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FTSE 350 analysis: Environmental reporting still evolving

Most companies in the UK’s  FTSE350 have met the requirements of the recent changes to the Companies Act to report more fully on environmental matters and to report on Greenhouse Gas (GHG) emissions within their annual reports and accounts, according to a study by the Climate Disclosure Standards Board (CDSB).

However, the CDSB,  an international consortium of business and environmental non-governmental organisations, said that its findings suggested that companies were less likely to report on environmental matters where the requirement to report depends on whether the information is relevant and/or material.

The UK Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (“the Regulations”) came into effect on 1st October 2013. They require quoted companies to report on environmental matters within the strategic report, including making use of key performance indicators (KPIs) and to report GHG emissions in the directors’ report of their annual report and accounts.

The regulations state that the strategic report must contain: “a description of the principal risks and uncertainties facing the company”. The study found that 41% of companies considered environmental matters in their principal risks.

Looking at particular sectors the study found that companies in the materials sector most often included environmental matters in their principal risks (91%). Significant proportions of industrial (54%), and energy (73%) companies also identified environmental principal risks. However, 81% of companies in the financial sector did not consider environment matters amongst their principal risks.

Quoted companies are also required to report information regarding the impact of their business on the environment to the extent that is necessary to give an understanding of the development, performance or position of the company’s business.

Commonly reported impacts include: GHG emissions; other emissions and waste. The analysis found that 90% of companies disclosed information about the environmental impacts of their operations and of the 10% that did not include information on the environmental impacts of their operations. Only 30% did not provide an explanation for the omission.

The analysis reviewed the KPIs  reported as measures to assess performance, management’s focus, and alignment with the interests and contribution to shareholder value. Under the regulations companies must provide, where appropriate, “analysis using other key performance indicators including information relating to environmental matters and employee matters” in order to provide an accurate “understanding of the development, performance or position of the company’s business”.

It was found that 27% of companies reported environmental KPIs. GHG emissions, energy management, waste management and water management-based KPIs were most popular across all the sectors. Within the materials sector 82% of companies reported environmental KPIs; 20% of companies in the Energy sector reported environmental KPIs while 7% of companies in the Financial sector reported environmental KPIs.

The report’s authors noted that there is a disconnect between the companies that report environmental impacts of their business (90%) and companies that report KPIs (27%) associated with environmental performance. This disconnect, they believec is at variance with UK government guidelines, which recommends that companies should report “at least 3 KPIs associated with their key environmental impacts”.

The study also found that although the regulations require companies to measure, calculate and report their GHG emissions in tonnes of CO2 equivalent figures (tCO2e), some companies chose to use KPIs referencing only CO2 emissions. Reporting CO2 emissions, the CDSB argues, provides only a partial disclosure of total GHG emissions and raises uncertainties as to the consistency and integrity of reported information. However, the authors also suggest that some companies may have made a mistake in the unit used and noted their emissions simply in terms of tonnes of CO2 rather than as tCO2e.

The regulations require companies to disclose information regarding environmental policies and provide an indication of the effectiveness of those policies. The study found that across all sectors, the majority of companies meet these requirements of the legislation. With the exception of financial, the disclosure of both policies and effectiveness is greater than 80% in all sectors.

Within the financial sector 34% of businesses did not disclose information on their environmental policies, the highest percentage across all sectors. However, many Financial companies reported having little or no impact on the environment (i.e. no employees, no owned nor leased properties and no direct operations outside investments), and would therefore not provide information related to environmental policies.

However, 66% of financial sector companies did disclose their policies, 50% disclosed both their policies and effectiveness. Some financial companies provided information on how and to what extent environmental matters were involved in their investment decisions and policies as part of their disclosure.

To obtain a copy of Manifest’s third annual analysis of the world’s leading sustainability disclosures, Say on Sustainability” email sustainability@manifest.co.uk.

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