FRC Review Findings on Streamlined Energy and Carbon Reporting (SECR)

The FRC has recently published the findings of its Thematic Review: Streamlined Energy and Carbon Reporting.

Background

For periods commencing on or after 1 April 2019, the revised Streamlined Energy and Carbon Reporting (SECR) requirements came into force. The requirements now not only apply to quoted companies, but also apply to large unquoted companies and large LLPs

It’s perhaps worth pointing out at this point that the determination of whether a company or LLP is large for this purpose is based on the requirements of the regulations (which happen to use the same size thresholds) rather than the requirements of the Companies Act 2006 itself.

Requirements

For large unquoted companies and large LLPs, most entities within scope of the requirements will need to disclose:

• Emissions, split by Scope 1 (direct greenhouse gas emissions) and Scope 2 (energy indirect), in carbon dioxide equivalent (CO2e);
• Energy consumption in kWh;
• The methodologies used to calculate the emissions and energy consumption information disclosed;
• At least one ratio expressing emissions in relation to a quantifiable factor associated with the entity’s activities (eg. emissions per £m of revenue); and
• The principal measures taken to increase energy efficiency (if any measures have been taken).

Good practice

The report identifies a number of examples of good practice, particularly with respect to additional disclosure such as:

• Additional information encouraged by the government guidelines such as details of Scope 3 (other indirect) emissions;
• Emissions reduction targets; and
• How the entity plans to meet such targets.

Better reports also explained to users which emissions were included under each heading (eg. under Scope 1, Scope 2 and Scope 3 (if presented)).

Areas for improvement

The report identifies a number of challenges in the first year of reporting, including:

• Not providing sufficient information about the methodologies used to calculate the emissions and energy use information. Given the different methodologies which may be applied, it is particularly important for a user to be able to understand the approach adopted.
• Ratios used were not necessarily the most appropriate for the entities’ operations.
• Disclosures about energy efficiency measures did not always clearly describe the principal measures taken by the entity in the current year.

In addition, errors including the following were identified:

• Not providing the required energy consumption disclosure.
• Disclosing a single total, rather than separate subtotals for Scope 1 (direct greenhouse gas emissions) and Scope 2 (energy indirect) emissions.
• Disclosing emissions of carbon dioxide (CO2) rather than the carbon dioxide equivalent (CO2e) of all six greenhouse gases that fall into scope of the requirements.

Where some form of assurance has been carried out on the report, disclosures need to provide sufficient context to understand the nature and extent of this assurance – they must avoid giving the impression of a higher level of assurance than has actually been obtained.

A reminder

For auditors with clients reporting under SECR rules, it is imperative that the auditor understands the disclosure requirements. Our file reviews have also often found this an area of weakness and there is no little / no challenge to where large unquoted clients are providing substandard or no disclosures. Where an entity is not disclosing the information because it has consumed 40,000 kWh of energy or less in the UK during the period, the report must state that the information is not disclosed for that reason.

How we can help

If you have clients applying the SECR requirement and would like us to review the financial statements then this is a service we perform. In addition our hot and cold file audit quality reviews also include a review of the financial statements.

Further information on these types of reviews can be located here.