This year listed companies are entering a new world where they are required to report on their greenhouse gas (GHG) emissions.
Companies may have previously voluntarily reported their emissions as part of their sustainability reporting, but the new regime has some specific requirements that bring additional reputational risks arising from two main elements of the reporting regime:
- the choice of reporting standard is not mandated but must be justified
- the report covers the same time period and organisational boundary as the annual financial and Directors’ report;
Why do these result in additional risk?
Choice of standard
Once a reporting standard is chosen it will be difficult to change without restating previous years, thus making it important to get the choice of standard right at the outset. In practice there are three standards in the UK:
1. the WRI/WBCSD GHG Protocol (“the GHG Protocol”)
2. the international standard ISO 14064-1:2006
3. the DEFRA GHG Reporting Guidelines.
The GHG Protocol is the most widely globally referred standard and the benchmark for many multi-national corporations. It is so widely used the ISO standard advises you to follow it for best practice. DEFRA’s own GHG Reporting Guidelines, offering UK specific guidance, are also based on the GHG Protocol with the main difference being the treatment of consumed energy. In short all standards lead back to the GHG Protocol.
Scope 2 of the GHG Protocol covering indirect emissions (in other words mostly electricity and heat supplies) is currently being revised. As the other standards rest on the GHG Protocol it’s likely they will also be revised once an updated version released.
I’ve been an active participant in the technical working group discussions on the proposals, and debate has been lively. At its heart is whether your choice of supplier or contract can be taken into account when reporting indirect emissions. For companies that have limited scope to invest in energy efficiency or on-site generation the outcome will determine the extent to which they can manage their Scope 2 emissions. I’ll cover the issues around Scope 2 in more detail later in the summer.
The link between financials and GHG reporting
For the first time, as a result of requiring the same reporting period and organisational footprint, stakeholders will be able to cross reference changes to an organisation’s financial results with changes to GHG emissions. This will put a renewed focus on sustainable growth and economic effectiveness of the actions taken to reduce carbon intensity. I suspect this will, over time, also put pressure on organisations to segment their GHG reporting to align with their financial reporting. Organisations must be aware of the additional reputational risk that this increased scrutiny brings. The recent focus on corporate tax shows how publicly disclosed information is now used by stakeholders to hold organisations to account.
Questions like these may be asked:
“Why have profits gone down, but emissions up?”
“Why can’t I see the same segmentation in your emissions report as your financials? What are you hiding?”
“Why is the carbon intensity and cost of your operations higher than your competitors?”
“Why is your emission reduction budget tiny compared to your marketing budget?”
What should organisations do to manage these risks?
Firstly they need to be aware of the proposed changes to Scope 2 emissions under the GHG Protocol. These will be coming out for consultation in the next few months. To keep up to date with developments, check Greenhouse Gas Protocol for updates. If you are affected then make sure your voice is heard, if possible through trade bodies, if you believe the proposal does not support your business. We can help you understand the implications.
Secondly organisations need to review their decision making for investment and changes affecting their GHG emissions to ensure the evaluation takes proper account of emissions. To be most effective these evaluations need to tie back to the organisation’s overall sustainability objectives. Organisations will need to be able to relate changes in their GHG emissions back to their financial reports and provide sufficient detail to stakeholders for them to evaluate the changes.
In conclusion organisations need to engage with reporting standards and issues, and review their internal decision making to ensure financial and sustainability objectives are properly joined together – the new reporting means contradictions between the two cannot be so easily hidden.
Although I’ve highlighted the risks this is also a great opportunity to effectively align an organisation’s financial and sustainability evaluation and reporting. Those that get it right will have an ongoing competitive advantage.