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Disclosure of carbon emissions has experienced exponential growth in recent years. An increasing awareness about climate change and the effect it has on business and society at large, paired with an ever demanding responsible investment community intent on including such issues into their investment strategies are key drivers for corporate reporting. Countries around the world are developing sustainability reporting policies and regulations, specifically for environmental issues. Backed by government initiatives, including regulatory changes impacting ESG disclosure, new rules for stock exchanges, legal advancements such as environmental protection laws and emission reduction requirements, voluntary reporting guidelines have slowly but surely started to transform into mandatory requirements.
Human activities such as burning fossil fuels, industrial processes, deforestation, agriculture, and transportation result in the release of greenhouse gases (GHG) into the atmosphere. GHGs, including carbon dioxide (CO2), methane (CH4), nitrous oxide (NO) and chlorofluorocarbons (CFCs) are considered to be the leading contributors to the greenhouse effect, which in turn, is the main cause for climate change.[i] Studies show that over the past 150 years human industrial activities have raised atmospheric carbon dioxide levels from 280 parts per million to 379 parts per million.[ii] Despite a few dissenting voices, scientists are gradually coming to a consensus that the build-up of these gases can change the Earth’s climate leading to serious consequences for human health and welfare and for ecosystems, as well as posing significant operational and financial risks to business. Many developed and developing countries recognize the risks posed by climate change and have adopted mandatory measures for the disclosure of corporate GHG emissions as part of their response.
One of the first initiatives was adopted in Japan in 1979. The Law Concerning the Rational Use of Energy, Act on Promotion of Global Warming Countermeasures[iii] requires companies surpassing a minimum threshold of energy use to publicly report their total amount of energy consumption and their GHG emissions to the government. Additionally, the Japanese government issued a GHG Monitoring and Reporting Manual which provides guidance on how to calculate emissions. Canada’s establishment of The Greenhouse Gas Emissions Reporting Program [iv] is another best practice example. The program applies to the largest industrial GHG emitters nationally, requiring facilities that emit 50 kilotonnes of CO2 or more per year to submit reports. Although many similar examples of mandatory reporting exist globally, these regulations fall short because they are only imposed on companies that:
Until recently, no country had imposed regulations regarding GHG emissions reporting on all companies, irrespective of their size, industry, number of employees, etc. The United Kingdom is the exception with the launch of a new requirement to be enacted in October 2013. The new regulation will make it mandatory for all companies incorporated and listed in the UK, officially listed in a European Economic Area or admitted to trading on either the New York Stock Exchange or NASDAQ to include emissions data in their annual reporting.[viii] The UK has made a commitment to cut its carbon emissions to 50 per cent of 1990 levels by 2025 and the UK Department for Environment, Food and Rural Affairs (DEFRA) has estimated that reporting will contribute to reducing CO2 emissions by four million tonnes by 2021.[ix]
Over 1,400 companies will be affected by the new UK requirements. Currently, Sustainalytics covers about 20 per cent of these companies. However, more than 76 per cent of these companies publicly reported their emissions, either in their annual or CSR reports, or to CDP (Carbon Disclosure Project). CDP is an international organization that provides a global system for companies to measure, disclose and manage environmental information. CDP works with market forces, including 722 institutional investors with assets of USD 87 trillion, to motivate companies to disclose and reduce their environmental impact and use of natural resources.
The number of companies reporting their GHG emissions to CDP has grown steadily (see chart below). According to CDP data from 2012, 68 per cent of the companies listed on the FTSE 350 responded to the CDP Questionnaire and 58 per cent disclosed their GHG emissions.[x] In 2014, all companies listed on FTSE 350 will have to publicly disclose all of their GHG emissions. The aforementioned regulations are likely to have a positive impact on the response rate to the CDP and disclosures on emissions.
The evolution of the regulatory framework mentioned above represents a milestone in climate change reporting. Companies are not only required to report their emissions, but they also have to set quantitative targets and deadlines to assess their performance year-over-year. Companies that are not obliged to report this data are encouraged to do so and will likely be included in future legislation. Enhanced reporting opens a door for responsible investors in the UK market, as they will have the opportunity to engage with companies that are more transparent on environmental issues and can make a more well-rounded investment decision. We can only hope that more countries will adopt similar legislation and mandatory reporting will become the norm.
[iii]Global Reporting Initiative, Carrots and Sticks Report 2013, https://www.globalreporting.org/resourcelibrary/Carrots-and-Sticks.pdf.
[viii] Department for Environment Food and Rural Affairs, Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance, June 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206392/pb13944-env-reporting-guidance.pdf.
[ix] Gov.UK, “The UK is the first country to make it compulsory for companies to include emissions data for their entire organisation in their annual reports,” June 20, 2012, https://www.gov.uk/government/news/leading-businesses-to-disclose-greenhouse-gas-emissions.
[x] Carbon Disclosure Project, The Future of Reporting – CDP FTSE 350 Climate Change Report 2012, https://www.cdproject.net/cdpresults/cdp-ftse-350-climate-change-report-2012.pdf.
Junior Analyst, Research Products