Faltering steps: The holes in contractors’ carbon footprint metrics

Has the industry or the environment felt any benefit from rules requiring contractors to report on their carbon footprints?

Devon-based contractor and furniture supplier TCi spent years developing the sustainable side of its business. It wasn’t just the right thing to do – it was a way to set itself apart in the market. TCi became a net-zero business in 2022, offering reduced-carbon options on its construction projects and allowing clients access to its environmental performance figures. But the 2022 full-scale Russian invasion of Ukraine put pressure on the strategy. “When costs suddenly needed to be shaved out, we found ourselves losing projects,” says TCi sustainability manager Ben Gibbs.

The firm’s furniture supply work was hit particularly badly. “That’s where contractors were trying to save money. We’ve seen construction contractors saying: ‘I don’t need it to be sustainable. I don’t need it to be particularly nice. I need a chair that looks like a chair and desk that looks like a desk for as little money as possible’.

“Suddenly, sustainability is not winning us business. I’m left trying to justify enhancing our sustainability credentials when the financial bottom line says there’s not a lot of returns in that.”

“[The reporting requirements] definitely helps us to identify our key target areas”

Rebecca Ewan, Mace

More than five years have passed since the government introduced mandatory carbon emission reporting requirements. But some firms, like £32m-turnover TCi, question whether they have made any tangible difference. Gibbs says carbon reporting only comes up occasionally in client and main contractor assessments. TCi recently tried to produce a detailed report on its emissions, including those of its supply chain, but found many of the partner companies it asked for data were clueless about their own emissions. He says his firm will continue its sustainability efforts and is hopeful that the wider economy will prioritise such issues again soon.

TCi’s experience highlights one of the tensions in the industry between cost and environmental action. But it also highlights another, more fundamental issue – a patchy approach by large sections of the supply chain to collecting carbon emissions data, despite larger firms being bound by the reporting requirements.

Direct and indirect

Carbon emissions can be categorised into three types. Scope 1 emissions are those made directly by a business, and Scope 2 are made through indirect means such as heating or fuel use. Scope 3 emissions are not caused by the reporting company but are generated by companies in its supply chain, making the reporting company indirectly responsible for them. These are usually the largest category of emissions, particularly in the fragmented construction industry, and were what Gibbs struggled to establish for TCi.

Since April 2019, large and quoted companies have been obliged to report their Scope 1 and 2 emissions in their annual reports as part of the Streamlined Energy and Carbon Reporting requirements. This was introduced under a revision to the Companies Act 2006. The government encourages firms to report their Scope 3 emissions, but it is not compulsory.

“Is there anyone actually out there qualified to regulate any of this stuff?”

Simon Wyatt, Cundall

Further mandatory climate-related financial disclosures were introduced for listed and large firms in 2022. Firms with more than 500 employees and turnover of more than £500m are required to comply, or face a £50,000 fine. These rules ensure large companies report how their governance considers the climate, for example where it sits within a corporate strategy or its risk management policies, and how it informs decision making.

Firms have to ensure they have the correct data in place to comply with the mandatory reporting rules. This has taken up much of the time since the regulations came into force, says Jannis Bille, head of environmental, social and governance (ESG) at law firm Herbert Smith Freehills.

The rules operate on a “comply or explain” basis, meaning firms do not have to make disclosures if they can give a valid reason why they are unable to. “It’s been really effective,” Bille says, “because the comply or explain gave corporates a maximum grace period to comply and they should [all do so] by now. There will be qualitative differences as some companies started much higher up the journey than others. For some it was quite a fast-paced implementation process, but you can definitely see qualitative improvements throughout the economy.”

Some find the regulations helpful. “It definitely helps us to identify our key target areas,” says Mace senior sustainability manager Rebecca Ewan. “As well as the annual disclosure, we do ongoing reporting quarterly to make sure we’re checking how we’re performing on a more regular basis.”

Along with its reporting requirements, Mace has its own annual target to lower its emissions by 10 per cent each year. In its past two financial years, it reported a 5.9 per cent drop in emissions – to 10,758 tCO2e from 11,430 tCO2e in the previous year (see table, right).

Companies with more than 250 staff or a turnover of at least £36m annually are required to take part in the Energy Savings Opportunity Scheme (ESOS). The scheme, which began in 2014, requires qualifying companies to audit their total energy consumption, with a view to reducing it and saving money.

Geraint Rowland, group environmental director of listed firm Costain, agrees that mandatory rules have helped the firm sharpen its focus. “The legislation could be better coordinated. We’ve just been through ESOS, which is… focused on energy but effectively carbon too, but it has driven us to get better with our data,” he says.

In contrast to TCi’s experience, Rowland says Costain’s clients are increasingly asking for emissions data. Megaprojects like Tideway, HS2 and Crossrail were among the earlier movers, with water companies now following suit.

But others believe the rules are being undermined by weak enforcement. “I would say all of the mandatory disclosure which has to be done in the UK has been very limited,” says Simon Wyatt, sustainability partner at engineering consultancy Cundall. “It’s still very much in its infancy and one of the biggest issues is that all of this is becoming mandatory, but who are the regulators? Is there anyone actually out there qualified to regulate any of this stuff? At the moment, I would say no.”

Wyatt adds that voluntary schemes such as the Carbon Disclosure Project and Science Based Targets are more useful than the mandatory requirements, because they involve benchmarking against set standards, so are more credible. Contractors signing up to SBTi (such as Balfour Beatty) are required to disclose their Scope 3 emissions if they account for 40 per cent or more of their overall emissions. But their voluntary nature limits their effectiveness, he says.

The previous page’s analysis of the top 30 contractors by turnover from the CN100 also found discrepancies in the way companies record their data. There are different accounting methods – known as location-based and market-based calculations – that can be used for Scope 2 and 3 emissions calculations. Publication of carbon emissions under the different methods varies widely among the largest contractors. This means that while it is possible to compare individual firms’ emissions to their previous years, trying to compare them to each other is not easy.

Supply chain emissions

Another issue some raise is that Scope 3 reporting is not mandatory, yet it usually accounts for the largest share of a businesses’ carbon impact.

Commentators such as Bille expect that Scope 3 will become a mandatory reporting requirement in future, with work from the International Sustainability Standards Board, created at the 2021 COP26 Climate Change Conference in Glasgow, leading to the creation of a global baseline for investor-related sustainability reporting.

The work, which the UK, EU and US have backed, has Scope 3 in its sights as a future mandatory disclosure. In addition, since a 2021 procurement notice, the UK Government has theoretically favoured large firms that report their Scope 3 emissions when awarding major contracts.

CN’s analysis of the UK’s largest 30 contractors found that all now publish data on their Scope 3 emissions even though it is not yet compulsory.  For many, this is a very new metric, with the Murphy Group only reporting them for its whole group for the first time in its latest annual report. The firm published Scope 3 figures in 2022, but they only covered its UK operations and excluded its work in Ireland and North America.

Given the lack of rules governing publication of Scope 3 emissions data, there is very little consistency on what is reported. Many annual reports include one of either market-based or location-based accounting for Scope 3 emissions. Six of the top 30 publish both, one only mentions location-based Scope 3 and the rest do not specify which method they use.

There are 15 different sub-categories of Scope 3 emissions, ranging from employee travel to downstream leased assets and investments. Only Balfour Beatty provides figures for every one of the categories.

Reporting Scope 3 figures gives an indication of some of the challenges facing the industry. For example, despite Mace targeting a 10 per cent cut in carbon annually, its Scope 3 emissions actually rose from 7,607 tCO2e in 2022 to 7,699 tCO2e in 2023. And with SMEs, who make up the majority of the industry, not required to publish their carbon emissions at all, are too many companies left out of the reporting requirements?

“There is a recognition that the burden is [proportionally] much larger on smaller entities than on larger ones because of how much manpower it requires to collect the data,” says Bille. “By targeting certain players, you make sure that a lot of others are affected directly or indirectly because the reporting obligation of one relies on other people, and [the larger companies] will leverage their power in the market to obtain that data.”

To reduce the burden of data gathering on its supply chain, Mace and Costain have both developed their own environmental reporting platforms so subcontractors can easily provide the data the main contractors need. Costain is still in the process of rolling out its carbon tracker across its projects.

Most people CN spoke to for this article are concerned about the quantity of data collection required under the various mandatory and voluntary disclosure rules. “There are a lot of organisations who have comprehensive ESG teams who are basically spending 90 per cent of their time reporting their impact rather than coming up with strategies and plans [for improvement],” says Cundall’s Wyatt.

“I think the new regulation is pushing in the right direction, but it needs to be brought together in one place and made a lot simpler so it’s easier to report. Because if everyone’s spending all their time reporting and they’re not actually changing anything, it’s a waste of time. We need action.”

TOP 30 UK CONSTRUCTION FIRMS’CARBON ACCOUNTING

James Low, group sustainability director at Mace and Geraint Rowland, group environmental director at Costain, discuss the direction of travel for carbon accounting in the latest episode of CN’s First Site podcast.