Growing concerns about social and environmental issues as well as more attention being given to corporate governance and legal obligations on companies to disclose climate-related information, has led to greater interest in how companies should operate in a responsible way. Companies are increasingly expected to consider purpose as well as profit, and the future of our planet and its people. All these various issues are collectively referred to as environmental, social and governance (ESG).
In recent years, the term ESG has gained significant traction in the business world. But what exactly is ESG, and what exactly does it mean for businesses in terms of their compliance?
ESG stands for Environment, Social, and Governance.
Environment: This pertains to a company’s sustainability practices, its carbon footprint, and its overall impact on the planet.
Social: This aspect focuses on a company’s relationship with its community, workforce, customers, and suppliers.
Governance: This deals with a company’s internal rules, processes, contracts, and other regulatory aspects.
The Growing Importance of ESG
While ESG might seem like a side project for some, it’s becoming central to how businesses operate. Large companies, especially in the UK, are now facing significant changes in their reporting requirements. Under the guidance of the Financial Reporting Council (FRC), these companies are required to disclose specific ESG-related information. This trend is not just limited to large corporations. As the world moves towards net-zero carbon emissions, even SMEs will likely face similar requirements in the future.
The Potential for Mandatory ESG Reporting
Large companies are currently affected by ESG reporting requirements. In the UK, there are significant changes regarding carbon reporting. Large companies are now required by law or under the guidance of the Financial Reporting Council (FRC) to disclose certain ESG-related information.
This trend is expected to trickle down to SMEs in the future, especially as the world moves towards net-zero carbon emissions.
With the introduction of potential legislation like the Better Business Act, which would amend and replace section 172 of the Companies Act 2006, there’s a shift in focus from just shareholder primacy to considering other stakeholders. This act aims to require private sector organisations in the UK to take ownership of their social and environmental impacts and give directors more freedom to operate their businesses with the planet, employees, and the broader community in mind.
The EU has a raft of new regulations, including the Corporate Sustainability Reporting Directive where from next year most companies with operations in the EU will be required to publish regular reports on their sustainable activities and a rolling timetable based on size.
The Race to Net Zero is a global campaign aimed to encourage business to half global CO2 emissions by 2030 and be carbon neutral by 2050 to avoid runaway climate change .
As younger generations become a more significant part of the consumer base, their ESG-conscious values and behaviours will drive businesses to adapt. Companies that fail to recognize and act on these changing values risk becoming redundant.
For businesses, ESG is not just about compliance; it’s an opportunity. Early adopters stand to gain a competitive advantage. They can attract a new, conscious customer base, foster stronger community relations, and build a sustainable future for their business.
In conclusion, while it’s still early days, the signs point towards a future where ESG reporting will indeed become mandatory. Businesses that recognize this shift and act on it now will be better positioned for success in this new ESG-conscious world.
In our latest podcast our business advisor Jack Spoor talks to Martin Wardle about the subject of whether ESG will become compliant for SMEs as well as larger organisations.