Capital Quarter Summer 2020: The impact of the new carbon framework on business

We take a high-level look at and summarises the changes to the UK Corporate Governance Code, effective from 1 January 2019.

Streamlined Energy and Carbon Reporting (SECR)

The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 introduced several new and enhanced disclosure requirements for UK companies, effective from periods beginning 1 April 2019. Under these changes, quoted companies, in addition to reporting on their greenhouse gas emissions and an intensity ratio, are now also required to report their total global energy use and information relating to the energy efficiency action alongside the methodology used to calculate the new and existing disclosure requirements.

Those companies that have not supplied environmental reporting previously might need to implement significant processes to ensure that they are able to capture the data required for their reporting. The revised standard comes into effect for periods beginning on or after 1 April 2019, and disclosures should be presented in the directors’ report. Where energy usage and carbon emissions are of strategic importance to the company, disclosure of the relevant information could be included in the strategic report instead of the directors’ report.

What is the purpose of the new requirements?

There are several key points in which the introduction of the new SECR was brought in for:

• Increase awareness of energy costs within large and quoted organisations, including enhanced visibility to key decision makers.
• Provide organisations in scope with the right data to inform adoption of energy efficiency measures and opportunities to reduce their impact on climate change.
• 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.
• Create more of a level playing field among large organisations, in terms of energy and emissions reporting.
• Supply greater transparency for investors and other stakeholders, on business energy efficiency and low carbon readiness.

Disclosure requirements

• Comparative figures for energy use and Greenhouse gas emissions (not required for the first year).
• Underlying global energy use that is used to calculate Greenhouse Gas emissions (gas, electricity and fuel from transport bought for business use etc.).
• Details about the action taken to improve energy efficiency in the company throughout the year.
• The methodology used in calculating the disclosures.
• Annual global emissions, in kWh, from activities for which that company is responsible including fuel combustion and the operation of any facility, and annual emissions from the purchase of electricity, heat, steam or cooling by the company for its own use.
• At least one intensity ratio.

For financial years starting on or after 1 April 2019, quoted companies also need to state the proportion of their energy consumption and emissions related to consumption in the UK.

Exemptions from reporting

There are two exemptions available from the SECR disclosure requirements:

1. If the company qualifies as a ‘low energy user’, i.e where energy use is less than 40,000 kWh annually (See section 6 of the HMRC guidance) provided.
2.  Where the information would be seriously prejudicial, or it would not be practical to obtain it.

Companies that are low energy users must disclose the fact in the Directors Report.

Groups and subsidiaries

Where the organisation is reporting at a group level, the disclosures must include information on any subsidiaries included in the consolidation which themselves meet the qualifying conditions.

However, organisations have the choice to exclude from their report any energy and carbon information relating to a subsidiary which it would not be obliged to report if reporting on its own account.

A subsidiary is not obliged to report its energy and carbon information if it meets the following criteria:

• it is a subsidiary undertaking at the end of the financial year;
• it is included in the properly prepared UK group report of a parent company; and
• that group report is prepared for a financial year of the parent that ends at the same time as, or before, the end of the subsidiary’s financial year.

Where can I find more information?

HMRC have released guidance in respect of the disclosure requirements on their website.

2018 UK Corporate Governance Code and revised Guidance on board effectiveness

There has also been a major revision to the UK Corporate Governance Code and Guidance. This includes reporting on how the board has engaged with a company’s stakeholders in a way that is broadly consistent with the new Companies Act reporting Regulations as set out below within The Companies (Miscellaneous Reporting) Regulations 2018.

The Code is supplemented with significantly revised guidance on board effectiveness, with an emphasis on the importance of principles and reporting. The major areas of discussion are as follows:

• The assessment of the independence of directors is in the hands of the board’s judgement;
• The chair should not remain in post beyond nine years from the date of their first appointment to the board (an extension is applicable in certain circumstances);
• Removal of the exemption for boards outside the FTSE 350 to only have two independent directors (independent directors should make up half the board); and
• The chair of the board cannot be on the audit committee.

Additional information can be found on the FRC Guidance on the Annual Review of the UK Corporate Governance Code.