Carbon reporting: Clearing the fog

In the UK, government rules threaten to kill off green energy investments. Two Tomorrows group director Jon Woodhead charts a course through the murky recent developments in carbon reporting

A recent flurry of guidance and reports on carbon emissions and reporting has added complexity to an already tricky picture in the UK. For those seeking to keep their CR reporting up to date or to demonstrate green leadership, figuring out what these developments mean for the collection, analysis and reporting of emissions data is no mean feat.

A report co-authored by my colleague at Two Tomorrows Vicky McAllister and published in December by the Association of Chartered Certified Accountants and the Global Reporting Initiative (GRI) examines climate change in detail. The report, High-impact Sectors: the Challenge of Reporting on Climate Change, analyses how well multinationals from the 15 highest-impact industries are disclosing their greenhouse gas (GHG) emissions and their subsequent strategies for reduction.

The report finds that less than half of companies studied disclose specific climate change-related data using GRI indicators. The aviation and oil industries come in for particular criticism for falling short of what investors and users of financial statements actually want. These findings are broadly consistent with those from other studies such as the Carbon Disclosure Project 2009 Global 500 report.

Mandatory reporting looming?

In light of the poor corporate response so far, the case for mandatory reporting is gathering momentum. At the start of 2010, a group of 40 businesses and non-governmental organisations, including Aviva, BSkyB, National Grid and Friends of the Earth, and 50 MPs, including Liberal Democrat leader Nick Clegg and Conservative Shadow Climate Change Minister Greg Barker, wrote to the Business Secretary Lord Mandelson calling on him to enact powers in the Climate Change Act that would make it mandatory for listed firms to report on their carbon emissions.

Paul Monaghan, head of social goals at The Co-operative Group, a signatory of the letter, believes the current voluntary approach to carbon reporting has proved ineffective. “The advocates of voluntary reporting have had their way for over a decade and still just half of the UK’s largest businesses report their greenhouse gas emissions,” he observes. “Legislation is long overdue, and we will not see investors begin to systemically factor climate change into their decision making until this nettle is grasped.”

Reporting challenges

Not that this is easy for big companies. Having helped numerous clients devise their key performance indicators for all kinds of areas including emissions, it is clear to us that companies face a big challenge to come up with indicators that can illustrate success in tacking carbon emissions while taking account of growth in operations. Normalisation of total emissions, for example by expressing emissions in relation to values such as turnover or product output, can often hide important details.

Back in 2008, BT announced a groundbreaking new approach, called the Climate Stabilisation Intensity indicator, which associates an organisation’s total CO2 emissions with the contribution its profits and employment costs make to the world economy. Targets for reducing the company’s carbon intensity (CO2 per unit of contribution to GDP) are then set in line with world targets to reduce CO2 emissions per unit of GDP. Other companies should now be looking to learn from this type of innovation and develop new indicators of their own.

Help may be at hand in the shape of the Climate Disclosure Standards Board (CDSB). In May 2009, the CDSB launched a draft reporting framework, based on existing standards, for corporate reporting on climate change. But it is still early days.

Unclear rules and guidance

To compound the difficulties companies face, the lead from government has, so far, been less than clear-cut .The Companies Act 2006, while it called on companies to report on material non-financial issues such as carbon emissions, failed to specify how they should do this.

This has contributed to a situation where carbon emissions are commonly cited in companies’ annual financial reports as one of their most material issues, and yet the quality of carbon reporting is often poor. In 2009, the Accounting Standards Board, part of the Financial Reporting Council (the regulator responsible for promoting confidence in corporate reporting), published a report entitled Rising to the challenge: A review of narrative reporting by UK listed companies. It found that, in many companies’ annual reports, “immaterial clutter . . . most frequently in the corporate social responsibility (CSR) and risk reporting sections of the narrative” was detracting from the quality of the reports.

Overall, the lack of reporting on the linkages between core business strategy and carbon emissions can only add weight to calls for mandatory reporting.

In autumn 2009, the Department for Environment, Food and Rural Affairs and the Department of Energy and Climate Change published detailed guidance for businesses and organisations on how to measure and report their GHG emissions. The guidance complements the PAS 2050 and ISO 14040 standards, which can be used to measure the carbon footprint of products.

While most of this guidance is reasonably straightforward, the rules covering reporting on energy from renewable sources include some drawbacks. For example, only carbon offsets that meet the criteria set out in the Government’s Quality Assurance Scheme for Carbon Offsetting can be counted as part of any reduction in a company’s total GHG account. Domestic projects do not normally meet the good-quality criteria.

So where does this leave companies who invest in UK-based renewables projects and who are looking to show the benefits of this investment in their reporting? The carbon reporting rules have destroyed the business case for making these investments, says a group of 40 businesses including BT, Microsoft and Sun Microsystems. The group, some of whom have cancelled green energy plans, have recently set out their complaints in a letter to Joan Ruddock, the MP responsible for climate change action.

BT has stated that its 250MW wind farm project is under threat because of the rules, which demand that any electricity subsidised using one government scheme (Renewable Obligation Certificates) cannot be classed as green in the mandatory carbon budgets that will be brought in by the Climate Change Act.

Meanwhile, Sun Microsystems has suspended development work on solar and wind projects for on-site generation at its Guillemont Park Campus in Surrey because of the rules. It says it will not lift the suspension until the legislation is revised. It believes it is impossible to make a business case for such projects under the current rules, which it says penalise companies seeking to invest in renewable energy.

The guidance suggests that organisations funding such projects should communicate their contribution “in another way”, for example by stating that “this investment is expected to help the UK to meet its national targets”. Clearly the authors of this guidance have never had to get a company board to sign off investments of this type!

More change to come?

As part of its obligations under the Climate Change Act, the Government has said it will review the contribution GHG emissions reporting makes to helping the UK meet its climate change objectives. In doing so, it will consider “wider options for the treatment of low-carbon electricity under the guidance”. This will include reviewing how the purchase of electricity by businesses can stimulate increased low-carbon generation and help reduce emissions.

The Department of Energy and Climate Change has said it will report by the end of 2010. It remains to be seen whether this will give business sufficient basis to retain investments in, or purchases of, renewable energy. However, if the rules on reporting do change, more complexity is guaranteed.