As we have previously reported, Defra (the UK Department for the Environment, Food and Rural Affairs) has been considering whether companies should be measuring and annually reporting greenhouse gas (GHG) emissions: there was a significant consultation last year and Defra was supposed to have come to a firm conclusion on the point by 6 April 2012. It failed to do so, but has now come to a view.
Mandatory reporting for quoted companies
Defra has now determined that “quoted companies” will be obliged to report on GHG emissions in their directors report and accounts. This immediately begs the question of which definition of quoted company will be applied in this context. It is hoped that the definition set out in section 385 Companies Act 2006 will be used which captures companies whose securities are included on the Official List of the UKLA, listed in an EEA state or admitted to dealing on either NYSE or Nasdaq. The application of this definition would, therefore, specifically exclude companies admitted to trading on AIM. Accordingly, this new reporting requirement would fall to a large number of companies, but should not unduly impact on the small and growth companies on exchange-regulated trading platforms.
The additional GHG reporting obligation will be one of additional “costs” of companies wishing to be on a quoted market, thus avoiding the data complexities that have arisen from many other environmental reporting requirements, most notably, the now ignominious CRC Energy Efficiency Scheme.
At present it remains unclear when this reporting requirement will come in, but the reporting requirements will require new secondary legislation to be made (the empowering primary legislation is already in place). Accordingly, we expect the reporting requirement will become effective from accounting periods commencing from 1 April 2013 to 1 April 2014. Clearly it would be useful for business if the regulations are made sooner rather than later so as to assist businesses in reporting.
No approved reporting methodology
Defra fails to address the burning need to settle upon a single approved methodology and standard against which GHG emissions are to be reported. The measurement of GHG emissions is an inexact science, and a clear, transparent and standard basis of reporting for corporate should be developed.
To establish a clear, consistent and practical reporting methodology will require a separate project involving a wide range of stakeholders, including Defra, the Financial Reporting Council, the EU institutions and the United Nations Framework Convention on Climate Change, and will require consistent application: this requires international engagement and cooperation. The reporting from the UK’s emasculated and discredited CRC Energy Efficiency Scheme would be of little use because that system only measures certain emissions arising in the UK (in a rather inconsistent manner), rather than on a consolidated basis for a group in respect of all GHG emissions. However, it is useful that Defra has determined that all GHG should be expressed in carbon dioxide equivalent (expressed as “CO2e”): this will allow for comparison of GHG emissions between quoted companies. When a standard and approved reporting methodology is in place, reporting of GHG emissions should become another element of general corporate reporting. However, without the support and certainty of a clear methodology quoted companies will be in a difficult position.
Defra does display some naivety in relation to quoted companies because it states that one of the reasons for complexity in the area is a “lack of awareness of international reporting financial standards [IFRS] leading to problems with data collection”. Such an analysis seems to totally ignore the fact that these quoted companies will all be reporting to IFRS in any event!
It is also worth noting that the regulatory landscape remains confused with Defra continuing to regulate this area in addition to the department established specifically for this purpose, DECC (the Department of Energy and Climate Change).
It is useful that Defra accepts that some reporting should be on a “comply or explain” basis where there is a genuine absence of information, reflective of the overriding principle behind the UK Corporate Governance Code, the key document governing board and corporate behaviours. It is interesting to note that, notwithstanding other initiatives from Government and supervisory bodies to “cut clutter” in annual reports and to divide out a strategic report from the directors’ report, a new GHG reporting requirement will again increase the volume of the back end of the directors’ report for quoted companies.
Finally, Defra has promised that mandatory GHG reporting will only be introduced if another regulatory burden on business is abolished, applying the “one in one out” principle. However, Defra has been careful in how such a commitment has been worded and one suspects that the abolished “burden” will be less significant than the new burden to be imposed on quoted companies.