In an era characterised by growing environmental and social consciousness, the need for businesses to demonstrate their commitment to sustainable practices has never been more pressing. Enter ESG reporting—a mechanism that has gained significant traction globally, including in the UK.
ESG, short for Environmental, Social, and Governance, encompasses a spectrum of factors that evaluate a company's impact beyond mere financial performance. Milton Friedman’s old maxim, ‘a company’s only obligation is to make profit for its shareholders’, is well and truly history now.
Instead, new mandatory ESG reporting for UK businesses marks a huge shift in the post-2008 climate from one of relentless profit maximisation to what has been dubbed ‘stakeholder capitalism’, i.e., using capitalism as a means of growth and raising living standards while balancing the need to consider the environment, society and other externalities.
ESG refers to the three pillars that collectively gauge a company's sustainability and societal contributions.
- Environmental: This dimension assesses a company's impact on the environment. Factors such as carbon emissions, waste management, resource conservation, and climate change mitigation are considered.
- Social: The social dimension examines a company's interactions with its employees, customers, communities, and other stakeholders. Employee wellbeing, diversity and inclusion, labour practices, community engagement, and human rights fall under this category.
- Governance: This pillar evaluates the structure and practices that guide a company's decision-making. Corporate governance, executive compensation, board independence, and anti-corruption policies are key aspects.
Assessment of ESG performance involves data collection, measurement, and analysis. Various frameworks and standards, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD), guide companies in disclosing relevant ESG information. However, it’s likely there will be divergence between the UK’s ESG marking scheme and that of American federal standards or the European Union, and that’s sure to cause a headache to multinational companies looking to juggle expectations in multiple markets. Nevertheless, all ESG criteria will be shooting towards a common goal: greener, socially conscious and transparent business practices.
The introduction of mandatory ESG reporting through the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 will not only affect the UK’s largest businesses. These regulations will apply to all smaller businesses within those supply chains, potentially adding substantial burdens to small businesses with limited capital, resources and time to compete with larger competitors.
As awareness of the interconnectedness between business success and societal well-being grows, ESG considerations are becoming central to corporate strategies. Governments, investors, and consumers alike are pushing for increased accountability and sustainability.
In the future, we can expect ESG reporting requirements to become more rigorous over time, prompting businesses to continually improve their sustainability efforts. In the road to Net Zero, easier means of carbon emissions reduction will be tackled first, meaning that to get closer to zero, businesses and governments will need to take increasingly restrictive measures to be sustainable or rely on future technologies to balance their remaining carbon footprint.
Additionally, global efforts to standardise ESG reporting frameworks will likely gain momentum, making comparisons between companies and industries more accurate. Technological advancements, such as blockchain and artificial intelligence, could streamline data collection and verification processes, making ESG reporting more efficient. ESG metrics are already becoming integrated with financial reports, providing a comprehensive view of a company's overall performance. We could see comprehensive and transparent collations of companies’ ESG performances shared in the public sphere, attempting to hold companies accountable to their lofty statements by educating consumers to continue supporting the company or financially punish them for missing targets. This only works, however, if consumers continue to value the idea of ESG more than the products they consume – at the end of the day, people will continue to buy products from these companies unless they step egregiously out of line.
Mandatory ESG reporting for UK businesses marks a pivotal step towards a more responsible and accountable business sector. By embracing ESG principles, companies can not only drive positive change but also position themselves for sustained success in an evolving business landscape. ESG reporting represents a strong market trend which will be difficult, if not impossible, to resist and are unlikely to reverse any time soon. It’s important that the Government is fully aware that businesses are committed to ESG and the work that comes with it, combining a concern for reputation management and brand promotion with a conscious effort to improve society as a whole. As the world continues to prioritise sustainability, businesses that take proactive steps towards transparency and responsibility are certainly poised to thrive in the long run.