Regulations to be introduced in the UK from April 2013 will require all businesses listed on the Main Market of the London Stock Exchange to report, within the Directors’ Report section of their Annual Reports, on the level and intensity of their greenhouse gas emissions.
The measure was announced by the Deputy Prime Minister at the recent (June 2012) UN-sponsored Rio +20 Summit. It is a flagship carbon disclosure measure – designed to send a strong message to corporations about the need to internalise the cost of their greenhouse emissions and to make businesses’ climate change risk profiles, climate change awareness levels and climate resilience central to decision-making for the investment community by requiring listed companies to disclose to investors how engaged they are with greenhouse gas reduction and with overall climate change response.
The Regulations, which will require a specific Greenhouse Gas Emissions Report to sit within the Directors’ Report, originate with the UK’s Climate Change Act of 2008. Section 85 of that Act required the Secretary of State to introduce Regulations requiring a company’s Directors’ Report to contain “information … about emissions of greenhouse gases from activities for which the company is responsible”. The Secretary of State was obliged to introduce Regulations by April 2012 or, failing that, to report to Parliament on the delay. A UK Government report published last March made it clear that Ministers were intent on introducing the measure but were focussed on whether or not to make reporting mandatory for all companies. Since then, citing the need to minimise the regulatory burden on companies, the UK Government has decided to initiate the measure for quoted companies. It is intended that experience gained at that level will inform a cost-benefit review in 2015 and, in 2016 the Government will decide whether to extend the requirement to all large companies.
Ahead of the April 2013 introduction date, there will be a consultation process to inform the content of the Regulations. An important issue to date for businesses has been what “organisational boundary” to apply for the purpose of reporting. Many listed companies of course have complex and multi-layered operations, often involving overseas entities. It seems from an earlier consultation process that the UK Department for Environment Food and Rural Affairs (DEFRA) will not be content for companies to choose their own organisational boundaries. Rather, DEFRA is emphasising the UK company law requirement that the “company” described in the Directors’ Report be the same as that in the financial portion of the Annual Report. DEFRA has indicated that “where appropriate” emissions from overseas activities will have to be included, stressing that Directors’ Reports will have to give a fundamentally true and accurate picture of the company’s greenhouse gas emissions.
The link between the challenge of measuring businesses’ greenhouse gas emissions and the quality and accuracy of the required Greenhouse Gas Emissions Reports is another issue of concern to companies but, in addition to a number of established greenhouse gas emissions’ measuring and reporting tools, DEFRA has now published its own guidance in the area of data sourcing and emissions measurement.
Another concern expressed since the measure was announced in 2008 relates to how directly connected emissions must be with a company’s operations in order to be covered by Directors’ Reports. The 2013 Regulations will certainly cover “Scope 1” emissions (emissions traceable to direct sources within a company’s operations – such as combustion units or transport fleets), as well as “Scope 2” emissions which, while also referable to company operations, are less direct than Scope 1 emissions, referring for example to emissions measurable from energy/electricity consumed by a business. It seems that “Scope 3” emissions – those less direct again (such as emissions referable to a business’s supply chain and to transport not controlled by the company, such as business travel) – may be voluntarily reported.
DEFRA has also considered whether a business’s “carbon intensity” should feature in the Directors Reports and it seems that it will have to – although it is likely that companies will have a choice as to the particular carbon intensity ratio to apply e.g. tonnes of greenhouse gas per unit of turnover or per unit of profit etc..
As already stated, DEFRA will run a consultation process ahead of the 2013 introduction date. This is likely to highlight further areas of concern and, from an Irish perspective, it will be worth monitoring – particularly in the light of proposed Irish climate change legislation (currently timed for the third or fourth quarter of 2013); but, even if a similar measure does not feature specifically in the Irish climate change law, the proposed UK Regulations highlight an evolving strand of climate change response that will inevitably come onto the radar before long for Irish companies via the European Union, quite possibly through harmonised changes to the Accounts Modernisation Directive.
Contributed by Conor Linehan.
