In Autumn 2019, changes were announced to the Companies (directors’ report and miscellaneous reporting) Regulations 2018, stipulating that large charitable companies now need to include additional disclosures in their trustees’ reports relating to their UK annual energy use and corporate decision-making. As we are now seeing the first cycle of accounting periods where these changes must be implemented, here we look back on what these changes include, how they affect your charity and what learnings can be gathered.
To recap; both the Streamlined Energy and Carbon Reporting (SECR) and Section 172(1) statement on corporate decision making requirements apply to large charitable companies – organisations which have met two of the following criteria for the last two years:
- Income of over £36m;
- Net assets of over £18m;
- 250 or more employees.
Charitable companies whose emissions exceed 40,000 Kilowatt-hours per annum must also make disclosures under the SECR and the Department for Business, Energy and Industrial Strategy encourages all organisations to report voluntarily. Unincorporated trusts and CIOs are not affected by these changes, but may wish to consider reporting to enhance their trustees’ reports.
SECR disclosures are mandatory for accounting periods beginning on 1 April 2019, while a Section 172(1) statement is required in trustees’ reports for accounting periods commencing on 1 January 2019.
Streamlined Energy and Carbon Reporting
SECR changes were introduced to assist in meeting the UK’s target to become “carbon neutral” by 2050, help organisations manage their energy usage and costs as well as to increase transparency for stakeholders, including charities’ beneficiaries.
More information can be found in this Buzzacott expert insight, however, the four key requirements for a trustees’ report are summarised below.
- UK energy use – including direct fuel use, indirect use electricity and gas consumption, but also energy used in transport where the charitable company is responsible for purchasing the fuel. The government does not expect that obtaining this data will require the use of specialist consultants.
- Greenhouse gas emissions – The above usage must also be reported in tonnes of CO2 equivalent. The Government produces conversion factors to assist with this requirement, which can be found here. These conversion factors also assist in translating vehicle mileage into energy usage in KWhrs.
- An emissions intensity ratio – A simple metric of tonnes of CO2 produced in relation to a relevant measure is required. A useful metric for charities would be emissions per beneficiary (i.e. per member in a membership organisation or club, per brother or sister in a religious congregation), per grant awarded in a grant-making organisation or per performance in a theatrical organisation. The legislation requires a consistent ratio to be used each year for comparability.
- The methodology used in preparing these figures.
A useful example calculation and disclosure which may be helpful for charities is included in sections 9 and 10 of the Government guidance for academy trusts. This also provides more specific guidance for academy trusts, which must make these disclosures in their accounts for the year ended 31 August 2020 (if they meet the criteria).
How does this affect my charity?
Although only charities meeting the large company threshold are required to include the SECR disclosures, it may be useful to consider including this information in your Annual Report even if your charity is not required to do so by Company law.
The disclosures above can supplement and lend credence to information already included on corporate and social responsibility, energy usage and commitments to the environment. Charities with environmental objects (be they related to policy, engineering or research) or simply those with a broad public interest may find it particularly useful to include the information above in order to demonstrate their environmental commitments to stakeholders and the wider public.
Rather than collating the information internally, we are seeing a number of our clients commissioning external assessors to report on the charity’s energy usage, both from the perspective of providing the relevant information for disclosure within the Trustees’ report to the financial statements but also to advise on wider matters. For example, reports have included ideas for reducing both energy costs and usage, with suggested initiatives to minimise negative impacts on the environment, economy and society. We expect that there will be a greater focus on benchmarking and a comparison of environmental impact across charities as reporting in this area develops, particularly with the ever-growing focus on ESG.
Section 172(1)
Section 172(1) of the Companies (directors’ report) Regulations 2018 now requires trustees of large charitable companies to include a statement in their strategic report covering the following areas:
- The charitable company’s long-term behaviour:
- The likely consequences of decisions made by the charity in the long term; and
- The charitable company’s impact on communities and the environment (which can be linked to SECR requirements, above).
- Its engagement with stakeholders, specifically:
- The interests of employees;
- The need to foster business relationships with suppliers, customers and others; and
- The need to act fairly, as between members.
- Its general corporate behaviour, i.e.
- The desirability of the charitable company maintaining a reputation for high standards of (business) conduct.
Most of these requirements are not new to charities, which are already required to provide information on their decision-making and relationships to aid transparency and accountability, however there are additional specific requirements on employee engagement for charities with more than 250 employees.
How does this affect my charity?
Given that charities are public interest organisations, its best practice to be including at least some of the above information in the trustees’ report. These disclosures could be integrated into the review of the activities and achievements or within a specific stakeholders section in the structure, governance and management section of the report. Due to the Coronavirus pandemic, building strong relationships with supporters, suppliers, staff and beneficiaries has never been more important and there are several areas of best practice that the Financial Reporting Council (FRC) has identified in its latest thematic review which charities may find useful when drafting their annual reports.
- The arrangements for furloughing staff and plans arising from the recent Job Support Scheme announcement;
- The physical measures taken to keep staff safe;
- The financial and non-financial ways suppliers have been supported;
- The ways in which customers, beneficiaries or members have been supported and why it is important to continue to support them; and
- The ways in which the community (local, national or global) has been helped by the company and its employees.
The FRC’s review found that although companies provided sufficient information to enable a user to understand the impact COVID-19 had on their performance, position and future prospects, some would have benefited from more extensive disclosure. Such enhanced disclosures can help to invigorate trustees’ reports by bringing policies to life through examples; they also help to demonstrate the charity’s commitment to the public benefit.
Matthew King is audit manager in our charity and not-for-profit team at Buzzacott
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