In March 2008 the House of Lords inserted a new clause 80 in the Climate Change Bill, the intended effect of which is to require UK companies to publicly report on their emissions. Such reporting requirements may be onerous and impose significant cost burdens on a wide range of UK companies. The Bill returned to the Commons (in Committee) in July and the Government removed Clause 80 from the Bill, but inserted new provisions the purpose of which is to provide guidance on the measurement of greenhouse gas emissions. In this article we look at the current method of environmental reporting by UK companies; at the rationale behind the House of Lords' clause 80; and at the Government's alternative.

It is expected that the Bill will become law in late 2008.

Current reporting requirements

There is no single requirement under English law for companies to report on their emissions. Quoted companies and companies subject to the EU Emissions Trading Scheme have certain (but differing) reporting requirements, and there is a system of voluntary reporting.

Companies Act 2006

The Companies Act 2006 section 417 requires all companies (save small companies)1 to produce a business review as part of the annual director's report. The business review consists of a fair review of the company's business together with description of the principal risks and uncertainties applying to the company.

In the case of quoted companies, the business review must include information on environmental matters (including the impact of the company's business on the environment), but only insofar as such information is necessary for an understanding of the company's business. The Act provides no definition of "environmental matters". The Department of the Environment has issued guidance (albeit that it is voluntary for a quoted company to comply with such guidance) on 22 key performance indicators for environmental matters upon which companies might report, ranging from information on emissions to air and to land, through to resource use.

EU Emissions Trading Scheme (EU ETS)

The EU ETS applies only to operators of energy intensive and other heavy industries. The scheme requires that UK operators submit data on their CO2 emissions to the Environment Agency (or to the Scottish Environmental Protection Agency for Scottish based operators). The data must be verified by an independent third party but does not have to be included in the annual directors' reports or business review.

Voluntary reporting and shareholder pressure

The Carbon Disclosure Project (CDP)2 is an international voluntary disclosure programme set up in 2002 and which now represents over 300 institutional investors worldwide, including banks, pension funds and insurance companies. The CDP sends an annual questionnaire to the largest companies throughout the world seeking information on their greenhouse gas emissions and climate change strategies. The CDP provides guidance on how companies should calculate and report on their emissions, thus allowing a "like for like" comparison by investors. The CDP's website names those companies which do not respond to the questionnaire.

Some companies, such as The Royal Bank of Scotland, voluntarily report on greenhouse gas emissions and environmental issues, but use differing methodologies to calculate emissions, thus making a "like a like" comparison difficult. In the US, pressure has been brought to bear by activist shareholders on companies such as ExxonMobil and Ford to report on climate change policies and plans for emission reductions.

Why clause 80?

The rationale behind clause 80 is reasonably clear:

  • under the Kyoto Protocol, the UK is required to have a Greenhouse Gas Inventory in order to asses how (or whether) the country is meeting its Kyoto targets. The information used to compile the Inventory currently derives from estimates and modelling rather than reported and verified emissions. Clause 80 sought to achieve an "across the board" reporting standard and thus enable the Government to compile the Inventory with more accuracy;
  • it was hoped that by requiring companies to report on their emissions, it will lead to action being taken to reduce emissions whether through public/shareholder pressure, or because it will identify cost savings resulting from emissions reductions; and
  • for comparison purposes, there needs to be one methodology for calculating and reporting on emissions. Clause 80 was intended to create a level playing field.

Clause 80 sought to allow (but did not require) the Secretary of State to issue guidance regarding the information on greenhouse gas emissions which a company should publicly disclose as part of its annual reporting. The clause also provided that a company required to produce a business review under the Companies Act 2006 must also report on its greenhouse gas emissions, having regard to any guidance issued by the Secretary of State under clause 80.

The Government's alternative

The Government gave two main reasons for the removal of clause 80; it did not provide clear guidance on the manner in which emissions should be reported and; the Government already has power to impose new reporting requirements under Section 416(4) or 468 of the Companies Act 2006.

The Bill now requires the Secretary of State to publish guidance on the measurement or calculation of emission to assist those who are either required to report or voluntarily close, on their emissions. That guidance must be published not later than 1 October 2009. The possibility remains that additional reporting requirements may be introduced pursuant to existing powers under the Companies Act 2006.

The Guidance - some issues

It is too early to say what guidance might be issued. However, developing a standardised methodology for measuring emissions will not be a straightforward task. One might anticipate that relevant factors will include; the amount of power consumed; the source of that power (renewables or otherwise); and energy efficiency of plant and buildings. However, will a company be allowed to deduct carbon offsets from its emissions total? Will indirect emissions (for example, those created by offsite databases) be included? Will the guidance mirror existing methodology for emissions reporting under the EU ETS? If not, a company already reporting under that scheme may be faced with the burden of preparing separate reports in order to comply with the EU ETS on the one hand, and any new reporting requirement under the Climate Change Bill on the other.