The wake of the COVID-19 pandemic has left us all feeling the power of global connectivity – both the good and the bad. The past year has also seen a sharper focus on ESG.
ESG is an umbrella term largely used in the financial sector, pulling together a range of factors relating to the environment (E), society (S) and governance (G), which can be used by investors to assess the behaviour of those corporate entities in which they invest.
“Environmental” factors refer to the measure of a company’s impact on the natural environment, looking at issues such as its carbon footprint, attitude to waste and pollution and impact on biodiversity. Factors relating to society include how a company treats its employees, customers and suppliers, and how it supports its local community. The governance element refers to a company’s processes and procedures for measuring and demonstrating its ESG credentials, such as audits, internal controls and board diversity.
But ESG isn’t confined to listed companies, which are subject to a detailed governance regime. The pressure for companies in general to step up as good corporate citizens has never been greater, reflected in a range of new reporting requirements applicable to all companies meeting certain thresholds (see below), such as those relating to modern slavery, bribery and engagement with employees. We are increasingly seeing vocal consumers, investors and other stakeholders demanding transparency from companies with respect to their ESG credentials.
A number of regulations concerning corporate reporting by private companies have come in to force in the last few years and the field of guidance on how to enhance and embed ESG principles in your reporting process is ever expanding (the Wates Principles, TCFD (Taskforce on Climate-related Financial Disclosures), GRI Standards (Global Reporting Initiative) to name a few). Companies face an increasingly complex web of both soft and hard reporting, not just for quoted companies but also large private companies (meaning companies that meet at least two out of three of the following size criteria: turnover of more than £36m; balance sheet in excess of £18m; more than 250 employees). Examples of reporting which may be required includes:
Listed companies and large asset owners are expected to disclose in line with the Task Force on Climate-related Financial Disclosures framework by 2022
All large private companies must produce a section 172 statement detailing how the directors have had regard to the matters set down under section 172 Companies Act 2006, as per The Companies (Miscellaneous Reporting) Regulations 2018
In addition to satisfying legal requirements, the commercial incentives to consider reporting as central to the “G” in ESG are clear:
ESG is becoming a dominant consideration for investors and reporting serves a key communicative function; companies who neglect their reporting duties risk losing out on investment and other commercial opportunities.
There is an increasing societal expectation for companies to act sustainably, with a spotlight on the responsibilities owed to the wider community. As we see a rise in high profile activism such as Extinction Rebellion, companies who fail to foster transparency around their practices risk suffering considerable reputational damage.
A company that regularly self-audits in order to produce comprehensive reports will be far more attuned to its areas of potential weakness and able to protect against threats, be they market, environmental, reputational or otherwise.
Implementing comprehensive stakeholder engagement and reporting structures now will put you at a competitive advantage regarding future developments to corporate governance and reporting regimes.
See the below links for our toolkit regarding current and proposed regulations on reporting by private companies. Please get in touch with Nicola Broadhurst to discuss how your company can optimise its reporting practices and gear them towards furthering its ESG strategy.
- New reporting requirements on employee engagement in annual reports after January 2020
- FRC unveils Wates Principles for private company governance
- New reporting requirements for large private companies
- Government proposes wide-ranging reforms in bid to restore trust in audit and corporate governance
- Corporate governance reforms
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