Many in the private equity sector will be familiar with the UK’s complex and burdensome CRC scheme. Introduced in 2010 as the Carbon Reduction Commitment (later amended and renamed CRC Energy Efficiency Scheme), CRC comprised both a tax and a reporting requirement. It was particularly problematic for any private equity fund with investments in the UK because of its expansive grouping rules, and there was considerable relief when its abolition was announced in 2016 (although, of course, most of the costs of complying with the scheme had already been incurred by then). CRC has not yet been consigned to history – the final reports are due by 31 July next year – but firms now need to focus on its various successor schemes, which will build on both the tax and reporting elements.
Increases in the Climate Change Levy will ensure that the government is not out of pocket when CRC ends, and that companies still have financial incentives to reduce emissions. The Energy Savings Opportunity Scheme (ESOS), implementing pan-EU rules, has also required certain companies to undertake energy audits since 2015, and (like CRC) has troublesome aggregation rules. But the new reporting requirements for UK incorporated companies (and limited liability partnerships) have now been finalised and will require many businesses – many more than under CRC – to make fairly detailed reports on energy consumption in their accounts for financial years beginning on or after 1 April 2019.
It is inevitable that climate-related disclosures will become increasingly onerous for business. And, in a week when high-level inter-governmental meetings in Poland are reviewing progress against the targets set out in the Paris Agreement, most governments could be criticised for not yet going far enough. It is notable, for example, that the UK’s new reporting scheme – known as the Streamlined Energy and Carbon Reporting regime (or SECR) – has not adopted the recommendations of the international Task Force on Climate-related Financial Disclosures (TFCD), and has instead opted for somewhat lighter disclosures. (The government is separately looking at ways in which it can encourage or mandate compliance with the TCFD recommendations in the longer-term.)
The SECR rules were finalised last month, although guidance on some of the trickier questions that are left unanswered by the legislation is not expected until early next year.
The SECR will apply to all quoted companies and to large unquoted UK companies and LLPs. The usual definition of “large” is adopted, so that a business will be in scope if it meets two or more of the following tests: more than 250 employees; balance sheet assets exceeding £18 million (€20m); turnover of more than £36 million (€40m) (with some adjustments for group accounts). But the good news is that the aggregation rules are a lot more sensible than under CRC, and separate portfolio companies should be treated separately. Companies preparing group accounts will still have to prepare aggregated reports, and that seems like a sensible approach: too little aggregation allows businesses to hide the true picture, but too much makes the reports rather meaningless, and brings small businesses into scope unnecessarily.
Unquoted companies will be required to disclose the number of tonnes of carbon dioxide emissions generated by certain activities of the company, the amount of energy consumed in kWh, an “intensity metric”, and details of any measures taken to improve energy efficiency. Low energy users are exempt. Companies will also note that these disclosures are additional to the narrative reporting requirements that already apply to many UK companies.
Adjusting to new rules is always costly, and these will be no exception for the many UK portfolio companies that will be in scope. But regulatory and investor pressure will mean that climate-related disclosure requirements will only grow in the coming decade, and private companies will not be immune from the increasing compliance obligations.