The carbon reporting regime in the UK has been through significant changes in the last 18 months as the CRC Energy Efficiency Scheme (CRC) – the key domestic UK regime for the reporting of carbon emissions – has been replaced by the new Streamlined Energy and Carbon Reporting (SECR) regime. Applying to all financial years starting on or after 1 April 2019, SECR has now had opportunity to bed in, and all eligible companies (including Burges Salmon LLP) will now have had to factor SECR into their annual reporting.
It is dangerous, however, to dismiss SECR as just another regulatory hoop to jump through in preparing annual reports. Stakeholders may be entitled to expect that the reported results will be the trigger for action, and scrutiny is likely to follow. This gives rise to legal risk and well as reputational risk.
It is timely, therefore, to take stock and consider SECR in the wider context of environmental reporting in the UK. In particular it is important to look at the move from CRC to SECR not in isolation, but as part of a trend of driving environmental improvements through reporting, and through the scrutiny and challenge that follows. This trend is only likely to continue as disclosure and reporting is increasingly embedded in UK policy relating to environmental impact of companies. It is noteworthy, for example, that humble SECR was held up as a key tool for driving change in the UK’s Green Finance Strategy. The UK’s legally-binding commitment to net zero greenhouse gas emissions by 2050 and its role as host of COP-26 in Glasgow in November 2021 are all factors driving forward this agenda.
SECR and changes to carbon reporting
The recent changes to carbon reporting in the UK are particularly significant. Domestic carbon reporting was previously achieved primarily through the CRC, a standalone tool imposing reporting obligations on companies that met a certain threshold level of energy consumption. This reporting function arguably took second place to the function of CRC as a tool for financially incentivising energy efficiency through mandatory purchase and surrender of allowances in respect of energy consumed. The CRC had noble ambitions but in truth it was an overly complex and flawed legislative measure.
Following sweeping changes, these two mechanisms – reporting and financial incentives – have now been separated. CRC’s financial incentive to encourage energy efficiency has been replaced by an increase to the rate of Climate Change Levy (the tax charged on commercial energy consumption). SECR, meanwhile, has been introduced as a dedicated reporting regime operating through the existing legal requirement for annual filing of company reports. SECR requires qualifying companies to include information on energy use, greenhouse gas emissions, and energy efficiency in these annual reports.
Given its origins in CRC there are some continuities between SECR and its predecessor regime, however there are also some key differences: for example, the threshold for SECR obligations is lower than that for CRC meaning companies that had previously not been required to comply with CRC will need to report under SECR.
For the detail, take a look at our previous articles on the provisions and structure of SECR and of potential challenges for business arising out of official guidance on its implementation.
Other relevant regimes
SECR exists in a wider ecosystem of environmental reporting regimes all with a similar ‘shine a light and change will happen’ policy objective.
Mandatory environmental and climate-related reporting
In 2013, regulations were implemented requiring quoted companies (i.e. companies listed on the London Stock Exchange or equivalent European or US markets) to report on greenhouse gas emissions and also on environmental matters to the extent necessary for understanding of the company’s business (including the impact of the company’s activities on the environment).
In 2016, the UK implemented the EU Non-Financial Reporting Directive. This imposed an obligation on all large companies (not just quoted companies) to include a non-financial information statement in their reports, including information on environmental impact.
There is considerable overlap between the existing obligations on quoted companies and the new SECR obligations, however SECR expands the scope of reporting for quoted companies to include global energy use and energy efficiency measures.
Unquoted large companies will find their reporting obligations for emissions and energy use considerably increased under SECR, however reporting on environmental matters unconnected with energy or emissions is limited to the requirements of the non-financial information statement described above.
Energy Saving Opportunities Scheme (ESOS)
SECR and ESOS remain separate schemes: while SECR mandates reporting on energy efficiency, ESOS requires that a company undertakes investigations every five years as to what energy efficiency measures might be feasible to implement, though it does not require any action or reporting beyond that. While ESOS and SECR are distinct and separate they are also closely related. It is likely that companies required to follow both regimes will be able to use the output from their ESOS investigations to inform relevant parts of their SECR reporting. There is also an expectation that recommendations will be followed: not because of regulatory obligations, but because shareholders and stakeholders may well be asking searching questions if business leaders ignore these issues.
Environmental Permits, GHG permitting and EU ETS
A number of other regimes also include discrete reporting requirements. We have set out the primary examples of these, though this is not an exhaustive list.
Companies with installations that fall under EU ETS are required to report on relevant emissions as part of their GHG permitting obligations (and this reporting obligation may well survive the end of the Brexit transition period through the requirements of the replacement UK ETS which, with a carbon tax, is one of the potential successors to EU ETS). Similarly, companies subject to Climate Change Agreements will usually have to make relevant data available in the course of those agreements. Environmental permits can have conditions requiring reporting or collection of data.
In all cases, where affected companies also fall within the remit of SECR, they will be required to include relevant information (e.g. in relation to emissions) as part of their annual reporting.
Opportunities for Business and reporting in the future
As we have seen, there has been growth in recent years of non-financial reporting obligations, in particular with regard to environmental matters. This trend in UK Government environmental policy seems likely only to increase - for example, in the context of the Green Finance Strategy and, with regard to carbon emissions especially, the hard target of Net Zero by 2050.
Increased pressure on business for greater openness goes beyond regulatory obligations however, and is well-represented by growing investor sensitivity to ESG factors. One of the key effects of SECR is to make eligible companies’ information on emissions and energy consumption more readily available to the public. This could represent an opportunity for environmentally diligent businesses as there will now be a ready way for comparisons to be drawn with competitors.
With that in mind, companies could consider voluntarily going beyond the strict requirements of SECR. This approach is envisaged (and encouraged) in the official guidance to SECR. For example, unquoted companies and LLPS might consider providing information on energy consumed outside of the UK, or energy consumed for travel or shipping where the journey does not start or end in the UK (noting that, as mentioned above, quoted companies already have mandatory obligations in this regard). There may be other avenues to increase reporting on environmental matters – such as (where relevant) through their non-financial information statements.
Companies that adapt to this trend and engage with this culture of greater transparency may well find themselves well prepared for the future regulatory environmental and also able to optimise relations with increasingly environmentally conscious investors and stakeholders.