Draft Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

Claire Perry Excerpts

Thursday 25th October 2018 General Committees

[The Minister for Energy and Clean Growth (Claire Perry)]

I beg to move,

That the Committee has considered the draft Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.

It is always a pleasure to serve under your chairmanship, Mr Stringer. The principle behind the draft regulations is one that we would all support: encouraging good behaviour. What gets measured gets managed, and sunlight is a great disinfectant.

The draft regulations will introduce new requirements for large unquoted companies and large limited liability partnerships, and additional requirements for quoted companies of all sizes, to disclose in their annual report information on emissions, energy consumption and energy efficiency action. They will deliver streamlined energy and carbon reporting, as part of a package of changes announced in the 2016 Budget with the valuable aim of simplifying what some stakeholders saw as an overly complex tax and reporting policy landscape—a point of view with which I have great sympathy. They will also ensure that reporting on energy and associated emissions continues after the closure of the carbon reduction commitment energy efficiency scheme at the end of its current phase.

After Green Great Britain Week last week, the Committee will need no reminding that Britain has led the world in introducing measures to reduce greenhouse emissions. That was thanks to an awful lot of cross-party work—long may that continue. Our emissions intensity reduction by unit of national income is at the top of the G20 measurement league; those are not my figures, but those of PwC. One reason for that success was that in 2013 we were the first country in the world to make it compulsory for quoted companies’ annual reports to include emissions data for their entire organisation.

In September 2017, we were one of the first countries to endorse the recommendations of the brilliant Task Force on Climate-related Financial Disclosures. The taskforce, which was set up by the Bank of England, called on companies and financial institutions to implement “decision-useful” disclosure of energy and emissions information in their mainstream financial reports, so that shareholders, investors and employees can clearly understand the risks from changes in climate.

Our clean growth strategy looks at the other side of the problem. Reporting on emissions should encourage companies to take action to reduce them, so we have set out several measures for leading global efforts to cut greenhouse gas emissions by working with businesses, with the aim of improving energy efficiency in business and industry by at least 20% by 2030. In order to take action, however, organisations must know the quantum of the problem, and the first step is measuring energy use and emissions.

The draft regulations will provide an estimated 11,900 organisations with a legal framework, creating much-needed consistency in organisational energy emissions reporting. We estimate that that will lead to savings for businesses of more than £250 million a year in average energy bills.

The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 introduced a requirement for approximately 1,200 quoted companies to state in their directors’ report their annual greenhouse gas emissions alongside an intensity metric, and to disclose the methodology used. The draft regulations will introduce a new obligation for those companies to report their underlying global energy use, to better reflect the true impact of their operations.

The draft regulations will also introduce new requirements for more than 10,000 large unquoted companies and large LLPs to report information about their UK energy use and greenhouse gas emissions in relation to electricity, gas and transport, and to disclose the methodology used to calculate the relevant disclosures. They will further introduce a new requirement to report on the principal measures that the organisation has taken to increase energy efficiency in the financial year. As per the existing requirements, those disclosures are to be included in annual reports—specifically, the directors’ report for companies and a new energy and carbon report for LLPs. We believe that not only will they provide improved transparency for senior management, investors and stakeholders but will enable energy and carbon performance to be in line with both financial and operational performance. Companies might well take interesting learnings from considering what other peer group companies are doing.

If approved, the regulations will be introduced for financial years starting on or after 1 April next year. As always, we consulted widely on the policy and we received 155 responses. The majority of respondents agreed that mandatory reporting is important and that it should apply UK wide, be aligned with best practice in the UK and internationally, and build on the existing mandatory reporting of greenhouse gas emissions by quoted companies and mandatory energy audit under the energy savings opportunity scheme.

There was a very strong message that Government should not impose undue regulations and administrative burdens on UK businesses. The provisions contained in these regulations have gone through a number of refinements to meet that aim, such as the introduction of a minimum energy use threshold for the full disclosures. We have introduced the ability for unquoted companies and LLPs to introduce, as sometimes happens with parliamentary questions, a statement that it would not be practical to meet the reporting obligations, because it is impractical to obtain the information or that disclosure would be seriously prejudicial to the interests of the organisation.

In conclusion, we believe these regulations strike the right balance between disclosure of energy and carbon information and limiting the red tape burden, and that they will help to deliver consistent transparent and comparable reporting, to ensure that businesses can make informed investment decisions as we transition to a low-carbon future. I therefore commend the draft regulations to the Committee.

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[Claire Perry]

I thank my friend the hon. Member for Southampton, Test for a characteristically detailed analysis. I have an idea. I imagine that we will be meeting many times over the next few months, on various things, and I thought that perhaps we could enliven proceedings if the hon. Member for Enfield, Southgate taught us all to floss. I was very impressed when I saw his efforts, and that would be marvellous on parliamentary TV.

Turning to the meat of these important regulations, I obviously welcome the support for them expressed by the hon. Member for Southampton, Test. He asked, I think, about why this arrangement is replacing the CRC, but it sounds as though we agree that it is increasing the scope and reducing the burden and this does lead to net cost savings, based on estimates. I am pleased that he welcomes this change.

The hon. Gentleman asked a really important question about what will happen to the data once it is produced. I understand his desire for statutory measures on how the data should be reported. I want to invite him to come with me to something that I am organising about how the world looks at climate-related information disclosure. We had a big event at Bloomberg during Green Great Britain Week, and I was astonished at the amount of analysis and reporting in both standardised and bespoke ways that is happening with all sorts of aspects of climate data, because the audiences for the reporting are very different. Employees might be interested in what their company is doing and will potentially look at the information on a corporate intranet. Government are clearly interested in calculating what the emissions savings are from a particular company. We would be able to query the data remotely, because of course most of this stuff is now in the electronic domain.

There is an enormous and increasingly important raft of activist shareholders and investors whose funds want to align entirely with a low-carbon investment base and who will be relying on analytic platforms such as Bloomberg to grab the information and assess it for them. I think it is rather good that we do not have just one standard way of reporting but are making the information available to a global audience of armchair analysts, who can cut and mash up the data in any way they please. Of course, there are organisations such as BusinessGreen, which both the hon. Gentleman and I have worked with, that will be taking the data and generating their own league tables. I do not think it is for Government to specify how the data is presented. I think it absolutely right that we have made it a mandatory requirement that it be reported, but I imagine that the creative use of the data will be incredible.

I will take away and analyse the hon. Gentleman’s very good point about the league tables, because it would clearly be interesting to see how companies in that group have done over time; we can assess what is happening. We will publish more detailed guidance, and of course any reports that are published will be publicly available from Companies House, which will also act as a repository for all this data.

To pick up the point made by the hon. Member for Inverclyde, I think it is a good idea that if someone is opting out, they say so. I will take advice after the sitting as to whether that is implicit or explicit in the regulations. We have had, on similar measures in relation to some of our offshore oil and gas things, the debate as to what is a material event and what is a prejudicial event; and certainly it would be for companies to be clear about what that is.

My instant support team tell me that we will keep the use of non-disclosure options under review, but I think that we could go further and ask companies to say that they are using the non-disclosure option, without giving away too much information.

I am pleased that we have cross-party support for a very useful and balanced set of measures about disclosure. I am almost amazed by how much scrutiny is happening on a global basis on behalf of investors, including some of our largest pension funds, in determining that their portfolios are investing in companies committed to a low-carbon future.

I will invite the hon. Member for Southampton, Test to my office for a cup of tea when our Bloomberg terminals, which we have in the building, are set up and installed, because perhaps we could have a bit of a tutorial together from Bloomberg on how the information is actually being used. I think that that would be very helpful. With that, I commend the regulations to the Committee.

Question put and agreed to.