The expectation for companies to align their business with environment, social and governance (ESG) factors is on a rapid upward trajectory. Increasing stakeholder awareness of sustainability issues, and the impact that these can have on economic value, mean that companies are coming under increasing pressure not only to tackle their negative impact on society and the environment, but to contribute positively to the community and the wider world in which they operate.
This heightened investor awareness and expectation is reflected in the increase, both in scale and scope, of mandatory ESG corporate reporting requirements. To help companies with these obligations, various organisations have developed ESG reporting standards which provide a framework for the type of information that should be disclosed, e.g. the investor-focused Task Force on Climate Related Disclosures recommendations.
What is ESG?
ESG reporting requirements, and the standards which frame them, are constantly evolving, and keeping up with developments is not always easy. The concept of ESG itself is wide, with each component covering a range of separate, yet converging, themes. The "E" includes environmental matters such as climate change, energy use and energy efficiency, pollution, biodiversity and resource scarcity; the "S" looks at areas such as social, community and human rights issues, modern slavery, DEI (diversity, equity and inclusion), stakeholder and employee engagement, and gender pay gaps; and the "G" covers topics such as bribery, corruption, executive pay, board diversity and anti-money laundering, as well as cyber and data security (see here for more on ESG and cybersecurity).
While the E and the S certainly get more publicity, it is the G that forms the base of a robust sustainability strategy and a company's related reporting compliance. The introduction of mandatory disclosure obligations ensures that boards are having discussions around ESG issues and embedding those considerations into internal governance frameworks. This encourages the transition to a more sustainable business model, and means that boards are better equipped to navigate the evolving reporting landscape.
What are the UK reporting requirements?
Exactly what is required in terms of ESG disclosures, and where those obligations are found, will largely depend on the size and type of company – with quoted, premium listed and large companies subject to the most detailed requirements. Many reporting requirements are set out in the Companies Act 2006 and related regulations, e.g. Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. These requirements are supplemented by the Listing Rules and Disclosure Guidance and Transparency Rules for listed companies, and corporate governance and stewardship frameworks, e.g. the UK Corporate Governance Code 2018 for premium listed companies, the Wates Principles for large private companies and the UK Stewardship Code 2020 for asset owners, asset managers and service providers. There are also specific requirements under certain legislation such as the Modern Slavery Act 2015, the Equality Act 2010 and the Bribery Act 2010, as well as sector distinct requirements, e.g. for the financial services industry.
What about smaller companies?
Currently, mandatory disclosures generally affect the largest companies, but the direction of travel is towards deepening the scope of companies to which they apply. Therefore, smaller companies that are not currently legally obliged to report may choose to do so to prepare for future obligations. Companies may also elect to report voluntarily on ESG matters due to investor pressure or to attract employees among an increasingly aware talent pool.
What next?
Other developments in ESG reporting expected over the coming year include a mandatory requirement for certain companies to publish "net zero transition plans" that outline how they will adapt as the UK moves towards a low carbon economy by 2050. It is also worth noting that European corporate sustainability reporting requirements may well impact non-EU companies in the future if they have significant EU activity or fall within the value chain of an in-scope EU company as we discuss here.
