Large European companies are required to report on environmental issues in one way or another under both European and, in some cases, national law. A relatively new European Directive regulating non-financial reporting establishes a baseline standard, but some countries have been going further – the UK in particular. Now the British rules are changing again, but for the private equity community there is reason to hope that the new regime will be an improvement.
Many private equity firms investing in the UK will be wearily familiar with the initials “CRC”. This acronym – standing for Carbon Reduction Commitment Energy Efficiency Scheme – designates a set of rules originally introduced in 2010, and then significantly amended in 2013, which require many private equity portfolios to collect and report on their aggregate energy consumption, and to buy allowances for their implied carbon dioxide emissions.
The scheme is an administrative nightmare. Working out which companies are within the private equity portfolio for reporting purposes is hard enough – the BVCA even consulted counsel to help members navigate the complex legal rules – and allocating the costs of allowances across the portfolio can also be tricky. Even worse, the separate Energy Savings Opportunities Scheme (ESOS) – introduced in 2014, requiring some companies and portfolios to conduct energy audits – has different qualification criteria. And, although in both schemes it is possible to remove some companies from the “group” – so that they comply on their own account, different disaggregation rules apply to ESOS and the CRC, further increasing the compliance headaches.
Recognising the red tape associated with the CRC scheme, the UK government announced last year that it would abolish it in October 2019, replacing it with a new reporting regime. The lost revenue will be recouped by increasing the amounts payable under the existing Climate Change Levy (which applies to most UK businesses). ESOS will remain in place, unchanged.
Abolition of the CRC is welcome. But, until now, there has been little information on what might replace the CRC’s reporting requirements. Earlier this month, that became a little clearer when the British government published a consultation on a completely new reporting scheme (with a request for comments by January).
These proposals would extend the reporting framework that already applies in the UK, and would also apply the obligation to large UK private companies or corporate groups. The government offers three different suggestions for how to determine whether a private company is required to report its emissions, and is seeking views on which approach to adopt. Essentially, the question is whether the reporting requirements should apply to all ‘large’ companies (using employee, balance sheet and turnover tests), or only to companies that use more than a certain amount of electricity per year. Unquoted companies would also benefit from a less onerous reporting requirement than their publicly traded counterparts: instead of greenhouse gas emissions, they would only have to report on the electricity, gas and transport-related emissions for which they were responsible. Reporting of indirect emissions released within the company’s supply chain will remain voluntary.
There is still some way to go before these proposals are finalised, and 18 months before they are implemented. But, as well as offering the prospect of a simplified reporting framework, the new regime – if the aggregation rules are drafted more appropriately – may offer private equity fund managers some relief from the burdens imposed by the CRC.