Which net zero actions are likely to become mandatory for businesses?
In the wake of COP26, there is increasing focus on how the UK will meet its legally binding net zero target, and this autumn has seen a raft of government publications and announcements about the climate. Some climate-related actions are already compulsory for certain types of business; such as SECR and new the net zero rules for government contract bids.
But which new climate-related obligations are on the horizon and likely to become compulsory for businesses in the near future?
Listed and large companies: reporting on how climate affects your business
The new Sustainability Disclosure Requirements (SDR) will require certain categories of business to report on the risks and opportunities that climate change presents to their business. This must be done in a way that meets the standards of the Task Force on Climate-Related Financial Disclosures (TCFD).
These rules will definitely apply to companies listed in the Premium section of the London Stock Exchange, who already (since December 2020) have to either disclose climate-related information in their financial reporting or explain why not. A Treasury spokesperson told us that other groups are likely to be included:
- Companies listed in the Standard segment of the London Stock Exchange – but this is subject to the outcome of a recent consultation by the FCA.
- Certain financial companies that are either publicly quoted companies, large private companies or Limited Liability Partnerships (LLPs). This is also subject to the outcome of a consultation and also Parliamentary approval.
- Other companies such as publicly quoted companies, large private companies and large LLPs.
There is no definite date for when the new rules will come in, but it is likely to be next year. Businesses in the categories listed above should prepare for including climate-related information in financial reports from now on. See our blogpost on the Greening Finance Roadmap for more detail.
Large commercial and industrial buildings: energy use disclosure
April 2022 is likely to see the introduction of a new rating system for the energy performance of large commercial and industrial buildings (those above 1000m2). Owners and sole tenants of such buildings will be required to register their building with the online framework and then submit their energy use data for be rated by the system. The ratings will then be disclosed publicly and potential tenants or buyers must be made aware of it. Full story here.
Large non-domestic buildings: mandatory connection to heat networks
The government’s Heat and Buildings Strategy sets out plans to give local authorities the power to designate heat network zones. Within these zones, it would be compulsory for certain buildings, including large non-domestic buildings, to connect to the heat network. Businesses that are upgrading the heating systems of large sites or commissioning new buildings should take this possible future requirement into account and follow the requirements for “heat network ready” systems.
Large undertakings and maybe smaller businesses too: making a net zero plan
The government is proposing to strengthen the Energy Savings Opportunity Scheme (ESOS) to make it more effective at encouraging businesses to waste less energy. One of the proposals, set out in a consultation which closed in September, is to make a net zero element a compulsory part of ESOS audits. As well as the existing requirement to calculate and report on their energy usage, businesses in scope would have to assess their greenhouse gas emissions and set out a plan for reducing them to net zero.
As BiU’s Chief Commercial Officer explained in a blog post about the consultation, this is a game-changer. It represents the first time any government has actually mandated private businesses to develop a net zero plan.
ESOS applies to “large undertakings”, which means companies who either employ 250 or more people or have an annual turnover above €50 million (about £42 million) and a balance over €43 million (about £36 million). But it is very likely that the financial threshold will change to a turnover of £36 million and a balance of £18 million, to be in line with the Streamlined Energy and Carbon Reporting scheme. It is also possible, but less likely, that the scope will widen even further to include medium-sized enterprises.
The list of possible changes explored here is not exhaustive, and as urgency builds over the UK’s net zero target we can expect many more measures to reduce the climate impact of business. Even if your business is currently not in scope of any climate-related regulations, it makes sense to get to grips with your emissions now and begin working towards a net zero strategy.