Leading up-to and since COP26 there has been a lot of talk about ESG reporting. With this, comes ESG reporting requirements. But what exactly are ESG reporting requirements? Where do they apply? And how do they impact businesses in the UK? This article will demystify the world of ESG reporting requirements for UK businesses.
ESG stands for Environmental, Social and Governance. It refers to the positive impact factors that are attributed to an organization beyond traditional financial performance. Though ESG’s have become more prominent recently, they have actually been around for several years.
ESG’s are typically operationalised as reporting metrics, which are assigned through an ESG framework. There are many types of ESG frameworks, each with their own specific metrics.
Traditionally (and still today), ESG factors were used by investors to identify risk and growth opportunities of businesses, with a focus on the ‘humanitarian good’.
As the climate crisis has worsened, the environmental impact of businesses has been thrusted further into the limelight. This has meant investors and other stakeholders are paying more and more attention to a businesses environmental impact.
The increased attention paid to environmental impact, along with the awareness that sustainability impacts long-term profitability of businesses, is what has created the ‘perfect storm’ of demand for ESG metrics.
Though reporting requirements differ from framework to framework, there are general themes that will be covered by most frameworks. Not all themes are relevant for your industry, so it is wise to choose a framework that most reflects the needs and operations of your enterprise.
Typically, ESG frameworks will cover the following in terms of reporting requirements:
Environmental factors include:
For each of these, there will be technical protocols and accounting metrics to ensure the standards are followed correctly. An example of this is procedures to account for Scope 1, 2 and 3 emissions, a way of estimating carbon emissions that occur further down supply chains.
Social factors include:
In the UK, companies already have certain legal standards that they have to adhere to. Which standards apply depends on the type of company, size, industry and the activity it undertakes.
They can range from simple financial reports (e.g annual accounts) that apply to most businesses to more specific reports; such as anti-bribery or employee engagement statements for larger companies. For more information on this, see the companies act of 2006, and bribery act of 2010.
Though many of these measures have been in place for several years - as of February 2022, a unified framework typically thought of when describing ESGs is not mandatory for UK businesses.
Part of the reason for this is that a unified framework is not yet agreed upon. There is however a growing effort to achieve this, at which point it is likely to become mandatory.
As alluded, there is a considerable effort to bring a unified reporting structure, that would then be mandatory for UK businesses. The benefits of having a unified reporting standard is that organisations will be comparable to one another, like-for-like. This maintains fairness and consistency in reporting.
Some of the organisations working towards a unified ESG reporting structure include the World Economic Forum and Deloitte. They’re looking to identify common ground in existing frameworks, which can then be extrapolated in a common framework.
The view from these organisations is that once a common reporting standard can be agreed upon, that this will pave the way for regulatory requirements to disclose said information according to that standard. This could then be adopted internationally, ensuring multinationals are reporting to the same framework that subnational organisations will report to.
More specifically to the UK, recent events have suggested a mandatory reporting structure to be imminent.
The Green Finance Roadmap describes the planned roll-out of the Sustainability Disclosure Requirements. These requirements have been developed in collaboration with the TCFD (Task Force on Climate related Financial Disclosure), and will apply to all businesses with >500 employees and >£500m annual revenue. This will begin to affect UK organisations in 2022.
It should be noted that this is likely just the beginning of mandatory ESG reporting requirements. Even if your organisation currently is not mandated to report according to a framework, it will likely be the case that it is mandatory in the near future.
It should also be considered that the TCFD framework is initially being rolled out in the UK, but may not be the international standard, so some adjustments may be necessary post-adoption.
It would be wise for all organisations to begin considering how they track, measure and report on ESG metrics. Having processes and procedures in place now will make the adoption of future frameworks much easier, reducing friction caused as a result.
You may wish to assign an individual or department within your organisation the role of ‘ESG manager’, or ‘ESG programme manager’ where a portfolio of ESG projects are in place to aid progress.
We would also recommend considering that whatever framework is adopted, that it could change as new regulations come into place. Therefore, any tools or software adopted must be adaptable for changes, or significant friction is likely to occur.
Intuitix was designed to allow ESG programme managers to quickly and easily update their reporting frameworks, while maintaining automations and project data consistency. For more information on how we can help you do this, book a timeslot with one of our team.
We wish you the best of luck on your ESG reporting journey!