In an era where environmental consciousness is no longer a choice but a responsibility, businesses are facing increasing pressure to be transparent about their carbon footprint. As governments worldwide tighten regulations and consumers demand eco-friendly practices, the need for accurate and comprehensive carbon calculations has never been more critical.
The question echoing through boardrooms and executive suites is: Does your business have its carbon calculations ready to report?
Why start carbon reporting now?
Carbon reporting has evolved from a mere trend to a regulatory necessity. Governments and regulatory bodies globally are instituting stringent requirements for businesses to disclose their carbon emissions and sustainability efforts.
Whether you operate in manufacturing, technology, or any other sector, understanding and reporting your carbon impact is becoming a fundamental part of corporate responsibility.
Key regulatory drivers
Several major regulatory frameworks are shaping the landscape of carbon reporting, urging businesses to take action:
1. UK’s Streamlined Energy and Carbon Reporting (SECR):
SECR applies to quoted companies, large unquoted companies, large limited liability partnerships (LLPs), and academy trusts. The criterion for reporting is having a turnover of £36 million or more, balance sheet assets of £18 million or more, or 250 employees or more.
SECR requires companies to collect and report global Scope 1 and 2 GHG emissions. Scope 3 emissions reporting is voluntary, but recommended. In addition, companies must disclose at least one emissions intensity ratio - emissions factors that compare emissions data with an appropriate business metric or financial indicator, such as CO2e per employee or million £ in turnover.
2. UK’s Task Force on Climate-Related Financial Disclosures (TCFD)
In 2022, the UK Financial Conduct Authority (FCA) has made annual TCFD reporting mandatory for over 1,300 of the country’s largest UK-registered companies and financial institutions.
TCFD reporting focuses on four key areas: governance, strategy, risk management, and metrics and targets. The framework requires organisations to provide their Scope 1 and Scope 2 greenhouse gas emissions independent of a materiality assessment, and, if appropriate, Scope 3 emissions and the related risks.
3. EU’s Corporate Sustainability Reporting Directive (CSRD)
The new CSRD law came into force on 1st January 2024. It requires all large companies and listed SMEs that operate in the EU to report on their climate impact – and begin publishing regular reports in 2025 for the financial year 2024. This applies to EU companies that meet two of the criteria – $40 million in net revenue, $20 million in assets, or 250 or more employees – and non-EU companies that have considerable activity in the EU including a physical presence.
The CSRD establishes a baseline of reporting for all companies. That includes the full climate requirements, which go further than the TCFD framework, which they are based on. They include measurement and disclosure of a company’s full Scope 1, 2 and 3 emissions, an assessment of climate risks, and policies related to climate change mitigation and adoption.
4. UK’s and EU’s Carbon Border Adjustment Mechanism (CBAM)
The UK government announced that it will introduce a CBAM by 2027. It will establish a carbon tax on imported goods targeted at a series of key emissions-intensive industries, with the purpose of equalising the carbon price paid by UK producers with those outside the UK and avoiding “carbon leakage” or the shifting of production of carbon-intensive goods to jurisdictions with less stringent emissions reduction policies.
Further detail, including the precise list of products in scope, will be the subject of consultation in 2024. But in a nutshell, the UK CBAM means that emissions tracking across complex supply chains will become more important than ever. And high-quality product carbon footprints will be increasingly needed by businesses to remain compliant.
In an attempt to halt carbon leakage, the EU recently adopted a CBAM to equalise carbon prices on imports with its own ETS system. While carbon pricing under EU CBAM will commence on January 1, 2026, a transitional phase is set until the end of 2025, during which only reporting obligations will be enforced.
5. UK’s Sustainability Disclosure Requirements (SDR)
SDR represent the UK's ambitious move into the world of sustainable finance and corporate responsibility. At its core, the SDR is a comprehensive regulatory framework that mandates companies and financial institutions to disclose their impacts, both positive and negative, on the environment and society.
In August 2023, the UK Government introduced the UK Sustainability Disclosure Standards (SDS) within the SDR framework. The SDS will set out corporate disclosures on the sustainability-related risks and opportunities that companies face. They will form the basis of any future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change.
UK SDS will be based on the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB). By using the IFRS Sustainability Disclosure Standards as a baseline, the aim is for the information companies disclose under UK SDS to be globally comparable and decision-useful for investors.
6. International Sustainability Standards Board (ISSB)
The ISSB was formed by the International Financial Reporting Standards Foundation (IFRS Foundation) to sit alongside the International Accounting Standards Board (IASB). The goal is to provide a globally consistent set of baseline standards for sustainability-related financial disclosures that can be adopted worldwide.
In March 2022, the ISSB released drafts of its first two proposed Standards: IFRS S1 and IFRS S2. IFRS 2 requires companies to disclose absolute gross greenhouse gas emissions generated during the reporting period, measured in accordance with the Greenhouse Gas Protocol, across Scope 1, Scope 2 and Scope 3 emissions.
7. EU’s Corporate Sustainability Due Diligence Directive (CSDDD)
The European Commission, via its proposed Corporate Sustainability Due Diligence Directive (CSDDD), has put forward a legislative framework to oblige companies — including those in financial services — to demonstrate what action they are taking to protect the environment and human rights.
If adopted, the CSDDD would oblige companies to conduct due diligence not just on their own operations, but also on the activities of their subsidiaries and other entities in their value chains with which they have direct and indirect established business relationships.
What steps can you take to ensure your business is ready for carbon reporting?
Understand applicable regulations: Stay informed about the specific reporting requirements relevant to your industry and location. Subscribe to informative news outlets and set Google alerts for the climate legislation your business could be subject to in the future.
Conduct a carbon audit: Evaluate your carbon emissions across Scopes 1, 2, and 3. It’s important to be ready for disclosure requirements when they come and to not fall behind. Investing in specialised tools and professional help to conduct assess your carbon footprint could save time and resources, whilst providing confidence in your results.
Invest in data quality: Strengthen data collection processes to ensure the accuracy of your environmental data. Consider implementing software solutions that streamline data management. Make sure to assign responsibility and accountability for each data collection area.
Stay flexible: Prepare for changes in regulations and reporting standards. Maintain a flexible reporting infrastructure that can adapt to evolving requirements. Utilising a carbon accounting software solution can mitigate the risk of being static when it comes to calculations and processes. Be strategic, forward thinking and understand that carbon management is a journey.
Communicate transparently: Embrace transparency in your reporting. Clearly communicate your emissions, reduction initiatives, and sustainable practices to build trust with stakeholders – both internally and externally. Invest in employee upskilling to ensure your workforce understands the importance of carbon data collection and reporting.
Conclusion: Charting a sustainable course
As organisations embark on the crucial journey of disclosing their carbon footprint, it’s important to remember that beyond regulatory mandates, transparent carbon reporting emerges as an indispensable step toward fostering a sustainable business. Embracing this responsibility not only ensures compliance but positions businesses as trailblazers in an era where sustainability is the cornerstone of corporate resilience and success.
By demystifying the complexities of carbon reporting and committing to climate action, businesses can forge a path toward environmental accountability and stakeholder trust, contributing to increased market competitiveness and enhanced investment opportunities.
Find out more about how we can support your business with its carbon reporting - reach out to our expert team.