On the day that the UK government heeded calls not to scrap mandatory carbon reporting, Roger Ponting and Rory Sullivan share the sobering findings of some research into the effect of the legislation
Mandatory carbon reporting is widely seen as a key policy tool to encourage companies to reduce their greenhouse gas (GHG) emissions and improve their energy efficiency, providing business benefits such as reduced costs and enhanced reputations for good corporate responsibility.
This argument underpinned the UK government's decision in 2013 to amend the Companies Act to require a number of UK-incorporated, quoted companies to report on their GHG emissions as part of their annual directors' report.
The requirement to disclose through the directors' strategic report rather than via general environmental legislation was driven by a desire to ensure that GHG emissions were explicitly considered by boards of directors.
The overwhelming majority of interviewees did not think that the legislation had changed management practices or decisions
What is interesting about the UK is that carbon reporting was actually reasonably well established among large companies prior to the introduction of the legislation. For example, the 2014 report by the NGO CDP found that 222 companies in the FTSE 350 (63.4%) were already reporting on their GHG emissions.
This raises the question of how the introduction of mandatory carbon reporting affects companies in a context in which many companies are already providing reasonable levels of disclosure.
It also raises wider questions about whether such legislation actually has a substantive impact on these companies' reporting processes, management behaviours or decisions, or on the behaviour of key stakeholders such as analysts and investors.
To examine these questions, a series of semi-structured interviews were conducted in 2015 with directors, senior managers and individuals responsible for completing the data collection and disclosure process in compliance with legislation.
In total, 20 companies took part in the research process: 14 FTSE 100 companies, three FTSE 250 companies, two smaller quoted companies captured under the legislation and one large private company not captured by the legislation but with a history of carbon reporting.
The interviewees comprised one CEO, seven senior finance or legal officers (CFOs, finance directors or legal counsel) and 12 sustainability directors or managers.
Nearly all the companies had some familiarity with reporting carbon emissions prior to the introduction of the legislation, whether as a consequence of the need to comply with the CRC – formerly known as the Carbon Reduction Commitment -– or through voluntarily reporting via the CDP or through their own sustainability reports.
Impacts on data quality
Voluntary carbon reporting has been widely criticised for weaknesses in data collection methodologies and for inconsistencies in the data reported. This has made it difficult to make meaningful comparisons between companies, and has limited the usefulness of this information to stakeholders such as NGOs and investors.
It is too early to say whether mandatory carbon reporting has improved the comparability of the data being reported by companies. However, there are signs that it has stimulated improvements in data quality in companies that had previously reported their GHG emissions.
Half of the interviewees indicated that they had strengthened their data auditing and assurance processes, whether through internal audit or finance functions, or through changes in the scope of external audit processes.
Three indicated that the legislative change had supported the investment case for new systems to improve the accuracy and corporate reach of their data collection, for example by including subsidiaries and overseas operations.
Impacts on behaviour and decisions
It was expected that the requirement to report through the directors' strategic report would improve directors' awareness of their company's GHG emissions and lead to an increase in action to actively reduce these emissions.
Has this happened? Nine of the interviewees indicated that their senior management's awareness had increased, primarily as a consequence of the requirement to report through the annual report.
Despite this, the overwhelming majority – 18 out of 20 – of interviewees did not think that the legislation had changed management practices or decisions.
It is not clear that mandatory carbon reporting results in any substantive behavioural changes in companies that have previously reported on their emissions
The most common explanation provided was that, because of the company's history of carbon reporting, senior management saw the introduction of mandatory reporting as formalising what they were already doing, rather than requiring any substantive change in how they were managing their GHG emissions.
Seven of the interviewees explicitly stated that GHG emissions were considered financially immaterial to their business.
They commented that this meant that not only did their senior management perceive these emissions as financially unimportant, but that senior management was sceptical about the strategic and leadership opportunities that carbon reporting presented.
Impacts on stakeholders
Another argument underpinning the introduction of mandatory carbon reporting was that it would increase interest and engagement from external stakeholders, and that this interest would encourage companies to take action to reduce their emissions.
Eighteen of the 20 interviewees indicated that stakeholder interest or engagement had not changed as a result of the introduction of mandatory carbon reporting.
If policymakers want to make real progress in reducing corporate GHG emissions, they need to go far beyond mandatory carbon reporting, and to establish a meaningful price for carbon
Most said that they continued to receive few if any enquiries from stakeholders (investors, analysts or NGOs) about their carbon footprint.
Furthermore, half of the interviewees concluded that these stakeholders are simply not interested in their company's carbon footprint, either because their emissions are relatively small in absolute terms or because their emissions are considered to have no direct profit-and-loss impact.
A number commented that they were not surprised at this lack of interest given that these stakeholders had not been interested in the company's previous voluntary reporting, and given that these stakeholders did not perceive legislation as having created change in corporate environmental behaviour.
Reflections
Of course, care is required with these findings – the sample size was relatively small and the research completed at a time when most of the participants had only reported under statute once.
As such, it may be that more time is required before the predicted benefits appear.
Even so, the findings are sobering. While there is evidence that mandatory carbon reporting can stimulate improvements in data quality, it is not clear that it results in any substantive behavioural changes in companies that have previously reported on their emissions. More specifically, the research challenges the assumption that directors or other senior executives will use mandatory reporting to propel the issue of GHG emissions closer to the centre of the company's strategy.
From a policy perspective, this suggests that governments might be wise to temper any expectations they have that mandatory carbon reporting will catalyse the sort of dramatic reductions in corporate GHG emissions that are necessary to avert dangerous climate change.
It is difficult not to conclude that if policymakers want to make real progress in reducing corporate GHG emissions, they need to go far beyond mandatory carbon reporting, and to establish a meaningful price for carbon.
This article is based on the dissertation 'Mandatory Carbon Reporting: Does What Gets Reported Get Managed?' submitted by Roger Ponting in 2015 in partial fulfilment of the requirements for his Degree of Master of Studies in Sustainability Leadership at the University of Cambridge. The research was supervised by Rory Sullivan.
Roger Ponting holds a number of directorships and consultancy roles. He specialises in financial leadership and strategic transaction support across a number of sectors, and is group finance director of the Energy Saving Trust.
Rory Sullivan is an independent consultant, specialising in responsible investment and climate change.