they fail to disclose their carbon emissions, it would vote against their directors.

With this in mind, it is perhaps surprising that our recent insight shows that board-level engagement with the current energy reporting obligation – the Streamlined Energy and Carbon Reporting Scheme (SECR) – is low.

In the UK, 2020 will be the first time over 11,900 businesses will publicly report their emissions and implement energy saving measures under SECR. It requires all quoted companies, large unquoted companies and large limited liability partnerships (LLPs) (those that meet two of the following criteria – more than 250 employees, turnover of over £36m and balance sheet total in excess of £18m) to disclose carbon emissions and energy use from electricity, gas, and transport as a minimum as part of their annual filing obligations.

While businesses focusing on sustainability is not a new phenomenon, 2019 has undoubtedly been the year that it has come fully into the public consciousness.  With the government legislating to hit net zero carbon emissions by 2050, and ‘climate strike’ being announced as Collins Dictionary’s ‘word of the year’, companies are being publicly ‘named and shamed’ for ‘greenwashing’ if their sustainability pledges don’t have weight.

For example, in its letter, TCI says, “TCI believes that climate change-related risks, in particular a company’s greenhouse gas emissions, will have a material effect on a company’s long-term profitability, sustainability and investor returns. These risks include regulation, taxation, competitive disadvantage, brand impairment, financing, physical asset impairment and litigation.”

Strong stuff indeed.

Low on the list of priorities

So, why is it that, even with energy managers looking for SECR support at board-level, is the scheme still appearing low on the overall priority list? One possibility is because, when time and cost pressures are already high, energy reporting schemes are often seen to be an additional administrative burden. Therefore, while the SECR box will be ticked, there isn’t much appetite – or available resource – to do much more than that.

There is also the suggestion that the lack of board-level focus on SECR could be due to the relatively low financial penalties for not complying. At the time of writing, the new SECR framework does not include harsh penalties for non-compliance. The financial penalties for late or rejected annual reporting ranges from £150 for one month late, £375 for up to three months, £750 for three to six months and £1500 for more than six months. There is also a doubling of the overall penalty if you are late to report two years in succession.

However, while financial penalties are low, the reputational risk incurred if a business’ SECR reports reveal they’re not making enough progress in reducing emissions – or haven’t implemented energy efficiency measures – is high.

For example, although businesses are required to include any energy efficiency projects that they have carried out within the reporting year, they aren’t actually required to implement any energy efficiency measures at all.  However, if an organisation doesn’t implement any efficiency projects, this will need to be stated in the report.

An FD would need to ask themselves – what would be best – publishing a report that is full of proactive efficiency projects, or one that shows no real effort to improve sustainability at all?

In addition – as the move by TCI has shown – there could be damage to investor relationships, as well as an impact on the supply chains of the business, and a backlash against the company for failure, or lack of progress.

Efficiencies make savings

However, avoidance of negative reputational impacts aren’t the only benefit of adopting efficiency projects – improving energy efficiency is the only guaranteed way to ensure that a business isn’t paying more than it should for their energy. In fact, increasing energy efficiency through physical improvements and behavioral projects can result in an organisation ultimately making savings on its energy spend. In today’s volatile energy market, many businesses are seeing significant increases in their energy bills, so it’s financially prudent to ensure energy isn’t being wasted.

We are now on countdown to the first round of SECR reporting. The end of Q3 for businesses caught in the first wave of SECR publications should highlight how their data collation processes are working, and what is still to do to ensure the right information is available when it comes to collating their final reporting.

When the first reports are published, it will be interesting to see which businesses will have seen SECR as an opportunity to affect real change in how they approach the management of their energy consumption.

What is clear is that, as we transition into a low-carbon world, businesses will play a crucial role in the UK’s net-zero future – and schemes like SECR should be high on the board-level priority list, rather than just another box to tick.

If your organisation needs help meeting its SECR obligations, visit www.inspired-secr.co.uk.

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Climate change

SECR Reporting – Are you recording and reporting?

By Martyn Young | Director of ZTP