Legislation affecting UK-based companies
This blog provides an overview of existing carbon accounting legislation affecting UK based companies
Introduction
For UK-based companies, staying ahead of upcoming environmental regulations is not only crucial for compliance but also for maintaining a competitive edge and demonstrating corporate responsibility.
In this blog, we will explore the potential implications of upcoming environmental regulations on UK businesses, highlighting key areas where adaptation and proactive measures may be necessary. By understanding the evolving regulatory landscape and its potential impacts, companies can strategically position themselves for success in a greener, more sustainable future.
SECR
One significant policy driving this transformation in the UK is the Streamlined Energy and Carbon Reporting (SECR). This policy mandates organizations to disclose energy use and carbon emissions information in their annual reports. Let's dive deeper into SECR, its scope, compliance requirements, and how organizations can adhere to its reporting standards.
Who has to comply with SECR? SECR expands the reach of energy and carbon reporting to a broader range of companies. The following entities are required to comply with SECR:
- Quoted companies (companies listed on a public exchange)
- Large unquoted companies
- Large limited liability partnerships (LLPs)
Determining whether a company falls under the "large" category depends on meeting two or more of the following criteria:
- Turnover of £36 million or more
- Balance sheet of £18 million or more
- 250 employees or more
While external validation is not mandatory, it is strongly recommended to ensure the accuracy and reliability of the reported data. However, large unquoted companies and LLPs are exempt from SECR reporting if they can demonstrate that their energy use during the reporting period is less than 40 MWh.
Compliance Timeline:
Companies are required to provide SECR-accordant information in their Director's Report starting from the financial year commencing on April 1st, 2019, and for each subsequent financial year.
How to comply with SECR:
SECR introduces specific reporting requirements for different types of companies. Let's explore the reporting obligations for quoted companies and large unquoted companies/LLPs:
Quoted Companies
Quoted companies must report the following:
- Global scope 1 and 2 greenhouse gas (GHG) emissions. Reporting scope 3 emissions is voluntary but highly recommended.
- At least one emissions intensity ratio, which compares emissions data with an appropriate business metric or financial indicator, such as sales revenue or square meters of floor space, enabling comparability.
- Underlying global energy use for the current reporting year.
- Previous year's figures for energy use and GHG emissions.
- Energy efficiency actions taken, accompanied by a narrative description of the main measures implemented to enhance energy efficiency in the relevant financial year.
- Methodology used for reporting. It is advisable to adopt widely recognized independent standards, such as the GHG Reporting Protocol (Corporate Standard), International Organization for Standardization (ISO 14064-1:2018), Climate Disclosure Standards Board (CDSB), or The Global Reporting Initiative Sustainability Reporting Guidelines.
Large Unquoted Companies and LLPs
- Similar to quoted companies, large unquoted companies and LLPs must report their energy and carbon emissions information. However, they are not obligated to disclose emissions intensity ratios. The remaining reporting requirements, including global scope 1 and 2 GHG emissions, underlying energy use, previous year's figures, energy efficiency actions, and methodology, remain applicable.
Consequences of Non-Compliance
The SECR framework has been introduced with a view to cutting energy use and slashing emissions over time. But failure to do so doesn’t just impact your company’s green credentials. The Conduct Committee of the Financial Reporting Council, which is in charge of enforcing SECR, can also impose fines.
On top of that, Companies House can reject your annual accounts if inadequate information is provided. This could lead to SECR fines in the form of late deadline penalties when your accounts are resubmitted. Late filing penalties range from £150 up to £7,500 depending on the type of company and how late the accounts are submitted.
Conclusion
SECR plays a vital role in enhancing transparency and accountability regarding energy use and carbon emissions in the UK. By widening the scope of reporting, it encourages more organizations to take action towards energy efficiency and sustainability. As companies navigate the SECR requirements, adhering to the recommended reporting methodologies and using independent standards ensures consistency, comparability, and reliable data. Embracing SECR not only contributes to a greener future but also strengthens an organization's commitment to sustainability.
TCFD
The Task Force on Climate-related Financial Disclosures (TCFD) has emerged as a global framework, providing guidelines for companies to report on climate-related risks and opportunities. This blog aims to provide an overview of TCFD legislation in the UK, its current scope, anticipated expansion, benefits, reporting requirements, and potential consequences of non-compliance.
Current Scope of TCFD Reporting in the UK:
Since April 2022, over 1,300 UK-registered companies have started disclosing climate-related information as part of the TCFD framework. Additionally, private organizations with over 500 employees and an annual turnover of £500 million or more have also been included in this disclosure mandate. This concerted effort has resulted in consistent climate-related disclosures, enhancing transparency for stakeholders and enabling investment managers to support greener business models in both UK-listed and private companies.
Anticipated Expansion and Benefits:
By 2025, the TCFD reporting mandate is expected to expand further, encompassing a broader range of organizations and businesses. Research indicates that many of the UK's leading companies anticipate numerous benefits arising from TCFD reporting. These benefits include an increase in brand value and company valuation, reduced shareholder pressure, greater diversity of investors, and an overall positive impact on financial performance. Embracing TCFD reporting not only aligns businesses with sustainability goals but also strengthens their position in the market.
TCFD Reporting Requirements:
The TCFD emphasizes that greenhouse gas (GHG) emissions should be calculated following the GHG Protocol methodology. This methodology ensures consistency and comparability of emissions data across organizations and jurisdictions. The Financial Reporting Council (FRC) holds the authority to monitor Strategic Reports and can request the preparation of related documents through legal channels. Compliance with TCFD reporting requirements is crucial to meet the standards of transparency and disclosure established by the framework.
Consequences of Non-Compliance:
Non-compliance with TCFD reporting obligations can lead to penalties, ranging from a minimum fine of £2,500 to a maximum of £50,000. These penalties highlight the seriousness with which the UK government and regulatory bodies view climate-related disclosures. Adhering to TCFD guidelines not only helps avoid potential financial penalties but also demonstrates an organization's commitment to sustainability and responsible business practices.
Conclusion
TCFD reporting has become a powerful tool in promoting climate-related disclosures and driving the transition to a sustainable future. The UK's adoption of TCFD legislation has brought about greater transparency, benefiting stakeholders and enabling investment managers to support companies committed to environmental responsibility. As TCFD reporting requirements expand, more organizations will have the opportunity to reap the benefits of increased brand value, enhanced investor diversity, and improved financial performance. By adhering to TCFD guidelines, companies contribute to a greener business landscape while fulfilling their obligations to disclose climate-related risks and opportunities.
CSRD
The European Commission has taken a significant step towards this goal with the adoption of the Corporate Sustainability Reporting Directive (CSRD), which was adopted in November 2022.
We explore the key aspects of the CSRD, including its scope, reporting requirements, and implications for companies within and outside the EU.
Expanding Reporting Requirements:
The CSRD, replacing and building upon the Non-Financial Reporting Directive (NFRD), sets more comprehensive reporting standards for companies. Significantly, the CSRD extends its reach beyond EU-based companies to encompass companies based abroad that have a presence within the EU. For instance, a hypothetical U.S.-based company with subsidiaries in the EU must comply with the CSRD regulations.
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Applicability of the CSRD:
The CSRD expands the number of companies obligated to report sustainability information, growing from the 11,000 covered by the NFRD to nearly 50,000 under the CSRD. Large companies, including those outside the EU, will need to comply if they meet two of the following three conditions: €40 million in net turnover, €20 million in assets, or 250 or more employees. Additionally, non-EU companies with an EU turnover above €150 million are also subject to compliance. Small and medium enterprises (SMEs) are generally exempt from new reporting requirements, except for those listed on regulated markets. However, voluntary separate reporting standards are being developed for non-listed SMEs to support their participation in the transition to a sustainable economy.
An estimated 10,000 non-EU companies will be affected by CSRD. The data from Refinitiv, which is part of London Stock Exchange Group PLC, indicates there are nearly 10,400 foreign companies that have an EU stock listing and more than 100 companies that aren’t listed in the EU but have more than €150 million in local revenue. Of the total number of companies Refinitiv has identified, 31% are American, 13% are Canadian and 11% are British.
Reporting Obligations and Digital Standardization:
Under the CSRD, companies must disclose sustainability information in their management reports, synchronizing financial and sustainability data publication. This data will be submitted in a standardized digital format, facilitating easier verification and comparison through the European single access point database. To enhance reliability, the submitted data will undergo "limited third-party assurance," involving auditor evaluation.
Key Reporting Considerations:
The CSRD proposes reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). These standards emphasise the consideration of double materiality, addressing both a company's impact on climate change and its susceptibility to climate-related risks. Notably, the proposed standards also include reporting on value chain sustainability factors, requiring companies to disclose scope 3 emissions resulting from upstream and downstream activities. Given the complexities of measuring these indirect emissions, companies are urged to start the process early to ensure compliance with CSRD mandates.
Conclusion
The CSRD marks a significant milestone in promoting sustainability reporting and driving transparency and accountability across EU companies. As the CSRD takes effect, companies should proactively engage in the reporting process to ensure compliance and stay ahead of the evolving sustainability landscape.
Here are some other useful links:
CSRD:
