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Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

Volume 793: debated on Wednesday 17 October 2018

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.

My Lords, I beg to move that these regulations, which were laid before the House on 18 July 2018, be approved.

The purpose of this statutory instrument is to introduce additional requirements for quoted companies and new requirements for large unquoted companies and large limited liability partnerships—LLPs—to report annually on emissions, energy consumption and energy efficiency action. In 2013 the UK was the first country to make it compulsory for quoted companies to include emissions data for their entire organisation in their annual reports. At the time, the Government made a pledge to review the legislation and whether it should be extended to all large companies at a later date.

The Government recognise that for organisations to take action to reduce their energy use, they must have the appropriate tools and guidance. Measuring energy use and emissions is the first step to managing them effectively, and this legislation provides large organisations with a legal framework, creating the much-needed consistency in emissions reporting that aligns with the existing requirements for quoted companies. The importance of disclosure of consistent, comparable and clear energy and emissions information was also highlighted by the Task Force on Climate-related Financial Disclosures in June 2017, which the Government endorsed in September this year.

These regulations deliver what is known as streamlined energy and carbon reporting—part of a package of changes that were announced in the 2016 Budget with the aim of simplifying what stakeholders view as an overly complex tax and reporting policy landscape. They ensure that reporting on emissions will continue following the early closure of the CRC energy efficiency scheme, while further incentivising energy efficiency and thereby helping to improve productivity and reduce energy bills and emissions across the UK.

I turn now to the regulations. The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 brought in requirements for quoted companies to report their annual greenhouse gas emissions in their directors’ report, alongside an intensity metric, and to disclose the methodology used. The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018—these regulations—introduce a new obligation for these companies to report their underlying global energy use to reflect the true impact of their operations.

These regulations also introduce new requirements for large unquoted companies and large LLPs to report information about their UK energy use and greenhouse gas emissions in so far as it relates to electricity, gas and transport, and to disclose the methodology used in calculation of the relevant disclosures. Additionally, these regulations bring in a new requirement for all the organisations in scope to report on the principal measures taken to increase energy efficiency if any such action has been taken in the organisation’s financial year.

As per the existing requirement for quoted companies, these regulations require the disclosures for companies to be included in annual reports, specifically in the directors’ report. We consider that this will provide visibility of energy efficiency for senior management and transparency for investors and stakeholders, and will enable energy and carbon performance to be aligned with both financial and operational performance. These regulations introduce a new vehicle for reporting energy and carbon emissions information for large LLPs via a new report, the energy and carbon report, to be filed with Companies House alongside an LLP’s annual accounts.

To simplify reporting at group level, if a company or LLP is preparing group accounts and its report is a group report, the company or LLP must make the relevant disclosures on the basis of its energy use and greenhouse emissions and those of its subsidiaries—but only as far as those subsidiaries would themselves be in scope of these regulations. A subsidiary which would itself be required to disclose its energy and carbon information in its directors’ report will not have to do so if the group report meets certain requirements. These regulations apply to financial years that start on or after 1 April 2019.

The Government consulted widely on the policy behind this legislation, receiving responses from a wide variety of stakeholders including businesses, regulators and trade associations. The majority of respondents agreed that mandatory reporting was important and that it should apply UK wide, align with best practice in the UK and internationally and build on the existing mandatory reporting of greenhouse gas emissions by quoted companies and mandatory energy audits under the Energy Savings Opportunity Scheme. However, there was also a strong message that the Government should not be imposing unnecessary administrative burdens on UK business.

To balance these concerns with the overall objective of increasing transparency and improving consistency of energy and carbon reporting, the provisions contained in these regulations have undergone a number of refinements, such as the introduction of a minimum energy use threshold for the full disclosures, enabling organisations using domestic levels of energy to meet their obligations by simply confirming that they used 40 megawatt hours or less of energy in the reporting period.

We have also introduced the ability for unquoted companies and LLPs to state where they have not disclosed the information required under these regulations on the grounds that it would not be practical to obtain the information, or if, in what we expect would be exceptional circumstances, the directors or members think that disclosure would be seriously prejudicial to the interests of the organisation.

These regulations strike the right balance between disclosure of energy and carbon information by organisations and limiting the administrative burden. In line with the Government’s goal of enabling businesses and industry to improve energy efficiency and contribute to the goals of our clean growth and industrial strategies, consistent, transparent and comparable reporting will ensure that businesses make informed investment decisions in their preparations for a low-carbon future—an appropriate goal in Green Great Britain Week, which we are in at the moment, when we are showcasing the benefits of clean growth and what it will bring to all parts of society. I commend the regulations to the Committee.

My Lords, I thank the Minister for going through the detail of this instrument. It is Green Week and I suppose we ought to welcome that. To put this in perspective, the thing I would really like to do during Green Week is go through actual hard legislation that will determine how we meet our fifth carbon budget, rather than something that is very worthy in many ways but concerns the details of medium-sized companies or non-listed companies doing some carbon reporting mandatorily. But there we are; we are where we are and I welcome the fact that we are extending carbon reporting. As the Minister said, we were in the lead as a nation in 2013 by having carbon reporting for listed companies in the UK, which is good. Where we have led, others have followed.

We have to remember, as the Explanatory Memorandum says so well, that this is part of a broader package announced in the 2016 Budget where the death knell of the carbon reduction commitment as I know it—I know that it got a different name latterly—was announced. I was always very sad about that scheme, because when it originally came about it was to look at that tier of commercial business that was not captured by the EU ETS. It was brilliantly designed before it was launched so that it was taxation-neutral and rewarded those companies at the top of the league table that had done best in carbon and energy savings while penalising those at the bottom. There were incentives and, like all good energy taxation, it was neutral overall. Unfortunately, by the time it was introduced it was taken over by the Treasury and became a tax-raising regime that had all the complications that the Explanatory Memorandum goes through. I can see that that scheme became a burden for industry when it was effectively just a method of taxation rather than a proper method of incentivising through league tables and having good performance.

There is something I would be interested in understanding from the Minister. I know it is in the figures, but I found them quite difficult to go through—although I see the figures very clearly on the financial savings of the sector, which I agree are important. What is the net estimated carbon saving or deficit with this overall package of raising the climate change levy taxation rate and getting rid of the CRC and bringing in this management information system? I think that it is in the figures, but there was a whole range of figures and I found them very difficult to understand. I hope that the carbon savings are still positive because of that. I would be disappointed if they were not.

I am interested in the term “streamlined”, because going through the detail I was unclear whether it meant “rough estimate” or “back of the envelope” rather than the proper way that these things are calculated. I presume it is the latter but I am interested in the term “streamlined”.

The Minister mentioned global reach on these figures. As we know, the long supply chains in industry these days are one of the problems for carbon reporting. It can be relatively straightforward for corporates and large companies to estimate and publish their emissions, but one of the major ways in which any corporation can reduce its emissions is through offshoring or subcontracting more of its supply chain to suppliers. I would like to understand whether these figures include supply chain emissions and how the Government see themselves coping with that issue in future. I understand that it is not an easy question, and I am not suggesting that it has an easy answer. I would be interested to know how the Government see that area working as part of their broader green growth strategy.

Lastly, the Minister mentioned ESOS, a European scheme which is very useful in this area. Perhaps he can assure us that the scheme will continue post Brexit.

I, too, thank the Minister for his introduction to the regulations. Although limited in scope and somewhat technical, they are crucial to highlighting and building energy efficiency into everyday activities. We greatly welcome that.

As the Minister said, the regulations introduce mandatory requirements on emissions, energy consumption and energy efficiency action for large, unquoted companies. They also extend the reporting requirements for quoted companies to bring both, along with large limited liability partnerships, in line with common reporting requirements. Such organisations must set out their activities and performance in each year’s annual report. The intention of the changes is to compensate for and extend the reporting requirements previously obligated by the carbon reduction commitment, which is to end in April 2019. The new reporting requirements are to be in place after that date.

I have always thought that an organisation’s annual report is a very important document that sets out its strategic direction and how it has performed against its objectives. It should be a good promotional tool for its activities. Last week, the Intergovernmental Panel on Climate Change brought out a special report to warn again of the dangers of climate change without serious corrective action being taken on emissions, decarbonisation and energy efficiency. Previously, Labour supported and advocated companies reporting their activities in a coherent regime.

Regrettably, although the new measures are welcome they do not exactly replicate all that was in place under the carbon reduction commitment. Primarily, there was a league table of companies’ performances alongside the report. In the regulations, there is no measure of comparative performance and no means of producing such comparisons other than by a time-consuming and expensive trawl through all company reports, which may—or, more likely, may not—be reported in strictly comparable terms. While the regulations are prescriptive regarding what should be reported and how, there appears to be some leeway in the regulations whereby reports could mislead or be non-comparable in their meaning, particularly in terms of the possible distribution of reporting among subsidiaries of the main company. Does the Minister recognise the deficiency that there will be a lack of full comparability of reports because of the absence of a mechanism to allow performance to be compared and graded?

As what gets measured gets attention, how are companies to understand how they compare to their peers? Surely the full impact of these energy use indicators in annual reports is not being utilised as a competitive challenge for improvement. As the clean growth strategy states, businesses need measures,

“to improve their energy productivity, by at least 20% by 2030”.

The CRC was due to run until 2043. Here I echo the questions asked by the noble Lord, Lord Teverson, in his analysis of the CRC and its workings. The impact assessment outlines that the policy will be reviewed in 2024. That is some time away, especially given the timeframe in which the intergovernmental panel stresses mitigating measures need to be taken. How will any comparative analysis take place under these regulations? Indeed, will the Government undertake any analysis of the results of this reporting prior to 2024, and how will they measure success? Will government incentives be brought to bear on poor performance, not merely on reporting?

While we are in favour of these regulations today, there are nevertheless serious issues to address in which these regulations have perhaps not been as constructive as they might have been. Climate change is one of the most pressing issues of our age. The intergovernmental panel issued a special report last week between its fifth and sixth reports to underline its most recent assessment that there could be a very limited number of years, may be as few as 12—that is, until 2030—in which the world’s increase in temperature could be limited to less than 1.5 degrees above 1990 levels. I thought it was strange that the Conservative Government came out with a Ministerial Statement on Monday extolling all the achievements that have been secured when we all know that greater progress was made under previous Labour Governments and even under coalitions. Indeed, under the Conservative Government from 2015 progress has slowed, with a litany of cuts and policy reversals that I need not list at length today. Suffice to say that the UK is possibly no longer on track to meet the fourth, but more definitely the fifth, carbon budget.

I have one question for the Minister on the Government’s Statement on Monday. Labour has a policy of net zero emissions above 1990 levels by 2050, subject to the advice of the climate change committee. On the back of the report last week the Government have asked the CCC to advise on when and how we could achieve a net zero target. Whether they have precluded the CCC assessing and issuing immediate advice, it must advise on actions to secure net zero emissions to start at the end of the fifth carbon budget. That carbon budget is set to conclude in 2032. So the CCC cannot issue guidance or recommendations to begin until two years after the IPCC estimates that the world will be in a dangerous condition, recording in excess of its maximum 1.5 degrees above 1990 levels. The CCC advice will need to work hard and fast to secure a net zero target by 2050. I ask the Minister to answer on this feature of Monday’s announcement. Do the Government have some strategic assessment by which they have decided to limit the CCC’s advice until after 2032? The Government’s self-congratulatory words must be met by coherent and comprehensible policies. Winning slowly on climate change is the same as losing.

My Lords, I thank both noble Lords for their interventions. I rather regret the unnecessarily party-political line that the noble Lord, Lord Grantchester, took. Perhaps he could instead have taken that by responding to Monday’s Statement, which we offered to the Opposition but they did not wish to have it repeated in this House.

I welcome the fact that the noble Lord, Lord Teverson, highlighted that it is Green Week. I think the Government have been doing their bit to highlight the achievements that we have made in Green Week. I hope the noble Lord, Lord Grantchester, has received a number of invitations to some of the events that we have been holding to highlight the achievements of this Government, the previous coalition Government and—dare I say it, on this occasion, because, unlike the noble Lord, I do not want to be party political—the Labour Government who left office in 2010. In 2008 that Labour Government brought in the Climate Change Act, which had cross-party support. The noble Lord will find that Ministers—I am going way beyond the regulations, but it is worth getting this on the record—have been making it quite clear that over the past 10 years this country, again with cross-party support with the Labour Government, the coalition Government and the Conservative Government, has achieved great things on this front, particularly when he compares what we have done in carbon reduction with other G7 countries. Would he have liked us to have followed the route of Germany, which is now burning more coal than it has for many years while we are on the road to seeing coal disappear from energy generation by 2025? It is down to some 7% of our energy needs at the moment from 40% only a few years ago. The Government are very proud of those great achievements but we also pay tribute to the Labour Government who brought in the 2008 Act and the coalition Government, of which I was a part and the noble Lord, Lord Teverson, was a supporter. So in this green Britain or green UK week, whatever its long-winded title is, let us pay tribute to what we have dealt with as a country.

Turning to the regulations—it is important that we stick to the subject—I hope I can answer a number of questions and make it clear to the noble Lord, Lord Grantchester, that we will keep this under review and analyse how it has gone on, just as we did with the original regulations brought in in 2013. These regulations now extend them to other organisations and we will want to see how they develop and what they achieve. We want to make sure, as the noble Lord put it, that they not only provide information to potential investors or shareholders but act as a competitive challenge to business to do what it can to achieve a reduction in carbon over the years.

I will deal with some of the more detailed questions. I promise to write in due course after the debate on any detailed points that noble Lords may feel I have not answered. The noble Lord, Lord Teverson, asked what was the overall saving as he was having problems with the figures. The advice I have is that we are hoping that between 2019 and 2035 this could lead to 12.8 million tonnes of CO2 equivalent being removed. That would be equal to 0.75 million tonnes being saved per year. I hope that provides him with the information he wanted.

The noble Lord also asked how the streamlining of energy and carbon reporting is a simplification. A key aim of the package announced in the 2016 Budget, which included a revised reporting framework, was to reduce duplication and simplify measuring and reporting. The Government will deliver this through the abolition of the CRC energy efficiency scheme after the current phase covering emissions to March 2019 ends and the integration of mandatory greenhouse gas reporting by quoted companies into the SECR framework.

We are taking simple approaches that are familiar to organisations to avoid, as far as possible, additional burdens resulting from them having to learn new rules and put in place new processes. The new framework also does not involve CRC’s complex allowance trading aspects.

The noble Lord, Lord Teverson, echoed by the noble Lord, Lord Grantchester, asked whether ESOS would continue. These regulations have no impact on the separate ESOS regulations. Businesses required to comply with ESOS should already be gearing up for the next compliance deadline in December next year. Systems already in place to collect annual energy consumption across buildings, processes and transport for the purposes of ESOS should provide much of the information that organisations will need for their SECR obligations. SECR also strengthens ESOS by requiring organisations to disclose energy efficiency action they have taken, if any, which can include progress with implementation of the ESOS recommendations.

Lastly, I turn to consistency of reporting. That was a query from the noble Lord, Lord Grantchester. Moving from a number of established schemes to a specific single methodology could have added significant costs for a number of organisations that are already reporting. This goes back to the point about balance I made earlier. While we have not specified in the regulations specific methodologies to be used, we will set out in the guidance what we consider to be good practice, in particular to improve transparency and consistency of reporting when considering issues such as on-site generation, green and renewable energy tariffs, business travel, carbon off-setting and the increasing prevalence of ultra-low emission vehicles.

I appreciate that that does not deal with every detailed point put to me by noble Lords, but I offer to write in due course.

I do not want to prolong this, but will part of that be on supply chains and how the Government see they should be incorporated into carbon reporting?

I notice exactly what the noble Lord says. It would be very difficult for these regulations to include supply chains, but it obviously is a relevant matter. If we close down one business and shift the thing overseas we do not achieve anything for the world as a whole. Obviously it needs to be considered how it could be done, but that is another matter. I will write in greater detail to the noble Lord.

I believe that what we are offering offers simpler, better energy and carbon reporting and will encourage compliance by companies and LLPs to support the transition to the low-carbon economy that we wish. It will deliver long-term benefits across the UK and throughout the world. I commend these regulations to the Committee.

Motion agreed.