Reporting under the Streamlined Energy and Carbon Reporting (SECR) regime for the first time?
For many UK companies, this coming annual reporting cycle will be their first time reporting on their greenhouse gas emissions and energy consumption under the new SECR regime.
The SECR replaces the CRC regime and from a practical angle many (though not all) of the requirements will be familiar to quoted companies that were previously covered by the CRC. It’s not the most straightforward regime to grapple with, and yet in a world where climate reporting for companies is rapidly rising up the agenda, it pays to invest the time now getting this right.
Here is a quick recap of the key points of the new regime, focusing mainly in this post on quoted companies.
Who is in scope?
The SECR regime affects: (i) all quoted companies, (ii) unquoted “large” companies and (iii) “large” LLPs, in each case which are incorporated in the UK.
What is a “quoted” company? A company whose shares are listed on the Main Market of the London Stock Exchange UK or in an EEA State, or admitted to trading on the New York Stock Exchange or Nasdaq. The specific reporting requirements are slightly different depending on whether you are either a quoted company or a large unquoted company/LLP, so this distinction is important.
What is “large”? A company which meets two or more of the following: (i) turnover of £36 million or more; (ii) balance sheet assets of £18 million or more; or (iii) 250 employees or more.
Companies that prepare Group Directors’ Reports must include their subsidiaries’ energy and carbon disclosures, unless those subsidiaries would not meet the thresholds for reporting (on an individual basis).
Finally, there is a low energy usage exemption (though note this is quite small at 40,000 kWh).
Is this mandatory?
The SECR requirements are technically “comply and explain”. Companies can choose not to report where directors or members think disclosure would be: (i) serious prejudicial to the interests of the organisation or (ii) where information is not practical to obtain. So the circumstances when you are not required to comply with the regime are very limited indeed.
If choosing not to report, a company must explain why it has chosen to exclude disclosure and take steps to fill material gaps. This option is usually reserved for very exceptional circumstances. Even in such circumstances, companies may still want to disclose for reputational reasons.
Practically, where is this information reported?
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, this may be included in the Strategic Report instead.
What content needs to go in the report?
Broadly speaking, this is looking at the amount of energy being used by the business (input) and the greenhouse gasses the business is emitting (output) within the financial reporting year.
In addition, companies will need to include calculations, an explanation of methods used and a description of actions they have taken. This includes:
1 Greenhous gas emissions in tonnes
Although the requirement is on UK businesses, it relates to their global emissions.
This includes scope 1 and 2 emissions. To recap, scope 1 is direct emissions (e.g. from your own on-site gas boilers and operations) and scope 2 is indirect emissions (e.g. the emissions created in the generation of the electricity you purchase for your own use)
Scope 3 (which is much broader and captures even emissions that your business doesn't own or control – e.g. those associated with supply chain, business travel, or use of your products by consumers) is encouraged but not required.
This applies to carbon dioxide or equivalent (including all seven gases included under the Kyoto Protocol).
2 Underlying global energy use
Companies then need to report on the underlying global energy that was used to calculate their greenhouse gas emissions.
This must be calculated in kWh. If being converted into kWh from other units (e.g. litres of transport fuel), this should be explained in the methodology (see below).
3 A chosen emissions intensity ratio
Intensity ratios compare your emissions data with an appropriate business or financial metric – e.g. your emissions compared to your sales revenue, or to your square meters of floor space. Businesses can choose their own, but it needs to be quantifiable, with the method of calculations disclosed, consistent year on year, and most relevant to the business. So the square meter example might be appropriate for the property sector, while those in the manufacturing sector might opt for emissions per tons of production.
4 A narrative description of key measures taken to improve the businesses’ energy efficiency in that year
The recommendation is to report on those measures that have most meaningful direct impact. Examples might be installing smart meters, capital investment in more efficient lighting, or behavioural change programmes. 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.
5 Methodology used must be disclosed
Although no methodology is prescribed, the guidance is that it must be robust, transparent and the recommendation is to use a widely recognised independent standard, for example the GHG Reporting Protocol.
If you are in a sector where existing methodologies have been developed, you should consider using those.
Whilst 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.
Finally, it is recommended to look at the reporting recommendations of Task Force on Climate-related Financial Disclosures (TCFD) and incorporate these.
Differences for large unquoted companies and large LLPs?
The key difference is that large unquoted companies and LLPs only need to report on UK and UK offshore emissions and energy use, rather than global emissions/energy use. There are also differences as to where LLPs need to report this information.
Thinking long term
After producing their first set of energy and carbon disclosures, unquoted and quoted companies will need to report current year and previous year disclosures going forward. So companies reporting next financial year will need to include energy and carbon disclosures from the current financial year.
It’s important to get this right, not only to comply with the UK regulations themselves, but more broadly given the heightened focus by investors and regulators on climate reporting, as evidenced by the FCA’s new climate reporting obligations for premium listed issuers.
It is therefore critical to act proactively to ensure consistency in the business strategy, calculation methodology, and narrative.
Find out more
The regulations that implement the SECR regime are the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
The UK government has published detailed (yet accessible) Guidance.
For a broader discussion around ESG reporting requirements for corporates, see the recording of our recent Linklaters webinar.