A Guide to ESOS and SECR

Introduced in 2014 and 2019 respectively, these two schemes require businesses to undertake energy efficiency audits and disclose their annual energy consumption and greenhouse gas emissions. However, they have different focuses (for the time being), and there are key differences that businesses need to be aware of.

With that in mind, let’s take a closer look at ESOS and SECR and guide you through what they mean for your business.

What is ESOS?

ESOS was introduced in 2014 and is the UK’s interpretation of the EU Energy Efficiency Directive (EED). The scheme runs in four-year cycles (currently in Phase 3), and companies pick a 12-month period within each cycle to measure and report their energy consumption.

Organisations are also required to identify energy-saving measures and the costs associated with implementing these measures as part of the scheme, which includes all organisational energy consumption from buildings to industrial processes and transportation.

Currently, there are approximately 10,000 businesses that fall under the scope of ESOS. However, this is likely to increase with impending changes that will strengthen the regulations in 2024.

What is SECR?

SECR came into effect in 2019, with the first reporting period falling in 2020. It’s the replacement of the Carbon Reduction Commitment (CRC) scheme and aims to simplify (hence the titular “streamlined”) the mandatory reporting of energy consumption and greenhouse gas emissions.

These reports are due yearly as part of the Director’s Report filing to Companies House. They must include actions taken within the reporting period to reduce energy consumption and emissions. There are roughly 12,000 companies that fall under the scope of mandatory SECR reporting, and it helps provide more transparency on businesses’ environmental performance.

The scope and requirements of SECR are to be reviewed in 2024 when it could be opened up to include medium-sized businesses.

What are the Criteria for ESOS and SECR?

You may have noticed that more companies fall under SECR reporting requirements than ESOS. That’s due to slightly different criteria between the two schemes. They are as follows:

ESOS Eligibility

ESOS requirements apply to UK companies with over 250 employees or a turnover of over £38.9 million and a balance sheet of over £33.5 million. These company size requirements are larger than SECR, hence the lower number of organisations that fall under ESOS.

SECR Eligibility

Mandatory SECR reporting applies to any company listed on a stock exchange or those that qualify as “large” under the Companies Act 2006. In short, any company that meets two of the three following criteria:

• Over 250 employees
• A turnover of over £36 million
• A balance sheet of over £18 million

Notably, SECR does not apply to organisations not registered in the UK.

What Are the Key Differences Between ESOS and SECR?

The overriding difference between the two schemes is that ESOS focuses on energy consumption, whereas SECR focuses more on emissions.

SECR is more stringent in its requirements. For example, while ESOS asks companies to identify opportunities for improving their energy efficiency and list these in their report, SECR requires documented proof of actions taken by a company to reduce energy use and emissions.

SECR also asks companies within its scope to include at least one intensity ratio –  a way of defining your emissions data in relation to an appropriate business metric, such as tonnes of CO2e per sales revenue or tonnes of CO2e per total square metres of floor space. There is no such requirement for energy intensity ratios under ESOS (at least not yet).

In short, SECR drives the implementation of the recommendations identified by ESOS (the majority of large companies fall under both schemes) through greater transparency and accountability.

The comparatively weak compliance requirements of ESOS versus those of SECR prompted a public consultation and shake-up of the former scheme, which will now be strengthened and extended in scope, as we shall now explain.

How is ESOS Being Strengthened?

In light of the UK government falling behind on net zero targets, ESOS has been beefed up to make it a more efficient driver of energy efficiency and closely align it with our country’s carbon reduction goals.

Some of the proposed changes will come within Phase 3 and have a compliance deadline of 5 December 2023, whereas some of the more far-reaching changes will come into effect during Phase 4 (2024 onwards).

Below are some of the most notable changes:

ESOS Phase 3 Changes

• Firms must set a target or action plan following the Phase 3 compliance deadline and report on progress towards it annually, not once every four years.
• There must be an addition of at least one energy intensity metric, such as kWh/m2 for buildings, kWh/unit output for industry, and kWh/miles travelled for transport.
• Mandatory sharing of ESOS reports with subsidiaries.

ESOS Phase 4 Changes

• A net zero element will be added to ESOS audits, requiring an assessment of actions needed to meet future net zero commitments.
• Changing the scope of ESOS to match criteria laid out in SECR, bringing ~2,000 more companies within its remit.
• Mandating action on the recommendations made in each audit. Missed targets and goals will have to be explained in the following report if they have not been met.
• Display Energy Certificates (DECs) and Green Deal Assessments (GDAs) will no longer be acceptable compliance routes for ESOS.

The significant tightening of ESOS requirements will help align it more closely with the UK’s net zero goals and force more companies to take meaningful action through greater accountability and transparency.

Do ESOS and SECR Represent Burdens or Opportunities for Large Companies?

For many large businesses, ESOS and SECR have been seen as a necessary evil or a box that has to be ticked. However, as the government’s net zero ambitions become more stringent, businesses will need to proactively manage their energy consumption and emissions and, in doing so, should uncover opportunities for making significant savings.

Secure Significant Business Cost Savings

Energy audits and assessments are merely the first steps to identifying areas for improvement, such as inefficient lighting and heating systems. The savings made through implementing these measures can dramatically outweigh the cost of meeting the new ESOS or SECR requirements, making these audits far more of an opportunity than a burden.

Forward-thinking companies operating with triple-bottom-line philosophies have already realised the potential for reducing energy consumption and emissions, with savings often far outweighing the costs associated with implementing these measures.

Enhance Brand Value to Increasingly Environmentally-Aware Consumers

What’s more, those companies who view these regulations as an opportunity rather than a burden will be the ones that come out ahead in the long run. The public consciousness surrounding the climate crisis is shifting, and consumers are increasingly aware of their environmental impact and looking to support companies that do their bit for the environment.

Sustainability is a crucial motivating factor for purchases today. Over the last five years, 86% of UK consumers reported becoming “greener” in their purchasing, with 62% stating that a company’s sustainability was an important purchase criterion. Those percentages are only set to increase as consumers become more educated on the impact of their consumption choices.

Win the Ongoing Talent War with Meaningful, Sustainable Business Practices

Lastly, in the current war between competitors across all industries for top talent, a company’s environmental policies are often a deciding factor for prospective employees. A recent PWC report found an organisation’s commitment to sustainability is an important consideration for 78% of employees when searching for a new role.

With over a million roles currently unfulfilled in the UK, it’s clear the talent war can be won by setting ambitious targets and showing a serious commitment to sustainability.

Candidates from Millennial and Gen Z cohorts will increasingly scrutinise your ESOS and SECR reports (as well as any other publicised environmental pledges) and assess whether they’re enough to make a difference or merely greenwashing.

Can Large Companies Get Help With ESOS and SECR Reporting?

Whether you’re a company about to cross the threshold of employees or you’re already reporting under SECR and are about to fall under the scope of the revised ESOS criteria, we understand the complexities of complying with these regulations can seem daunting at first.

But there is professional help available to steer you through the compliance requirements of these increasingly stringent environmental schemes.

From conducting the audits to compiling the data and the reports, with the right help, you can comply with the legislation and uncover significant opportunities for business cost savings that help you grow your bottom line while delivering your sustainability goals (such as becoming carbon neutral).

At Beyond Procurement, our energy audit experts and carbon reduction consultants can help you navigate the complexities of ESOS and SECR reporting and ensure you’re not left in the dark about the significant opportunities for reducing your company’s energy consumption and emissions.

With our expertise, you can avoid the significant fines accompanying non-compliance and secure potential competitive advantages through more sustainable practices, leaving you to focus on your core activities of growing your business and delivering shareholder value.

So don’t hesitate to contact us to discuss our ESOS and SECR compliance services and see how we can help your business reach its sustainability goals faster.