The Long Path to Environmental Reporting – Some Giant Leaps


The Department for Environment, Food and Rural Affairs (Defra) has at last published its draft Regulations requiring mandatory greenhouse gas (GHG) emissions for UK quoted companies[1].  The road to this level of mandatory reporting has been bumpy and taken a few turns along the way but this time, it seems that the UK has now taken a giant leap and will take the lead in requiring a significant number, in the region of 1800 companies, to report on their GHG emissions.

Alongside the issue of the draft GHG reporting Regulations, the Government has also published some updated draft reporting guidelines for Business on Environmental Key Performance Indicators replacing some earlier guidance dating back to 2006[2].

Consultations Launched

On 25 July Defra launched two parallel consultations. These consultations follow on from the announcement made by the UK Deputy Prime Minister at the Rio+ 20 Summit that all businesses listed on the Main Market of the London Stock Exchange will have to report their levels of greenhouse gas emissions from the start of the next financial year.

Alongside that announcement, “The Future We Want – Our Common Vision”, the draft negotiating text unveiled at Rio+20 itself acknowledges:

“…… the importance of corporate sustainability reporting and encourage[s] companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle.”

The UK is the first country to make it compulsory for companies to include emissions data for their entire organisation in their annual reports. It is committed to cutting UK carbon emissions to 50% of 1990 levels by 2025. It is estimated that this obligation will assist companies to save four million tonnes of CO2 emissions which has a value of £48m (at the £12/tonne CRC rate) by 2021.

At the same time, the Government has also published some updated reporting guidelines for Business on Environmental Key Performance Indicators which replace a previous version dating from 2006.

The Background to Mandatory Reporting

In 2011 only 230 of the UK’s largest companies disclosed GHG emissions data via the Carbon Disclosure Project[3].  Under the new Regulations, a further 1,500+ companies will be required to start measuring and reporting their emissions and will then naturally find themselves setting, or being pressured into setting, reduction targets against which they subsequently will have to report. 

Some companies are already bound in several instances to make disclosures of certain relevant environmental information, for example, under the Companies Act 2006, the CRC Energy Efficiency Scheme, the EU ETS and under environmental permits.  However, this is the first such occasion when the requirement is to be imposed without reference to some other overriding regime.  This new regulation requires information to be provided for its own sake (albeit clearly with the aim of encouraging corporate strategies to be developed to reduce those now measured and reported upon emissions).

Entities such as the CBI and the Aldersgate Group have long been calling for mandatory reporting and the majority of respondents to a consultation in 2011 supported making GHG emissions reporting mandatory.

It is not surprising that the Government has issued these draft Regulations given the requirement in the Climate Change Act 2008 for the Government to make regulations pursuant to section 416(4) of the Companies Act 2006 which would require UK-incorporated companies to include information about greenhouse gas emissions in their directors' reports or to report to Parliament as to why no such regulations have been made.  In fact a holding explanation was issued in March this year explaining that the Government needed extra time to make its determinations as to whether to introduce such requirements.

Environmental Reporting in Corporate Reports

As we have noted, certain companies have been required to make reports on environmental issues particularly under the Companies Act 2006 requirements for several years and these requirements have been supplemented by guidance issued by Defra which such companies were encouraged to take into account when reporting on environmental issues within their Annual Reports and Accounts.  The 2006 Guidelines entitled “Environmental Key Performance Indicators – Reporting Guidelines for UK Business” aimed to help companies report their environmental impacts in a meaningful and cost-effective way.

In particular, the guidelines aimed to assist quoted companies meet the additional requirements placed on them by the Companies Act 2006 (which implements the EU Accounts Modernisation Directive), to include certain environmental information in their business reviews, which form part of the narrative section of their annual corporate reports to their shareholders[4].

These annual corporate reports are also publicly available. The existing requirement is to include “where appropriate, analysis using key performance indicators including information relating to environmental matters”. 

Environmental Key Performance Indicators (KPIs) provide businesses with a tool for measurement. They are quantifiable metrics that reflect the environmental performance of a business in the context of achieving its wider goals and objectives. KPIs help businesses to implement strategies by linking various levels of an organisation (business units, departments and individuals) with clearly defined targets and benchmarks.

Responsibility for compliance rests with company directors and additional guidance is available from the Environment Agency and the Institute of Chartered Accountants in England & Wales[5].

The revised Environmental Reporting Guidance issued in July this year replaces the original 22 KPIs outlined in the 2006 Guidance and focuses instead on five key environmental categories.  The primary aim of the guidance remains to assist corporate reporting of environmental issues and impacts as required under the Companies Act whilst at the same time to encourage companies to factor these issues into their corporate strategy.

In 2009 new “Guidance on how to Measure and Report your Greenhouse Gas Emissions” replaced the 2006 guidelines in respect of GHG reporting for all companies and this Guidance remains valid as guidance to companies on how to report on their GHG emissions. The revised guidance is intended to complement the 2009 GHG reporting guidance and does not replace it.

It seeks to provide clear advice to companies on how to measure and report on their environmental performance using environmental KPIs;  help determine which KPIs are most relevant to an organisation; and set out the rationale for managing environmental performance using KPIs.

What next for Narrative Reporting?

Previously, Operating and Financial Reviews (OFRs) had been originally introduced in 2005, then repealed and partially replaced by the business review in 2006. Many major companies already publish an OFR on a voluntary basis and continue to do so despite the repeal of the formal OFR requirements.

The Coalition Agreement made it clear that the Government wishes to reinstate the OFR "to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency".

In August 2010, the Department for Business, Innovation and Skills (BIS) consulted on the future of narrative reporting and then, BIS published a further consultation on the future of narrative corporate reporting in September 2011.

The consultation describes a new, simpler reporting framework for UK companies and proposes that the current business review and directors' report be replaced with a strategic report and an annual directors' statement, both of which are likely to contain certain environmental disclosures. In March 2012, BIS published a response to the consultation, in which it indicated that it intends to publish draft regulations on these changes in 2012.  These proposals will not affect the Guidance proposed for Environmental Reporting other than where reference is made to “directors’ report”.

There was a parallel EU consultation on narrative reporting, which was published by the European Commission in November 2010. The purpose of that consultation was to seek views on ways to improve company disclosure of non-financial information, such as environmental information.  The Commission held a series of workshops in 2011 at which particular issues were discussed with relevant European experts and it seems likely that a proposal will also be made by the EU Commission in due course.

It is very likely then that we will have a proposal from BIS in the next few months clarifying what further level of reporting obligation may be imposed upon companies to report on environmental matters as well as social and other matters in the updated narrative reporting requirements.

The Updated Guidance

This new Guidance is not intended to be used solely where environmental reporting is mandated and so it will be relevant also for those companies taking voluntary giant steps of their own to report. Highlights of the new Guidance are summarised below.

Why Measure and Report?

The benefits of measuring and reporting on environmental issues in addition to regulatory compliance include:

  • Lower energy and resource costs;

  • Gaining a better understanding of exposure to the risks of climate change – both physical risks (disruption to supply chains) and business risks (increased energy prices, commodity costs and waste management costs) and identifying measures to adapt to climate change;

  • Generating business opportunities (such as companies who may deliver high-value opportunities for the extraction of metals and minerals from domestic and commercial waste streams; improving internal business processes to cope with the direct and indirect impacts of climate change; and exploiting market shifts by developing new products and services);

  • Demonstrating leadership which will improve your green credentials;

  • Satisfying investors, shareholders and other stakeholders who increasingly require improved environmental disclosures;

  • Responding to and surpassing supply chain demands for better environmental information and increasingly improved environmental performance.

How do you go about it?

You can publish the data in your Business review and may publish additional data in your corporate responsibility report or stand alone sustainability or environmental report and also on your company website.  You can report on environmental data alongside other matters such as social and community involvement to show the commercial, social and environmental context within which you operate.

The aim of reporting is to enable readers to assess the relative behaviours and prospects of different companies within and between organisation sectors.  The KPIs need to be quantitative (measurable), relevant (with its purpose and impacts explained), comparable (with the narrative part of the report enabling further clarification of issues to be made) and transparent (the value of the data will be enhanced if it is explained how and why data are collected).

Key steps in the process include:

Understanding what environmental issues are relevant to your company:

  • by looking at your operational boundaries and considering on a polluter pays basis what pollution you may cause and what natural resources you may directly consume – these are your direct impacts;

  • all other impacts are indirect such as the purchase of finished products (electricity/outsourced logistics) which result in upstream indirect (supply chain) impacts; and

  • downstream indirect impacts are caused by the use of disposal of a product after it has been sold.

Determining where your impacts occur in one or more of six categories which form the basis of the KPIs:

  • GHG (covered by other guidance);

  • Air pollution and other emissions;

  • Water;

  • Biodiversity and ecosystem services;

  • Materials;

  • Waste.

Assess whether you need to report on all parts of your organisation – reporting boundaries should be the same as for financial reporting purposes and depends on equity share, operational control or financial control.  You might also consider your supply chain and products when determining your organisational boundaries.

Measuring and reporting:

  • each of the 5 subject chapters provides specific guidance on measuring and reporting against that particular KPI;

  • general principles which should be utilised and reported upon include:

    • environmental management systems – EMS objectives and targets can be used to show a company’s progress against stated plans and goals;

    • environmental fines and expenditures (including in development of more efficient production processes, recycling facilities, reclamation of land or investment in local projects in the community);

    • assurance – although there is no statutory requirement to have environmental information audited, the auditor must state whether the information in the directors’ report is consistent with that found in the financial statements. 

  • Any robust assurance statement should:

    • clarify what is material to the company and stakeholders;

    • review the quality of reporting;

    • provide clear conclusions on data quality;

    • be conducted by a qualified independent third party reviewer;

    • meet recognised standard requirements;

    • be easily understood and jargon free.

  • setting targets – you will need to set targets and choose and report on a base year;

  • intensity ratios/normalisation factors – dividing the impact you are reporting on (whether tonnes of waste or emissions) by an appropriate activity metric (units produced) or financial metric (£ million turnover).  The resulting normalised data is called an intensity ratio;

  • The upstream supply chain – the guidance provides some helpful suggestions as to how to implement a strategic process that can be used to determine the impacts upstream in the supply chain which should be set within the wider context of an organisation’s purchasing and environmental management activities;

  • The downstream impacts – this is beyond the scope of this guidance although the guidance notes that there are some obvious issues which companies should be considering (such as legally compliant disposal of waste or waste products and end of life obligations for certain products such as electrical equipment).

The rest of the guidance sets out the KPIs for the 5 categories of environmental issues which are generally relevant and how to measure and report on those recognising that some companies will be regulated for example, on their emissions and will need to obtain permits whilst at the same time noting that others that are not so regulated may also contribute significantly to air pollution and other emissions, through for example, transport operations.

Questions posed in the Consultation

The eleven questions posed in the consultation on the Guidance are general in nature and provide ample opportunity for commentators to make recommendations on the style of the guidance, its scope and the use of tables and sample reporting tables and quite clearly seeks input on what additional information it might helpfully include.  The deadline for submission of responses is 17 October 2012.

GHG Reporting – the draft Regulations

Which companies are required to report?

The Regulations will apply to quoted companies[6] and so will apply to a company that is UK incorporated and whose equity share capital is listed by UKLA or is officially listed in an EEA State or is admitted to dealing on either the NY Stock Exchange or Nasdaq.

What emissions do they cover?

The Regulations apply to the 6 GHG listed in the Climate Change Act 2008, namely, carbon dioxide, methane, hydrofluorocarbons, nitrous oxide, perfluorocarbons and sulphur hexafluoride.

The directors’ report will be required to state the annual quantity of emissions in tonnes of carbon dioxide equivalent 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.

This annual quantity must include the leakage resulting directly or indirectly from any of the above activities.  In other words, the Regulations propose adopting some key elements of the approach to direct and indirect emissions taken by the “GHG Protocol: A Corporate Accounting and Reporting Standard” which was established by the World Resource Institute and the World Business Council for Sustainable Development in 2001.

The GHG Protocol defines direct and indirect emissions as follows:

  • Direct GHG emissions are emissions from sources that are owned or controlled by the reporting entity; and

  • Indirect GHG emissions are emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity.

The GHG Protocol further categorises these direct and indirect emissions into three broad scopes:

  • Scope 1: All direct GHG emissions;

  • Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam;

  • Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. Transmission & Distribution  losses) not covered in Scope 2, outsourced activities, waste disposal, etc.

The Regulations will require both direct and indirect emissions within scope 1 and 2 to be covered and may in the future extend the requirements to report on scope 3 emissions, it being thought that it would be better to start with emissions which are likely to be easier to measure.

What accounting period do they start from?

The Regulations propose that the first reporting year will be for the company’s first financial year ending after 6 April 2013 and the information from this first reporting year will also need to be repeated in subsequent reports so that readers will be able to see how subsequent emissions level compare with the first year of reporting.

Some amendment of base year data will be allowed for example, following changes in company structure.  Furthermore, directors may decide to report company emissions on a different reporting year providing they make that clear in the report.

What approach or methodology to reporting do they require companies to take?

The Regulations do not prescribe the methodology used to calculate the tonnes of carbon dioxide emissions although directors must state which methodology they have used.

The consultation document clearly references the 2009 Guidance on GHG emissions as being one methodology that can be used but it recognises that other standards may already be being used by companies such as the GHG Protocol (which is widely drawn upon by the Defra 2009 GHG guidance).  In addition, it notes that ISO 14064-1 could also be used which standard specifies principles and requirements at the organisation level for quantification and reporting of greenhouse gas (GHG) emissions and removals. Sector specific guidance also exists for some sectors.

The GHG Protocol referred to previously is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions.

The GHG Protocol Corporate Standard provides standards and guidance for companies and other organisations preparing a GHG emissions inventory. It covers the accounting and reporting of the six greenhouse gases covered by the Kyoto Protocol — carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6). It was designed with the following objectives in mind:

  • To help companies prepare a GHG inventory that represents a true and fair account of their emissions, through the use of standardised approaches and principles;

  • To simplify and reduce the costs of compiling a GHG inventory;

  • To provide business with information that can be used to build an effective strategy to manage and reduce GHG emissions;

  • To increase consistency and transparency in GHG accounting and reporting among various companies and GHG programs.

The module, which builds on the experience and knowledge of over 350 leading experts drawn from businesses, NGOs, governments and accounting associations has been road-tested by over 30 companies in nine countries. Its vision is to harmonize GHG accounting and reporting standards internationally to ensure that different trading schemes and other climate related initiatives adopt consistent approaches to GHG accounting.

What else do the Regulations Require?

Recognising that data may be being generated under other regimes such as the CRC energy efficiency scheme, Climate Change Agreements and the EU ETS, the Regulations require the directors’ report to clarify whether the data provided in the report was generated for any such purpose.

In an effort to ensure that the data is provided in a format which should assist relevant stakeholders in making an assessment of a company’s emissions against their peers, the Regulations further provide that the reports should include an intensity ratio (as explained previously, this is a ratio which expresses a company’s annual emissions in relation to a quantifiable factor associated with its activity).

Who will enforce these new requirements?

As the Regulations are being implemented under the Companies Act 2006, it will be the Conduct Committee of the Financial Reporting Council who will be tasked with assessing compliance with these new requirements and ultimately sanctions will be capable of being brought against directors under the Companies Act[7].

Further down the line…

The first two years of the new reporting regime will be assessed by Government with a view to determining whether to extend the scope to all large companies from 2016.

The timetable for implementation of the Regulations may slip slightly depending on the outcome of the BIS review of narrative reporting as it may be seen best to implement both measures simultaneously.

Commentary on the Draft Regulations

Centrica, amongst other large energy users and producers, warmly welcomes mandatory carbon reporting as, having been reporting since 2006 on their GHG emissions and since 2010 through the Carbon Disclosure Project, they called upon the Government along with some 190 companies to bring in mandatory carbon reporting.  Others are seeing it as the death knell of the CRC energy efficiency scheme and in particular, the redundancy of the Performance League table within the scheme.

The Carbon Disclosure Project, the mechanism used to date for companies to benchmark their GHG emissions reports has commented that as the draft Regulations do not specify a standardised reporting approach to be used for compliance with the requirement to deliver GHG emissions information, it fails to introduce reporting that will produce consistent and comparable information within a structure that could be adopted by other national jurisdictions. Furthermore, although issued by Defra alongside a consultation on a number of environmental key performance indicators that businesses can adopt for reporting, the draft regulation looks at corporate greenhouse gas emissions as an isolated issue and does not require companies make a full assessment of how climate change is expected to affect their business. These points directly impact how much value investors will be able to derive from any mandatory reporting.

The Climate Disclosures Standard Board (a project set up by the Carbon Disclosure Project) has also warmly welcomed the draft Regulations.  It does however believe that the implementation should be delayed until BIS has made its recommendations on narrative reporting due later this year and is concerned how the Regulations fail to specify any narrative reporting requirements alongside the obligation to report the raw data on GHG emissions such that investors will find the data difficult to interpret.  It supports the omission of requirements on Scope 3 GHG emissions reporting at this stage pending further testing of the new World Resources Institute and World Business Council for Sustainable Development standard on Scope 3 reporting.

They are disappointed to note that the draft Regulations do not prescribe one or more specific methodologies for calculating GHG emissions. In the absence of one or more prescribed methodologies, consistency and comparability will be difficult to achieve. They recommend that the CDP reporting system is used at the mechanism for delivering information in satisfaction of the Regulation and that their Climate Change Reporting Framework is referenced as the standard for compliance with the regulation.


It will be an interesting few months as BIS reaches its conclusions as to improvements to narrative reporting and Defra absorbs the responses to these two consultations both due by 17 October 2012.  Directors of the affected companies will need to start preparing now for the measurement and reporting obligations which are likely to impact and other companies will be best placed to start determining their policy to GHG emissions, their measurement and reporting approach both alongside or instead of the much criticised CRC energy efficiency scheme.

[3] The Carbon Disclosure Project requests climate change data on behalf of 655 institutional investors to be used by financial decision makers in their investment, lending and insurance analysis.
[4] Section 417 of the Companies Act 2006 specifies that in the case of a quoted company, the business review must, inter alia, contain information about environmental matters (including the impact of the company’s business on the environment).
[6] as defined in section 385(2) of the Companies Act 2006
[7] Failure to produce a business review in accordance with the 2006 Act is an offence under section 419(3).