Energy Compliance: The Outlook for 2022

The UK became the first major global economy to legally bind themselves to net zero emissions in 2019. We’ve since seen an increase of government announcements on sustainability, and new regulations are already in effect for certain businesses. What’s in store for 2022?

Performance-based energy ratings for large commercial and industrial buildings

The UK government proposed that owners or single tenants of large buildings above 1,000m2 should undergo an annual performance review of their energy use. They must then disclose the findings publicly, online.

Phase one will apply to the office sector only – affecting an estimated 10,000 offices across England and Wales. Beginning with a soft launch in April 2022, this would require all qualifying sites to register and produce an energy rating within the first 12 months. The government plans for this framework to reduce annual business energy bills by £116m before 2030.

In England and Wales, only 7% of commercial and industrial buildings are larger than 1,000m2. Yet these buildings use over 53% of all the energy used by commercial and industrial buildings. 

It’s likely that commercial and industrial buildings over 1,000m2 are complex and bespoke to each organisation. Therefore, to make meaningful and lasting improvements to these buildings, owners and occupiers must have a detailed understanding of how the building works, how it operates, and how it uses energy.

This is especially true when it comes to viewing the decarbonisation of the building over the long term, with the legal requirement to reach net zero by 2050.

Key takeaways:

  • Soft launch to the office sector in April 2022 requiring all qualifying sites to register with the ratings administrator and publish ratings within the first 12 months.
  • Public disclosure of ratings is highly encouraged.
  • No fixed reporting date within the 12 month period, allowing organisations to align reporting needs to suit their needs.
  • Following soft launch, mandatory ratings and disclosures may become a requirement going forward.

Sustainability Disclosure Requirements (SDR)

In October 2021, the Treasury published its Green Finance Roadmap that set out new rules designed to create greater transparency in the business world.

It provided new details on Sustainability Disclosure Requirements (SDR), which forces large companies, asset managers and creators of investment products to report on the risks and opportunities that climate change presents to their business. 

These disclosures must report in a way that meets the standards set by the Task Force on Climate-related Financial Disclosures (TCFD). The UK is also one of the first countries to mandate the TCFD recommendations for businesses.

The new policy intends to clamp down on “greenwashing” (unsubstantiated or misleading claims that a business is environmentally friendly) and make it easier for investors and consumers to understand how a firm impacts the environment.

SDR: Four Core Elements

The TCFD structured its recommendations around four key areas that represent core elements of how organisations operate. 

Governance:

How does the governance of the organisation account for climate change? Also, is climate change considered when the organisation undertakes significant decisions, in terms of risk and impact?

Strategy:

How does the long-term business development strategy account for climate change? Do company stakeholders also understand the effects of climate change on business operations? And have climate scenarios been modelled across the organisation and is there a strategy in place?

Risk management:

Has the organisation assessed climate-related risks, and where do they stand in relation to other risks faced by the organisation? Has the organisation also implemented processes to assess their climate-related risks, and is there a strategy in place for the mitigation of climate-related impact?

Metrics and targets:

What targets have been set for emissions reduction and how does the organisation perform against these targets?

SDR 4 Pillars

Key takeaways:

  • Some new rules from the SDR are subject to consultation and parliamentary approval.
  • However some of the changes will impact some businesses as early as 2022.
  • UK businesses should familiarise themselves with what may become requirements as soon as possible.

Strengthening the Energy Savings Opportunity Scheme (ESOS)

The government proposed changes to strengthen the ESOS in July 2021. Part of the proposals included the public disclosure of data and proposed widening the scope to medium-sized businesses.

Additionally, the consultation proposed implementing an obligatory net zero element as part of the ESOS audit. This would mean businesses will have to assess their emissions and plan for reducing them towards net zero. This is also in addition to calculating and reporting on their energy consumption.

If the changes move forward, it would be the first time that any government has actually mandated net zero plans for private businesses.

The ESOS also applies to companies that either employ over 250 people, or have an annual turnover of more than £41.6m, and a balance sheet of over £35.8m. However, it’s likely that the threshold will reduce dramatically to an annual turnover of £36m and a balance of £18m. This is in order to keep the ESOS in line with the Streamlined Energy and Carbon Reporting scheme.

It’s also likely that further changes are expected as greater urgency develops over the UK’s net zero targets. Even if your business does not currently fall under the scope of these sustainability regulations, it’s vital to understand the impact of your emissions and begin a secure journey towards your net zero strategy.

Key takeaways:

  • Most of the proposals would come into effect before 2023 (ESOS Phase 3).
  • When the outcome of the consultation becomes available in 2022, the direction will become clear.

Widening the Scope for Streamlined Energy and Carbon Reporting (SECR)

The Streamlined Energy and Carbon Reporting scheme began in 2019. Most qualifying businesses will have already experienced the reporting process. 

However, in October 2021, the government announced that it may consider changing some of the scope of the SECR by 2023.

It would be beneficial for businesses to prepare for more ambitious net zero reduction targets, as scrutiny is likely to increase scrutiny on organisations ahead of the release of new policies.

The reporting on emissions scopes under the SECR are in review and therefore likely to change. Currently, the SECR is largely focused on Scopes 1 and 2 emissions. Most elements of Scope 3 emissions are voluntary. However, for most large businesses, Scope 3 emissions constitute the majority of emissions, making it likely for Scope 3 reporting to become mandatory in future.

Key takeaways:

  • It’s advisable for companies to submit voluntary reporting, even of Scope 3 emissions, as they are likely to be implemented by 2023.

Take action before it’s too late

No matter how small the first step to sustainability is, businesses should begin to adopt net zero measures. The guidance around carbon reduction targets are actually designed to be achieved in small increments. This means that any delays to the process will make it more difficult for businesses to achieve future carbon reduction targets. Plus, businesses may miss out on possible savings and investment opportunities.  

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