Mamma M-ESOS: Here we go again

The thresholds for ESOS are unchanged: an individual UK entity must have either 250 employees, or both an annual turnover in excess of £44 million and an annual balance sheet in excess of £38 million. These thresholds are the same as in previous phases, even though the definitions of a "large undertaking" for other purposes do not align with that in ESOS. ESOS also sits outside the Companies Act, and is not expected to be directly impacted by the Government's imminent Modernising Corporate Reporting review.

Note that where a parent company prepares consolidated accounts, it will need to understand its own individual employee, turnover and balance sheet numbers, as the thresholds must be exceeded by an individual entity, not a group.

A particular feature of ESOS is the aggressive rules around corporate grouping. All UK entities which are part of the same group will need to comply with ESOS if there is one individual large undertaking in the same group that exceeds the thresholds. While this might not be problematic in a straightforward corporate group consisting of a parent company and a few wholly owned subsidiaries, it may be an issue for large, diverse groups with significant separation between business units.

Alternative asset managers should also be aware that their fund vehicles may be the parent of majority-held portfolio groups containing UK companies, with the consequence that one large UK portfolio company impacts the compliance position of an entirely unrelated portfolio company in the same fund. A UK fund vehicle may itself hold the obligation to comply.

Without someone in the organisation overseeing parts of the group in scope and communicating that down to other UK entities, there is a good chance that some entities which should comply will be unaware of that fact.

A new feature of Phase 3 was the requirement for in-scope businesses to prepare an action plan detailing energy efficiency measures they intended to take in the relevant period (the remaining years of the four year phase), or alternatively to submit a statement that they did not intend to take any such measures. The action plan also needs to be updated annually.

In this first compliance period, businesses may have struggled with whether to file a "no action" statement, considering that this may send a particular message regarding their environmental ambitions. According to public ESOS data, around 85% of in-scope businesses chose to submit an action plan rather than a "no action" statement. There may, however, be numerous good reasons for opting for "no action", including an already highly efficient office space or lack of control over the building's energy usage. Measures recorded in the public data ranged from staff education on energy usage or closing offices for certain periods, to replacement of boilers or even demolition of old buildings.

The Environment Agency, which administers ESOS in England, took enforcement action against an unusually high number of businesses for failing to comply with Phase 3. According to published data, between November 2025 and August 2026, more than 160 civil penalties were imposed, including on some household names and listed companies. Penalties are relatively modest, the highest being £67,500 and the lowest £1,250, with an average of just over £20,000. However, the EA employs a "name and shame" approach and is not easily persuaded against publication of the company's name and penalty level even where there are mitigating circumstances. There will also have been a much larger cohort of businesses who were not fined but did receive an enforcement letter from the EA, which in itself can be disruptive as the business will have limited time to comply before the EA takes more definitive action.

The EA reports that as of August 2026, 86% of businesses are in compliance, but that it continues to enforce the regime against those who are not.

ESOS is derived from the EU's Energy Efficiency Directive 2012, and as a result, group companies located in EU Member States may well be under similar energy audit obligations. However the EU has recently revised its energy audit rules via the Energy Efficiency Directive 2023, and the scope of the obligation now depends on the entity's energy consumption rather than its size in employee or financial terms. This means that some entities who were not in scope of the audit  obligation previously will find themselves newly in scope. Entities with over 10 TJ average annual energy consumption across the previous three years must carry out an energy audit, and those with over 85 TJ on average must implement an energy management system.

The revised energy audit obligation should take effect on 11 October 2026, though not all EU Member States have transposed the Directive on time, meaning that the previous size-based obligations will continue to apply. The application of the rules to corporate groups should also be carefully considered, and may vary between Member States.

Given the Environment Agency's increasingly robust approach to enforcement and the short window between the Phase 4 qualification date and the compliance deadline, organisations should begin their scoping and preparation now rather than waiting until the position is fully crystallised. This is particularly so for complex groups and alternative asset managers, where identifying the full universe of in-scope entities requires early engagement across business units and fund structures.