Streamlined energy and carbon reporting explainedby
Julia Penny examines the findings of the FRC's Thematic Review on Streamlined Energy and Carbon Reporting (SECR), which was issued on 8 September 2021.
On 8 September, the UK Financial Reporting Council (FRC) issued its thematic review on streamlined energy and carbon reporting (SECR). With the COP26 climate conference heading for Glasgow in November, the issue is going to rise up accounting's agenda in the next few months. As the FRC makes clear, more rigorous reporting of energy use is going to be part of accountancy's portfolio for a lot longer than that.
If you are new to the issues and terms used in this article, start off by reading the companion article, which explains some of the key terms in understanding reporting on climate change issues.
Emissions and energy use
The SECR includes requirements to disclose both emissions and energy use, as well as various other information. The FRC review highlighted examples of good reporting, such as that by housebuilder Persimmon plc, that explained the targets for reduction of emissions as well as disclosing the information regarding scope 1 and 2 emissions. The FRC would like to see clear explanations of what types of emissions are included under each heading, to aid understanding.
Investors want to see specific targets on the journey to net zero, with interim milestones identified by companies. Some entities in the FRC’s review did this well, including timescales and metrics connected to the targets. Good examples (eg SEGRO plc) included detailed disclosures of the CO2e used, together with an analysis of which areas are included within the net zero target set by the company.
The SECR disclosures do not require companies to obtain any external assurance of the figures reported, but some companies do this voluntarily as it is encouraged. This might be very valuable for directors when making decisions about action to reduce emissions, as they can be more confident that the emissions reported are correct. If there is some sort of assurance obtained, then disclosures should explain the nature of that assurance, so that users can properly understand the context.
The SECR do not set out the methodology to be used to calculate the emissions and energy consumption information. However, many organisations around the world have set up standards in this area and the SECR reference widely used standards (see table) including:
- The GHG Protocol Corporate Standard
- ISO 14064
- The Climate Disclosures Standard Board
- The Global Reporting Initiative Sustainability Reporting Guidelines.
The FRC encourages companies to report using the TCFD’s 11 recommended disclosures against the SASB metrics relevant to their sector. From 1 January 2021 TCFD disclosures will be required for premium listed companies with an expansion of the scope expected in later periods. As there is a wide choice of methodologies it is vital that the company explains the ones used in its disclosures.
The review found that 25 out of the 27 entities covered by the review provided some explanation of the methodology, but often this was very limited and is an area for improvement. An important part of the methodology disclosures is to identify the reporting boundaries, for instance which subsidiaries are included within the reported figures, as it is permitted to exclude emissions outside of the UK.
There is a requirement to disclose at least one ratio which expresses the entity’s annual emissions in relation to a quantifiable factor associated with the entity’s activities. Examples of the metrics used included revenue (e.g. tonnes CO2e per £m revenue), production units, floor space, employees, units sold, or ratios related to profit measures. Whilst all entities had included at least one emission ratio, entities should explain why they have chosen that particular ratio and why it has changed (or not) since last year. It should be possible for users of the accounts to recalculate the ratio given based on the published information, so extra disclosures might be needed to ensure this can be done.
To encourage companies to take action, there is a requirement to disclose the principal measures taken, if any, for the purpose of improving energy efficiency. If no such measures have been taken it is best to state this fact, so that readers do not think it is a missing disclosure. Comparative disclosures of principal measures will also be needed in future periods, so care needs to be taken to ensure this is given.
The FRC report concludes with their expectations for future periods which, in brief, ask entities to:
- Present all information in a clear, understandable, easy to navigate format;
- Provide an adequate explanation of methodologies used to calculation emissions and energy use;
- Provide an explanation or reconciliation where ratios cannot be recalculated from the annual report disclosures and consider which ratio is the most appropriate;
- Describe the extent of any due diligence or assurance over the metrics disclosed;
- Provide an adequate description of the principal energy efficiency initiatives in the current and comparative period;
- Provide clear explanations which help users to understand and compare major commitments such as net zero targets or Paris-aligned strategies.
If your company or your clients have not yet started to get to grips with the required disclosures, or if none, the general risks to the business posed by climate change, then now would be a good time to start that journey. With COP26 just around the corner, the world will be focusing on climate change and how we take action to limit the damage. Accountants can make a real difference by ensuring there is a means to measure progress and by focusing on the risks presented to the business by climate change.
Carbon accounting and sustainability are set to be the key topics taking centre stage at our AccountingWEB Live Expo this 1-2 December. Click here to register for free now.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...