Computatis - Cost effective Carbon Accounting

Introductory Note

Under the requirements of UK Company Law, the Board of Directors of all large Companies have to produce an annual document called the “Directors’ Report” which details the state of the Company and its compliance with a set of financial, accounting and corporate social responsibility standards.

Incoming Regulations on Greenhouse Gas (GHG) Emissions Reporting for all UK Quoted Companies

In June this year, a draft Statutory Instrument entitled “The Greenhouse Gas Emissions (Directors’ Report) Regulations 2013” was laid before the Houses of Parliament and approved by each House.

According to Defra’s “Consultation on greenhouse gas emissions reporting draft regulations for quoted companies” as of July 2012, a definitive Statutory Instrument will be made in Parliament by April 2013. Our analysis of the legislative proposal, which undertakings it could involve and the extent of the compulsory requirements is laid out below:

When will the Regulations Come into Force?

The Government are currently proposing that the Regulations will come into force for reporting years ending after 06 April 2013; however, the UK Department for Business, Innovation and Skills (BIS) is in the process of reviewing the current Regulations concerning company reporting and the changes proposed are likely to come into effect for reporting years ending after 01 October 2013. In order to align the new legislative introductions with each other, it is likely that the new rules on GHG reporting will be timed to come into effect at the same time as the BIS Regulations – thus concerning reporting years ending after 01 October 2013.

Which Companies will be Involved?

The term “quoted company” used in the draft Statutory Instrument refers to a Company that is UK incorporated and whose equity share capital is officially listed on the Main Market of the London Stock Exchange (UKLA), or in an EEA State, or is admitted to dealing on either the New York Stock Exchange or Nasdaq.

What will Companies have to Report?

According to Article 3 of the draft Statutory Instrument, the Board of Directors of all UK quoted Companies will have to enclose in their “Director’s Report” the quantity of CO2e emissions resulting directly from:

• The combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the Company
• The use of any means of transport, machinery or equipment operated, owned or controlled by the Company
• The operation or control of any manufacturing process undertaken by the Company.

All aforementioned emission sources are the direct responsibility of the Company – i.e. the emissions come from sources owned, controlled or operated by the undertaking. These GHG releases fall under Scope 1, as defined by The Greenhouse Gas Protocol: they are also called “direct emissions” as they stem from activities directly owned or controlled by an Organisation. Other emissions to be accounted for in the “Directors’ Report” are those resulting from the purchase of electricity, heat, steam or cooling by the Company: these are typically Scope 2 emissions, i.e. indirect GHG emissions arising as a consequence of the Organisation’s activities (e.g. any activity that uses electricity) but occurring at sources neither owned nor controlled by the Organisation.

The new Regulations do not require Companies to account for their Scope 3 emissions; this covers all other indirect GHG releases generally linked to the Supply Chain of their products or to waste disposal, business travel by means not owned by the Company and other non-directly controlled activities.

What about Emissions already Reported for Compliance with the CRC EES, the EU ETS and with CCAs?

In order to reduce the regulatory burden where possible, Article 5 of the draft Regulations permits the use of data obtained as a result of compliance with other carbon legislations. In such cases, the original source of the data must be explicitly declared.

Which Methodology must be Used to Calculate the Emissions?

No specific methodology has been indicated in the Regulations and the Government does not require the adoption of one particular standard – Directors are only asked to clearly state the methodology they chose to use for calculating their emissions.

Defra and the Department for Energy and Climate Change (DECC) have produced Guidance for Companies wishing to measure and disclose their emissions, and annually publish recalculated emission factors; these are the emission factors and methodology used by Computatis for compliance with the incoming Regulations.

The Usefulness of a Carbon Intensity Ratio

Under Article 6 of the draft Statutory Instrument Directors are required to include an Intensity Ratio within their emissions report; the Intensity Ratio to be used – whether financial or activity related – is not specified, and each Company is left to decide which would be most appropriate for their business. Intensity Ratios compare emissions data with an appropriate business metric or financial indicator, such as sales revenues or square metres of floor space: using an Intensity Ratio allows a Company to compare their performance over time and with other similar types of Organisations.

For How Long Will These Regulations Stay in Force?

It is proposed under Article 8 of the legislative draft that these Regulations will be in force for a period of at least five years, thus allowing the Secretary of State to carry out a review of the outcomes and lay it before Parliament. This Report will inform the decision on whether to lighten the Regulations and/or to extend them to all large UK Companies.