Paul Suff follows the discussion at the recent environmentalist/WSP roundtable on mandatory greenhouse-gas disclosure
The Climate Change Act 2008 requires the introduction of regulations by 6 April 2012 obliging companies to report their greenhouse-gas (GHG) emissions or for the government to explain why this has not happened. Defra’s consultation on GHG reporting, which closed on 5 July, contained four options to take this forward.
The government has separately decided to seek changes to the narrative reporting obligations for quoted companies – these demand that information on social and environmental matters is included in annual reports. Defra has made it clear that any moves to introduce mandatory GHG reporting will align with changes to the narrative reporting framework.
It’s obvious from the the consultation document that the government has still not decided whether to introduce regulations on mandatory reporting, even including “enhanced voluntary reporting” as one of the four options under discussion.
Climate change minister, Greg Barker, recently conceded that there is “still a very live debate in government” over the issue, although he told the Aldersgate Group meeting in June that he was personally in favour of mandatory reporting because of the benefits for investors in understanding a company’s carbon risk and for company directors who need to understand their exposure to the prices of carbon, oil and gas. “A common reporting practice is going to be good for business,” he said.
The environment profession has heavily endorsed the introduction of mandatory reporting. In its latest survey of members, IEMA reports that support had reached 90% in June among the almost 900 environment professionals responding. A previous IEMA poll, in December 2010, found 80% of participants in favour. Many leading UK companies already report on their GHG emissions.
The Carbon Disclosure Project (CDP), for example, revealed that 206 companies in the FTSE 350 disclosed their emissions in 2010, although not all made their data public. Smaller firms are less likely to report and few UK companies report in line with existing government guidance, which was published in 2009 and is based on the GHG Protocol.
The Environment Agency found, also in 2010, that just 22% of the then 458 FTSE All Share companies reported carbon emissions in line with the 2009 guidance during the financial year 2009/10.
Aside from encouraging more voluntary reporting, Defra’s options range from mandating all quoted companies (option 2) to disclose GHG data, which would cover about 1,100, to requiring all large companies (option 3) – as defined by the Companies Act 2006 – to do so, which would catch between 17,000 and 31,000 firms.
In June, the environmentalist and WSP jointly hosted a roundtable event to discuss the best approach to GHG reporting and some of the main issues surrounding mandatory disclosure.
Only one option
Lindsay Harris, the Defra official leading the team looking at GHG reporting, kicks off the discussion by explaining the government’s position. “There is no preferred government option. Ministers haven’t made up their minds yet,” he stresses.
Harris explains that Defra had run close to 20 workshops around the country, which had all been oversubscribed, and that environment department officials had spoken at events hosted by organisations such as the Aldersgate Group, CBI, EEF, the British Retail Consortium and IEMA. “Defra wanted to get a better sense of where stakeholders were coming from,” he says.
He reports that “option 3” is the clear choice among most of those attending the workshops and meetings. “The fairly strong majority view is that we should be regulating all large companies,” he says, before adding the caveat: “There is an element of ‘they would say that wouldn’t they’, because the people that are motivated to attend the workshops tend to be those who are interested and who are already reporting and tend to think that others should do so too.”
Harris also acknowledges that a fairly significant minority are not convinced that GHG reporting should be mandatory.
Most of the roundtable participants work in organisations that already disclose emissions data. Steve McNabb, who leads on environment practice at Simmons & Simmons, says the international law firm, although not a big emitter, has recently started reporting using the protocol developed by the Legal Sector Alliance (a calculation methodology developed with the Carbon Trust, verified by the Edinburgh Centre for Carbon Management).
“It’s voluntary and covers most of the largest legal firms in the UK,” he explains.
Given their existing experience of reporting, it is no surprise that option 3 is also the preferred choice among the roundtable participants. “Our view would be option 3,” says Jonathan Garrett, group head of sustainability at Balfour Beatty, the infrastructure company. “This year, for the first time, Balfour Beatty aligned its carbon reporting with its annual report,” he notes.
Victoria Barlow, group environment manager at travel company Thomas Cook, also favours option 3. “Yes, we’d agree. Option 3 is the best option for us. We don’t currently align our annual and sustainability reports so that would require some changes,” she says.
“Option 3 is the logical way to go,” concurs Andrew Bright, who leads on UK corporate sustainability practice at WSP Environment & Energy.
Martin Baxter, policy director at IEMA, explains that the environment profession is overwhelmingly in favour of option 3 because it “will enable the biggest carbon reduction and the biggest business benefits – we don’t see those two as being mutually exclusive.”
Going down the option 3 route would involve far more organisations providing information on emissions than any of the other options, however. It would catch all large companies, which the Companies Act 2006 defines as a firm that meets two out of the following three criteria: more than 250 employees; annual turnover greater than £25.9 million; a balance sheet greater than £13.9 million.
There is some concern among the roundtable delegates that mandating up to 31,000 organisations – the consultation document makes it clear that option 3 would cover both private and public sector organisations – could pose problems.
“I think [reporting] is a journey, but one thing we need to be mindful of is, yes, the seasoned reporters are happy to have mandatory reporting, but if we go for option 3 it will be new to a lot of companies. We have to have some initial flexibility in how they measure their GHG emissions so they are not being forced to ‘run before they can walk’,” says Garrett. Barlow agrees: “There are a lot of organisations that haven’t done this before, so we need to get everyone up to the same level.”
David Symons, director at WSP Environment & Energy, says more assistance will have to be provided to the companies that currently do not report so they can accurately measure and disclose their GHG emissions.
“Some organisations will need a lot more training in how to monitor and measure their emissions,” advises McNabb.
Asked whether mandatory reporting could go further and catch smaller companies, Harris says that is not an option. “I don’t think there is any appetite from ministers to go down that route. They are very open about the options on the table and want to hear views on them, but they’ve made it quite clear that they’re not interested in regulating SMEs at all,” he explains.
Accountability
As well as catching a significant number of “new” reporters, option 3 could challenge existing reporters.
“Putting something in law is an entirely different proposition,” explains Harris. “This has come out when talking to finance people in companies and the group representing company secretaries. Often companies, even the leading ones that are doing really good carbon reporting and who are regarded as leaders, provide very little GHG information in the directors’ report.
"A lot of businesses have said to us that if GHG information has to go in the directors’ report, that involves a significantly raised level of attention and verification of the data than if it is just reporting to the CDP, for example. So the sense we had before the consultation, that the all-listed-companies option wouldn’t deliver much more as half are reporting already, is not quite right, because it will mean a lot of change even for those companies.”
There is an acknowledgment among participants that data accuracy and levels of assurance will have to improve. “We have a degree of assurance, but it is not as well developed as the processes we have for our financial data,” concedes Garrett.
“It’s evolving. The CRC [Carbon Reduction Commitment Energy Efficiency scheme] has been a real driver. Because it’s a regulatory requirement a lot of effort has gone into getting the numbers right, so the level of assurance has increased markedly over the past year. I think once mandatory reporting comes in there would be a higher degree of internal checking. But we’re going to be doing that anyway as part of our response to the CRC. Our evidence packs are pretty good, but we’ll be doing more to improve accuracy.”
Barlow says that Thomas Cook is treading a similar path. “We are currently improving our data capture methodology but whether we’d have it ready in time for the legislation is something we’d have to sort out internally.”
Involving finance departments in data gathering is one way of improving assurance, according to several delegates. “The more we ask our finance team to produce numbers, the more robust they are,” says Symons.
Harris says the related issues of organisational boundaries – what parts of the organisation are covered by any obligatory requirement to report – and the scope of the emissions data have been keenly discussed in the Defra workshops.
“Organisational boundaries are an issue, especially among multinationals that also operate in the US,” says Harris. “There is a concern about the strict liability rules that govern the American system.
“Boundaries could also be tricky if we go down the mandatory route because if we legislate under the Companies Act, the organisational boundary will be the same as for financial reporting. In the Defra GHG reporting guidance we recommend financial control as the way of setting your organisational boundary, based on the GHG Protocol. Apparently, that is slightly different from the way the organisational boundary is set in some financial reports and accounts. Not hugely, but marginally. So anyone following the guidance, and not putting the figures in the directors’ report might need to amend their GHG figures at the margins.”
Barlow advises that the legislation has to be quite clear on what needs to be covered and in setting the organisational boundary.
The discussion shifts to scope, and specifically whether scope 3 emissions – indirect discharges, such as those from business travel and upstream emissions embedded in suppliers’ products – should be included in the mandatory data.
Although scope 3 emissions are much harder to calculate than either scope 1 or 2 discharges, measuring them gives organisations and investors a better understanding, including their potential exposure to climate change risks. “Material scope 3 emissions provide a more complete picture of performance in terms of the overall value chain of the products and services they are providing,” acknowledges Baxter.
McNabb says that larger firms are increasingly seeking such information. “We do get asked in tenders from large corporations in panel reviews: ‘How do you measure? How do you monitor?’ There is significant supply chain pressure.”
Including scope 3 emissions in the requirements will be a huge challenge for many organisations, however. “The issue we have with scope 3 is that our hotel supply chain is vast and very difficult to get data from. Yes, some of the big hotel chains release information about their own carbon footprint, but for us to go to hotels and get that sort of data is just too difficult. Most just don’t collect that information,” explains Barlow. “Scope 3 is therefore a big nightmare for us.”
Garrett says Balfour Beatty sees scope 3 as more of an opportunity than a nightmare. “Where we have done it well, we’ve saved money through material substitution. It comes down to materiality for your organisation.”
Harris says the general consensus is that including scope 3 emissions would be too difficult. “On the whole, the message is don’t go there: it’s too complicated.”
He is keen to know whether using intensity ratios – for example, the amount of CO2 emitted per pound of turnover – as a way of reporting emissions is something roundtable participants would support.
“Intensity ratios have come up a lot in the Defra workshops, particularly among large companies,” says Harris. “Some company reports use intensity ratios and it helps stakeholders to see the performance of the firm over time. So, where you’ve got big acquisitions or changes to the business it provides a more comparable figure.” Baxter agrees. “If firms are encouraged to develop intensity ratios, more meaningful comparisons could be made,” he says.
Others are not convinced. “Intensity ratios have a huge amount of use inside companies to understand efficiencies of operation and to make comparisons with other organisations, where they can be looked at on a like-for-like basis. It’s particularly easy to make direct comparisons between companies making ‘widgets’. But they can also hide a huge amount of disparity and the numbers can be skewed to make you look good and bad,” explains Bright.
Several delegates were concerned that comparisons of intensity ratios might lead to the wrong conclusions being drawn. “I’m not against intensity ratios,” says Garrett. “I’m just saying it’s hard to directly compare numbers. Take tonnes of carbon per million pounds of revenue, for example. If yours is 50 and you are being compared with an organisation with 10, then you’re not comparing ‘like with like’.”
Symons offers the following example to illustrate the potential problem. “Take supermarkets. Morrisons is a more vertically integrated organisation than Sainsbury’s. It has its own dairies and bakeries etc. To the uninitiated, if you were to make a direct comparison of the carbon intensity of both companies you’d draw some very different conclusions that would probably be incorrect. Comparison of GHG intensity even between companies in the same sector is extremely difficult,” he notes.
Conflicting demands
Participants were unanimous in suggesting that the existing reporting demands on organisations need to be streamlined if mandatory reporting is not to be seen as another burden.
“There are already so many different carbon-reporting programmes out there that all require different sets of data over different time periods, so we need to keep any mandatory mechanism as simple as possible,” says Barlow.
Inevitably, attention turns to the relationship between mandatory reporting and the CRC. Bright picks up on this point. “We’ve got so many reporting mechanisms and if we go down a mandatory reporting route there is a danger that organisations will have several different carbon ‘numbers’ in the public domain. So the ‘man in the street’ and newspaper headline writers will be able to make some interesting comparisons out of the differences between those numbers without being particularly well informed, which could put companies in quite awkward positions. It creates a situation where they have to come out and defend or set out the reasons why the figures differ. “Do we not need to do something with the CRC in terms of its reporting and maybe think about getting rid of it?” he asks.
“People are saying precisely that,” admits Harris. He says the link or overlap between the CRC and mandatory reporting is one of the biggest things to have come out of the Defra workshops and meetings. “Most of the participants in the Defra reporting workshops that have spoken about the CRC support the idea of replacing the reporting element of the scheme with mandatory reporting,” says Harris.
“If the government did remove the CRC reporting league table element, that would fit with its ‘one in, one out’ regulatory commitment,” notes Baxter.
He says one of the main problems with the CRC is that it only measures a small proportion (energy-related) of emissions. “We’ve currently got regulatory levers that drive organisations to look at only a very small part of their overall emissions. Whereas mandatory reporting will provide overall context,” explains Baxter.
Barlow acknowledges that point. “Because we operate four airlines, which account for 98% of our carbon footprint, we actually look better in the CRC than we would if our complete GHG picture was on display. So, by us focusing on our electricity and gas consumption across our retail outlets, we’re not having a massive impact on our overall carbon footprint because of our aircraft.”
Garrett, however, says that Balfour Beatty’s participation in the CRC is driving the company to look much more closely at aspects of its carbon footprint that are not covered by the scheme.
Costs and benefits
Several roundtable participants were critical of the impact assessment (IA) that accompanied the consultation document. “If you look at the IA, for all the options, other than the voluntary one, the costs are greater than the benefits,” notes Symons.
“We’ve been working through the IA and are challenging some of the assumptions it makes,” Baxter says. “We believe that the balance of costs and benefits associated with GHG reporting is significantly different to the situation outlined in the IA.”
Harris responds by saying: “We are conscious of the limitations of our IA. I would accept that our IA probably does under-catch the benefits, and that has been a fairly unanimous verdict from businesses at our consultation workshops and gatherings. My gut feeling is that the total benefits are a bit low, but getting the data to demonstrate total benefits is hard.”
Others are keen to illustrate some of the potential benefits by highlighting how the CRC is driving improvements. “The introduction of the CRC scheme means that both myself and our energy services manager have been able to put together better business cases for the installation of smart metering across our retail network and improving lighting at our aircraft hangar facility. We are starting to get more attention at the board level,” says Barlow at Thomas Cook. She says that although the roll-out of smart meters is not yet complete, the travel company is looking at savings, with one outlet saving between £4,000 and £4,500 so far.
Harris asked whether the business case for smart meters was because Thomas Cook now has to report under the CRC or because the firm now has the numbers to support the introduction of smart meters.
“It’s a mixture of both,” responds Barlow. “We’ve obviously gone out there and reported, which required the data set. By improving our data-capture methodology we’ve now got a bit more trust in the figures. For example, previously, the CRC energy use in our UK retail network was based on estimated bills most of the time. And although we did some utility bill validation, and were able to get some costs back, now we’ve installed smart meters we can see that most of our outlets had faulty heating switches, meaning the heating was running all night. That has been remedied through a very simple solution.”
Garrett believes the potential benefits of reporting are more than just financial, and include reputational drivers. “If you look at it purely from a cost perspective, it wouldn’t even be on the radar of senior management. Balfour Beatty’s revenues are £10.5 billion and energy is a tiny, tiny proportion of that. But when it gets reported as a distinct key performance indicator, and when you are being ranked against other organisations, its importance increases,” he explains.
Symons uses the IA for the CRC to highlight the paucity of the benefits set out in the reporting IA.
“The CRC IA forecast a net present value benefit of £3.8 billion before recycling payments were removed. It quantifies the intangible benefits such as air quality which the reporting IA excludes. Most importantly though, the CRC IA suggests that reporting is very good for business – which the GHG reporting IA does not. It’s inconsistent,” he explains.
Baxter agrees, and goes further. “The critical thing is that the number of companies that are in the CRC and would also be covered by mandatory reporting if it came in would be about 2,100. The public sector wouldn’t be there, so the actual figures are different. There would be significantly more companies that would potentially benefit from mandatory reporting. It will force them to look across their performance. In order to have to report, they’ll have to be managing their energy and collecting data, so they’ll start to ask ‘why are we heating our offices at night’, or whatever, so they’ll get those benefits.”
Garrett takes a similar view: “We’d be looking at wider carbon impacts than the CRC, including transport. There is lots of stuff out there that gives you 10–15% savings. There is more stuff to go for, more potential efficiencies to be made.”
The final word
Finally, roundtable participants are asked to offer some closing thoughts on the introduction of mandatory reporting.
“I think this is a great opportunity. UK plc collectively and companies individually will benefit hugely from undertaking mandatory reporting. They should see it as an opportunity,” says Bright.
Garrett agrees that it is a potential opportunity: “If you get it right it will save companies money.” He would like to see voluntary reporting continue for smaller organisations, and the government to encourage this through its procurement activities. “The message is don’t drop encouragement for voluntary reporting,” he says.
Barlow reiterates her call for the mandatory mechanism to be as simple as possible.
Baxter says: “Mandatory reporting removes misdirected efforts by allowing companies to take a view on all their emissions, not just some of them, and target improvement where the greatest environmental and business benefits can be gained.”
Symons spells out the enormous potential environmental benefits. “We know that we can take 10% out of the energy consumption of a building just through better monitoring at no cost. So, if we get up to 29,000 more companies doing that, it will have an enormous impact on UK emissions, as well as delivering huge cost savings for business.”
the environmentalist and WSP roundtable took place on 23 June at WSP House in London. WSP and the environmentalist would like to thank all those who took part.
