ESG – the developments and obligations to be aware of

ESG

The environmental, social and governance (ESG) issues are some of the key driving forces currently for companies. Across industries these factors are being used as a framework to assess the sustainability of a company. The implementation of an ESG strategy will include the consideration of the following factors amongst others:

• Environmental
  • The company’s contribution to pollution, climate change, greenhouse gas emissions and their waste disposal. As well as their environmental related policies and compliance with environmental regulation.
• Social
  • The company’s relationship with its employees and community in which it operates. This will include the working conditions, data protection and privacy policies, diversity and inclusion and its supply chain.
• Governance
  • The company’s corporate governance, this includes the composition of the board, avoiding bribery and transparency with their accounting methods.

Implementing an ESG strategy may be time consuming and costly initially, however there are wide-ranging benefits that the company will enjoy in the long term.

Companies with strong ESG frameworks will be recognised within their industries, therefore they will be unlikely to face reputational damage for a lack of consideration to environmental related issues. In addition, an ESG focus can improve financial performance, reduce any financial repercussions of non-compliance with relevant policies and assist in procurement and future investment decisions.

Recent developments in environmental reporting

At the end of July 2023, the European Commission set out the first EU Sustainability Reporting Standards. These standards provide for new governance and reporting obligations in relation to company policies on sustainability, climate change and human rights. These factors are considered in relation to the company performance, growth and any risks it is currently facing or may face in the future.

Any EU publicly listed company with 500 or more employees will have to comply with these obligations from 1 January 2024. The scope extends with time, by 2026 EU publicly listed companies with more than 250 employees, over €40m turnover or over €20m total assets will need to comply.

By 2028 small and medium sized listed companies and non-EU companies with subsidiaries in the EU with net turnover of over €150m will be subject to these provisions.

Following on from the European Commission, the Department for Business and Trade published their proposal of the UK Sustainability Disclosure Standards. These standards set out sustainability related opportunities and risks that the company is facing. These will be based on the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards that were issued in June 2023.

It is not clear yet which companies will be subject to the UK Sustainability Disclosure Standards, however it is likely that publicly listed companies and large UK companies that are currently making Task Force of Climate-Related Financial Disclosures (TCFD) related disclosures will be the ones initially subject to the requirements.

The Secretary of State for Business and Trade will be considering the endorsement of the IFRS Sustainability Disclosure Standards, in order to formulate the UK Sustainability Disclosure Standards by July 2024.

Once the IFRS Sustainability Disclosure Standards have been endorsed, the UK government will consider whether disclosures will be a requirement for limited liability partnerships and UK registered companies and the Financial Conduct Authority will do the same for UK publicly listed companies.

The aim of these reporting requirements is to create a more transparent market which will assist investors in comparing companies when considering different investment opportunities and allocating capital.

Looking ahead

There is a clear drive within company boardrooms across industries to consider and implement robust environmentally focussed strategies and policies, with the addition of governments beginning to set out sustainability related reporting obligations.

Therefore, starting to consider these factors now will prepare companies for any future legislative obligations as well as increase the transparency of their company for future investors.

HCR has dedicated specialists who would be happy to discuss these issues with companies.

For further information please contact a member of our commercial team.