Greenhouse Gas reporting is about to become mandatory and much more stringent for companies based in Britain.
Publicly traded companies incorporated in the United Kingdom will have to disclose their Greenhouse Gas emissions, under new laws currently before Parliament, as early as for financial reporting years ending on or after Sept. 30, 2013.
Many large companies already make voluntary disclosures about their activities and emissions that affect the environment, but Britain will become the first country in the world to make GHG reporting mandatory.
The law—which is nearly certain to be approved—will apply to all U.K. companies with shares listed on a public market, including the New York Stock Exchange and Nasdaq.
GHG reporting experts say companies that already report emissions data need to check that their current disclosures would be in line with the law. And they need to be confident that their information systems are reliable.
Listed companies that currently don't report GHG emissions need to work out how they can comply, and fast, as the deadlines are tight. “It heralds a fundamental change to directors' reports and will require companies to swiftly develop a framework that allows such information to be collated and accurately reported,” says Richard Tipper, chief executive of Ecometrica, a GHG consulting firm.
The new laws are part of wider regulations put before Parliament on June 12. The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 change the legal structure of narrative reporting sections of financial reports. But the government has taken the opportunity to add in other reporting changes, including the GHG requirement.
Listed companies will have to disclose all GHG emissions they are “responsible” for, how they've calculated their emissions, and an “intensity metric”— such as tons of GHG emissions compared to revenue. After the first year of reporting, companies will need to provide historical comparisons.
The legislation covers the gases carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, perfluorocarbons, and sulphur hexafluoride. Companies don't have to report their emissions for each one; government guidance says few companies will emit all of them.
More widely, the new law requires listed companies to report on environmental matters “to the extent it is necessary for an understanding of the company's business.” This reporting needs to backed up with key performance indicators.
An immediate challenge for companies is to work out what the word “responsible” means for their business, says Paul Holland, director in the Sustainability Advisory Services team at KPMG.
“The statutory significance of environmental reporting has now been elevated to the same level as financial information.”
—Richard Tipper,
Chief Executive Officer,
Ecometrica
The government has been deliberately vague here, he says. Companies already making voluntary GHG disclosures have used different ways of defining their “boundary of responsibility”—the government wants to keep that flexibility, Holland explains. The extent of the company's financial control or operational control are two popular boundary lines.
Companies might have to report GHG emissions, however, from activities they don't actually consolidate in the financial statements, if they decide they are responsible for them. These could include GHGs pumped by trucks or airplanes in their supply chain.
Wherever a company draws the line, it must be able to justify it, says Gordon McCreath, a planning and environment partner at law firm Pinsent Masons. “And if the emissions for which a company assesses itself as responsible don't fit with the operations covered in the company's consolidated financial statement, it must make that clear,” he explains.
Gathering the GHG data needed to comply with the law, and making sure it is accurate, will be a major undertaking, says Holland. Compared to mainstream financial information, “Greenhouse Gas data is inherently prone to error,” he believes. “Without robust collection and reporting processes and controls, companies risk including inaccurate information.”
“Directors will not only want assurance that such numbers are correct but also a thorough understanding of how these break down across the business, by type of greenhouse gas and geography,” says Tipper. “The statutory significance of environmental reporting has now been elevated to the same level as financial information.”
WHAT EMISSIONS TO REPORT
The following excerpt from the Department for Environment, Food & Rural Affairs' Environmental Reporting Guidelines explains what emissions must be reported.
You are required to quantify and report on emissions of the following
greenhouse gases - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6).
You are not required to give individual figures for emissions of each of the
GHGs listed. Indeed few companies will emit all of the GHGs listed. However,
you must state in your directors' report the annual quantity of GHG emissions
in tones of carbon dioxide equivalent (CO2e) from the following emission
sources:
A. the combustion of fuel, e.g.:
Stationary combustion: combustion of fuels in stationary equipment such as boilers, furnaces, burners, turbines, heaters, incinerators, engines, flares, etc.
Mobile combustion: combustion of fuels in transportation devices such
as automobiles, trucks, buses, trains, airplanes, boats, ships, barges, vessels, etc.
B. the operation of any facility
This category is not limited to emission sources that are permanent or land-based or stationary. This category would also include emission sources that are: mobile; temporary e.g. mobile offices; and marine-based e.g. oil production platforms. The following types of sources of emissions should be considered when identifying emissions on which to report:
Process emissions: emissions from physical or chemical processes such as CO2
from the calcination step in cement manufacturing, CO2 from catalytic cracking in petrochemical processing, PFC emissions from aluminum smelting, etc.
Fugitive emissions: intentional and unintentional releases such as equipment leaks from joints, seals, packing, gaskets, as well as fugitive emissions from coal piles, wastewater treatment, pits, cooling towers, gas processing facilities, etc.
C. a separate figure giving the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting from the purchase of electricity, heat, steam or cooling by the company for its own use.
In the case of companies that are lessees of an emission source, they should decide if they have responsibility for that emission sources e.g. electricity use within the building. This determines whether companies must report emissions associated with the electricity, rather than their method of payment.
If you decide that you do have responsibility for emissions either as a lessee or as a lessor, but cannot get the consumption data necessary to calculate the emissions, then you may either estimate the emissions or state that emissions from the building are excluded and explain why.
The totals arrived at from the above are similar respectively to scopes 1 and 2
of the GHG Protocol Corporate Standard and the direct emissions and energy
indirect emission categories of ISO 16064-1.
You are not required to report on other emissions associated with inputs into
your company (such as emissions from your supply chain) or emissions linked
with outputs from your company (such as emissions from your products when
they are used by your customers). However, you should consider reporting
these separately to give a wider picture of your organization to investors and
shareholders.
Having established the activities for which you are responsible, you may also
wish to consider whether particular emissions are material to the total of your
company emissions. Materiality will depend on the circumstances of your
individual company. It will be influenced by issues such as the size and
nature of an operation. It is for you to judge whether an emission is material
or not.
Source: Department for Environment, Food & Rural Affairs.
U.K. companies have little time to comply with the new requirements. With the new rules applying to any reporting period ending on or after Sept. 30, 2013, for the largest companies, those with a December financial year are already more than half way through their first reporting period.
And it often takes companies more time to gather social and environmental information than it does financial reporting data, says Holland. “They need to consider the effect of having to collect and report this information on time to meet their annual financial reporting timetable,” he says.
Companies can choose how to report their emissions and many will carry on with the industry standards they use already, such as the Greenhouse Gas Protocol and guidelines from the Global Reporting Initiative.
“In reality, emissions reports themselves may be quite short, but as they are mandatory they will now be monitored by the Conduct Committee of the Financial Reporting Council,” says Tim Baines, senior associate at law firm Norton Rose Fulbright. If it looks like a company has failed to comply, the Council can get a court order to force a restatement.
Chance to Opt Out
While the tight deadlines should be worrisome to any company that doesn't already have a GHG reporting mechanism in place, one comfort for companies is that the law offers them a handy opt out. A “comply or explain” clause means they can ignore the reporting obligations if it's not practical for them to gather the information they'd need. They just have to explain what information they've not included and why.
That doesn't mean, however, they are off the hook entirely. The guidance says companies must make “every reasonable effort” to get the information they need. What that means is debatable, says McCreath, “but the important point is that companies will need to provide a justification that stands up.”
The new regime will be a burden. Companies that already collect emissions data so they can benefit from various environmental improvement schemes need to look at how they can adapt this work to comply with the GHG law, says Baines.
Such initiatives include the European Union's Emissions Trading Scheme and the United Kingdom's Carbon Reduction Commitment Energy Efficiency Scheme and Climate Change Agreements.
On the benefits side, Holland stresses the fact that while better emissions disclosures can help with softer issues like brand building and stakeholder relationships, they can also help companies to cut costs. “The underlying transactions behind GHG emissions are often related to things that cost companies a lot of money—be that gas, electricity, fuel for use in transportation, or other sources of emissions,” he says.
“Having good data about how much emissions they are responsible for can be a starting point for companies to put in place robust emissions reductions strategies that can help mitigate the exposure to increasing energy costs, provide some degree of a buffer against the risks of energy security, and provide a competitive advantage.”
The new law's flexibility gives companies a chance to make of the obligations what they will, says McCreath. “The drivers for reporting will be as much market-based competitive ones, as legal ones. Quoted companies will need to ensure they meet the regulations, yes, but perhaps more importantly they will need to ensure that their reporting stands up in both form and substance against that of their competitors.”
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