SECR was implemented on 1 April 2019, replacing the Carbon Reduction Commitment (CRC) energy efficiency scheme. The new regulations (see also summary: https://is.gd/qoroce) require an estimated 11,900 companies incorporated in the UK to disclose their energy and carbon emissions.
The new reporting framework is intended to encourage the implementation of energy efficiency measures, with both economic and environmental benefits, supporting companies in cutting costs and improving productivity while reducing carbon emissions.
Andrew Jones, director of narrative reporting at accountancy firm Mazars, explains: “If you’re looking to reach much lower levels of carbon you should be building this information into your management systems, understanding how your products work and how much energy they use to manufacture.
“For operations engineers, there are likely to be changes in how buildings will be designed and run. For example, refrigerants that can’t be used anymore, lift programming systems that will have to change, passive heating and ventilation systems that will have to be installed in order to fall within the electricity limits, materials that will or won’t be suitable or may become too expensive, and office use changing as a result of Coronavirus.
“Looking at these things, what decisions have you made; what things do you think are going to change; how are you measuring how that change is happening; what proportion of your products are compliant with the latest legislation; what risks are you looking at; what could come in in the intermediate future that suddenly changes the shape for your business that’s associated with climate change?”
From a practical angle, many of the requirements will be familiar to companies that previously reported under CRC. It’s not the simplest system to tackle, but in a world where climate reporting is rapidly rising up the agenda for companies, it pays to invest the time to get it right.
WHO IS IN SCOPE?
Stephen Lavington, senior associate at law firm, Burges-Salmon, says: “There are two categories SECR currently applies to: all companies that are quoted on a major stock exchange, and large unquoted companies or limited liability partnerships (LLP).
“The Companies Act defines a ‘large company’ as having a turnover of £36 million, a balance sheet threshold of £18m, and employees numbering 250 or more. If you satisfy two or more of these criteria you qualify as a large company or LLP.”
Companies that prepare group directors’ reports must also include their subsidiaries’ energy and carbon disclosures, unless those subsidiaries would not meet the thresholds for reporting on an individual basis.
Lavington adds: “If you consume less than 40MWh of energy in the financial year (taking into account gas and transport fuel, as well as electricity), you can claim the low energy exemption.”
However, these companies will still need to include a statement in their report confirming they are a low-energy user. If preparing a group report, the low energy user threshold applies to the energy consumption of the parent group and its subsidiaries.
Private sector organisations which fall outside the scope of SECR are also encouraged to voluntarily report.
IS IT MANDATORY?
Where a company falls within the scope of SECR it is generally required to meet the reporting obligations.
There are limited exceptions, including the low energy user’s exemption. In addition, companies can exclude information where directors or members think disclosure would be ‘seriously prejudicial to the interests of the organisation or where information is not practical to obtain’. Having said that, companies must state where they rely on such exemptions. However, the expectation is that these will be relied on in exceptional circumstances and indications are that the regulator, the Financial Reporting Council, may scrutinise this approach.
Even so, Lavington advises that companies may still want to disclose for reputational reasons: “Even where there is no obligation to report, companies might seriously consider doing so in order to demonstrate to stakeholders that they are actively controlling their emissions.”
For most companies, this information goes in the directors’ report as part of annual filing obligations. However, where energy usage and carbon emissions are of strategic importance to the company, it can be included in the strategic report instead.
WHAT NEEDS TO BE REPORTED?
Reporting requirements vary. Quoted companies must continue to report their global scope 1 and 2 greenhouse gas (GHG) emissions in tonnes of CO2 equivalent (including all seven gases stipulated under the Kyoto Protocol), and a chosen emissions intensity ratio in their directors’ reports for the current and previous reporting periods.
Additionally, they will be required to report their underlying global energy use for the current reporting year. Furthermore, the split between UK and offshore energy use in other countries is required; in addition, after the first reporting year, so is a comparison with the previous year.
Reporting of so-called ‘Scope 3’ emissions, which are the most indirect, remain voluntary. Its potential extent can vary substantially, but is strongly recommended for material emissions sources. As a reminder, Scope 1 covers direct emissions from owned or controlled sources; scope 2 covers indirect emissions from purchased electricity, heat and steam; scope 3 covers all other indirect emissions from the value chain, such as purchased goods and services, transportation and distribution, according to the Carbon Trust’s guide (https://is.gd/dusepu).
Unquoted large companies and LLPs will need to report, as a minimum, UK energy use from electricity, gas, and transport fuel – as well as the associated GHG emissions – including at least one intensity metric that compare emissions with a relevant business metric or financial indicator, according to the DEFRA’s 2009 GHG guidance document (https://is.gd/eniren).
Transport energy includes business usage where the company supplies fuel, but not journeys where the fuel is paid for indirectly. For example, fuel consumed for business use in company cars, fleet, and private/hire cars (including where employees are reimbursed for business mileage) and on-site vehicles are included. But fuel associated with air, rail, or taxi journeys that the company does not operate, or fuel for the transportation of goods contracted to a third party, is not included.
The relevant report must include a description of measures taken to improve the businesses’ energy efficiency in that year. Where possible, resulting energy saving from the actions reported should also be stated. If no measures have been taken this should also be included in the report.
Lavington says: “It’s not prescriptive, it’s more outcomes-focussed, but you are required to show your working and the methodology that you’ve used. There are various corporate standards on reporting out there.”
Companies are encouraged to go beyond the minimum requirements and voluntarily include any other material source of energy use or GHG emissions outside these boundaries, as well as reporting on scope 3 emissions. The use of forward-looking science-based targets on emissions and adopting the reporting recommendations of the Switzerland-based Task Force on Climate-related Financial Disclosures (TCFD) is also encouraged.
It’s something that Jones agrees companies should be doing. “What SECR is supposed to drive is understanding and building CO2 into companies’ management information. And it won’t just be CO2, eventually it will be other effects, like social impact and pollution,” he says.
“These systems will allow you to see how much your products cost and what components are needed to manufacture them as well as how much carbon is used. You’ll also see that when the carbon price goes up by a certain amount the product is going to become unviable, and you’ll have to change it in certain ways.”
The organisers of TCFD reported in October 2020 that the number of organisations expressing their support of the code has increased by 85% since its 2019 status report.
Finally, while not a requirement, external verification or assurance is recommended as best practice to ensure the accuracy, completeness, and consistency of data for both internal and external stakeholders.
THINKING LONG TERM
Both Lavington and Jones say it’s important to get this right, not only to comply with UK regulations, but also due to the heightened focus by investors and regulators on climate reporting. It is therefore critical to act proactively to ensure consistency in the business strategy, calculation methodology, and narrative.
Jones says: “These crude measures are the beginning, but the systems that gather this data will become your control systems later. Underlying them are collections from each plant, each building, each use of electricity or gas. If you build the systems that look at that and you understand what’s driving them, you can use this to manage the company to reduce carbon emissions and energy use.
“These are baby steps but we’re going to have to get to running really quickly if we’re going to sort out the climate change issue.”
BOX: REPORTING CLIMATE RISKS
In October 2020, the organisers of TCFD published guidance on climate-related scenario analysis and on integrating climate-related risks into existing risk management processes (https://is.gd/aguteb). The 130-page document expands its 2017 technical supplement. The executive summary states: “It is meant to illuminate comon practices, considerations and questions that a company needs to think about, taking into consideration its particular circumstances.” The guidance is also explicitly intended for non-financial companies, and those unfamiliar with the topic.
It defines a scenario as a plausible but hypothetical path of development leading to a particular future outcomes – what-ifs. A specific type, called a ‘normative scenario’ imagines a preferred future state, working back from which can help understand how to get there.
The report adds: “Scenario analysis helps companies in making strategic and risk management decisions under complex and uncertain conditions such as climate change.”
A further status report from the organisation with more analysis of the use of such exercises is scheduled for September 2021.
BOX: SELECTED ENERGY MANAGEMENT SOFTWARE
Electricity utility Engie promotes its C3NTINEL energy-management software, which combines consumption data from multiple sites and facilities, including energy meters, building management systems, weather data and asset sensors, and provides reports. The system claims to make data analysis intuitive.
SystemsLink monitors all of the utilities that feed an organisation. One particular feature, its web portal, includes site league tables, customisable reports, smart alarms triggered by unusual consumption and bespoke user views for different types of employees in the organisation.
ABB’s Energy Manager software is intended for industrial and production systems. There are four modules included: energy monitoring and reporting, energy load forecasting and planning; energy demand and supply optimisation and predictive emission monitoring systems inferential modelling platform. The latter, https://is.gd/ahuruj, uses an artificial intelligence model to predict emission concentrations based on process data, such as fuel flow, load, operating pressure and ambient air temperature.