Mandatory reporting of greenhouse gas emissions

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Back in June, the Government announced that it planned to introduce a new Regulation requiring the reporting of greenhouse gas emissions by UK quoted companies.  Its rationale was to enable investors to see how companies are managing their carbon liabilities and thus assess medium- to long-term risks.

Quick off the mark, Defra (the Department for Environment Food and Rural Affairs) has recently issued a draft Regulation (the proposed Greenhouse Gas Emissions (Directors’ Reports) Regulations 2013) for public consultation.  The consultation period ends on 17 October 2012 (which coincides with the end of Defra’s current consultation on revised reporting guidance for UK companies on environmental key performance indicators).

Subject to the consultation responses received, it is proposed that the Regulation’s requirements will apply to reporting years ending after 6 April 2013.  However, we expect respondents may support delaying its coming into force so as to co-ordinate it with forthcoming changes to narrative reporting announced recently by the Department for Business, Innovation and Skills.

Which companies are caught?

As drafted, the Regulation applies to all UK quoted companies – i.e. companies that are UK incorporated and whose equity share capital is officially listed on the Main Market of the London Stock Exchange; or is officially listed in an EEA state; or is admitted to dealing on either the New York Stock Exchange or NASDAQ.

The Government intends to review the first two years of greenhouse gas reporting and then take a further decision in 2016 on whether to extend the reporting requirement to all large companies.

The reporting requirement

For reporting years ending after 6 April 2013, the draft Regulation requires the annual directors' report to state the annual quantity of emissions (including any leakages or escapes) in tonnes of carbon dioxide equivalent resulting directly from any of the following activities undertaken by the company:

• the combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the company;

• the use of any means of transport machinery or equipment operated, owned or controlled by the company; and

• the operation or control of any manufacturing process undertaken by the company.

It must also state the annual quantity of emissions (including any leakages or escapes) in tonnes of carbon dioxide equivalent resulting from the purchase of electricity, heat, steam or cooling by the company.

There do not appear to be any geographical limits to the activities or purchasing that need to be assessed for the purposes of the report. This reflects the view of the majority of respondents to an earlier consultation, that companies should report on their emissions within their organisational boundary, including overseas emissions.  This of course tallies with companies’ financial reporting requirements generally - and is designed to ensure that shareholders and investors see a true picture of the company’s overall emissions.

The report must clearly state which methodology has been used for calculating emissions – and must also include an “intensity ratio”: see below for further details.

The information reported in a company’s first reporting year has to be included in subsequent directors’ reports to allow progress in emissions management to be visible.

How to comply

Decide upon a calculation methodology

There are a number of accepted methodologies for calculating greenhouse gas emissions from which to choose.  As well as the methodology in Defra’s own existing guidance (published in September 2009), methodologies can be found in the World Resource Institute/World Business Council for Sustainable Development Greenhouse Gas Protocol, ISO 14064-1, and the Climate Change Disclosure Board’s "Climate Change Reporting Framework". In addition, some sectors have developed their own bespoke methodologies.

Use existing reported data, where applicable

Many quoted companies are already subject to some form of greenhouse gas regulation in the UK.  To reduce regulatory burden, the Regulation permits the use in the report of data accumulated by a company in compliance with certain established regulatory regimes, namely Climate Change Agreements, EU Emissions Trading Scheme and the CRC Energy Efficiency Scheme.  To the extent that a company takes advantage of this in calculating emissions, it must declare it in the report.

Choose an intensity ratio

“Normalising” emissions data facilitates comparison over time and comparison across different business sectors and products.  Emissions data can be normalised by dividing a company’s emissions by an appropriate activity metric (e.g. floor space, Full Time Equivalents) or financial metric (£ million sales). The resulting figure is called an “intensity ratio”. The draft Regulation requires the report to include an “intensity ratio”, although what intensity ratio is used is not specified.  Each company can therefore choose to use whichever intensity ratio is of most interest to shareholders.

Enforcement and penalties for non-compliance

The Regulation will be made under the Companies Act 2006, and enforcement of the Regulation will be carried out by the Conduct Committee of the Financial Reporting Council.  If it feels it necessary, it can apply to the court for a declaration that a quoted company’s annual report does not comply with the applicable requirements and for an order that the directors revise it so that it does.  In addition, under the provisions of the Companies Act, the directors may face a fine if they knew that the directors’ report was non-compliant with the applicable requirements, or were reckless or failed to take reasonable steps to ensure compliance.

How we can help

For further guidance and assistance with environmental reporting, and all other environmental compliance and liability issues, please contact Aidan Thomson, another member of the Environment Team or your usual BLP contact.

 

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