Defra consults on mandatory carbon reporting

London, UK: The Department for Environment, Food and Rural Affairs (Defra) has launched a consultation on whether it should be mandatory for some UK companies to report their greenhouse gas emissions.

The consultation acknowledges a primary tenet of the climate change lobby: that in order to manage (and reduce) GHG emissions, one must first measure them. Given the importance the government has placed on meeting the country’s legally binding climate change commitments, the role of UK business has not been overlooked, says legal firm, Shepherd & Wedderburn LLP.

Defra’s consultation seeks views on four options: enhanced voluntary reporting, compulsory reporting for all quoted companies, all large companies, or a mandate for all UK companies consuming electricity above a certain level.

Enhanced voluntary reporting is the least stringent of the four options and focuses on enhancing the current steps taken by business such as increasing the awareness of the benefits received by companies who report. Initiatives such as the Carbon Disclosure Project (CDP) already have the backing of major institutional investors and aim to highlight the risks and opportunities for companies who engage with climate change and GHG emissions reporting, says Douglas Campbell at Shepherd & Wedderburn.

“This option would provide support to the likes of the CDP and stress to businesses the importance of brand recognition, improved investor relations and cost savings associated with measuring and reporting emissions,” he says.

The second option to mandate reporting for all quoted companies requires changes to the Companies Act 2006. Defra estimates that this will cover around 1100 companies on the London Stock Exchange but would exclude large private companies.

Defra has also tabled the possibility of requiring all large companies – public and private – to include their GHG emissions in directors’ report. If a company fulfils the criteria contained in the Companies Act with respect to size (based on measurements such as turnover and number of employees, etc) then it would be required to report GHG emissions. The UK Department of Business, Innovation and Skills estimates that this would cover between 17,000 and 31,000 “large” companies in the UK with such companies likely to be the most significant emitters of GHGs.

Defra’s fourth option is to mandate all UK companies consuming electricity above a certain level. The proposal is aimed at the largest energy users and would apply to companies where they have at least one half-hourly meter, and their electricity consumption through such meters exceeds an annual limit.

The reference to the half-hourly meters suggests that it might be linked to another Government initiative, the CRC Energy Efficiency Scheme, says Campbell. “Whilst this proposal would cover the largest energy users, certain high emitters may escape where they emit GHGs from other activities, such as transport or emissions from overseas activities. This proposal also doesn’t use the definitions in the Companies Act as to the size of the company but rather refers to the threshold of electricity used each year at 6,000 MWh,” he says.

Defra says that ministers have not selected a preferred option and the consultation is entirely open. “The business community remains divided over the issue with some industry groups weary of imposing a further burden on companies in what are challenging times,” Campbell says.

“One concern, which has been raised by some, is the form that new emissions reports would take. Accountancy, as a profession, has developed a number of sophisticated ways to report a company’s financial performance and has a great deal of experience on which to draw. The same cannot be said for GHG emissions reporting and it may be some time before a unified standard emerges. Until then, accountancy firms such as PricewaterhouseCoopers have released mock-up reports based on what they consider might be included in mandatory GHG emissions reports. Only time will tell what the reports will look like but it seems that UK business is braced for, if not embracing, change,” says Campbell.

PricewaterhouseCoopers’ carbon emissions reporting model provides an illustrative example for business climate change and greenhouse gas emissions reporting. It has been developed by PwC to help companies interpret reporting guidelines launched this year by Defra, the Climate Disclosure Standards Board and the Confederation of British Industry.

It is the first report of its kind to demonstrate how reporting on emissions connects financial and non-financial data to see the value and impact of carbon emissions on a business. Information presented in this context will more accurately reflect the real risks – and opportunities – that climate change presents, says PricewaterhouseCoopers

“Following the UK government’s launch of the world’s first legally binding carbon budget, aimed at achieving an 80% reduction of carbon emissions by 2050, the dawn of mandatory reporting for a large number of UK companies is fast approaching,” the company says on its web site.

• Defra’s consultation closes on 5 July with a decision expected in autumn ahead of the new regime being implemented in April 2012. Section 85 of the Climate Change Act 2008 requires the government to introduce secondary legislation by 6 April 2012, which would require the directors’ report of a company to include information about their company’s greenhouse gas emissions. If the government decides against implementing mandatory emissions reporting it must explain to Parliament why no regulations will be made.