In a move by the UK government to secure greater environmental accountability, companies listed on the London Stock Exchange will soon be required to report their global GHG emissions. The new rules, introduced as part of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, will initially cover all companies listed on LSE’s main market and come into force from financial years ending on or after 30 September 2013.
Environmental reporting in the UK has effectively been elevated to the same level as financial information, which will place specific responsibilities on companies and their directors. In practice, this will require a framework that allows such information to be collated and accurately reported, alongside that of an organization’s financial information. However, with haphazard reporting and inadequate systems to control the quality of data and calculations, many organizations will struggle to meet the new requirements.
The regulations explicitly require the directors’ reports, a key element of the existing reporting framework, to state the methodologies used to calculate emissions. Furthermore, disclosure must also include at least one GHG emissions intensity ratio that confirms the relationship between an organization’s emissions and activities.
CFOs and their co-directors will want assurance that such numbers are correct and that they fully understand how the numbers break down across the business, by type of greenhouse gas and geography. A key question facing these companies is how they can fulfill their obligations of what is, potentially, a complex and onerous area of reporting.
There are four main challenges facing businesses in delivering a carbon report that will stand up to scrutiny.
First, the scope of what is to be covered in the report needs to be determined – in terms of geography, types of greenhouse gases, business activities and business units, according to ownership, operational control or relevance.
Second, the data needs to be collected and organized in a systematic way so that it can, if necessary, be verified.
Third, the activity data needs to be combined with the correct conversion and emission factors in calculations. This can be complex since many of these factors change from year to year. And fourth, the company needs to be able to analyze and intelligently comment on the results.
To provide intelligent narrative, a better understanding of the background to these numbers will be required. This will include the ability to contextualize the wider strategic significance and the likely future impact on the business, including the areas of business that have the highest carbon intensity; the scope for reducing emissions; easy wins; and the areas requiring investment.
While the GHG-producing activities, such as electricity and gas consumption, company car use and perhaps some fugitive emissions of refrigerant gases of a London-headquartered services company with satellite offices all round the world may at first glance look simple, there is a much bigger challenge to overcome.
Global data must be collected, often from people that have no background in environment or CSR, speak a foreign language and have no knowledge of the UK policy landscape. Not only may these overseas offices not understand the data they are being asked to collect, they may not understand why they need to or even where to find the data. Where this is the case, obtaining accurate and reliable information is difficult and time consuming, presenting the very real risk of material misstatements.
The best way to get reliable data is to make it as simple and engaging as possible for those collecting data.
Start by aligning the collection process with financial reporting systems and cycles; often those that need to submit GHG data are the same people who are collecting and submitting data for financial purposes. In fact, much GHG input data could be financial, for example, the amount spent on electricity or gas.
Companies with a history of reporting GHG emissions often had this done in-house by CSR teams using spreadsheets but many are now moving to more robust, easy to audit systems. The most cost effective systems are web-based and allow companies to collect data from their global offices and sites in a structured way, which has the built-in process controls favoured by auditors. Some even support different languages, greatly improving timeliness and quality of the data submitted by overseas offices. The most advanced systems include all the latest geographically relevant emissions factors, automatic selection of the correct factors according to the input data, allowing automatic calculation of GHG emissions in real-time. These also present companies and their auditors with input data, calculations, emission factors, references, supporting evidence and control data, which should also provide third-party accreditation from, for example, the Carbon Disclosure Project or audit firms.
The prospect of having to restate financial results is something that will send a shiver down the spine of most CFOs. With GHG emissions now placed alongside financial information, organisations must ensure they have the right reporting framework and systems in place to ensure the timely and accurate delivery of such insight.
Gary Davis is co-founder and operations director of Ecometrica, a global provider of web-based environmental and greenhouse gas accounting software.