As reported in our earlier post on changes to the environmental reporting regimes in the UK (here), certain companies are now required to participate in Streamlined Energy and Carbon Reporting (SECR), under The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (the Regulations), which come into force today, 1 April 2019. The reporting changes apply, for companies within scope, to all financial years which begin on or after 1 April 2019. Accordingly, reporting is not required until 1 April 2020 at the earliest. If the annual period used for SECR reporting is not the same as the financial year covered by the relevant report, this must be made clear in the report.
The Government recently published its long-awaited guidance on SECR, a copy of which is available here. Whilst the guidance provides some helpful background and a narrative explanation of the requirements for entities unfamiliar with the Regulations, many grey areas still remain. In particular, it was hoped that the guidance would make the application of the grouping tests to funds and portfolios clearer. However, the guidance provided is unlikely to provide much clarity for businesses within scope of SECR, especially as the grouping tests differ in a number of ways from existing reporting regimes.
The SECR regime expands the number of companies within scope of mandatory “green” reporting. The Government’s guidance emphasises the utility of environmental KPIs in reporting, and notes that entities may choose to “go beyond what is legally required”, thereby aligning SECR with a broader global move towards driving transparency for a range of stakeholders. Environmental reporting of this type is an area of particular interest for a wide range of companies, not just from a regulatory compliance perspective but also as an important tool with which to strengthen green credentials in the marketplace, reduce operational costs and environmental risks, and improve investor engagement.
Who is subject to SECR?
The Regulations require the following companies to participate in SECR:
- All UK-incorporated quoted companies;
- “Large” UK-incorporated unquoted companies; and
- “Large” LLPs.
A “large” company or LLP is one which fulfils at least two of the following conditions in the relevant financial year: it has (i) at least 250 employees; (ii) an annual turnover greater than £36m; and (iii) an annual balance sheet total greater than £18m. The guidance confirms that companies incorporated outside of the UK are not required to report under SECR, including foreign parent companies of UK subsidiaries.
There are a number of exemptions to SECR:
- “Low energy user” companies, ie those that can show that their energy use is less than 40 MWh (40,000 kWh) in the relevant 12 month period, are exempt. If a group report is prepared, the assessment of energy usage is made in relation to the energy consumption of the parent and all subsidiaries which are included in the consolidation and are either quoted companies, unquoted companies or LLPs.
- The Regulations adopt a “comply or explain” approach. Information can be excluded from SECR reporting where:
- for an unquoted company or LLP, it is impractical for the entity to obtain certain energy use data. However, the report must clearly state what data is excluded and explain why.
- for a quoted company, disclosure would be seriously prejudicial to the interests of the organisation. However, the report must clearly state that the information is excluded for this reason. This exemption is intended by the Government to be construed narrowly, and should only be relied on in exceptional circumstances.
It should be noted that the Government continues to encourage all private sector organisations which are not within scope of the Regulations to report in line with SECR, although this remains voluntary. Certain public bodies (such as Government departments and local authorities) are subject to separate environmental reporting requirements, which are not discussed here.
Businesses should also consider whether they fall within the scope of other reporting frameworks, as summarised in our earlier post, such as ESOS and/or the EU ETS. Data collected as part of those reporting processes are likely to be useful for the purposes of SECR.
How does SECR apply to group structures?
- Group reports: Where an entity is required to report at a group level, it must take into account its own information as well as the information of any subsidiaries included in the consolidation which are quoted companies, unquoted companies or LLPs. It can, however, opt to exclude information relating to any subsidiary which would not itself be obliged to report (eg a group company incorporated outside of the UK), if that subsidiary was reporting on its own account.
- Subsidiary companies: A subsidiary is not obliged to report its energy and carbon information if: (i) that information is included in the group report of a parent undertaking; (ii) that group report is prepared for a financial year of the parent that ends at the same time as, or before the end of, the subsidiary’s financial year; and (iii) the group report complies with the relevant obligations on the parent to report energy and carbon information for themselves and their subsidiaries (unless, in exceptional circumstances, this would be “seriously prejudicial” to the interests of the organisation, if the group report is prepared by a quoted company parent). This differs from the approach under other regimes, for example ESOS (on which, see here). Subsidiary companies may choose to report on a voluntary basis under SECR, even if their information is included in a group report prepared by a parent company.
- Portfolio companies: Where a parent company is not registered in the UK but has portfolio companies which are, those portfolio companies only need to participate in their own right if they themselves are over the “large” threshold. As with subsidiary companies covered by a parent group report, UK portfolio subsidiaries above the “large” threshold will not be required to report if they are covered by a parent’s group report.
What are the requirements of SECR?
SECR expands the range of disclosures which must be made by quoted companies in their Directors’ Report, and introduces requirements for large unquoted companies and large LLPs to disclose certain information. Quoted companies are also already required to report on environmental matters (including the impact of their activities on the environment), to the extent necessary for an understanding of the company’s business, within the Annual Report (ie in the Strategic Report).
In the case of quoted companies and large unquoted companies, the Regulations impose new obligations for what must be included in the Directors’ Report (under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013). In the case of large LLPs, the Regulations impose an obligation to prepare a new type of report – the ‘Energy and Carbon Report’.
The table below sets out, for each type of entity, what must be disclosed under SECR for each relevant reporting year.
*Scope 1 (direct) emissions are those which arise from activities owned or controlled by a company that release emissions into the atmosphere, including the combustion of fuel and the operation of any facility.
**Scope 2 (energy indirect) emissions are those which are released into the atmosphere and associated with a company’s consumption of purchased electricity, heat, steam and cooling.*Scope 1 (direct) emissions are those which arise from activities owned or controlled by a company that release emissions into the atmosphere, including the combustion of fuel and the operation of any facility.
Disclosure of Scope 3 (other indirect) emissions (ie emissions which are a consequence of a company’s actions, which occur at sources not owned or controlled by the company, and which are not classed as scope 2 emissions) remains voluntary, including for quoted companies. Additionally, although large unquoted companies and large LLPs are not required to report on emissions such as energy consumed outside the UK, or energy not used by the organisation, but which is supplied to a third party, they may choose to do so voluntarily.