ESG is a term used to refer to the conduct and decision making of a company in relation to environmental, social and governance matters. Reporting requirements have been in place since the inception of the Companies Act 2006, but recent amendments have been made to the provisions of the Act to address ESG concerns. The Government has committed to ensuring that this trend continues and more ESG reporting requirements are on the horizon. This blog aims to set out the key recent developments and provide some practical guidance on how you can ensure your company is and remains compliant.
ESG reporting requirements
Most of the necessary accounting information that must be included in a company's annual accounts and filed at Companies House are set out in s446 of the Act. On 1 January 2019, new regulations seeking to address ESG concerns came into force, making it mandatory for certain companies to provide the following in their annual reports:
- A statement (known as a section 172 statement) including the issues, factors and stakeholders the directors consider relevant in complying with their duty to promote the company's success
- Directors’ Report statement of engagement with employees
- Directors’ Report statement on business relationships
- Statement of Corporate Governance Arrangements
- Energy and Carbon Reporting
At present the reporting requirements primarily apply to large private companies that meet at least two of the following criteria:
- Turnover of more than £36m
- Balance sheet total of more than £18m
- More than 250 employees
But even if your business is not yet large enough to meet these criteria, it is foreseeable that these reporting requirements will become an industry bellwether, influencing shareholders and prospective funders (such as new investors). Increasingly, these are issues on which funders will focus when assessing your company and conducting their pre-investment diligence.
More ESG reporting...
2022 saw further regulations introduced, made effective from 6 April, creating additional ESG reporting requirements. These affect certain qualifying companies (traded companies along with banking, insurance and very high turnover companies) and include an obligation to provide information "to the extent necessary for an understanding of the company's development, performance and position and the impact of its activity" (see our blog for further information on these latest requirements).
Why is ESG reporting important?
For qualifying companies, there is a statutory obligation to report and companies can be fined for failing to comply.
Investors are increasingly using target companies' ESG ratings (such as the one developed by investment research firm MSCI) when determining investments and the UK government is following a roadmap that aims to make disclosure requirements recommended by the Task Force on Climate-Related Financial Disclosures mandatory across the UK economy by 2025.
On top of this, climate change litigation has reportedly doubled in the past few years reflecting increasing public scrutiny on the impact of companies on the environment.
The macroeconomic context for ESG reporting is such that, even if your company is currently exempt from the mandatory requirements, it is never too early to start developing good practice and there are a number of benefits associated with voluntary reporting.
What are some practical steps you can take?
- Double check your requirements
The legislation is fairly complicated and, in light of the recent amendments, it is worth double checking your reporting obligations. To ensure your company and its employees continue to understand these requirements, you may wish to consider ESG training and awareness raising within the company. In any case, it is important that all companies keep an eye on changes to the requirements as these can and will happen frequently in the coming years.
- Consider voluntary reporting
If your company is currently exempt from the requirements, as many small and medium sized companies are, consider whether reporting voluntarily could boost your company's ESG rating, help mitigate the long-term risks of climate change to your business and put your company in a position to respond effectively to future mandatory ESG reporting obligations.
Complying with the reporting requirements demonstrates a healthy level of governance which could put your business on an "investor ready" footing.
- Identify where your company currently stands
Put together a team across the business to report on ESG matters. Look at what practices you already follow and identify the areas of ESG reporting that are particularly relevant to your business. Ensure you understand what is required and pick out any gaps in your current reporting practices.
- Set realistic targets
Whilst net zero commitments demonstrate laudable ambition and can be an effective marketing tool, with the spotlight on greenwashing growing ever brighter, these sorts of commitments are falling under greater scrutiny. Volkswagen were taken to court by customers for misrepresenting the levels of emissions from their diesel vehicles – the case recently settled for £193 million plus a contribution towards the legal costs of the claimants.
Companies should not be discouraged from having ambitious targets but they need to ensure they are genuine, realistic and that they have a robust strategy for achieving them.
If you have any questions or queries regarding any of the above, please get in touch with a member of our Corporate Team or your usual Brodies contact
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