New regime will have direct consequences for manufacturing, housing and service companies – and their directors
From 1 April 2019 more UK companies will have mandatory increased energy and carbon reporting obligations. Out with the familiar Carbon Reporting Commitment and in with the new and untested Streamlined Energy and Carbon Reporting (SECR) framework thanks to The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
This will apply whether you are a manufacturing company, work in the housing sector or provide services if you meet the criteria. SECR will also be relevant to you if you are a private or institutional investor.
Even taking into account previous mandatory greenhouse gas reporting obligations on quoted companies, almost 6,000 more companies will be made to report.
This huge drive for transparency when it comes to energy use in large organisations is not only due to the need for the Government to ensure it is meeting its carbon budgets and that it reduces business energy consumption by 20% by 2030.
The Government is also thinking of investors, including institutional investors, and shareholders and their ability to discern whether an investment is ESG. It wants them to know how ready a company is to transition to a low carbon economy, how resilient it is to climate change and what financial impact climate change may have on the company. This goes to how resilient investments and profit margins are.
Who needs to comply with SECR?
UK incorporated companies that were listed during the relevant period in an EEA state, the New York Stock Exchange or Nasdaq.
Large unquoted companies and large limited liability partnerships (LLPs)
SECR is a new obligation for "large" UK incorporated companies and LLPs.
"Large" means that at least two of the following apply during the relevant financial year:
- 250 employees or more
- annual turnover over £36 million
- annual balance sheet over £18 million
Affected parent companies can report for their subsidiaries.
What do companies need to report on under SECR?
Quoted companies, which were already caught under CRC, will now have to report on:
- Greenhouse gas (GHG) emissions from business activities, including from the operation of a facility and combustion of fuel and from the purchase of electricity, heat or steam or cooling for its own use
- Energy consumption figures – from the operation of a facility, combustion of fuel and purchase of electricity, heat or steam for its own use
- The previous year's figures
- The methodology for calculating figures
- An intensity ratio
- The underlying energy use data used to calculate their GHG emissions (new obligation)
- A description of energy efficiency action taken in the organisation’s financial year (new obligation)
- The proportion of emissions related to their UK operations and those relating to offshore areas (new obligation)
Energy includes energy products such as renewable energy sources and electricity, combustion fuel or heat.
- Large unquoted companies and large limited liability partnerships (LLPs) did not report under CRC, but now have to comply with the SECR regime, requiring them to report on:
- GHG emissions in CO2e from the combustion of gas and combustion of fuel for transport and from the purchase of electricity by the company for its own use, including for transport
- Energy consumption figures for the combustion of gas, transport and buying electricity for the company's own use
- Intensity ratio – a factor for quantifying emissions relating to the companies activities
- Information about energy efficiency action taken in the organisation’s financial year
- The methodologies used in calculation of disclosures
- The previous year’s figures for energy use and GHG emissions
Transport is likely to include transport by aircraft, road, trains and vessels, where the journey starts and ends or starts or ends in the UK.
Exemptions to SECR
Three exclusions apply:
- Subsidiaries that are covered by their parent company's Directors Annual Report
- Companies that use 40,000kWh or less within a financial year simply need to state in their Directors' Annual Report that they are a 'small energy user'. This is a low threshold and to put this into perspective can equate to an annual spend on electricity of £5,000
- If disclosing information would be 'seriously prejudicial to the company's interests', the company needs to make a statement in its Directors' Report to the effect that disclosing this information would seriously prejudice its interests. The government expects this exemption to only be used in exceptional circumstances (for example, if specific sensitivities arise from a restructuring or an acquisition which occur in the run up to producing a report). If this exemption is used, there is a risk that this will be questioned and challenged by the FCA.
Non-compliance WITH SECR - DIRECTORS' RESPONSIBILITIES
If affected entities do not comply, the directors in office before the end of the period for filing the accounts and reports could be liable for criminal prosecution and an unlimited fine. The court may also require the directors to prepare reviewed accounts or a revised report.
Energy and carbon disclosures are likely to have consequences for a company's reputation and how it operates. For example it will put large companies with operations abroad, such as clothes manufacturers under greater scrutiny. Reporting on fuel consumption in company cars and business trips for large companies will also shine a light on a company's sustainability practices.
Where exactly do you need to disclose?
Companies in scope of the legislation will need to include their energy and carbon information in their Directors’ Report as part of their annual filing obligations.
Large LLPs are required to prepare an equivalent report to the Directors’ Report for each financial year in which they will disclose their energy and carbon information.
When do companies need to START reportING?
Quoted companies already have to report on energy use in their financial report in years ending on or after 30 September 2013. Depending on the company's financial year there could be an overlap of reporting regimes.
Given that the new regulations come into force from 1 April 2019 the new reporting obligations will kick in at different times. If your usual reporting year is 1 January to 31 December you will apply SECR for the period 1 January 2020 to 31 December 2020, so need to start collecting data from 1 January 2020. If your financial year runs from 1 April to 31 March, you will report for the financial year 1 April 2019 to 31 March 2020 and need to start collecting data from 1 April 2019.
What will the report look like?
There is no model provided by the Government yet, but some of the reporting could be simplified by a table which compares the previous reporting period to the current one. There needs to be mandatory information in there such as how much energy the business uses, but a company can take a decision to add other voluntary information, for example emissions from use of sold products and services out of operational control.
The Government does require a narrative to explain what energy efficiency action has been taken in the financial year and future reduction measures. It is also helpful to explain the data, including methodology for calculation of data.
Affected entities will need to come to terms with this complex system and ensure they have appropriate monitoring and reporting systems in place. This means greater costs for most companies.
The government published guidance in January 2019 which covers the technical detail of the new regime and can be found here. If you would be interesting in discussing what the regime means for your business, what you will have to declare and to gain a better understanding of the activity required in real terms, please don't hesitate to contact me.
For advice on your reporting obligations under SECR, contact Begonia Filgueira, Legal Director and Head of Environment: firstname.lastname@example.org.