Summary

UK organisations have grappled in recent years with CRC Energy Efficiency Scheme (“CRC”) and with the Energy Savings Opportunity Scheme (“ESOS” - now in its second phase). Now it is time to get to grips with Strategic Energy and Carbon Reporting (“SECR”). 

For the vast majority of organisations subject to SECR, the first report is due in respect of their current financial year.

The CRC Energy Efficiency Scheme may have closed at the end of the 2018/19 compliance year, but the UK government is not going soft on energy use and carbon emissions. Indeed, far from it.  It has, after all, just amended the Climate Change Act 2008 so as to create an obligation to ensure that the UK has net zero carbon emissions by 2050.   

Other energy use and carbon emissions reduction measures have already come to the fore. One of these is an increase in the main rates of the climate change levy (which is paid by business and public services on their electricity, gas and solid fuel use) from April 2019.  Another, which forms the main subject matter of this note, is the application of mandatory Energy and Carbon Reporting to a much wider cross section of UK business than was previously the case.

Who is affected by SECR?

• Quoted companies (i.e. whose share capital is on the Official List) - they have been subject to a level of emissions reporting for some time.
• Large unquoted companies (including large charitable companies) and large Limited Liability Partnerships (“LLPs”).

This is as a result of the Energy and Carbon Report Regulations 2018. The requirement to report applies to financial years commencing on or after 1 April 2019.  

Large UK unquoted companies and large UK LLPs are companies/LLPs that satisfy two or more of the following criteria in a financial year:

1. over 250 employees;
2. annual turnover of more than £36m; and
3. annual balance sheet total of over £18m.Quoted companies must continue to report:

What needs to be reported under SECR?

• Annual global emissions from activities for which that company is responsible including the combustion of fuel and the operation of any facility; together with the annual emissions from the purchase of electricity, heat, steam or cooling by the company for its own use.
• At least one “intensity ratio” relevant to the business activity, so as to enable comparison with similar types of organisation.
• Previous year’s figures for energy use and GHG emissions (except in the first year of reporting).
• Methodologies used.
• Additionally, quoted companies must also now report:
• Underlying global energy use that is used to calculate GHG emissions, including previous year’s figure (in the first year, previous figures are not required).
• Information about energy efficiency action taken in the organisation’s financial year.

For financial years commencing on or after 1 April 2019, quoted companies also need to state what proportion of their energy consumption and their emissions related to emissions and energy consumption in the UK (including the UK’s offshore area).

Unquoted companies and LLPs will be required to report:

• UK energy use, including in the UK offshore area (to include as a minimum purchased electricity, gas and transport).
• Associated greenhouse gas emissions.
• At least one intensity ratio.
• Previous year’s figures for energy use and GHG emissions (except in the first year).
• Information about energy efficiency action taken in the organisation’s financial year.
• Methodologies used.

Where an organisation (taken together, where applicable, with other UK members of its group) qualifies as a “low energy user” (broadly, one which has consumed 40MWh or less during the period in respect of which the report is prepared) it is not required to make the detailed disclosures of energy and carbon information referred to above. Instead, such an organisation is required to state, in its relevant report, that its energy and carbon information is not disclosed for that reason.

The legislation permits that certain required information may be excluded:

• when the directors or members consider the disclosure of the energy and carbon information would be seriously prejudicial to the interests of the organisation. Businesses are allowed to rely on this only in exceptional circumstances;
• where the energy and carbon information is not practical to obtain. The relevant report must still state what energy and carbon information is not included and why.

The reporting requirements do not yet stipulate forward-looking, science-based emission reduction targets, or financial risks and opportunities arising from climate change. Organisations are welcome to do so if they wish, however.  In relation to financial risks and opportunities arising from climate change, the applicable guidance suggests reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD).  The UK Government formally endorsed the TCFD’s globally recognised framework for making climate-related financial disclosures in 2017.

What is SECR aiming to do?

The new mandatory reporting requirements are designed to:

• increase awareness of energy costs within large and quoted organisations, including enhanced visibility to key decision makers;
• create more of a level playing field among large organisations, in terms of energy and emissions reporting;
• ensure administrative burdens associated with energy and emissions reporting are proportionate and broadly aligned to the existing energy reporting requirements and the business reporting framework;
• provide organisations in scope with the right data to inform adoption of energy efficiency measures and opportunities to reduce their impact on climate change; and
• provide greater transparency for investors, and other stakeholders, on business energy efficiency and low carbon readiness.

Comment

Many businesses subject to the new rules will already have much of the internal infrastructure required to comply with the new (and in the case of quoted companies, the additional) disclosure requirements due to their participation in other schemes - not just CRC (now historic) but also ESOS, the Climate Change Agreements Scheme, and the EU Emissions Trading System.

They may also already be geared up to comply as a result of them already taking a proactive stance on wider Environment Social and Governance (“ESG”) issues, as more and more companies are doing in response in part to investor and consumer pressure.

Some businesses, however, may not have this head start and will therefore need to consider energy and carbon consumption, and associated reporting from scratch. They should engage as soon as possible. In the current climate (no pun intended), scrutiny of energy and carbon emissions, and indeed of wider ESG matters, is the order of the day and more can be expected in the not too distant future.