ESG stands for Environmental, Social and Governance. For a business, ESG is about how they contribute to a sustainable planet. Forms of ESG in larger businesses has been around for a while, but with a revival in climate awareness and social responsibility, many businesses are now looking to adopt ESG policies and frameworks. In some circumstances this is essential if you want to secure bank funding or investment, amongst other things.
To achieve ESG compliance a business needs to establish standards for their operations. This compliance can be judged to a specific set of matrices and is used by many investors and third parties when determining the value and future of a business. It is worth noting that 83% of consumers are now saying businesses should actively shape ESG best practices, with many refusing to work/buy from a non-compliant business. With this in mind, compliance it is a goal worth aiming for.
Environmental:
- Climate change;
- carbon emissions;
- energy efficiency etc.
Social:
- Data protection;
- gender and diversity;
- labour standards etc.
Governance:
- Whislteblower schemes;
- bribery and corruption; executive compensation etc.
ESG factors are now difficult to turn a blind eye to with many governments taking an encouraging approach. However, it is a convoluted area of legislation and difficult to understand exactly what the obligations of a business are. The main obligations put on businesses in view of their environmental and social impact include some of the following pieces of legislation:
- Climate Change Act 2008;
- UK Stewardship Code 2020;
- Disclosure Guidance and Transparency Rules;
- Modern Slavery Act 2015
- Companies Act 2006; and
- UK Corporate Governance Code 2018;
The key reporting obligations contained within the above are:
- Modern Slavery – companies with a turnover of more than £36 million must report on their steps taken to prevent modern slavery;
- Gender pay gap – employers with more than 250 employees must report on their gender pay gap;
- Energy use – listed companies must report on their global energy use; and
- Greenhouse gas – listed companies must report on their greenhouse emissions.
Where the above legislation surrounding ESG starts to get complicated is that the majority of reporting contained under ESG regulations does not apply to all businesses, and is not mandatory for all. However, although the regulations do not apply to all but the biggest businesses for now, we are seeing (as per the pledges from COP26) more and more government involvement in this area. It is expected that very soon we will see these regulations extended to all businesses. As an example, we have recently seen the Chancellor announced that some businesses are obliged to publicly disclose climate-related financial information, to ensure businesses are considering their own impact on the planet. These rules come into force from April 2022 and is currently aimed at the 1,300 largest registered companies.
We are aware that lender and investors have long focused on ESG compliance when valuing, lending and deciding to invest in a business, no matter the size. Coupled with this, the governments clear direction and consumers new interest in working with environmentally and socially responsible businesses, it is important that businesses of all size to consider and adequately address their ESG compliance.
It would be a good idea for businesses to bear some of the following in mind when trying to achieve ESG compliance:
- Conduct an assessment to highlight/prioritise appropriate ESG areas in the business. Using this, businesses should clearly identify any relevant reporting requirements;
- Make sure that ESG is discussed at board level and ensure the board are kept up-to-date with requirements and information on ESG issues so that changes can be made;
- Identify any ESG issues that would matter most to a business’ stakeholders and ensure these areas are prioritised;
- Address technology, regulatory and monitoring of specific ESG requirements (such as adopting the World Economic Forum’s ESG metrics);
- Trying to address a lack of ESG policy or direction with existing relationships should be a priority to ensure a business has recourse should their supplier or other business partner fall short of their expectations on ESG. It is worth noting that many businesses are keen to show their own ESG compliance, so will be open to the idea;
- Build on corporate reputation by clearly showing ESG compliance. This can be done in many ways, but having a clearly displayed outward facing ESG policy is recommended. As is properly negotiating contracts with suppliers and other partners, looking at their own ESG compliance and ensuring that, by dealing with them, a business’s reputation would not be tarnished; and
- Satisfy individual investor requirements where possible. There are many investors who already demand specific disclosure on ESG issues before releasing funds. .
In order to do this, it is important to take a holistic view at your business and not ignore any aspect. You must expect that, in the beginning, change may be difficult, but a business must keep in mind the clear direction we are travelling in, the benefits in terms of employee’s and other stakeholder’s happiness, corporate image and ability to secure funding.
Here at ACLF, we are extremely proud of own journey to ESG compliance, if you need any help with your obligations or if you need assistance implementing some of the above suggestions, please reach out to our experienced team for a chat.
Review your suppliers position; your distributors; what do your consumers/ clients want; what is and isn’t mandatory and practically what can you achieve. The framework and policies governing these can then be created with many benefits afforded to the business for the future.
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