Carbon reporting reforms put UK businesses at “risk of losing customers, suppliers and talent”

A leading East Midlands accountancy and business advice practice supporting more than 4,500 businesses in the region is urging employers to continue carbon reporting after regulatory changes come into effect.

In March, the UK government published suggested changes to company size limits that will impact 131,000 companies nationwide. This will have a direct effect on auditing thresholds and other reporting requirements, including carbon reporting obligations.

These changes could see 5,000 large companies reclassified as medium-sized, 13,000 medium-sized companies reclassified as small and 113,000 small companies reclassified as micro-entities.

While the reforms aim to reduce the non-financial reporting obligations for businesses, Duncan & Toplis is warning that companies could be at substantial risk if they don’t maintain existing obligations around sustainability.

Stuart Brown, director and head of technical and compliance at Duncan & Toplis, said: “At first glance, businesses may think that the government’s changes to company size are an easy win that would simplify auditing and annual reporting - but there’s more to it than initially meets the eye.

“The proposed reclassification would mean that thousands of currently ‘large’ companies can take advantage of eased requirements to cut their admin spend, but it also means that thousands of businesses will no longer be required to report their carbon emissions to the government - as this only applies to large companies. This could prove especially problematic for companies that are effectively downsized by the move, potentially extending as far as limiting their access to loans if they cease their carbon reporting.”

The move has been projected to save £150 million per year for UK companies and while, on the surface, this will reduce the regulatory burden on thousands of companies, there may well be unintended consequences. The company highlights that the potential fallout from the reduced regulatory need to report carbon emissions could mean that they no longer appear committed to environmental sustainability – something that lenders, customers, suppliers and employees are increasingly invested in.

A recent study by the Journal of Banking & Finance found that banks in 30 countries globally are more likely to offer lower loan rates to companies that show clear environment and sustainability concerns - increasing their rates to companies that fail to do so. There are also concerns about the impact this may have on recruitment and retention.

Sally-Anne Hurn, Sustainability Champion at Duncan & Toplis, explains: “With figures from DWF showing that almost two-thirds of businesses are already losing out on recruiting new staff and tender agreements due to poor environmental, social and governance (ESG) performance, further loosening the current requirements could put businesses at risk of losing customers, suppliers and emerging talent - ultimately impacting on the profitability of the company.

“Environmental and social responsibility is an increasing concern for jobseekers and there has been a pronounced shift in focus towards seeking out sustainable, environmentally-friendly employment opportunities in recent years. Employers should prioritise investing in continued carbon reporting and being transparent about their emissions.

“My advice to businesses is to continue diligently monitoring your carbon emissions and the environmental footprint of doing business, even if the legal mandate to do so is removed when your company is reclassified as a medium entity.

“You may well find that failure to do so means that banks are less likely to lend you finance and you may struggle to win tenders against more socially responsible competitors. Importantly, larger suppliers may still require businesses to undertake calculations in order to trade with them. This will be as larger corporations will be considering their Scope 3 emissions - so it’s vital this isn’t overlooked.”

The proposed changes have yet to be confirmed, but the wide-ranging connotations for business are likely to impact thousands of companies nationwide. Employers can explore the full impact assessment from the UK government detailing the suggested changes here.

Businesses in the East Midlands looking for advice on how to remain competitive and circumvent potentially costly supply chain issues are urged to contact Duncan & Toplis directly for guidance on ensuring that auditing requirements and carbon reporting concerns do not go overlooked.