Quoted companies, large unquoted companies and large LLPs now required to comply with additional environmental reporting
A large number of businesses will now be subject to new environmental reporting requirements under the new ‘streamlined energy and carbon reporting regime’ (“SECR”). This requires:
- quoted companies (of any size);
- large unquoted companies (including those undertaking public or not-for-profit activities); and
- large limited liability partnerships (“LLPs”)
to report on their annual figures for energy use, greenhouse gas emissions (“GHG”) and other related information (set out below) for financial years which start on or after 1 April 2019.
The practical difficulty for most businesses, particularly those which are undertaking environmental reporting for the first time, is the need to implement new procedures to collect and record their energy use and emissions activities. This will no doubt be a time consuming (but necessary) process and will need the attention of the relevant directors/partners. Businesses with complex organisational structures (e.g. where some entities may be part-owned or owned but not operated) will need to review carefully their boundaries to identify if they fall within the SECR. If so, an agreed approach should be implemented across the organisation.
The SECR has been introduced through the Companies (Directors’ Reports) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (“Energy and Carbon Report Regulations 2018”), which supplements (rather than replaces) existing narrative reporting requirements under the Companies Act 2006.
Your organisation will fall within the scope of the SECR if it is: i) a quoted company; ii) a large unquoted company; or iii) a large LLP incorporated in the UK.
Unquoted companies and LLPs are “large” if at least two of the following qualifying conditions are met during a reporting period:
- The organisation employs more than 250 employees;
- The organisation has an annual turnover greater than £36m; or
- The organisation has an annual balance sheet greater than £18m.
The term “quoted company” is based on the definition set out in section 385(2) of the Companies Act 2006. In brief, this includes a company that is UK incorporated and whose equity share capital is: i) listed on the FCA’s Official List (i.e. the Main Market of the London Stock Exchange UK); ii) officially listed in an EEA State; or iii) admitted to trading on the New York Stock Exchange or Nasdaq. Companies trading on the securities market but which do not fall within the definition of a “quoted company” (such as those on the Alternative Investment Market (AIM companies)) could still fall within the scope of the SECR regime as large unquoted companies if at least two of the above qualifying conditions are met.
Whilst non-UK incorporated companies and LLPs are not required to disclose their energy and emissions information (as they do not file annual reports at Companies House), any subsidiaries that are registered in the UK that fall within the scope of the SECR will still need to comply with these requirements.
An exemption applies for entities that can show they use 40MWh or less of energy over a reporting period (i.e. a low energy user) – although these companies will still need to include a statement to this effect in the relevant report.
What must be reported?
Large unquoted companies and LLPs are required to disclose the following information in a directors’ report (in the case of companies) or in an annual “energy and carbon report” (in the case of LLPs):
- UK energy use (to include, as a minimum, energy use from purchased electricity, gas and transport) for the current financial year.
- Associated GHG emissions for the current financial year.
- At least one “intensity ratio”.
This means expressing emissions data using an appropriate metric or financial indicator for the business, so as to ‘normalise’ the data in a quantifiable way. Two commonly used normalising factors are turnover and production output, although there are several others. For example, companies with offices or retail operations may express their emissions based on floor space (i.e. as tonnes of CO2e per total square metres).
- Information about energy efficiency actions taken by an organisation during its financial year.
Businesses must provide a narrative description of the measures taken to increase energy efficiency within the organisation during each financial year (unless no measures have been taken, in which case the report must state this). Examples of energy efficiency actions include (but is not limited to): the installation of smart meters and energy monitoring tools, upgrading building insulation, replacement of heating, ventilation and air-conditioning systems, moving fleet from fossil fuels to electric vehicles.
- Information about methodologies used to calculate disclosures.
- With the exception of the first financial year to be reported under the SECR, organisations are also required to provide information set out at points 1-4 above for the preceding financial year.
Quoted companies are already required to disclose most of the information requirements set out above in their director’s report (i.e. annual global emissions from activities for which that company is responsible, at least one intensity ratio, previous year’s figures on energy use and GHG emissions, and information on methodologies used to calculate disclosures). However, the SECR requires quoted companies whose financial years start on, or after, 1 April 2019 to also report on:
- The total global energy use by the company across all energy types. This new requirement consists of i) the annual quantity of energy consumed from all activities for which the company is responsible (including from the combustion of fuel or from operating a facility) and ii) annual quantity of energy consumed from the purchase of electricity, heat, steam or cooling by the company for its own use.
- Information about energy efficiency actions taken by an organisation during its financial year.
Where a director’s report is being submitted at a group level, the parent company submitting the report must take into account in the consolidation not only their own information but also the information of any subsidiaries which are quoted companies, unquoted companies or LLPs. There are complex provisions relating to group reporting under the Energy and Carbon Regulations 2018, which we will not go into detail in this article. However, a parent company is not required to include information relating to a subsidiary which the subsidiary itself is not obliged to report on its own account.
The same applies to LLPs required to prepare a group energy and carbon report.
Guidance published by Defra makes clear that, in the context of landlord/tenant arrangements, it is the consumer of energy who is responsible for reporting under SECR, rather than the purchaser of the energy supply. Qualifying tenant organisations will therefore be expected to report on the energy consumed within their “rented serviced areas”. The Defra guidance suggests that tenants will need to agree with their landlord (and potentially other tenants and/or any property management company) on how energy consumption “estimates” are to be divided for each of their tenanted areas. This will be very difficult and undoubtedly time-consuming, particularly in the context of large multi-let schemes.
Implications for non-compliance
Reporting under the SECR will be subject to existing monitoring requirements and enforcement provisions relating to the filing of accounts under the Companies Act 2006.
The Conduct Committee of the Financial Reporting Council (“FRC”) will be responsible for monitoring compliance with the SECR. Where a director’s report is defective, the FRC has the power to apply for a court order to declare that the report does not comply with the Companies Act 2006 and require directors to prepare a revised report so as to comply with reporting requirements.
Importantly, reports that fail to comply with SECR requirements could be rejected by Companies House, which could then result in fines being imposed on the company/LLP for late filing of accounts under the Companies Act 2006. In addition, actions could be taken directly against directors (or members of an LLP), who could themselves be liable for a summary conviction.*
*Companies House may not accept any accounts that do not meet the requirements of the Companies Act, and where acceptable accounts are delivered after the filing deadline, the company is liable to a civil penalty in accordance with section 453 of the Companies Act 2006. The civil penalty for the late filing of accounts is in addition to any action taken against directors (or members of an LLP), under section 451 of the Act.” (Defra guidance, March 2019.)
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