New carbon emissions reporting rules: more than just hot air

COMPANIESmust now include data on their greenhouse gas emissions in annual reports following changes to the Companies Act 2006. The information is designed to inform investors and analysts on their assessment of a company’s exposure to climate change and energy related risks.

However, despite long heralding of these regulations many companies are underprepared, with some woefully so, what are the potential repercussions of providing poor data, or indeed missing out key information altogether?

The Financial Reporting Council’s conduct committee is responsible for monitoring compliance of company reports and accounts. Referrals to the FRC panel are rare but it does respond to well informed complaints and there are precedents for reissuing of annual reports. In 2011 a FTSE 100 company had to restate its commentary of environmental and social disclosures, because the FRC said these were not consistent with other public statements.

The consistent approach

A lack of consistency between greenhouse gas data and narrative, relating to environmental KPIs, elsewhere in the Annual Report, may raise concerns about data quality. This in itself may undermine confidence in a company’s broader data and potentially also poses a risk to the reputation of the business.

Carbon and energy costs coupled with reporting risks arising from carbon policy are a material business risk. Accurate and timely data is needed to enable decision making on how these issues should best be managed. Robust processes and data controls are instrumental to achieving this and mitigating reputational risk.

Preparation of greenhouse gas data is not straightforward. To be done cost effectively companies need to have sufficient controls and procedures in place. One finding from Verco’s research, presented at the ICAEW this summer, was that less than 20% of companies have a documented greenhouse gas governance and data management plan. Without this, and a thorough review of data requirements, there is a substantial risk of providing misleading or inaccurate data; or indeed failing to provide data on time for the annual report.

Carbon accounting is a decade, rather than centuries old discipline. In many companies it has been left in the hands of sustainability practitioners, without sufficient processes and controls in place to ensure robust data. All that needs to change now.

There will be increased levels of scrutiny as investors and other stakeholders, as well as competitors, understand the changes brought about by the revision to the Act. There needs to be close collaboration between finance, reporting and sustainability functions. The most effective carbon accounting in a business requires a blend of the engineering and financial mindset. Reputations are at stake.

Andrew Prosser is head of environmental governance and reporting at sustainability consultancy Verco