The UK’s current commitment to an 80% greenhouse gas emissions cut by 2050 includes corporate carbon. On 1 April 2019 reporting rules for quoted companies changed and now take in “large” unquoted businesses and LLPs. But SMEs are also encouraged to volunteer for the new best practice. Jon Herbert reports.

The Government’s new Streamlined Energy and Carbon Reporting (SECR) scheme is extending its reach around corporate carbon as global warming fears grow and politicians are accused of inaction.

UK greenhouse gas (GHG) emissions fell by 2.5% in 2018 compared to 3% in 2017 and 16% in 2016 — making a total of 43.5% since 1990. Theoretically at least, Britain is more than halfway towards its commitment of an 80% reduction by 2050. However, this has been the easy half.

More specifically, UK CO₂ emissions fell by 2.4% to 364.1 million tonnes while global carbon releases reached a 2018 all-time high, rising by 4.7%, 2.5% and 6.3% in China, the US and India. But there is potentially bad UK carbon news on the horizon that does call for urgent action.

Having beaten its first and second carbon budgets by 36 MtCO₂e and 384 MtCO₂e respectively, with an 88 MtCO₂e surplus predicted for the third from 2018 to 2022, the Department for Business, Energy and Industrial Strategy (BEIS) recognises that the UK is on course to breach its fourth and fifth budgets by 139 million and 245 million tonnes of carbon dioxide equivalent (MtCO₂e).

Aiming at the corporate and private sector

Emissions associated with business and industry make a major contribution. The question for policy-makers has been finding an effective tool to encourage greater efficiency and year-on-year reductions. Their choice is energy and carbon reporting.

Until recently, the rules only applied to large quoted companies. Now, they are being extended to “large” unquoted businesses through SECR, with the direction of travel pointing towards SMEs that are being encouraged to embrace the benefits of best practice voluntarily before being pushed.

Under SECR, qualifying organisations must include new energy and carbon reporting data within annual reports covering their next financial year starting in the 12-months leading up to 31 March 2020. For full details see www.gov.uk.

SECR awareness not high

The Government has been accused of not promoting the new scheme effectively. This makes it all the more important for companies to understand any new responsibilities now.

BEIS’ communication focus has been via Companies House and the Financial Regulatory Council, Environment Agency newsletters (ESOS, CRC and Climate Change Agreements), business trusts and professional bodies, including the CBI, Make UK, Major Energy Users Council (MEUC), Retail Energy Forum, Emissions Trading Group — plus EMA and IEMA.

However, because SECR will only apply to financial years that start after 1 April 2019, there is still time to get ready. The earliest reports will be submitted in April 2020, allowing companies to prepare systems and synchronise them with existing corporate reporting cycles.

Evolution of corporate carbon reporting

As of October 2013, companies listed on the London Stock Exchange, in the European Economic Area, or on the New York Stock Exchange or NASDAQ, have had to measure and report their greenhouse gas (GHG) emissions using a robust independent standard that presents all data clearly and shows how it differs from information given in conventional consolidated financial statements.

However, it was soon recognised that measuring, managing and reducing carbon emissions is an effective way for companies generally to identify their carbon footprints, raise efficiency, cut costs and set important environmental targets within their supply chains.

The result is SECR which BEIS estimates will affect some 11,900 organisations at this stage — including c. 1200 quoted companies.

Moving forward

SECR builds on — but does not replace — existing requirements, such as Mandatory Greenhouse Gas (MGHG) reporting for quoted companies, the Energy Saving Opportunity Scheme (ESOS), Climate Change Agreements (CCA) Scheme, EU Emissions Trading Scheme (ETS) and Climate Change Levy increase. It also coincides with the end of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme.

What happened on 1 April 2019 is that under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, SECR has updated the rules and extended the requirements not only to quoted companies but also to unquoted companies or limited liability partnerships (LLPs) deemed “large” in the Companies Act 2006.

“Large” is generally defined as meeting two of the three following criteria within a reporting period: — having more than 250 employees; an annual turnover greater than £36 million; and/or an annual balance sheet greater than £18 million.

SECR reporting requirements

Quoted companies, according to the Carbon Trust, must continue to report their “global scope 1 and 2” (direct and indirect) GHG emissions in CO₂-equivalent tonnes (all seven gases under the Kyoto Protocol) within their Directors’ reports, plus at least one emissions “intensity ratio” for current and previous reporting periods.

However, they must now also report their underlying global energy use split between the UK and offshore countries, again with previous year comparisons after the first SECR reporting period.

Unquoted large companies and large LLPs now have to report at a minimum, their UK energy use from electricity, gas and transport fuels (in company vehicles, including reimbursement for employee business mileage, but not external air, rail or taxi journeys, or third party contractors), plus associated GHG emissions and at least one intensity metric — such as tonnes of CO₂/kWh for the energy sector, or tonnes of CO₂/m² for the property sector

In all cases, reporting must include a description of steps taken to improve the businesses’ energy efficiency in the relevant year, plus resulting energy savings if known. Where no measures are taken, this should also be reported.

Although no specific methodology is prescribed, the methodology used must be shown and be robust, transparent and widely-accepted. Scope 3 “corporate value chain” indirect emissions should also be given with the voluntary disclosure of any additional sources of energy or GHG emissions.

Why would SMEs volunteer?

BEIS points out that improving business energy efficiency can help to boost productivity and growth development while enhancing energy supply security and contributing to a decarbonised economy. By choosing to learn the SECR ropes early, SMEs can enjoy the benefits sooner rather than later.

Exceptions

There are exceptions. Local authorities, government departments and statutory agencies are not covered by SECR, but report carbon in their annual reports under other legislation. Devolved administrations have separate systems. Not-for-profit bodies — such as companies and LLPs owned by universities or NHS trusts — come under SECR rules.

One other area where clarification is important is the distinction between group and subsidiary level SECR reporting — the aim being to avoid duplication. Another sub-group is companies falling within the SECR definition that use no more than 40MWh. They must submit total energy calculations and also make a statement that they are low energy users.

A further area for potential short-term exemptions is sensitive situations, such as takeovers, where releasing information could be prejudicial. Also, if certain data cannot be collected in a specific year, why this is so, the impact and how it will be provided in the future must be explained.

Summary

The Streamlined Energy and Carbon Reporting (SECR) scheme began on 1 April 2019 and brings quoted companies, plus unquoted and LLPs meeting the Companies Act 2006 definition of “large”, into the regime that could in future be extended towards SMEs.

SECR aims to improve business energy efficiency, boost productivity and growth, enhance energy supply security and help decarbonise the economy. By choosing to join SECR voluntarily, SMEs may benefit early. Details are at www.gov.uk.

First published by Croner-i on 21 May 2019