Memorandum submitted by the Environment
Agency
SUMMARY
HM Treasury plays a critical role in delivering
the government's environmental and sustainable development policy.
The Pre-Budget Report (PBR) itself announced
little new environmental policy, somewhat surprisingly in the
context of the recent publication of the Stern Review. We look
forward to a credible response in the Budget 2007, Comprehensive
Spending Review and any other processes that will unfold through
2007.
Although the Stern Review has a focus on international
action, it also has important implications at the domestic level.
The Stern Review concluded that domestic action to reduce the
carbon intensity of the UK economy would be likely to have limited
impacts on competitiveness. In this light, HM Treasury should
consider:
— building risk management into
the domestic economic responses to climate change, so that unexpected
changes in circumstances are met with a policy response that ensures
our climate change objectives are still achieved;
— prioritising domestic action
in sectors with least competitiveness exposure, such as power
and commercial sectors and through promoting "no-regrets"
measures such as cost-effective energy efficiency measures;
— avoiding lock-in to high carbon
infrastructure, particularly in medium term investments in the
energy sector through the establishment of a credible policy framework
to establish a realistic carbon price over the medium to long
term, with interim measures as required;
— ensuring adequate investment
in adaptation to climate change, such as improving flood defences,
securing water supplies and coastal realignment and directing
our rapidly rising aid spend to assist developing countries in
climate-proofing their development.
Following the Stern Review, HM Treasury needs
to adopt improving resource productivity, particularly the carbon
intensity, of the economy, as a core objective, and to approach
it with similar rigour as, for instance, it does labour productivity.
Following the abolition of the proposed Operating
and Financial Reviews and continuing poor and erratic environmental
reporting, there is an urgent need for Government guidance on
the publication of non-financial information to address the current
confusion and ensure consistency with current Government guidelines
on environmental KPIs.
TRANSLATION OF
THE STERN
REVIEW INTO
TREASURY POLICY
The Committee asks "how the recommendations
and implications of the Stern Review have been—or should
be—translated into Treasury policy".
The emphasis in the Treasury response to the
Stern Review is on the need to promote international action to
address climate change, particularly through championing a stronger
cap in the EU ETS. This is a key theme of the Stern Review and
certainly needs to be an essential part of Treasury policy. However,
there are also clear implications of the Stern Review for domestic
action that the Treasury needs to respond to, particularly in
the light of Stern's conclusions that this should have limited
competitiveness impacts.
Take a risk-based approach: Stern emphasises
the importance of framing policy responses to climate change in
terms of managing risks. Because we cannot know now what will
work or how the economy, energy prices or technology will change
over time, we will need to review and adjust the mix of policies
to ensure that clearly stated outcome goals are achieved. This
would mean adopting a portfolio of responses, covering energy
and transport demand, energy and transport infrastructure development,
non-CO2 sources, land use and, importantly, adaptation to climate
change. More pervasive and aggressive use of economic instruments
would enable the response to be adjusted to changing circumstances.
Prioritise where competitiveness exposure
is least: Stern concludes that the risks of competitiveness
impacts to early movers in carbon reduction are limited to carbon
intensive, highly traded sectors—this is a small part of
the economy. HM Treasury should therefore take an ambitious approach
to domestic carbon reduction in non-carbon intensive, low traded
sectors, such as the power, commercial, transport and domestic
sectors. This would suggest, for instance, supporting the more
ambitious approach of a mandatory trading scheme (under development
as the Energy Performance Commitment) should be taken to promote
energy efficiency in large non-energy intensive organisations.
Avoid low-carbon lock-in: Stern warns
of the danger that "investments made in the next 10--20 years
could lock in very high emissions for the next half-century"
before regional or global carbon pricing is established at a credible
and adequate level to factor into investment decisions. In the
light of this, HM Treasury needs to give serious consideration
to domestic action, rather than relying on the EU ETS alone. At
present, the EU ETS and carbon policy framework is not providing
strong incentives to invest in low carbon generation—on
the contrary, there have been recent Electricity Act licensing
applications for construction of large new coal-fired power stations.
Proposals have been made for long-term contracts for low-carbon
electricity and auctions for realising future carbon reductions.
One of the most important tasks for HM Treasury is to ensure there
is a credible market-orientated policy framework that creates
a realistic carbon price in which investors can have sufficient
confidence over a realistic investment horizon.
Ensure effective adaptation to climate change:
Stern highlights the lack of adaptation in developed countries
and lack of quantitative information on the costs and benefits
of economy-wide adaptation. It is notable that the PBR does not
contain a section on adaptation, although this involves potentially
large expenditures. HM Treasury should recognise the likely magnitude
and distribution of welfare and economic impacts arising from
climate change and invest in adaptation and resilience where it
is cost effective. That would mean, for example, a substantial
increase in flood risk management expenditure. Climate change
threatens international development objectives and it is vital
that we align the UK's large and rising development spend with
climate-proofing investment in vulnerable developing countries.
COMPANIES' ENVIRONMENTAL
REPORTING REQUIREMENTS
Our research concludes that the quality of environmental
disclosure is very poor with only 24% of FTSE all share companies
reporting providing quantitative information on their environmental
impacts. We believe that the integration of more quantified environmental
information into corporate disclosures is essential if investors
are to truly assess the future prospects of a company.
In November 2006 we published, "Environmental
disclosure in the FTSE All Share: First 100 FTSE All Share Companies
to report under the new Company Law reporting requirements".
A report covering the FTSE All-share will be published in Autumn
2007.
Key findings from the 2006 report:
— There is evidence that there
is more environmental reporting. However much environmental reporting
is still at a very basic level—it may be just a one-word
mention of a key phrase that this study was designed to identify.
96% of the companies referred to the environment in 2006, compared
to 89% in 2004.
— There has been an increase in
the level of quantified disclosures (nearly half of companies
survey in the 2006 report provided statistics compared to 24%
in 2004). However there are still too few quantified disclosures
to make meaningful comparisons between the environmental performance
of companies—only 21% of companies provided quantified disclosures
that enabled meaningful comparison.
— 83% of the companies reported
on just one topic out of water, waste, and energy use/climate
change. 26% reported on all three topics. (In 2004 the figures
were 58% and 10% respectively.)
— A standard structure for annual
report and accounts would help readability and comparability.
The present naming convention adds to the confusion:
— 37 companies included a Business
Review, 43 include an OFR, five did both.
— 25 did not a produce separate section
clearly labelled OFR or Business Review.
The abolition of the OFR has caused confusion
as it has provided the impression that large companies no longer
need to report on their environmental performance, while in truth
reporting of non-financial information is still required following
UK implementation of the EU accounts modernisation directive.
There is an urgent need for guidance to companies on their reporting
requirements that clarifies their legal requirements and ensures
consistency with government guidelines published by Defra on environmental
KPIs for businesses. In particular, reporting of CO2 emissions
should be relevant to all companies.
We welcome the introduction of some new reporting
requirements in the new Companies Act 2006 but we strongly urge
the Government and bodies such as the Financial Reporting Council
and Financial Services Authority to enforce the use of the DEFRA
environmental reporting guidelines and KPIs by business.
Whilst we commend businesses who make disclosures
in corporate responsibility reports, web sites and other publications,
we strongly believe statements on financially material environmentally
related business risks should not be sidelined but held in the
same regard as other risks to future business performance. All
business, no matter what size or sector, affect and are affected
by the environment, be it the availability and quality of natural
resources, resulting energy prices and water shortages or the
impacts of climate change. Yet only six companies[16]
link environmental issues to financial performance or to shareholder
value.
January 2007
16 From the first 100 companies to published their
Annual Report and Accounts under the EU Accounts Modernisation
Directive. The Directive affects all reports for financial years
from 1 April 2005. It applies to all EU countries and in the UK
it is part of the Companies Act 1985. Back
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