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

Lord Teverson Excerpts

Wednesday 17th October 2018 Grand Committee

[Lord Teverson (LD)]

My Lords, I thank the Minister for going through the detail of this instrument. It is Green Week and I suppose we ought to welcome that. To put this in perspective, the thing I would really like to do during Green Week is go through actual hard legislation that will determine how we meet our fifth carbon budget, rather than something that is very worthy in many ways but concerns the details of medium-sized companies or non-listed companies doing some carbon reporting mandatorily. But there we are; we are where we are and I welcome the fact that we are extending carbon reporting. As the Minister said, we were in the lead as a nation in 2013 by having carbon reporting for listed companies in the UK, which is good. Where we have led, others have followed.

We have to remember, as the Explanatory Memorandum says so well, that this is part of a broader package announced in the 2016 Budget where the death knell of the carbon reduction commitment as I know it—I know that it got a different name latterly—was announced. I was always very sad about that scheme, because when it originally came about it was to look at that tier of commercial business that was not captured by the EU ETS. It was brilliantly designed before it was launched so that it was taxation-neutral and rewarded those companies at the top of the league table that had done best in carbon and energy savings while penalising those at the bottom. There were incentives and, like all good energy taxation, it was neutral overall. Unfortunately, by the time it was introduced it was taken over by the Treasury and became a tax-raising regime that had all the complications that the Explanatory Memorandum goes through. I can see that that scheme became a burden for industry when it was effectively just a method of taxation rather than a proper method of incentivising through league tables and having good performance.

There is something I would be interested in understanding from the Minister. I know it is in the figures, but I found them quite difficult to go through—although I see the figures very clearly on the financial savings of the sector, which I agree are important. What is the net estimated carbon saving or deficit with this overall package of raising the climate change levy taxation rate and getting rid of the CRC and bringing in this management information system? I think that it is in the figures, but there was a whole range of figures and I found them very difficult to understand. I hope that the carbon savings are still positive because of that. I would be disappointed if they were not.

I am interested in the term “streamlined”, because going through the detail I was unclear whether it meant “rough estimate” or “back of the envelope” rather than the proper way that these things are calculated. I presume it is the latter but I am interested in the term “streamlined”.

The Minister mentioned global reach on these figures. As we know, the long supply chains in industry these days are one of the problems for carbon reporting. It can be relatively straightforward for corporates and large companies to estimate and publish their emissions, but one of the major ways in which any corporation can reduce its emissions is through offshoring or subcontracting more of its supply chain to suppliers. I would like to understand whether these figures include supply chain emissions and how the Government see themselves coping with that issue in future. I understand that it is not an easy question, and I am not suggesting that it has an easy answer. I would be interested to know how the Government see that area working as part of their broader green growth strategy.

Lastly, the Minister mentioned ESOS, a European scheme which is very useful in this area. Perhaps he can assure us that the scheme will continue post Brexit.

[Lord Grantchester (Lab)]

I, too, thank the Minister for his introduction to the regulations. Although limited in scope and somewhat technical, they are crucial to highlighting and building energy efficiency into everyday activities. We greatly welcome that.

As the Minister said, the regulations introduce mandatory requirements on emissions, energy consumption and energy efficiency action for large, unquoted companies. They also extend the reporting requirements for quoted companies to bring both, along with large limited liability partnerships, in line with common reporting requirements. Such organisations must set out their activities and performance in each year’s annual report. The intention of the changes is to compensate for and extend the reporting requirements previously obligated by the carbon reduction commitment, which is to end in April 2019. The new reporting requirements are to be in place after that date.

I have always thought that an organisation’s annual report is a very important document that sets out its strategic direction and how it has performed against its objectives. It should be a good promotional tool for its activities. Last week, the Intergovernmental Panel on Climate Change brought out a special report to warn again of the dangers of climate change without serious corrective action being taken on emissions, decarbonisation and energy efficiency. Previously, Labour supported and advocated companies reporting their activities in a coherent regime.

Regrettably, although the new measures are welcome they do not exactly replicate all that was in place under the carbon reduction commitment. Primarily, there was a league table of companies’ performances alongside the report. In the regulations, there is no measure of comparative performance and no means of producing such comparisons other than by a time-consuming and expensive trawl through all company reports, which may—or, more likely, may not—be reported in strictly comparable terms. While the regulations are prescriptive regarding what should be reported and how, there appears to be some leeway in the regulations whereby reports could mislead or be non-comparable in their meaning, particularly in terms of the possible distribution of reporting among subsidiaries of the main company. Does the Minister recognise the deficiency that there will be a lack of full comparability of reports because of the absence of a mechanism to allow performance to be compared and graded?

As what gets measured gets attention, how are companies to understand how they compare to their peers? Surely the full impact of these energy use indicators in annual reports is not being utilised as a competitive challenge for improvement. As the clean growth strategy states, businesses need measures,

“to improve their energy productivity, by at least 20% by 2030”.

The CRC was due to run until 2043. Here I echo the questions asked by the noble Lord, Lord Teverson, in his analysis of the CRC and its workings. The impact assessment outlines that the policy will be reviewed in 2024. That is some time away, especially given the timeframe in which the intergovernmental panel stresses mitigating measures need to be taken. How will any comparative analysis take place under these regulations? Indeed, will the Government undertake any analysis of the results of this reporting prior to 2024, and how will they measure success? Will government incentives be brought to bear on poor performance, not merely on reporting?

While we are in favour of these regulations today, there are nevertheless serious issues to address in which these regulations have perhaps not been as constructive as they might have been. Climate change is one of the most pressing issues of our age. The intergovernmental panel issued a special report last week between its fifth and sixth reports to underline its most recent assessment that there could be a very limited number of years, may be as few as 12—that is, until 2030—in which the world’s increase in temperature could be limited to less than 1.5 degrees above 1990 levels. I thought it was strange that the Conservative Government came out with a Ministerial Statement on Monday extolling all the achievements that have been secured when we all know that greater progress was made under previous Labour Governments and even under coalitions. Indeed, under the Conservative Government from 2015 progress has slowed, with a litany of cuts and policy reversals that I need not list at length today. Suffice to say that the UK is possibly no longer on track to meet the fourth, but more definitely the fifth, carbon budget.

I have one question for the Minister on the Government’s Statement on Monday. Labour has a policy of net zero emissions above 1990 levels by 2050, subject to the advice of the climate change committee. On the back of the report last week the Government have asked the CCC to advise on when and how we could achieve a net zero target. Whether they have precluded the CCC assessing and issuing immediate advice, it must advise on actions to secure net zero emissions to start at the end of the fifth carbon budget. That carbon budget is set to conclude in 2032. So the CCC cannot issue guidance or recommendations to begin until two years after the IPCC estimates that the world will be in a dangerous condition, recording in excess of its maximum 1.5 degrees above 1990 levels. The CCC advice will need to work hard and fast to secure a net zero target by 2050. I ask the Minister to answer on this feature of Monday’s announcement. Do the Government have some strategic assessment by which they have decided to limit the CCC’s advice until after 2032? The Government’s self-congratulatory words must be met by coherent and comprehensible policies. Winning slowly on climate change is the same as losing.

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I appreciate that that does not deal with every detailed point put to me by noble Lords, but I offer to write in due course.

[Lord Teverson]

I do not want to prolong this, but will part of that be on supply chains and how the Government see they should be incorporated into carbon reporting?

[Lord Henley]

I notice exactly what the noble Lord says. It would be very difficult for these regulations to include supply chains, but it obviously is a relevant matter. If we close down one business and shift the thing overseas we do not achieve anything for the world as a whole. Obviously it needs to be considered how it could be done, but that is another matter. I will write in greater detail to the noble Lord.

I believe that what we are offering offers simpler, better energy and carbon reporting and will encourage compliance by companies and LLPs to support the transition to the low-carbon economy that we wish. It will deliver long-term benefits across the UK and throughout the world. I commend these regulations to the Committee.