Introduction
Designed to drive the UK’s long-term response to COVID-19, the government’s approach to what has been termed a green industrial revolution revolves around augmenting and refining Environmental, Social, and Governance (ESG) regulations. The intent to establish leadership in sustainability was vehemently signaled at last year’s Presidency of COP2026 where the UK became one of the first major economies to incorporate net-zero legislation.
In a bid to accelerate post-pandemic growth, the UK government is developing a regulatory landscape for ESG policies that work for the UK market by tailoring many areas of the law to local priorities. Post-Brexit legislation built to align with and even exceed sustainability and human rights standards enshrined in EU law is also part of the mix.
With an increase in consumer and investor scrutiny over ESG performance metrics, UK firms need to pay more heed to the broader impact of their business activities on these issues and subsequently compliance with the rules and regulations laid down for them.
ESG-compliant company stocks have consistently outperformed their non-ESG counterparts in the open markets indicating a strong sentiment towards enterprises that care about non-financial or extra-financial activities.
As the views of investors in this area continue to mature, ESG data has graduated from being merely a peripheral part of investment analysis to a core part of it across all asset classes. This fact is perhaps best demonstrated by the steady rise in AUM from signatories to the UN-supported Principles for Responsible Investment (PRI), which has gone up from $22T in 2010 to over $60T a decade later.
With this in view, let’s take a brief look at some of the regulations for ESG reporting in the UK.
ESG Reporting in the UK
As all the elements of ESG reporting are extremely interdependent, performing satisfactorily in one area is critical to meeting the requirements of the other. They not only cover a diverse range of topics but are also constantly evolving owing to the changing nature of global events. As with any regulation, however, the development of ESG reporting frameworks has been cautious and studied.
Since the issues they cover have grown and changed in focus and importance over time, there are no cohesive, one-size-fits-all ESG reporting frameworks covering all factors. Depending on the scope, sector, and size of companies, they must comply with different ESG regulations covering various aspects derived from a range of official guidance and legislative sources.
These include
- Companies Act, 2006
- Climate Change Act (CCA), 2008
- Disclosure Guidance and Transparency Rules (DTRs)
- UK Stewardship Code (USC), 2020
- UK Corporate Governance Code (UKCGC), 2018
- Modern Slavery Act, 2015
- Bribery Act, 2010
The bulk of ESG compliance requirements come from the DTRs, UKCGC, and the Companies Act. However, there are certain specific requirements that come under the ambit of mandatory ESG reporting. These are,
- Energy Use: As required by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations, quoted companies (those having their equity share capital listed officially on a stock exchange) must report on global energy use. Large businesses are required to disclose their GHG emissions and UK annual energy use.
- Gender Pay Gap: Any company having a strength of >= 250 is required to comply with gender pay gap reporting regulations and make appropriate disclosures.
- GHG Reporting: Under the Companies Act (Strategic Reports and Directors’ Report), Regulations, GHG emissions reporting is mandatory for quoted companies since 2013.
- Modern Slavery: Organizations in the UK with an annual turnover of >= £36M are required to publish an annual statement listing steps to prevent modern slavery.
While these requirements are certainly not exhaustive and continue to grow in scope with each passing day, a lot of companies have voluntarily adopted frameworks and implemented processes that will make them ESG-compliant and prepare them better for future obligations.
The Lloyds Banking Group (LBG) is among one of the UK’s most prominent companies and published its first ESG report in February 2021 where it noted that stakeholders have increasingly shifted focus toward ESG performance when assessing a company’s overall success. It indicated the scale and scope of ESG and its impact across the organization and referred to the Task Force on Climate-Related Financial Disclosures (TCFD) among other disclosure and reporting guidelines that it seeks to align itself with.
The TCFD has perhaps the most significant momentum among various ESG frameworks in the UK with erstwhile chancellor Rishi Sunak hinting that mandatory reporting in accordance with its guidelines will be implemented by 2025 across the UK economy.
In our next section, we will briefly list some of the ESG-related guidelines and frameworks that are in use in the UK by various organizations.
ESG Reporting Frameworks in Use in the UK
There are six principle frameworks and guidelines in existence that various organizations can utilize to facilitate ESG reporting and compliance. These are:
- The Task Force on Climate-Related Financial Disclosures (TCFD)
- The Carbon Disclosure Project (CDP)
- The Sustainability Accounting Standards Board (SASB)
- The Global Reporting Initiative (GRI)
- The UN Principles for Responsible Investment (PRI)
- The International Integrated Reporting Framework (IIRC)
Ranging from financial impact in accounting standards to social and climate impacts in others, all of these frameworks have varied focus areas and companies may adopt one or more of these depending on various factors such as sector and size.
The aforementioned ESG report from LBG not only leverages the GRI, SASB, and TCFD but also aligns with the UN’s Environment Programme Finance Initiative’s Principles for Responsible Banking.
In a bid to clear the alphabet clutter and develop an overarching framework incorporating the best of each framework, the World Economic Forum (WEF) proposed a set of ESG metrics via its International Business Committee that aims to build on existing guidelines and frameworks.
In our last and final section, we briefly describe the steps companies need to take to align themselves with current and future ESG regulations and enjoy hassle-free compliance.
Complying with Current and Future ESG Regulatory Reporting
Now that we know and understand the broad landscape of ESG reporting in the UK, let us briefly understand why compliance is not the only benefit for organizations that are required to comply with ESG reporting requirements.
Organizations in the UK must understand the impact of these regulations on their business to fully appreciate ESG regulatory compliance. These include:
- Building a Corporate Reputation – Both employees and consumers expect businesses today to show a strong commitment to ESG issues and expound on their long-term plans to improve performance in those areas.
- Reducing Direct Costs and Gaining Efficiencies – ESG reporting facilitates monitoring and measuring various critical metrics such as raw material and energy consumption allowing companies to realize superlative operational efficiencies.
- Managing Investor Expectations – Institutional investors are increasingly interested in issues such as environmental oversight, board diversity, and risk and it is crucial for organizations to deal with the added scrutiny with care and consideration.
- Building a Competitive Advantage – Perhaps the most important, early implementations of ESG monitoring and reporting have shown exceptional results for companies and allow time for an organization’s ESG approach to mature, develop into a strategic activity and culminate in a competitive advantage.
Here’s what organizations in the UK can do today to make sure they align themselves with current ESG regulations and improve their ESG reporting in the future.
- Identify core audiences (regulators, shareholders, investors, analysts, etc.) that you want to address as part of your ESG reporting activity.
- Identify technologies, infrastructure, and investment in resources that are needed to support the identification of material issues, ESG performance monitoring, and associated regulatory compliance.
- Conducting an assessment of materiality is critical to prioritizing applicable ESG areas specific to your business, along with identifying existing ESG regulatory reporting requirements and how they can apply to you.
- ESG should be a standing item on the agenda of the Board and it should have access to comprehensive data and expertise around ESG regulatory reporting so as to adequately support the business.
- Understanding the suitability of existing ESG frameworks and guidelines for your own business is extremely important. Regularly monitoring the ESG reporting landscape is highly recommended. Since ESG reporting has wide-ranging implications for any business, evolving processes to make it a strategic driver is a complex exercise.
It is extremely important to invest in the right technologies and partners to navigate the complex waters of ESG reporting. Having produced GAP Inc’s very first ESG report, an all-in-one disclosure management system like IRIS CARBON(R) is equipped to facilitate ESG reporting of the highest quality for your organization.