Environmental reporting is moving from the realms of a voluntary PR exercise to serious audit. The introduction of a mandatory operating and financial review (OFR) will force the top 1,000 companies to come to terms with environmental reporting.
Those that have already carried out some form of environmental review on a voluntary basis will be ahead of the game. However, the key test to whether a company will have to disclose an environmental impact in its OFR comes down to whether or not it is deemed material.
This week sees the close of the OFR consultation, headed by Rosemary Radcliffe, an economist and former partner of PricewaterhouseCoopers.
It has set about establishing how directors should decide what to include in the OFR.
As environmental reports have so far been done on a voluntary basis, the subject has remained a grey area.
One UK company praised for its approach is BT. Dunstan Hope, manager of social policy development at the company, explains: ‘We generally report on all our environmental impacts that are material to stakeholders. Once information is in the public domain, you’re more likely to pay attention to it and manage it more effectively. Part of our reporting is to set targets to environmentally improve.’
The approach has helped BT reduce its emissions by around 40% since 1996.
It’s no secret that generating good PR was part of BT’s motivation when it embraced environmental reporting in the nineties, but it is the UK’s largest single purchaser of electricity and has the largest vehicle fleet. It buys 1.8% of the nation’s industrial energy and produces 100,000 tonnes of waste a year.
The focus of the OFR is on matters material to shareholders’ interests.
When the way a company handles an environmental challenge affects a significant number of people, this can be relevant to shareholders. Any adverse effect on a company’s reputation can impact on profitability and shareholders interests.
Simon Thomas, chairman of environmental research organisation Trucost, emphasises that it’s not just the activities of heavy industry that can affect the environment.
‘Banks attract a lot of attention because their loan books can end up encouraging bad environmental consequences. International lending policies and what they finance can have huge environmental consequences. If they’re financing logging and pipelines, they come under the spotlight,’ says Thomas.
But for electricity generators, the OFR will be much more crucial. The UK signed up to the Kyoto protocol in 1996 to reduce greenhouse gases.
While the UK is thought to be advanced in shifting power generation away from coal-fired plants to the cleaner gas-driven power stations, the European Union’s emissions trading scheme directive comes into force in 2005, setting emissions limits on each member state.
UK companies affected include the utilities Scottish & Southern, Scottish Power, International Power and Powergen. Under the EU directive, companies exceeding their emissions allocation will be forced to trade excess emissions or face heavy fines. Those with surplus permits will be able to sell them to companies who exceed their allocation. The scheme currently only covers CO2 emissions, but it may be expanded to cover other greenhouse gases.
The measure could be beneficial for the UK companies if they can sell some of their surplus allocations to other EU companies. ‘Because of the dash for gas, we took on a lot of natural gas capacity. We will see a firmer test of an emissions reduction of 20%, but the directive only requires us to reduce emissions by 12%,’ explains Thomas.
The OFR aims to make shareholders aware of events likely to affect company performance. Giving shareholders more information should make the stock market more efficient and scientific evidence is likely to be of key importance in OFRs. For example, the International Underwriting Association has warned that people living or working near electricity pylons may file compensation claims for leukaemia. Likewise, mobile phone operators would be required to include any evidence of a clear link between the use of mobile phones and brain damage in users.
Hope says: ‘What will operators say to investors about mobile phone risks? Are they a health issue? That’s what could be in the OFR.’
Airport operators may also be affected. With permission for airport expansion dependent on environmental impact, the OFR could become an important document for investors.
- James Hester is reporter of Accountancy Age.