Thursday, May 23, 2013

Greenhouse Gas Reporting - The IEMA/ICAEW Webinar 22nd May 2013

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For major companies, greenhouse gas reporting is due from 1st October. Today’s webinar, hosted by the Institute of Environmental Management and Assessment and the Institute of Chartered Accountants in England and Wales, laid out the key issues.

First we had a rundown of the statutory requirements from Carla Hopkins from DEFRA. The companies involved are all those incorporated in the United Kingdom and listed either on the London Stock Exchange, a European stock exchange or the New York Stock Exchange. There will be about 1,000 of these, all required to report on their annual emissions of CO2 equivalent. This covers all six Kyoto gases and all emissions throughout the organisation’s global operations. In broad terms these are the companies’ Scope One and Scope Two emissions, although the legislation does not define them in these terms. The company must also quote one or more intensity ratios and explain the methodology used to obtain the results. It is up to companies to decide which emissions they are responsible for and they can use data from other schemes such as the carbon reduction commitment or the EU ETS, although the scope of those schemes is different from the scope of greenhouse gas reporting. They may choose to use different intensity ratios for different parts of the business. From Year 2 onwards reports must show the previous years’ results for comparison purposes. Reports will be audited and the auditors must confirm that the information provided is consistent with the financial statements.

Reporting requirements are effective from 1st October 2013 and relate to all financial years ending on or after 30th September 2013. This means that many companies will already be well through their first reporting year.

DEFRA last issued guidance on greenhouse gas reporting in 2009 and an updated version of the guidance will be available very shortly - see GOV.UK.

The scheme will be reviewed in 2015 when it will be decided whether all large companies, not just quoted companies, should be brought into the scheme from 2016.

A new web-based conversion factor tool will be published on the DEFRA website shortly.

Paul Holland from KPMG spoke about data quality. He said there was a significant risk from imperfect data, that data was important and therefore it was a key task to lower the risk of poor quality data. By comparison with accountancy, sustainability reporting is in its infancy. There is a lack of controls and processes and there is no key indicator of accuracy such as a balancing balance sheet. There is no double entry, no accepted or universal methodology and so far, limited guidance. The old cliché tells us that what gets measured gets managed, but if what is measured is inaccurate then what gets managed is defective as well. Emissions generally arrive from the use of costly resources so managing emissions is a way of managing costs. There is also increasing external interest in the environmental management of organisations as we saw later in Bekir Andrews’ submission from Balfour Beatty. Mandatory reporting now provides a whole new incentive.

Coming from an accountancy firm, it’s perhaps not surprisingly that Paul strongly recommended that finance departments should work with environment departments and vice versa. There is in any case no doubt that accountants are skilled in detailed and forensic analysis of data. Their skills are complementary to those of sustainability and environmental professionals. The objectives of the exercise should be a detailed analysis of the background, identification of opportunities for improvement, emphasis on the greatest risk areas, and a critical assessment of methodologies.

There are many areas of uncertainty, particularly related to large organisations. Given that it’s mainly large organisations that will be involved this is obviously of concern. Examples were how the emissions of joint ventures should be shared out and how intensity metrics should be designed – relating to turnover, to output or what? Whatever is decided, participants should be able to stand firmly behind their methodologies. Then there’s the question of transport. Do you treat owned vehicles in the same way as leased vehicles? What about subcontracted transport? And do you account for the journey where the vehicle returns empty?

Final words of caution. Carbon reporting can take very much longer than financial reporting and time is short. There will be people involved in reporting who’ve never been involved in such activities before and will need training. Paul echoed Carla’s warning that many companies are already well into their first reporting period.

Bekir Andrews from Balfour Beatty explained to us the challenges from greenhouse gas reporting facing a very large organisation. With an £11 billion turnover and 50% of activities overseas the amount of data involved is enormous. There is a wide range of sources of data and it is extremely difficult to obtain data in some jurisdictions. One of the main challenges which he identified was the issue of fugitive emissions. These do not generally come from mainstream production processes and are very difficult to track and analyse. For example, sulphur hexafluoride, one of the six Kyoto gases, is used as an insulator in switchgear. 1 kg of this gas has the same effect as 28 tons of CO2 and will persist in the atmosphere for 3,200 years. Almost as bad are the other Kyoto gases which may leak from air conditioning and refrigeration units.

Bekir spoke about managing data and the issue of baselines. As mentioned earlier, from Year 2 onwards the data has to be compared with the previous years. In a large group, corporate acquisitions and disposals can alter this baseline radically. Again he brought up the issue of training, because those who collect and verify the data must have a clear methodology and guidance documents. Quite apart from the benefit of compliance there are a number of other positive aspects to the whole process. Reducing emissions will in most cases reduce costs. It will reinforce relationships with suppliers and clients and it will enhance the corporate reputation. Nevertheless there are challenges. Fugitive gases have already been mentioned. The treatment of energy received from the landlord is different within the Greenhouse Gas scheme from the treatment within the Carbon Reduction Commitment. Electricity may be sub-metered, but heat provided from a central boiler in a communal office block will be much more problematic. There are different international benchmarks, there will be difficulties in making estimates in some areas and inevitably there will be costs involved in validation and data collection. He emphasised too, that time is short.

In summary, there’s lots to do and a surprisingly short time left for most participants. Of course, it only involves 1,000 companies and yours may not be one of them. However, by 2016 your company too may be drawn into the net. At present, unlike CRC or ETS, there are no carbon credits to buy. But have you ever known George Osborne miss an opportunity for more tax?

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