Following an extensive consultation, in July 2018 the UK government announced its proposed approach to simplify the energy and carbon reporting framework for business and industry. This is being put in place to replace the CRC Energy Efficiency Scheme, which comes to an end in April 2019, with a new streamlined energy and carbon reporting (SECR) framework.
The changes are part of a suite of policies being implemented as part of the government’s Clean Growth Strategy, to deliver on its ambition of enabling business and industry to improve their energy productivity by at least 20% by 2030. Some of the main points from the government’s preferred SECR framework currently being implemented are set out below.
Why is the SECR framework being implemented?
The new SECR framework’s purpose is to simplify carbon and energy reporting requirements for companies, at the same time as ensuring that they have the information they need to act to reduce emissions and energy costs.
The SECR has been designed to build on existing mandatory greenhouse gas emissions reporting requirements that already apply to UK quoted companies under the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013, as well the Energy Saving Opportunity Scheme (ESOS) Regulations 2014. The framework recognises that the majority of consultation responses accepted that a mandatory reporting scheme is important and that it needs to be aligned with best practice in the UK and internationally, but that it should not introduce unnecessary additional complexity and reporting burden.
The reporting itself is intended to encourage the implementation of energy efficiency measures in business and industry, which have both economic and environmental benefits, supporting companies to cut costs and improve productivity at the same time as reducing carbon emissions. Requiring companies to make disclosures on energy and carbon is also in line with the recommendations of G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures, by providing important information for investors and financial actors to help them navigate the transition to a sustainable, low carbon economy.
Who needs to comply with the SECR framework?
The SECR framework will apply to an estimated 11,900 companies across the UK, which compares to around 4,000 businesses that responded to CRC Energy Efficiency Scheme.
Four groups of businesses will need to comply with the new reporting requirements:
- Quoted companies as defined in section 385 of the Companies Act 2006. These are companies that are UK registered with equity share capital officially listed on the Main Market of the London Stock Exchange or in an EEA State, or admitted to dealing on either the New York Stock Exchange or Nasdaq. This is the same group of around 1,200 companies already required to report under mandatory greenhouse gas reporting requirements.
- UK registered, unquoted large companies as defined in the Companies Act 2006 (note that this differs from the definition of “large” in the ESOS Regulations). This refers to companies that fulfil at least two of the following conditions three in the financial year for which they are reporting:
- at least 250 employees;
- an annual turnover greater than £36m; and/or
- an annual balance sheet total greater than £18m.
All companies that fall within these definitions will need to report unless they meet one of the exemptions set out below.
When can a company be exempt from reporting?
Companies will not need to comply with the requirements in the SECR framework if they meet one or more of the following exemptions:
- A statutory de minimis has been introduced for companies that can demonstrate that their energy use is very low, at close to domestic levels, so that it is not cost-effective to audit and report on this. This will apply to companies that can confirm their energy use is 40,000kWh or less over a 12-month period.
- UK subsidiaries will not be required to report separately if they are covered by parent company’s group report, although they may report on a voluntary basis.
- Unquoted companies not registered in the UK will fall outside the scope of the mandatory framework. However, any qualifying UK registered subsidiaries under these parent groups will need to report in their own right.
- If it is impractical for a company to obtain some or all of its global energy use then this does not need to be reported, so long as the excluded information is clearly stated, with justification of why this has been done.
- In some cases – particularly in energy intensive industries – publicly reporting on energy use could be deemed to be commercially sensitive information and disclosing this could be seriously prejudicial to a company’s interests. In certain exceptional circumstances this can be used by the Director’s as justification for an exemption.
What will companies need to report?
Quoted companies are already required, where practical, to disclose global scope 1 and 2 greenhouse gas emissions and an intensity metric in their annual reports under existing mandatory greenhouse gas reporting requirements that have been in place since 2013. Scope 3 reporting is currently done on a voluntary basis and this will continue remain the case. However, quoted companies will be required, where practical, to report on global energy use as well.
Unquoted large companies, large LLPs and other unquoted companies will need to report, as a minimum, UK energy use from electricity, gas and transport, as well as the associated scope 1 and 2 greenhouse gas emissions from these and an intensity metric. As with quoted companies, reporting only needs to be done where practical, and transport is defined as including road, rail, air and shipping. Companies are also able to go beyond this and include any other material source of energy use or greenhouse gas emissions outside these boundaries, as well as reporting on scope 3 emissions.
In addition, all reporting businesses will be required to provide a narrative commentary on any energy efficiency action taken in the previous financial year. They will not currently be required to disclose ESOS recommendations and current progress with implementation of these, although they can include this information if they wish to do so. The government has expressed that it intends to revisit how the SECR framework will interact with ESOS following completion of its evaluation of the impact and effectiveness of the first phase of ESOS.
The government has also said that it will not specify which methodologies should be used for energy and carbon reporting in the legislation. However, it will set out in guidance what it considers to be good practice, which will include encouragement for transparency in areas such as on site clean energy generation, the purchase of low carbon energy, action taken to reduce the impact of business travel, any offsetting of emissions, and the use of ultra low emission vehicles.
Similarly, the government will not specify the intensity metrics that must be used in reporting. Companies will need to express their emissions as a ratio against at least one other quantifiable factor related to business activities, such as turnover, number of full time employees, or production volume. Appropriate metrics will vary from sector to sector, with best practice and guidance likely to already exist. The government will work with sectors to develop appropriate guidance to support consistency.
Where, when and how will companies need to report?
Qualifying companies will need to report in line with the SECR framework in the directors’ report or equivalent section contained within their annual report for financial years beginning on or after 1 April 2019.
Electronic reporting for SECR will currently be voluntary from 2019, as it is currently not mandatory to for directors’ reports to be submitted electronically. However, the government intends to keep this under review and mandatory electronic reporting could be an option in the future, particularly if the wider company accounts reporting requirements also move in this direction.