What a difference a year makes

29th September 2014

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James Shears

the environmentalist looks at how the mandatory reporting of GHG emissions is changing companies' annual reports

Mandatory reporting of greenhouse-gas (GHG) emissions for UK incorporated companies that are listed on the main market of the London Stock Exchange – or in an European Economic Area state or admitted to trading on either the New York Stock Exchange or NASDAQ – came into force last year through the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

They require “quoted companies” to disclose in their directors’ reports all scope 1 and 2 emissions they are responsible for; if they operate outside the UK, this includes their global emissions.

In addition to carbon, the reporting requirements cover the other five primary GHGs under the Kyoto protocol: methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. These can be reported in tonnes of carbon dioxide equivalent (CO2e) from the combustion of fuel, such as from boilers, and the operation of a facility.

The regulations require all reports produced in relation to financial years ending on or after 30 September 2013 to disclose GHG emissions. The first ones have been published over the past few months, leading the environmentalist to ask whether reports are changing. And, if so, how?

Moving numbers

The government estimated that around 1,100 companies would initially be subject to the 2013 regulations. Around two-thirds of affected firms already reported their emissions in some way before the regulations came into force.

Nonetheless, research last year by carbon management company Carbon Clear revealed that, by July 2013, only 52 companies in the FTSE 100 had included their carbon footprint in their annual report.

An analysis of the most recent reports from some of the UK’s largest listed companies, comparing the content with that of previous reports, provides a snapshot of what firms are doing to comply with the regulations.

A comparison of the 2012 and 2013 annual reports from pharmaceutical business Shire provides an example of one approach. The 2012 report contains no information about the firm’s GHG emissions.

The 2013 report, however, covers the calendar year to the end of December, and so comes within the scope of the 2013 regulations. By contrast to its approach in the previous year, Shire’s 2013 report includes GHG data and details of the assessment parameters the firm adopted to calculate its emissions.

Fashion company Burberry provides global GHG data for the financial year to the end of March 2014 in its 2013/14 annual report – information which was absent from the company’s 2012/13 report.

Similarly, Tullow Oil, which describes itself as Africa’s leading independent oil company, includes GHG data for the first time in its annual report and accounts in 2013, stating that it is now reporting in line with the revised Companies Act 2006 by disclosing its carbon emissions, including new disclosure on the firm’s scope 2 emissions.

Aberdeen Asset Management is another company that has quantified its global GHG emissions for the first time in its latest annual report.

A question of format

For many companies, however, mandatory reporting has not involved a significant change. Instead, it has led them to make existing information available in a greater number of formats.

Fashion retailer Next is disclosing GHG figures in its annual report for the first time this year (financial year to January 2014), having previously published the data in its corporate responsibility reports.

Next’s 2013 annual report and accounts had merely highlighted the firm’s 2015 environmental targets for the UK and Ireland.

Marks & Spencer has regularly included details of its Plan A sustainability strategy in its annual report and financial statements; however, the latest edition (2014) contains, for the first time, the company’s headline GHG data, summarising the detailed information on emissions found in its 2014 Plan A report.

A comparison of the 2013 and 2014 reports and financial statements from J Sainsbury reveals a similar picture. Details of the food retailer’s performance against its 20x20 sustainability plan commitments are a feature of both reports, but the 2014 annual report includes more detail of its GHG footprint.

Early compliance

Tesco, meanwhile, introduced GHG data into its annual report ahead of the legislation. Its 2013 annual report and financial statements, covering the financial year to 23 February 2013, includes the information as one of the retailer’s key performance indicators.

Accompanying the table of GHG data is the statement: “This is a new addition to our annual report ahead of the upcoming UK legislation on mandatory greenhouse-gas emission reporting.”

Media group Pearson said in its 2012 report that the company was preparing for mandatory reporting, while its latest report complies with the legislation, disclosing GHG emissions for the 2013 calendar year.

Away from the FTSE 100, drinks company Britvic opted for a similar approach to Tesco, including a table detailing GHG emissions in its 2013 report covering the period ending on 29 September 2013. “The directors are making this disclosure for the first time, ahead of the new requirements for companies to disclose their GHG emissions,” Britvic says in a statement.

Speciality chemicals manufacturer Croda has switched in its annual report from giving only a summary of performance against its environment targets, which were set in 2010, to presenting details of its GHG emissions in line with the reporting requirements.

These were previously found only in its sustainability report. Until the latest edition, the annual report and accounts from facilities management business Mitie contained details of its carbon emissions (in tonnes per employee).

This information remains in the 2014 report, but it is supplemented by details of Mitie’s GHG emissions, which are taken from the company’s sustainability report.

Greater detail

Several companies operating globally have had to gather and report data from their worldwide operations, in addition to previously disclosed emissions information from UK sites, to comply with the 2013 Regulations.

Ahead of the legislation, engineering group Babcock acknowledged in its 2013 annual report and accounts that the way in which the company reported its GHG emissions would be changing in future reports, to include emissions for the entire business, including its overseas operations.

Babcock’s 2014 report for the 12-month period to March therefore contains more detailed GHG information.

Intertek has also expanded the coverage of its emissions data. The provider of quality and safety services included figures for its operations worldwide in its 2013 report, having the previous year reported only the emissions of its largest 25 countries by headcount.

Lloyds Banking Group, which has voluntarily reported its carbon emissions in its annual accounts since 2009, has applied a different methodology for its 2013 report.

It states: “Previously, reported scope 1 emissions covered only the emissions generated from the gas and oil in UK buildings where the group holds the supply contract direct with the utilities supplier, along with emissions generated from company-owned vehicles used for business travel; and reported scope 2 emissions covered only the emissions generated from the use of electricity in UK buildings where the group holds the supply contract direct with the electricity supplier.”

However, additional emissions included in the 2013 edition relate to UK sites where the group does not hold the supply contract directly with the energy supplier (shadow sites); energy consumed in international locations (non-UK sites); and gas emissions arising from the use of air conditioning and chiller/refrigerant plant (fugitive emissions).

Having previously disclosed its UK emissions through the carbon reduction commitment scheme, Oxford Instruments in 2014 published its global GHG emissions in its report and financial statements.

The manufacturing and research business also confirms that, in addition to the mandatory reporting of GHG, it will in future make a voluntary report on its emissions to the Carbon Disclosure Project.

Brewer Greene King has amended how it reports environmental data in its latest report to reflect the new obligations. For example, its 2013 report details its natural gas consumption in terms of megawatt hours (Mwh), whereas the 2014 edition states the CO2e emissions from such sources.

Similarly, the environmental metrics cited in the 2012 report and accounts from Meggitt, the engineering company, included a calculation of overall carbon, as well as consumption in Mwh of both electricity and gas.

In Meggitt’s 2013 report, total carbon emissions are broken down into those from the combustion of fuel and operation of facilities (scope 1) and those from electricity, heat, steam and cooling purchased for its own use (scope 2).

Scope 3 emissions

Global advertising and marketing business WPP is another that has changed how it reports GHG emissions. The 2013 annual report and accounts, which cover the 12 months to the end of December, breakdown the firm’s scope 1, 2 and 3 emissions in tonnes of CO2e.

While WPP has long reported its emissions, previous annual reports and accounts, such as in 2012, contained figures for the company’s carbon footprint based on tonnes of CO2 per person. This data is also in the 2013 report, alongside details of its scope 1, 2 and 3 emissions.

WPP is an example of a company that is reporting more than is necessary under the 2013 regulations. Under these, quoted companies must report on their GHG emissions from activities for which they are responsible, thus requiring scope 1 and 2 emissions to be reported as set out in the GHG protocol standard.

Although companies are not required to report on other emissions associated with inputs into their business, such as those from their supply chain and business travel, the Defra guidance suggests that firms should consider also disclosing such scope 3 data because it would provide a wider picture of the organisation to investors and shareholders.

WPP is not unique in revealing its scope 3 emissions, although the companies doing so tend to be those that already made such data available in another format, for example, in sustainability reports or online.

Tesco is one such firm. Its 2014 annual report and financial statements contain details of its scope 3 emissions, in terms of business travel and for those related to transmission and distribution, in addition to so-called “well-to-tank” (from extraction to vehicle) emissions.

Lloyds Banking Group, meanwhile, says its reported scope 3 emissions relate to business travel by UK-based staff using rail, privately owned and hire vehicles, and air travel. Emissions associated with joint ventures and investments are not included in the emissions disclosure, however, because the bank says these are outside the scope of its operational boundary.

Normalising the data

The 2013 regulations require companies to calculate their scope 1 and 2 emissions as an intensity ratio or ratios by dividing the emissions by an appropriate activity metric – for example, by units produced by the number of full-time equivalent staff or by financial turnover.

“Normalising” the data in this way can help readers of reports to compare organisations over time and across sectors, says the environment department.

Medical technology business Smith & Nephew gives both a financial (per $ million of revenue) and staff (per full-time employee) intensity ratio in its 2013 annual report. Tesco, by contrast, discloses an overall carbon intensity based on total net emissions per square foot of store space and distribution centres expressed in CO2kg.

Mining business Rio Tinto publishes two intensity ratios: tonnes of CO2e per tonne of product; and its own intensity index, which is the weighted emissions intensity for each of firm’s main commodities, relative to the commodity intensities in its 2008 base year (set to 100).

This index incorporates about 95% of Rio Tinto’s emissions from managed operations.

Oil and gas business Petrofac is another that has adopted tCO2e per $ million of revenue as its intensity ratio, saying that it chose this a metric because it is the most representative across its whole business.

Meggitt, which has disclosed in its annual report for a number of years a measure of intensity, continues to apply tonnes per £ million of revenue as its metric.

Challenging times?

Most organisations with experience of collecting and reporting data on their environmental impacts have had little problem complying with the 2013 Regulations. Caroline McCarthy-Stout, head of reporting, awards and communications strategy at Lloyds Banking Group, told the environmentalist that the business met the requirements of mandatory reporting with minimal additional work.

“We have made some changes and improvements to our data gathering to meet the expanded requirements of the mandatory GHG reporting legislation,” she said, adding that the bank will continue to develop its environmental data gathering and reporting.

The 2013 report from Lloyds notes, for example, that the dates covered by its GHG data are different from those covered by its financial accounts. “The reporting period for emissions (October 2012 to September 2013) differs to that of the directors’ report (January 2013 to December 2013).

However, in line with the new regulations, the majority of the emission reporting year falls within the period of the directors’ report.”

Other companies acknowledge that collecting GHG is a challenge. Babcock states in its 2014 report, for example, that: “We recognise that reporting on environmental performance for such a large and diverse company is a complex undertaking.”

It also says that the company will in future be looking to streamline and standardise its processes for collecting and collating data to ensure greater accuracy and transparency.

Observers have detected several trends from the first reports under the mandatory reporting legislation. Lois Guthrie, executive director at the Climate Disclosure Standards Board, which is reviewing the first-year reports, has observed much variation: “You’d expect that, as companies explore how best to disclose the necessary information.”

She also says many firms have taken advantage of the proviso in the regulations to report only emissions for which they are responsible, in order to limit the amount of detailed information they have published.

Richard Morley, commercial director at Ecometrica, which provides software to measure firms’ environmental impacts, says generally the bigger companies are publishing more information and a broader narrative on emissions, whereas the “mid-” and “small-cap” companies tend to disclose the bare minimum.

Nonetheless, investment analyst Seb Beloe, head of sustainability research at WHEB Asset Management, believes that it is important that “mid-cap” companies that did not previously disclose are now doing so.

“Many will not have reported in the past because they did not regard themselves as big energy users,” he says. “But emissions data can provide the investment community with really useful information about how a business is managed.”

External assurance is absent from the requirement to disclose GHG data. Financial auditors simply have to assess whether the information in the business review is consistent with the financial statements.

Chris Whitehead, group head of sustainability and innovation at infrastructure company Balfour Beatty, maintains that GHG data published in annual reports will be meaningful only if it is subject to independent verification.

“Mandatory external audit, similar to the audit that companies commission on their financial data, would sharpen everyone up,” he says.

Some companies remain reluctant reporters, however. One such company is temporary power generation company Aggreko, which has complied with the mandatory reporting requirements in its annual report and accounts for 2013 (as it did for the first time in 2012).

Nonetheless, it has expressed doubts over the value of the data, stating: “We are somewhat sceptical of the reporting on GHG emissions. Our issue is not with the principle of reporting; it is with attempting to impose spurious levels of accuracy and pretending that the numbers produced are accurate.

"They are not: they are an aggregate of many hundreds of more or less wild guesses. By way of example, in our reporting, 84% of our GHG emissions comes from our customers burning fuel in our engines.

"But ‘best practice’ dictates that we add 18.5% to this number to ‘account for’ the assumed GHG gases expended making the fuel and getting it to site, irrespective of whether fuel gets to our engine down a pipeline or in a truck.”


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