Feeling the heat? ESOS phase 4 is on the horizon in the UK

As phase four of the Energy Savings Opportunity Scheme (ESOS) approaches, organisations will be looking to confirm whether they qualify, map the entities within scope – including complex group and joint venture (JV) structures – and engage ESOS lead assessors before regulatory pressure starts to turn up the heat on energy compliance.

Who needs to comply? 

The current compliance deadline for ESOS phase four is 5 December 2027. By this date, qualifying organisations must submit a notification of compliance to the relevant national environmental regulator.

Whether an organisation qualifies for the next ESOS phase is determined by its status on the qualification date of 31 December this year. An organisation will qualify if, on that date, it is deemed a “large undertaking”, meaning any UK company that either employs 250 or more people or has an annual turnover in excess of £44 million and an annual balance sheet total in excess of £38 million (for two consecutive years).

These tests capture a wide range of businesses, including those where one UK undertaking within the corporate group meets the threshold and triggers compliance for the whole group.

Organisations should not assume that a previous phase three non-qualification automatically carries forward: circumstances change and the 31 December qualification date must be assessed afresh.

Large undertakings

A first step for organisations is to establish whether they or any other UK-based entity within the corporate group meets the definition of a large undertaking. Corporate groups qualify under ESOS if at least one UK group member meets the scheme's definition of a "large undertaking", with the highest UK parent company being responsible for compliance.

ESOS also applies to UK registered establishments of an overseas company, regardless of their size, if any other part of their global corporate group's activities in the UK meet the ESOS qualifying criteria. 

Assessments and notifications

Where it is determined that the "large undertaking" threshold is not met, companies can still be subject to environment regulator enforcement action if they do not open a "managing your ESOS" (MESOS) account and submit a "does not qualify" notification. This is because complexities around consolidated accounting or complex corporate structures may trigger the environment agency to question the silence.

There are different responsibilities for each member of a corporate group where there is a large undertaking. 

For group parents, the top UK parent company will operate as the default responsible undertaking for the purposes of an ESOS submission. It will be its responsibility to ensure that all group entities are captured as part of the ESOS analysis and evidence pack. It will need to open a MESOS account, carry out an energy audit, report and submit a compliance notification. 

For subsidiaries in the UK, they may not meet the large undertaking threshold in their own right, but compliance may be triggered by a company in their wider group. Subsidiaries should ensure that ESOS compliance is being handled at parent level.

Standalone undertakings – those that are not part of a wider corporate group that have confirmed that they must comply with ESOS on the basis of their own employee numbers, turnover and balance sheet total – will need to open a MESOS account, carry out an ESOS assessment and report and then submit a notification of compliance. 

Investment companies and corporate groups

Some investment companies will not be caught under ESOS as they do not supply goods or services to customers and so have no turnover. Investment companies that do not have any turnover and employ fewer than 250 employees fall outside the scope of ESOS in their own right.

However, if an investment company has just one group member that is trading and meets the ESOS thresholds, the whole group qualifies for ESOS. The investment undertaking may be part of the UK group or can be the responsible undertaking for ESOS purposes even with no turnover of its own. The position of investment companies within wider group structures, therefore, requires careful analysis at an early stage. 

Joint ventures 

Care is also required when deciphering who is responsible for assessing ESOS obligations for JVs. The "control tests" from the Companies Act 2006 are imperative for determining within which group a company sits. This will require a review of the voting rights, ability to appoint or remove board directors and the ability to exercise a dominant influence. The position of a JV is no different and depends on the nature of the control exercised.

• If the JV is controlled by one party: the JV forms part of that party's corporate group for ESOS purposes; if the JV meets the definition of a large undertaking then the wider group must comply with ESOS.
• If the JV is jointly controlled, with no one party having more control than any other: the JV will need to assess its own qualification as a standalone undertaking.
• In the unlikely event that the JV triggers ESOS compliance for more than one corporate group: both groups should comply so as not to be in breach; this will require careful coordination and means early clarity on control arrangements is essential. 

Identifying the controlling party in a JV is not always a straightforward exercise – when it comes to ESOS compliance, it will be important to establish and document who is responsible.

Consequences of non-compliance 

Non-compliance with ESOS most commonly gives rise to enforcement action by the relevant environmental regulator. There are five main financial penalties – including failure to notify and failure to carry out an assessment – that apply and each can incur separate liability for the company if an ESOS submission has not been made. The penalties are broad in scope starting at £5,000 or £50,000 (depending on the breach) with the accrual of penalties for each day in breach (up to a maximum of 80 days).

Notably, the public register of non-compliant organisations that receive a penalty under ESOS is a powerful deterrent in its own right: in an era of heightened ESG scrutiny from investors, lenders and supply chains, being identified as having failed to comply with ESOS can have reputational consequences that may be more damaging than the possible financial penalties.

Osborne Clarke comment 

With the phase four compliance deadline on 5 December 2027, early and structured preparation is advisable. The qualification criteria cast a wide net: and the interplay between group structures, investment company positions and JV arrangements means that mapping ESOS obligations is rarely a straightforward exercise.

Whether acting as a standalone undertaking, part of a corporate group, an investment company with portfolio holdings, or a JV partner, understanding which specific obligations apply –  and acting on that understanding early –  is essential. ESOS compliance is not a box-ticking exercise: it is an opportunity to get ahead of the "energy curve". The consequences, both reputational and financial,  of getting this wrong — underscore the importance of acting now rather than waiting for regulatory pressure to mount.

Steps that can be taken at this stage include assessing qualification status on the 31 December qualification date, identifying which entities fall within your ESOS scope and engaging an ESOS lead assessor to begin the audit process in good time.

Osborne Clarke is at the forefront of these developments and ready to help businesses navigate the fast-changing sustainability regulations. Please contact our experts if you wish to discuss these developments further.