Books of revelation?

10th June 2013


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Paul Suff asks experts whether forcing companies to disclose greenhouse-gas emissions in their annual reports will deliver a sea change in transparency

Environment professionals generally view the introduction of mandatory greenhouse-gas (GHG) reporting as a positive step. IEMA members responding to a survey in 2011 heavily supported compulsory disclosure, with 90% of the 900 respondents backing the move. The majority also believed a legal obligation to report would deliver significant financial and environmental benefits: more than two-thirds (69%) said GHG reporting would produce cost savings, while three-quarters (77%) claimed it would help reduce carbon emissions.

Mandatory reporting is due to start for companies listed on the main market of the London Stock Exchange for reporting years ending on and after 30 September 2013. The government claims that the legal obligation to report will save companies money on energy bills, improve their reputation with customers and help them manage their long-term costs. Defra estimates that the measure will save 4 million tonnes of carbon emissions by 2021. However, many of the companies covered by the requirement already voluntarily disclose emissions data. So, will it really make much of a difference?

To help answer that question, the environmentalist brought together environment practitioners and reporting experts to discuss the potential impact of mandatory reporting. The discussion was hosted by the consultancy WSP Environment and Energy and led by its head of global corporate sustainability advisory practice, David Symons.

Driving change

According to the government, the Greenhouse Gas Emissions (Directors’ Reports) Regulations 2013 will affect about 1,100 companies but the number is likely to fluctuate over time. Richard Morley, commercial director at Ecometrica, which provides software to measure firms’ environmental impacts, including carbon, believes the real figure is considerably less. “When you strip out asset management groups and the like it will affect about 650 companies,” he says.

Also, around two-thirds of firms affected already report their emissions. Balfour Beatty is one such company. “For us, all that’s happening is that the legislation is following what we’ve been doing for a number of years,” says Chris Whitehead, group head of sustainability and innovation at the infrastructure company. Lloyds Banking Group is another. “We have targets and report our emissions, so mandatory reporting isn’t a significant change for us,” confirms Caroline McCarthy-Stout, head of responsible business reporting at Lloyds.

Nonetheless, there is acknowledgement that mandatory reporting will force existing reporters to examine how they gather and disclose GHG data. “We will all have to continue to make sure our systems and processes are robust,” says McCarthy-Stout.

Morley agrees and highlights the likely impact on reputation if the data are of poor quality . “Lots of firms are reporting, but are not reviewing how they are doing it. Although the Regulations do not demand that the GHG numbers are subject to limited assurance auditing in most cases, most companies will regard such assurance as necessary to avoid potential embarrassment,” he explains.

Similarly, Ben Watson, head of government relations at the Carbon Disclosure Project (CDP), the independent organisation working to drive GHG emissions reductions, expects firms to test their existing systems. “The Regulations won’t disrupt existing practices, but firms should be keen to disclose complete and credible numbers.”

“It will encourage firms to use the existing best practice standards, like the GHG protocol and ISO 14064 [guidance for the quantification and reporting of GHG emissions and removals],” states Jackie Harvey-Watts, product technical manager at the business standards company BSI.

Martin Baxter, director of policy at IEMA, believes that the companies covered by the legislation that already report GHGs should look again at their systems and ask: “Are we reporting in line with the Regulations? Is the quality of the data sufficient?”

The government’s impact assessment for mandatory GHG reporting states that publishing such information in a company’s annual report will ensure emissions are brought to the attention of the board and senior management, which will help drive emissions reduction activity. The panel is largely of the opinion that mandatory reporting will raise the visibility of GHG emissions data in companies. “It will certainly make emissions a board-level issue where perhaps they weren’t previously,” says Watson.

“Because the GHG numbers will be published in the directors’ report, chief financial officers are going to take more of an interest,” acknowledges Whitehead.

“The fact that GHG reporting will now be a regulated measure means a lot of boards and company secretaries will treat it in a slightly different way than they have done in the past,” argues Baxter.

Several panellists refer to the well-worn adage, “what gets measured, gets managed”, to illustrate how an obligation to report will bring emissions to prominence. “It’s like anything: if you measure and report GHG emissions, you’ll manage them. That is going to drive change. Firms will be able to set appropriate targets for cuts and that will inevitably produce better performance throughout the business,” says McCarthy-Stout.

Bruce Duguid, head of sustainability and green impact at the recently formed Green Investment Bank, says: “If something is not measured at all, I can’t see how it will be the focus of senior management activity. Whereas if GHG numbers are being calculated and disclosed there’s a much higher chance that it will be.”

Baxter is of the same opinion. “If you are reporting, you understand your emissions and will start to drive them down, and save costs too. That’s the driving force behind the introduction of mandatory reporting; companies that report are reducing emissions much faster than firms that do not disclose.”

Valued addition?

On the whole, our experts believe that financial and GHG savings will help underpin support for mandatory reporting, particularly among the one-third of companies affected by the legislation that do not currently disclose such information.

“For GHG reporting to be successful, companies will need to engage positively to identify and address their situation and commercial benefits,” advises Nick Blyth, policy and practice lead at IEMA. “It might be energy efficiency and reducing costs for some. For others, it might provide a competitive advantage when bidding for contracts or it might help boost their corporate reputation with stakeholders.”

He points out that the government’s impact assessment, which looked at the progress made by firms already reporting, was positive, revealing that companies disclosing their GHG data for more than four years were achieving significant reductions.

Whitehead confirms that Balfour Beatty monitors both the monetary and carbon benefits associated with reporting its emissions. He reports that some of the company’s major clients, such as Network Rail, want to know how the firm is managing its carbon, but that the information is generally used internally to identify areas for improvement.

“We started collecting GHG data to become more efficient on a country-by-country basis, and predominantly use the information in-house. The carbon intensity of our UK operations has fallen by about 35% over the past few years because we discovered that connecting our construction sites to the national grid much earlier than we had previously would generate considerable fuel savings.”

Watson illustrates the added value that reporting can potentially deliver by describing how a large retailer’s participation in the CDP process highlighted where it should channel its reduction efforts. “The retailer had mistakenly believed its main emissions were from its logistics operations and spent heavily on making its trucks more efficient. But, after going through the CDP reporting process, it discovered they were actually from its refrigeration units. So, reporting can help identify the right areas for action.”

However, Seb Beloe, a partner at specialist sustainability fund manager WHEB Asset Management, is anxious that some companies do not consign reporting to the compliance agenda, but see it as an opportunity to drive change and reduce costs and GHG emissions. “My concern is that the requirement to report will be interpreted by firms as a compliance issue. If we just end up with the absolute minimum – a GHG number and a spurious intensity ratio – then that doesn’t help anyone,” he argues.

Morley at Ecometrica reports that he has already encountered different responses to the reporting legislation from different sectors. “There are varying degrees of enthusiasm and scepticism depending largely on the sector or the position of the company in the stock market,” he says. “Firms with a relatively small market capitalisation tend to regard reporting as a compliance issue, while large companies in the FTSE350 are adopting a more ‘value-added’ approach.”

BSI’s Harvey-Watts agrees that, where reporting is restricted to the compliance agenda, it is likely to be considered little more than a box-ticking exercise, though she believes that this position may not last.

“Maybe in years one and two, it will be a compliance agenda item, while people develop their understanding of what they need to do. But once they have complied and gathered the data, hopefully, companies will find a productive use for the information and start to pursue reductions, which will ultimately improve their corporate social responsibility standing and lead to cost savings.”

The scale of a company’s GHG emissions is likely to determine their response to mandatory reporting, says Duguid. “If you’re a service firm, emissions are primarily from office space and a bit of travel, so typically not very large. Whereas carbon-intensive industries like steel and cement have a much higher carbon footprint and there is more of a spotlight on their performance,” he says.

Duguid also believes greater transparency will force even the most reluctant companies to take action on GHGs. “If you are having to publish your GHG numbers and they are worse than last year or double that of your competitors then, even if cost isn’t a big driver, it will act as a wake-up call.”

External audience

Defra believes that companies publicly disclosing GHG data will provide investors and other stakeholders with the information they need to fully take account of climate change risks in their investment decisions. Investors with long-term horizons, such as pension funds, have an interest in companies taking action to reduce their emissions now, to minimise future costs from the rising price of carbon, it states.

This proposition rings true with our panel. “Investors and analysts will look more favourably on firms that demonstrate progress over time in reducing their emissions,” says Baxter. Duguid adds: “Investors will now be able to look at GHG data for the third of listed firms that wouldn’t have otherwise reported.”

There is a degree of apprehension among some of the group as to what the investment community and other stakeholders will do with GHG information that will now be published in a more consistent format by more businesses.

“It will be regrettable if people start comparing businesses on their carbon intensity ratios [for example, emissions per £ turnover or per tonne production] rather than their ability to manage emissions,” argues Whitehead. “And, it will be irrational to compare a multinational like Balfour Beatty with mainly domestic construction companies. We do a lot of tunnelling work in Hong Kong, for example, which is carbon-intensive, so comparing us with, say, BAM would be meaningless.”

“Intensity ratios do not necessarily provide an opportunity to compare like-for-like,” acknowledges Morley. “Many hoped the regulations would produce a more level playing field in terms of the data made publicly available. But, because of the flexibility in the framework over how companies can report and the intensity ratios they can apply, that’s not really been the outcome.”

Harvey-Watts agrees. “There’s a lot of flexibility in the framework, so what is actually reported and its effect will depend on how a company applies the regulations, which systems it uses and how it collects the data,” she says. “You’re going to get very different figures, even within the same sector.”

Beloe, however, says investors will try to use the data to compare companies, though he admits that the difficulties encountered by analysts in making effective comparisons are unlikely to be removed entirely by mandatory disclosure. “Businesses all have different geographic footprints and different places in the value chain, so you can’t just take the gross GHG number and divide by profits, for example, to get a meaningful figure.”

He says analysts will look to break down the GHG data to reveal a more complete picture of performance and trends. “Just like you’d expect financial information to provide a comprehensive account of financial performance, GHG data should be as detailed as possible.

“We have a huge range of potential investments we can make in listed companies, so the data and context that are made available to justify a firm’s carbon footprint is very important. The narrative is as, if not more, important than the actual numbers.”

Duguid believes it might be some time before GHG disclosure is either as robust or comprehensive as companies’ publicly available financial information. “We’ve had several thousand years of financial reporting and it’s been codified for more than 100 years, whereas we’re only at the beginning of ‘green’ reporting.”

Missed opportunity?

External assurance is absent from the requirement to disclose GHG data. The Companies Act 2006 requires all annual accounts for a financial year to be audited in accordance with it, but that does not extend to environmental information. Financial auditors simply have to assess whether the information in the business review is consistent with the financial statements.

The panel is split over whether external verification of GHG data should have been included in the legislation. “I think it’s disappointing that third-party assurance isn’t also mandatory. External auditing would really sharpen up the quality of data,” says Whitehead, who reports that Balfour Beatty’s latest GHG figures were assured to ISAE 3000 – the international standard on assurance agreements – by KPMG.

Baxter takes the opposite view, pointing out that the additional cost verification would have imposed on reporters would have prevented the introduction of mandatory reporting. “The ‘one in, one out’ regulatory framework set by the government meant that any proposed legislation that would be a net cost on business was unlikely to get the green light. It was either mandatory GHG reporting in the way it is currently formed or no reporting at all. I don’t think external assurance was ever really on the agenda,” he says.

“Installations qualifying as small emitters under the EU emissions trading scheme opt-out no longer have to have their emissions verified after the European Commission recognised that the cost of external assurance was too great,” says Harvey-Watts. She reports, however, that some affected installations have retained third-party verification nonetheless.

Although a requirement to have GHG data externally verified is missing from the legislation, the government says it expects many companies to seek such assurance because directors will want to have confidence in the information and data they are publishing. Morley at Ecometrica agrees, but says some companies remain concerned about the potential costs involved. “Audit fees are a hot topic with company secretaries and finance directors,” he says.

Harvey-Watts responds by arguing that assurance costs are often only a very small proportion of the overall cost of complying with such legislation. She also points out there is a big difference between the fees charged by financial audit companies and those charged by certification bodies, which have traditionally verified companies’ GHG emissions.

First step

The majority of the panel regards the introduction of mandatory reporting of scope 1 and 2 emissions (direct emissions) as a first step to increasing the transparency of companies’ environmental impacts. There is little enthusiasm yet to extend the obligation to scope 3 emissions – the indirect emissions created upstream and downstream of a business.

Duguid describes calculating emissions from suppliers as an “almighty exercise”. He suggests moving to an alternative model. “It might be better to ask firms to provide a narrative on the strategic risks and opportunities to their business from supply-chain emissions.”

Rather than extending the obligation to cover scope 3 emissions, it is more likely that the next government will require more companies to report. The coalition has pledged to review the legislation in 2015 with the possibility of extending the obligation to report to all large companies from 2016.

“The decision on extending mandatory reporting to more companies in the future will depend on how it has been implemented and whether it has delivered cost savings for businesses and reduced emissions,” says Baxter. “If the response is positive, it will move to a grander scale, possibly covering up to 25,000 firms. For IEMA, that’s the prize. That’s when mandatory reporting will make a real impact.”

David Symons, head of global corporate sustainability at WSP Environment and Energy
Richard Morley, commercial director at Ecometrica
Chris Whitehead, group head of sustainability and innovation at Balfour Beatty
Caroline McCarthy-Stout, head of responsible business reporting at Lloyds Banking Group
Ben Watson, head of government relations at the Carbon Disclosure Project
Jackie Harvey-Watts, product technical manager at BSI.
Martin Baxter, director of policy at IEMA
Bruce Duguid, head of sustainability and green impact at the Green Investment Bank
Nick Blyth, policy and practice lead at IEMA
Seb Beloe, a partner at WHEB Asset Management

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