A Survey of Carbon Reporting Practice in UK Listed Companies: Carbon Reporting to Date - Seeing the Wood for the Trees

1. EXECUTIVE SUMMARY

   Organisations are facing increasing pressure from investors, customers and indeed employees, to measure, report and reduce their carbon footprint. Additionally, the associated cost savings in today's highly competitive environment are hard to ignore.

   Lord Adair Turner, Chairman of the Financial Services Authority, is quoted on the Carbon Disclosure Project ("CDP") website1 as saying that: "The first step towards managing carbon emissions is to measure them because in business what gets measured gets managed."

   In September 2009 the Department for the Environment, Food and Rural Affairs ("Defra") published guidance on how to measure and report GHG emissions (referred to as "carbon" or a company's "carbon footprint" in this report). Currently, this guidance is voluntary but there is an indication that reporting could become mandatory from 2012.2 So what are companies already reporting and to what extent do they already comply with this guidance?

   This report examines how a sample of 100 UK listed companies publicly report their greenhouse gas ("GHG") emissions or their 'corporate carbon footprint', compared to the guidance issued by Defra.

   Our survey shows a high degree of variation in carbon reporting practices and many companies, particularly those outside the top tier of FTSE companies, could do better. Highlights include:

   57% of companies reported carbon information to some degree and all but one company in Tier 1 did so.3 37% of companies 'formally reported'4 numerical data on their carbon footprint; 20% of companies 'formally reported' a specific target in relation to carbon reduction; Only 9% of companies disclosed that information on carbon had been reported in line with the Defra guidance; and Only 8% of companies stated that their reported information had been assured by a third party. In going beyond the recommendations of the various national and international reporting frameworks in place, some companies reporting their carbon footprint have presented extensive information in a way they consider more meaningful to their stakeholders. However, this does not aid comparison between reports. Further, in the absence of prescriptive guidance, this can result in extensive disclosure within a corporate responsibility or equivalent standalone report, without providing what we would consider to be the key highlights within the annual report. But there are some clear leaders in the field who embed carbon disclosures into their annual reporting framework, reflecting an attitude that this information is a core component of overall performance.

   But even with this in mind, only a handful of companies in our sample came within striking distance of complying with all of Defra's recommendations, indicating that a significant overhaul of existing carbon reporting practices will be required if these guidelines become mandatory.

   Key Findings

   The wide variety of both formal and informal carbon reporting practices identified does not facilitate comparison between companies or industry sectors, making it difficult to evaluate the relative performance of companies in monitoring and reducing their carbon footprint; a primary goal of the government in publishing the Defra guidance.

   Few companies made disclosures explaining year-on-year movements in sufficient depth to enable readers to gain a real understanding of a company's performance in the year in reducing their carbon footprint, or the appropriateness of targets set.

   Many companies failed to make basic disclosures around the reporting methodology used, or accounting principles applied, highlighting a lack of transparency around measurement principles and reporting of carbon footprints.

   Restatements of previously reported information noted correction of non-material errors, or updates to comply with revised calculation guidance. Carbon reporting is in its infancy relative to the financial reporting frameworks in existence, and there are additional complexities around measurement of carbon data. This heightens the risk of errors in published information.

   Seeing the Wood for the Trees

   As we look forward, the quality of carbon data reported will come under closer scrutiny, with a regulatory framework for reporting, and the audit regime that this entails, impacting UK companies within the CRC Energy Efficiency Scheme for the first time this year. For these organisations, the financial cost of consuming energy in the UK has further increased following the revisions to the CRC made by the Government in the Comprehensive Spending Review in October 2010. Moreover, with the publication of rankings under the CRC, the reputational cost of failing to manage the corporate carbon footprint, or failing to report it faithfully, remains significant. Senior executives should focus on the quality and accuracy of information they are using to make strategic decisions around energy and carbon management. Carbon data needs to be useful – and used – as part of this strategy. The missed opportunities, and risks, that arise from 'getting it wrong' will increase.

   Although there are emerging leaders in carbon reporting, many companies need to begin to think seriously about these requirements and equip themselves to compile the type of information recommended by the Defra guidance. For a start, this should help them to focus on where they can cut emissions and save costs. Secondly, this will give them a chance to embed reporting systems, processes and controls.

   Our survey highlights a number of 'best practice' disclosures to show how leading companies are reporting elements of their carbon footprint. It also includes a reporting checklist and illustrative carbon disclosures for an annual report, drawing on our findings to provide a practical guide to assist preparers with their carbon reporting.

   We hope that you will find this survey a useful insight into the current state of formal reporting of carbon emissions – 'carbon reporting to date'.

2. CARBON REPORTING FRAMEWORK – WHAT GUIDANCE IS AVAILABLE?

   The routes to accessing carbon information about UK companies are becoming increasingly extensive every year. The Carbon Disclosure Project ("CDP") obtains carbon information reported on a voluntary basis from more than 3,000 bodies internationally. CDP's questionnaire-based information request now extends to asking organisations to give their view on the opportunities that climate change affords them. Certain investor sites such as google finance pick out carbon reporting as a key performance indicator. One would expect the opportunities and/or risks resulting from climate change to be considered in corporate valuations when considering merger or acquisitions. But how much of that insight is published, and by how many companies, within a formal and reliable reporting framework?

   Introduction

   Carbon reporting guidelines exist both in the UK and internationally, but are still relatively early in their development. The 'GHG Protocol',5 which introduced a number of standardised methods for GHG accounting, was first published within this decade. Few jurisdictions mandate carbon footprint reporting. Entities in the scope of regulated emissions trading schemes are required to report information on regulated emissions, but these often only constitute a subset of their total carbon footprint. As such, today an accepted single global framework for carbon reporting does not exist, with the result that there is the potential for inconsistencies and a lack of comparability in reporting across different jurisdictions and different organisations. On the positive side, an increasing number of organisations have embraced the voluntary reporting indicators and guidance offered by the Carbon Disclosure Project6 and the GHG Protocol.

   The Climate Disclosure Standards Board7 issued a Climate Change Reporting Framework in September 2010 which is intended to provide guidance for the integration of climate change related information into mainstream corporate reporting.

   Existing reporting regulation is likely to be the thin end of the wedge. As the number of emissions trading schemes (and associated compliance cost) increases, it is likely that companies will be required to disclose sustainability and/or environmental risk as a key risk in the narrative report section within their financial statements. The Companies Act 20068 already requires large UK companies to report on material non-financial key performance indicators which include those relating to environmental matters, within the business review of their directors' report.

   The Department for Business, Innovation and Skills ("BIS") has recently undertaken a consultation on the future of narrative reporting, the results of which will be published by the end of 2010. The objective is to significantly improve the quality of narrative reporting including on social and environmental issues.

   The European Union's Cap and Trade Emissions Trading Scheme (the "EU ETS") has captured only the largest emitters, but the CRC Energy Efficiency Scheme ("CRC") captures a much broader spectrum of 'ordinary' companies. The first public rankings from this will be published in October 2011. Turning specifically to UK carbon disclosure frameworks, Defra published guidance on 'How to measure and report your greenhouse gas emissions' (the "Defra guidance") in September 2009. Although the guidance is currently voluntary, the Climate Change Act 2008 requires the government either to mandate carbon footprint reporting by 6 April 2012 or explain why it has not done so. Under the Climate Change Act, the UK government has set targets to reduce UK carbon dioxide ("CO2") emissions by at least 26-32 per cent by...