Out-Law Analysis | 11 Oct 2018 | 4:45 pm | 6 min. read
The introduction of SECR dovetails with the end of the carbon reduction commitment (CRC) on the same date, although there are several differences between the application and coverage of SECR in comparison to the CRC.
The new regime will apply, subject to exemptions and exclusions, to quoted and unquoted companies and limited liability partnerships (LLPs) ('relevant organisations') in the UK:
As a very rough guide, 40,000kWh worth of energy means that a relevant organisation could be affected if they use anything more than about £4,000 worth of energy in the relevant financial reporting year, although obviously this will vary between different energy sources.
We also understand that for a typical open plan, naturally ventilated office space, using benchmark data for energy intensity, the threshold for energy usage would be equivalent to a floor area of only 160 to 300 m2. For a 'prestige' air conditioned office, the floor area could be as low as 70m2.
All quoted companies that pass the energy threshold are covered by the scheme and there are additional threshold tests for unquoted companies and LLPs. There is no 'de minimis' level of emissions once relevant organisations pass the thresholds for the scheme. This means that relevant organisations will be required to report on all energy use and emissions, regardless of the level for each individual category.
Relevant organisations impacted by the SECR will need to prepare for its application and put in place monitoring and reporting systems capturing relevant energy information in time for the start of the scheme. There is no prescriptive methodology for reporting, so this will need to be considered by participants and appropriate systems put in place.
SECR has been criticised for its administrative complexity. As an example, specific concerns have already been raised around reporting for organisations with complex structures, overlaps with existing carbon reporting schemes, the scope of emissions to be covered by SECR and the lack of guidance on the reporting methodology that will be required.
The legislation is incredibly difficult to understand and guidance is not expected until January 2019, just three months before the SECR comes into force. The SECR overlaps with other existing carbon reporting requirements, but has different reporting timelines and requires reporting of different energy usage. This will cause more difficulties for relevant organisations.
It is an offence for relevant organisations to fail to meet their SECR obligations. Offences may be committed by the directors of quoted and unquoted companies, and by the members of LLPs.
This article summarises some of the main provisions of the SECR, and flags expected problems with the scheme. Please see our detailed guide to the SECR (12-page / 1.73MB PDF) for further information.
Why is SECR being introduced?
The intention of SECR is to use public disclosure of energy and carbon data to:
Who will SECR apply to?
The SECR obligations will be imposed on:
The obligations will be imposed by the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (the Regulations).
What must be reported?
There are subtle differences between quoted and unquoted companies in what energy needs to be reported, and between those companies and LLPs.
Quoted companies will be required to make statements in the directors' report concerning the company's greenhouse gas emissions and energy use from:
They will also be required to report on action taken to increase their energy efficiency.
The reporting requirements apply to all energy use for which the company is responsible, and also the proportion of these figures that relate to emissions in the UK and its offshore area.
Unquoted companies will be required to make statements in the directors' report concerning the company's greenhouse gas emissions, energy use and action taken to increase energy efficiency within the UK.
Where large unquoted companies' activities consist wholly or mainly of offshore activities, the company must also include certain activities in the offshore area. As a result, these obligations will introduce new difficulties for oil and gas companies. Otherwise, emissions and energy consumed outside of the UK are excluded.
From the second year of the SECR onwards, quoted and unquoted companies must also include in the relevant year's report the SECR information from the previous year.
LLPs which meet the threshold tests and do not satisfy one of the exemptions are required to prepare a consolidated energy and carbon report each year, relating to the undertakings included in the consolidation.
In the case of large LLPs, the energy and carbon report must include statements concerning the LLP's greenhouse gas emissions, energy use and action taken to increase energy efficiency in the same manner as is required of unquoted companies.
Energy reporting information for subsidiaries that are quoted companies, unquoted companies or LLPs must be reported by their parent companies, and there are various provisions relating to how this works set out in the SECR that we will not go into in detail here.
Guidance is expected to clarify organisational groupings for the purposes of SECR, although the government has stated that it expects group reporting will follow the model adopted for CRC.
What emissions are covered by the SECR?
The regulations define "energy" as all forms of energy products, and "energy products" as combustible fuels, heat, renewable energy, electricity or any other form of energy.
The definition of energy set out in the regulations is much broader than that previously used by the CRC and ESOS, although ESOS already covers transport. The addition of heat, renewable energy and transport, which was specifically excluded from the CRC, means that companies will have to review and revise their energy reporting and put in place new systems to capture this information, potentially from 1 April 2019 onwards.
"For the purposes of transport", as used in the reporting obligation, means for consumption by an aircraft, road-going vehicle, train or vessel during the course of any journey which starts, ends or both starts and ends within the UK. The government has so far not provided any indication on how transboundary journeys will be treated.
The definition of transport means that aircraft companies, haulage companies, train operators and boat companies will all be impacted by the SECR's reporting obligations. It also seems to include 'grey fleet' fuel usage, where companies reimburse their staff for use of their own cars for business purposes.
What are the exemptions and exclusions from the SECR?
Quoted companies, unquoted companies and LLPs are exempt from the reporting requirements if they consume 40,000kWH of energy or less during the period in respect of which the directors' report is prepared. They must state in the report that the information is not disclosed for that reason.
Quoted companies can claim an exemption if disclosure would, in the opinion of the directors, be seriously prejudicial to the interest of the company. They must state in the report than the information is not disclosed for that reason.
Unquoted companies can claim an exemption if disclosure would be impractical, however they must explain in the report what information is not included and why.
The government expects that organisations covered by the SECR will carefully consider the reputational implications of choosing to use these two exemptions. However, their incredibly broad drafting will mean that many could choose to argue that the exemptions are applicable.
There are three additional exclusions set out in the regulations. These state that the company may exclude from the report any information which relates to a subsidiary undertaking that is:
Areas of concern
The SECR Regulations have been laid before government, so there will not be any further consultation on the drafting of the regulations. They will come into force as they stand subject to parliamentary approval.
The government team working on the regulations has suggested that any issues will be resolved through the guidance, which they are expecting to be finalised by January 2019. As we have highlighted a number of difficulties with the SECR as currently drafted, we have concerns about how issues will be resolved through guidance; however the guidance should at least bring some clarity on how government expects the framework to apply in practice.
Georgie Messent is an environmental law expert at Pinsent Masons, the law firm behind Out-Law.com.