Businesses could be forgiven for being confused by what has jokingly been referred to as the “Alphabetti Spaghetti” of new terms, but that will not protect them from the impact of recent legislation.
The drive towards Net Zero has dramatically increased in recent years with the introduction of several key pieces of legislation across the UK and Europe, along with a slew of new frameworks and compliance standards and, inevitably, a raft of new acronyms and jargon.
Businesses could be forgiven for being confused by what has jokingly been referred to as the “Alphabetti Spaghetti” of new terms, but that will not protect them from the impact of recent legislation.
Ever since the introduction of Streamlined Energy and Carbon Reporting (“SECR”[1]) in the UK in 2019, which mandated the disclosure of energy consumption and Scope 1 and 2 emissions by organisations, the message has been clear – inaction is no longer an option.
Since then, the stakes have been further raised with the introduction of the Corporate Sustainability Reporting Directive (“CSRD”), and more recently the Corporate Sustainability and Due Diligence Directive (“CS3D”) across Europe. These place a much greater burden on large organisations to account for ESG impacts across their entire supply chains, addressing “Scope 3” – or ‘value chain’ – emissions.
And while governments may, for now, have their sights set on the largest businesses to comply with these more complex and far-reaching requirements, the conversation about “Scope 3” is growing louder and it is likely to be only a matter of time before the net is widened.
The lay of the land
As things currently stand there are basic requirements for many businesses to track and report on direct emissions (“Scope 1”) and, to a certain extent on indirect emissions where energy is purchased rather than generated directly (“Scope 2”). This includes a range of mandatory carbon compliance schemes, too numerous to discuss here, but general UK schemes with relevance to fleet and road transport include:
- Streamlined Energy and Carbon Reporting requires all large UK companies to report on their annual energy use, greenhouse gas emissions and the energy efficiency actions they have taken.
- TCFD reporting[2] Large UK-registered companies are required by law to report on climate-related risks and opportunities.
- Energy Savings Opportunity Scheme[3] Organisations in scope need to carry out audits of energy used every 4 years and identify cost-effective energy saving measures, covering energy consumed by buildings, industrial processes and transport.
CSRD already applies to UK companies with EU market listings and will soon apply to UK companies with operations in the EU. Ultimately, all large EU companies and most companies (including non-EU companies) with listed securities on EU-regulated markets will be in scope of the CSRD. Additional reporting obligations will also apply to EU subsidiaries or branches of non-EU groups that have generated more than €150m turnover in the EU.[4]
Moving on, the UK Government is currently developing a plan for economy wide Sustainability Disclosure Requirements (“SDR”) – a framework to facilitate and streamline the flow of robust, decision useful information between corporates, consumers and investors and capital markets. This includes endorsement and implementation of UK-endorsed ISSB standards, ensuring international interoperability, based on international IFRS Sustainability Disclosure Standards. It is currently engaged in consultation on implementing UK-endorsed ISSB standards and is seeking to strengthen its expectations for transition plan disclosures with reference to the TPT Disclosure Framework – this being aimed at helping companies communicate their plan to achieve net zero to shareholders and other stakeholders.
The emphasis is increasingly forward-looking, producing guidance supporting the need for businesses to have credible and consistent criteria to build action plans so they can reduce their emissions.
A large array of companies additionally chooses to commit to voluntary reporting as a means of turning good environmental performance into competitive advantage by communicating the value of sustainability – “green credentials” – to customers and stakeholders. The Carbon Disclosure Project (“CDP”), a global environmental disclosure system that promotes environmental engagement and action, is one example. As is SBTi, which confers important credibility on corporate net zero plans.
That said, a recent report by CDP revealed that the pace of decarbonisation in the UK had dropped by a third[5], suggesting that many companies are barely meeting mandatory requirements, yet alone planning towards the Paris Climate Agreement[6]. The same report shows that, when it comes to Scope 3 emissions the drop was even more dramatic, down by three quarters. Furthermore, nearly two-thirds of companies reported an increase in absolute emissions across all Scopes between 2022 and 2023.
This points to a general malaise among businesses, possibly confused by complex rules and regulations, or perhaps simply focussed on core business priorities during recent tough economic times. What is clear is the need for better education on how and why net zero reporting is important for society, for all stakeholders, for corporate profile and for potential business improvement. Whilst customer preferences are shifting and employee expectations are growing, energy efficiency and carbon reduction measures can cut significant unnecessary costs whilst also improving operational efficiencies.
Scope 3 measurement and reporting creates opportunities to inform decision making across procurement, product development and logistics teams regarding which interventions and product innovations can deliver the most significant emission reductions. However, “not all scope 3 emissions are created equal. Some are more material, some less so. Companies have significant control over some emissions, less over others. Some emissions are upstream, others are downstream.”[7] The result is that there is still work to do to address the challenges to scope 3 target setting and implementation.
[1] SECR – see Glossary for definitions and descriptions
[2] Taskforce for Climate-related Financial Disclosures (TCFD)..
[4] European sustainability reporting developments: UK companies | ICAEW
[5] https://www.cdp.net/en/articles/media/press-release-pace-of-decarbonisation-by-uk-businesses-falls-by-a-third-with-businesses-set-to-miss-paris-targets-bain-company-and-cdp
