The importance of sustainability is increasingly prevalent in today's society. Consumers and particularly investors want to know that businesses recognise their impact on wider society and the environment and are actively looking to improve this.
What is ESG?
ESG stands for Environmental, Social and Governance. It is a term used to describe standards that measure a business' effect on the environment and society. A strong ESG strategy ensures that a business is transparent about its operations and keeps it accountable for its impact.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (CR22) came into force on 6 April 2022, amending certain provisions of the Companies Act 2006 (CA 2006).
The CR22 has created mandatory climate-related financial disclosures including:
- Descriptions of how the company manages climate-related risks
- Descriptions of actual and potential impacts of climate-related risks on the company's model
There is scope for companies to not make certain disclosures, however the directors of the company must be able to show a clear explanation as to why they do not believe such a disclosure is relevant to their company.
The CR22 applies to UK companies with more than 500 employees, which are either a public company trading on a UK regulated market, AIM or a private company which has a turnover of more than £500 million.
The same disclosures are also required to be made by certain limited liability partnerships by way of the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022.
Task Force on Climate-Related Disclosures (TCFD)
Also aimed at companies with over 500 employees and £500 million turn-over is the TCFD. Introduced in 2015, the task force established recommended disclosures around four main areas of governance, strategy, risk management, and metrics and targets.
Since April 2022, these disclosures have become mandatory for over 1,300 of the largest UK companies and financial institutions.
- Describing climate-related risks and opportunities in the short, medium and long term
- Describing the targets used to manage climate-related risks
- Describing management's role in assessing and managing such risks and opportunities
For further information for businesses having to make such mandatory disclosures, the Department for Business, Energy and Industrial Strategy (BEIS) has recently published guidance here: https://www.gov.uk/government/publications/climate-related-financial-disclosures-for-companies-and-limited-liability-partnerships-llps
Some organisations in the UK have chosen to apply certain ESG guidelines, for example by signing up to the United Nation's Sustainable Development Goals. These are 17 objectives aiming to provide a more sustainable future for all.
Notable goals in relation to businesses include Goal 8 "promote sustained, inclusive and sustainable economic growth" and Goal 12 "ensure sustainable consumption and production patterns".
An example of a type of business committing to a strong ESG strategy is that of a B-Corp. These are companies aiming to benefit wider society and the environment, rather than just maximising profits for shareholders. A company has to meet certain requirements to be certified as a B-Corp and these are reviewed at regular intervals. For further explanation of B-Corps, please see our article The Rise of B-Corps also in this edition of Inside Out.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.