One way of judging a company’s environmental behaviour is what it reports about. Mandatory carbon reporting will finally shift the focus to fundamental performance

Under the right conditions, information can be a powerful force for change. While mandatory carbon reporting may address some of the limitations in the information currently being provided voluntarily by companies, it will not necessarily provide the consistent and comparable data that stakeholders require to hold companies to account for their climate change performance.

Any discussion of information-based governance must begin by acknowledging that companies need to communicate with a wide range of stakeholders. Inevitably, these stakeholders have quite different interests, and will seek to use the information provided by companies in a variety of ways.

For example, in relation to greenhouse gas emissions, they may want to assess how the company is performing against its emission reduction targets, how the company compares with its sector peers, or how much the company contributes to national or global greenhouse gas emissions.

This divergence of interests influences the decisions that companies make about reporting. Should they report or not? What should the scope of their reporting be? What information should they provide? What resources, and at what level, should they dedicate to reporting?

These decisions influence the quality of the information provided. This, in turn, directly affects the ability of stakeholders to hold companies to account for their performance.

Does voluntary work?

When we look at carbon reporting, it is clear that voluntary reporting is not delivering the quality of information required. Specifically, many large companies (notwithstanding the contribution of the Carbon Disclosure Project) do not report. Even among those that do report, there continues to be a wide divergence in the reporting protocols used, in the scope of reporting, and in the supplementary information provided to put reported information into context.

Despite these limitations, the information being provided by companies can be used to draw some conclusions about a company’s approach to climate change-related risks and opportunities. For example, the absence of reporting can be seen as an indication that climate change is not seen as a priority for management attention.

For companies that do report, it is often possible to make an assessment of the financial significance of climate change to the business, to understand the importance assigned by the company to managing its climate change-related risks and opportunities and (where the company has reported for a number of years) to assess trends in performance and in the quality of the company’s implementation of its climate change strategy.

However, there are two notable areas where current reporting practice fails to meet stakeholders’ needs. First, it remains difficult, even within relatively homogeneous sectors, to make robust comparisons between companies. Second, while it is often possible to draw some conclusions about the scale of a company’s direct (or operational) emissions, it is rarely possible to have anything like the same confidence in assessing the significance of emissions associated with supply chains and value chains.

Not if, but how

Recognition of the limits of voluntary reporting opens up the question of whether mandatory reporting – such as the UK government’s proposals to introduce mandatory greenhouse gas emissions reporting for all companies listed on the main index of the London Stock Exchange from April 2013 – can address these limitations.

In theory, mandatory carbon reporting should ensure that all companies report, and in turn should help to address the problems caused by inconsistencies in reporting. This applies in particular if the reporting requirements do the following.

• Specify the reporting boundaries so that all firms define the scope of their reporting in a consistent manner. From an accountability perspective, it makes most sense that reporting is based on financial control (ie the consolidated entities that are covered by companies’ financial reporting).

• Require all companies to report on, as a minimum, their Scope 1 emissions – those from sources owned or controlled by the company, including the generation of electricity, heat or steam, physical or chemical processing, transport in company owned/controlled vehicles, fugitive emissions; and Scope 2 emissions – from the generation of purchased electricity that is consumed in company owned or controlled equipment or operations.

• Require companies to report on specific Scope 3 emissions such as emissions from business travel and third-party distribution, and encourage them to report on other emissions (eg embedded carbon in products, emissions reductions that result from the provision of more efficient products).

• Require reporting on all greenhouse gases, expressed both in terms of total carbon dioxide equivalent (CO₂e) and, where relevant, broken down by greenhouse gas.

• Provide clear guidance on how emissions are to be calculated (eg through specifying preferred calculation techniques, through providing default emission factors), normalised (eg through requiring companies to report on emissions per unit of sales or relative to sector-specific indicators) and presented (eg should emissions be broken down by activity or by business unit?).

• Require companies to provide a clear account of how they have calculated their greenhouse gas emissions, including the assumptions they have made, the activity and other data they have used to produce their emissions and the emission factors they have used to calculate their emissions.

Mandatory reporting, if designed in line with these principles – and, critically, applied to all medium and large companies, not just listed companies – would represent a major step forward in enabling stakeholders to hold companies to account for their carbon performance.

Consistent and comparable

However, such reporting will not necessarily address all of the issues around data consistency and comparability. Inevitably, as has been seen in other areas where mandatory environmental reporting has been introduced, companies will have significant discretion on the scope of reporting, in the emission factors that they use, and how they present their data. The consequence is that stakeholders using these data will need to take care to ensure they interpret the data correctly and appropriately.

There is another reason why now is a good time to focus on mandatory reporting. For the past 10 years, stakeholders have focused primarily on whether or not companies report and, to a lesser extent, on the quality of the information provided.

The real question is of course what performance outcomes have actually been achieved. For example, how far have companies actually reduced their greenhouse gas emissions? Mandatory reporting offers the potential to reinvigorate the reporting debate by forcing us all to look beyond the fact that a report has been produced and to look much more carefully at the substance of that reporting.

This article is based on a working paper by Rory Sullivan and Andy Gouldson (2012), “Understanding the Limits of Voluntary Carbon Reporting and the Potential of Mandatory Reporting”, prepared for the centre for climate change economics and policy.

Dr Rory Sullivan is a senior research fellow at the University of Leeds, strategic adviser, Ethix SRI Advisers and a member of the Ethical Corporation editorial advisory board. Professor Andy Gouldson is director of the centre for climate change economics and policy at the University of Leeds.

Voluntary reporting is not delivering the quality of information required

Mandatory reporting can enable stakeholders to hold companies to account