The Department for Environment, Food and Rural Affairs ("Defra") is currently consulting on plans that could require some companies to measure and provide numerical information about their greenhouse gas ("GHG") emissions in their annual reports. The aim is to encourage businesses to lower their carbon footprints (and reap the resulting efficiency savings) and allow investors or potential customers to evaluate a company's "green" credentials.
The consultation represents the culmination of a series of government actions required by the Climate Change Act 2008 ("CCA 2008") as part of the underlying obligation contained in the CCA 2008 to reduce UK GHG emissions by 80% of 1990 levels by 2050. Accordingly, the government must decide by April 2012 whether to create a legal requirement for some companies to disclose GHG emissions. If the government chooses not to impose regulations, a report must be laid before Parliament explaining why. Defra has made it clear that no decision has yet been taken, and the breadth of options being consulted upon shows there is still much to play for.
Which companies would be affected?
The consultation is focused on which companies should be required by law to report their GHG emissions. The options are as follows:
- none (but encourage voluntary reporting of emissions) - the first option would involve no mandatory requirement. The UK's largest public companies already commonly publish statistical information about GHG emissions, and it may be argued that the market opprobrium of not doing so will be sufficient to encourage adequate reporting without creating new regulations
- quoted companies (as defined by section 385 of the Companies Act 2006) - this would require regulations to be made under section 416(4) of the Companies Act 2006 requiring GHG statistics to be included in the directors' report. The requirement would be in addition to the existing obligation that the business review in the directors' report must include information about environmental matters including the impact of the company's business on the environment. This would also be in addition to requirements under the EU ETS, CRC and CCA schemes to disclose emissions.
It is estimated that about 1,100 companies would be affected. This option would promote investor awareness of environmental issues whilst only targeting companies which choose to access the markets
- "large" companies (as defined by implication in the Companies Act 2006) - this option would cover all large companies, including large private companies excluded by the previous option. It is estimated that between 17,000 and 31,000 companies would be affected
- companies with UK electricity consumption over a certain threshold - this option would effectively be an extension of the CRC Energy Efficiency Scheme (which applies the same qualification test). If the CRC threshold is maintained, roughly 4,000 companies would be affected. The consultation refers to a possible lowering of the threshold to cover up to 15,000 companies. The option may be perceived as unfair because it would ignore companies with low electricity consumption in the UK but significant overseas emissions.
Other issues being consulted upon focus on measurement, calculation and reporting issues. The consultation questions suggest that the options are narrower in this area. However, this does mean that the consultation provides better insight into the possible shape of any future regulations. Issues on which views are sought include the following:
- organisational boundaries (that is, which companies in a group should be included). It is proposed that companies should specify whether a financial control, organisational control or equity share approach is used. A key point is that foreign emissions could be included (however, further questions show a degree of flexibility where data collection is not possible)
- the consultation proposes to include all six GHGs identified in the Kyoto Protocol, using "CO2 equivalent" as a standard scale for reporting
- it is proposed that the international "GHG Protocol" system of scopes is used to define which activities should be reported upon: scope 1 includes direct emissions; scope 2 includes indirect emissions (but restricted to purchased electricity, heat, steam and cooling); and scope 3 relates to all other indirect emissions. Defra proposes to require reporting on scopes 1 and 2. This reflects a pragmatic approach because data collection for these scopes is much easier. However, the consultation asks whether certain scope 3 emissions should be included as well
- views are sought on what level of auditing should be required, ranging from no auditing to internal checks or third party verification compliant with an international standard
- a welcome possible inclusion is the requirement for an "intensity ratio" to be published. An intensity ratio allows fairer comparison by relating emissions to another factor such as revenue or output (for example, grammes of CO2 per million pounds of revenue or litres of beer produced). This will offer comfort to large but efficient companies or those who fear that "increasing efficiency" will be seen as a euphemism for a decline in business.
There is likely to be lively debate as to which companies, if any, should be subject to reporting regulations. On the one hand, the government will be keen to avoid adding to the existing medley of environmental reporting regulations, especially given its commitment to lower regulation through the "Red Tape Challenge". On the other hand, reducing UK companies' carbon footprint could have economic as well as environmental benefits. Further, there have been suggestions from industry that regulations would provide the certainty required to ensure a level playing field for environmental reporting.
The consultation closes on 5 July 2011.