After some significant delay and indecision by the Government, it has now been determined that quoted companies must from 2013 report on a mandatory basis on greenhouse gas (GHG) emissions as part of the directors’ report. This requirement is to be contained in The Greenhouse Gas Emissions (Directors’ Reports) Regulations 2013, to be made under powers inserted into the Companies Act 2006 by the Climate Change Act 2008.

What are the greenhouse gases?

For the purposes of UK law six greenhouse gases defined in section 92 of the Climate Change Act 2008 (and identified by the United Nations in the Kyoto Protocol) are as follows:

CO2 (carbon dioxide)

CH4 (methane)

N2O (nitrous oxide)

HFCs (hydrofluorocarbons)

PFCs (perfluorocarbons)

SF6 (sulphur hexafluoride)

In order that transparent and comparable data can be produced and meaningful analysis carried out, all reporting will be in tonnes of carbon dioxide equivalent (CO2e), having applied the relevant conversion factor between the relevant gas and CO2.

Directors’ narrative reporting

The format of the directors’ report is evolving and the Department for Business, Innovation and Skills (BIS) has undertaken a review of narrative reporting. In time the business review is to be replaced by a report on strategy while the remainder of the director's report stays substantially intact (see further Corporate governance update); GHG emissions reporting will form part of the directors' report. It is welcome that BIS and the Department for Environment, Food and Rural Affairs (Defra) have worked on this together.

What is a quoted company?

After some debate and a major consultation last year, Defra has determined that the mandatory obligation on a company to report GHG emissions should arise in respect to all quoted companies. Accordingly, the determining factor is not number of employees, market capitalisation or turnover, but whether or not the securities of the relevant issuer are on the Official List of the FSA. Official List shares can be admitted to trading on the main market of the London Stock Exchange and the PLUS-SX primary listed market, but not AIM. Accordingly, whilst this new reporting obligation will not touch much of the small and mid cap listed sector, it will oblige a number of small issuers on the main market of the London Stock Exchange to measure energy consumption data, analyse it and then report on it.

How will my company have to report?

From 2013 a directors’ report must state the company’s annual UK emissions arising from the following:

  • directly from the combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the company;
  • directly from the use of any means of transport, machinery or equipment operated, owned or controlled by the company;
  • directly from the operation or control of any manufacturing process undertaken by the company; and
  • indirectly from the purchase by the company of electricity, heat, steam or cooling.

Note, that there will necessarily be some duplication of reporting of the same emissions between companies, particularly in the context of power production.

Accordingly, whilst the relevant regulations are not yet in force, companies should now start to put in place the appropriate procedures to capture, handle, analyse and report energy consumption data.

Defra has probably simply harnessed one of the clear directions of travel in relation to corporate Britain. Many companies have had to report under the EU Emissions Trading Scheme (EU-ETS) or, more recently, under the CRC Energy Efficiency Scheme. A broader constituency of companies has also been making voluntary measurement and reporting of GHG emissions as part of their corporate responsibility policy. Accordingly, for many, this new obligation will not create a significant additional regulatory burden. If the data a company reports arises from EU-ETS data, under a Climate Change Agreement or under the CRC Energy Efficiency Scheme, the company must also report that fact.

However, Defra has declined to determine the manner in which reporting is to be made and, notably, has not identified a single reporting criteria to be applied. In time, transparency in the manner of reporting needs to be evolved, most probably only in conjunction with the United Nations Framework Conventions on Climate Change (UNFCCC) structures and the European Union. Accordingly, many companies have welcomed the fact that, at this stage, there is no mandatory reporting standard.

The nature and presentation of GHG reporting will evolve over time. Please note that, whilst assurance will become a growing theme, there is no current proposal that the GHG reporting data or narrative will need to be audited.

Complications will arise where data collection procedures relate to the whole of a business (not just the UK), where energy is consumed by landlords for the benefit of tenants and where data has been collected under other schemes (for example, the CRC Energy Efficiency Scheme specifically excludes transport emissions). In due course, standardisation of scope would be useful for business.

Where next?

We expect that this represent the start of a more standardised manner of general GHG reporting. Defra intends to review the 2013-2015 data and reporting process with the intention of putting in place reporting obligations on a broader range of companies from 2015 (i.e. large unlisted companies). We hope that through the process a greater level of standardisation of reporting will arise.