New requirements for directors' reports?
Section 85 of the Climate Change Act 2008 requires the Government to introduce secondary legislation by 6 April 2012, which would require the directors' report of a company to include information about their company's greenhouse gas (GHG) emissions. If the Government decides against implementing mandatory emissions reporting it must explain to Parliament why no regulations will be made.
DEFRA launches carbon reporting consultation
The Department for Environment, Food and Rural Affairs (DEFRA) has now launched a consultation on whether it should be mandatory for certain UK companies to report their GHG emissions.
The consultation acknowledges a primary tenet of the climate change lobby: that in order to manage (and reduce) GHG emissions, one must first measure them. Given the importance the Government has placed on meeting the country's legally binding climate change commitments, the role of UK business has not been overlooked.
No decision has yet been made and DEFRA's consultation seeks views on the following four options:
- 1. enhanced voluntary reporting;
- 2. mandate for all quoted companies;
- 3. mandate for all large companies; or
- 4. mandate for all UK companies consuming electricity above a certain level.
Option 1: Enhanced voluntary reporting
This is the least stringent of the four options and focuses on enhancing the current steps taken by business such as increasing the awareness of the benefits received by companies who report. Initiatives such as the Carbon Disclosure Project (CDP) already have the backing of major institutional investors and aim to highlight the risks and opportunities for companies who engage with climate change and GHG emissions reporting.
This option would provide support to the likes of the CDP and stress to businesses the importance of brand recognition, improved investor relations and cost savings associated with measuring and reporting emissions.
Option 2: Mandate for all quoted companies
(as defined in section 385 of the Companies Act 2006)
This and the following option rely on changes being made to section 416(4) of the Companies Act 2006 and refer to companies which are required to produce a directors' report as part of a company's annual report and accounts. DEFRA estimates that this will cover around 1100 companies on the London Stock Exchange but would exclude large private companies.
Option 3: Mandate for all large companies
(as defined in Sections 382, 383, 465 and 466 of the Companies Act 2006)
DEFRA has also tabled the possibility of requiring all large companies (public and private) to include their GHG emissions in their directors' report. If a company fulfils the criteria contained in the Companies Act with respect to size (based on measurements such as turnover and number of employees, etc) then it would be required to report GHG emissions. The UK Department of Business, Innovation and Skills (BIS)/DEFRA's figures estimate that this would cover between 17,000 and 31,000 "large" companies in the UK with such companies likely to be the most significant emitters of GHGs. Unlike option 2, this option would cover both private and public companies.
Option 4: Mandate for all UK companies consuming electricity above a certain level
Finally, DEFRA has included a proposal that all companies whose UK consumption of electricity exceeded a minimum threshold of half-hourly metered electricity in one year, should report their GHG emissions in their directors' report. The proposal is aimed at the largest energy users and would apply to companies where they have at least one half-hourly meter, and their electricity consumption through such meters exceeds an annual limit. The reference to the half-hourly meters suggests that it might be linked to another Government initiative, the CRC Energy Efficiency Scheme. Whilst this proposal would cover the largest energy users, certain high emitters may escape where they emit GHGs from other activities, such as transport or emissions from overseas activities. This proposal also doesn’t use the definitions in the Companies Act as to the size of the company but rather refers to the threshold of electricity used each year at 6,000 MWh.
Mandatory or voluntary?
The opposition parties have so far criticised the Government for supporting mandatory reporting while in opposition but now including a voluntary option in DEFRA's consultation. Meanwhile, DEFRA has stressed that ministers have not selected a preferred option and the consultation is entirely open. The business community remains divided over the issue with some industry groups weary of imposing a further burden on companies in what are challenging times. However, Environment Minister Lord Henley argues that mandatory reporting has already benefited UK businesses - "Companies found that they saved money by focusing attention on energy efficiency, improved their green image with consumers and became more attractive proposition for potential investors."
One concern which has been raised by some is the form that new emissions reports would take. Accountancy, as a profession, has developed a number of sophisticated ways to report a company's financial performance and has a great deal of experience on which to draw. The same cannot be said for GHG emissions reporting and it may be some time before a unified standard emerges. Until then, accountancy firms such as PricewaterhouseCoopers have released mock-up reports based on what they consider might be included in mandatory GHG emissions reports. Only time will tell what the reports will look like but it seems that UK business is braced for, if not embracing, change.
The consultation closes on 5 July with a decision expected in autumn ahead of the new regime being implemented in April 2012.