A Guide to Mandatory Carbon Reporting

Aug 22 2016

The UK has the aim to cut down carbon emissions to 50% of 1990 levels by 2025 and 80% of 1990 levels by 2050, and they are considered to be the very first country to enforce compulsory annual emissions data reporting for certain companies.

It is hoped that this compulsory enforcement will motivate companies to reduce emissions to enable the UK to meet the climate targets.

Carbon emissions

Figure 1. Carbon emissions

On 6 August 2013, the UK government announced that the regulations would come into effect from 1 October 2013. This announcement was made based on a public consultation, where mandatory reporting on greenhouse gas emissions was supported in the majority.

The plan was to evaluate the initial two years of reporting by quoted companies in 2015, following which the government decided whether the requirement will be expanded in order to consider several of the large companies in 2016.

A set of Environmental Reporting Guidelines that provide guidance on compulsory greenhouse gas reporting was published by DEFRA, the government department responsible for the regulations. The compliance of a company’s reports will be analysed by the Financial Reporting Council who are also responsible to enforce the mandatory carbon reporting regulations.

Transparency is the key theme of the requirements. It is necessary to clearly specify the process used to determine the greenhouse gas emissions and to provide reasons if emissions are excluded. This transparency allows companies to prove to their stakeholders that they are controlling their emissions.

Who Does it Include?

Quoted companies are those that are UK incorporated and their equity share capital is listed officially in a European Economic Area, or listed on the main market of the London Stock Exchange, or admitted to dealing on either NASDAQ or the New York Stock Exchange.

The reporting process is undertaken by almost 1,100 companies. PLCs, SMEs, and public sector companies are not included in the requirements.

The excluded companies can voluntarily report their greenhouse gas emissions. This reporting process has several benefits, such as increasing credibility with stakeholders and enhancing brand image, it may also be beneficial to be prepared in the likely event that it will become compulsory for an increasing number of companies in the coming years.

What do Companies Need to do to Comply?

Find out What Emissions they are Responsible for

Companies are required to report the annual quantity of emissions for activities that they are responsible for, including the operation of any facility and the combustion of fuel. These companies should also report emissions arising from the purchase of steam, heat, electricity, or cooling by the company for its own use.

Reported emissions must include all six Kyoto gases, reported in tons of carbon dioxide (CO₂) equivalent.

SF₆- sulphur hexafluoride
PFCs - perflurorocarbons
HFCs - hydrofluorocarbons
N₂O - nitrous oxide
CH₄ - methane
CO₂ - carbon dioxide

The regulations cover a company’s global emissions in the UK and also emissions from all overseas operations. This is a challenge for several multinational companies that are currently not reporting on global emissions, as they first need to have adequate systems in place to gather data from all of their international operations.

These companies will also have to choose suitable emission factors - the average emission rate of greenhouse gas emissions for a given source.

Decide on Which Methodology to Use

A prescribed methodology does not exist for the reporting of carbon numbers under these new regulations. However, ISO 14064 Part 1 (2006) is the recognised international methodology to measure greenhouse gas emissions and is strongly recommended.

This methodology has global recognition, and provides credibility to greenhouse gas reporting. The GHG Protocol (Corporate Accounting and Reporting Standard) from the WRI/WBCSD is another widely recommended standard in the draft bill and also underpinned by ISO 14064-1.

Data obtained from other regulatory reporting processes can be used, such as:

The Carbon Reduction Commitment Energy Efficiency Scheme
The EU Emissions Trading Scheme
Climate Change Agreements

It should be noted that some of these regulatory schemes do not include all of the data needed by the new Mandatory Carbon Reporting regulations. This will have to be examined, and if required, extra data will have to be collected and included.

Although it is possible to use any methodology, the guidance document points out that included emissions will be those equivalent to scopes 1 and 2 of a carbon footprint. Given below are examples of typical scope 1 and 2 emissions:

Scope 1 (Direct Emissions)

Refrigerants from air conditioning and refrigeration units
Vehicle fuel
Combustion from boilers

Scope 2 (Indirect Emissions)

purchased electricity for own use

Several data sources can be used to gather the necessary data. Some of these sources include:

Material purchase invoices
Mileage records
Meter readings
Weighbridge records
Fuel receipts
Fuel receipts
Utility bills

Choose an Appropriate Reporting Period

Companies should ideally report on emissions for the period corresponding with their financial year, even though it is not mandatory. If a company plans to calculate emissions for a different 12 month period, they will have to present appropriate explanations within the report.

Excluding the initial mandatory reporting year, repeat emissions data from the previous year should be included with data gathered from the present year. After the completion of one year, companies will be reporting present year emissions with a report on the previous year’s emissions.

It is also possible to recalculate the previous year’s emissions if the structure of the company has gone through significant changes. This is not mandatory, but if a company is planning to go through this process then it must be clear within the report that this has been done.

Decide on an Intensity Ratio

The total emissions must be expressed as an intensity ratio or ratios. All companies have the freedom to decide what intensity ratio they want to use and some examples include:

Emissions per m² floor space
Emissions per employee
Emissions per unit
Emissions per £m turnover

An intensity ratio helps to put the emission figure into context and makes room for comparisons against other similar organisations. A company should use at least one intensity ratio for its total emissions.

It is also possible to report extra intensity ratios for parts of the company. The intensity ratio that has been selected should be relevant to the company.

Check and Report Emissions

The data should be verified by a greenhouse gas auditor before it is reported in the company’s annual report. This verification process is performed only after the emissions have been calculated using an ideal methodology and applying an intensity ratio.

The auditor will be responsible for examining compliance with the legislation in terms of the scope and boundaries against the methodology employed. The auditor also checks if the calculations are accurate, the emission factors are correct, and the source data has been properly collected.

After being checked, the numbers can be entered into the annual report where they will be signed off by a financial auditor and the company’s Director.

What are the Timescales for Reporting?

Companies will have to report 12 months of data. This normally follows their reporting period for their annual report (e.g. 1 January to 31 December or 1 April to 31 March).

The Mandatory Carbon Reporting (MCR) numbers are then added in the subsequent annual report.

What are the Benefits of Getting Third Party Verification?

Even though there is no requirement to obtain independent verification of emissions data, it is recommended in proportion with best practice. Independent verification ensures that the data reported is reliable and accurate.

Investors and other interested parties are capable of scrutinising the greenhouse gas numbers published in annual reports, so having them verified will add more credibility to the data.

Not obtaining verification has its own risks, which could lead to charges of ‘greenwash’ that is often avoided by many companies. Getting the numbers wrong would not only impact investors’ confidence, but would also affect a company’s reputation.

This risk can be reduced by using a greenhouse gas auditor to validate the emissions data, and put the directors’ minds at rest. Using greenhouse gas verifiers to perform this verification process ensures that they will be experienced and familiar when it comes to the standards, methodologies, and schemes.

How Can Reporting Carbon Emissions Help a Company?

The process of measuring carbon emissions, whether mandatory or voluntary, can help companies control their emissions and ultimately focus on reducing them. This will decrease any unnecessary expenditure.

Controlling emissions can also provide businesses with a better understanding of the opportunities and risks related to climate change and the possible opportunities to come across new market perspectives in the future.

The credibility with stakeholders can be enhanced by reporting emissions in a transparent manner, especially if they have been verified by a third party. This level of transparency with clients, investors, and the general public will improve the company’s brand image and reputation. Data credibility enables investors to make suitable decisions and give preference to companies with lower emissions.

Conclusion

A few companies believe that Mandatory Carbon Reporting is another hoop to jump through. Companies that accept the new regulations have the confidence of identifying benefits in brand reputation, credibility, and accuracy.

Since the environment, companies, and the government experience the benefits of reporting emissions data, it is only be a matter of time before the regulations are used by other companies.