ESG reporting has become an integral part of corporate responsibility and transparency in the UK. With increasing awareness of climate change, social justice, and ethical governance, stakeholders are demanding more comprehensive ESG reporting from businesses.
In this article we discuss ESG reporting requirements in the UK and best practices to follow.
Why is ESG reporting important for organisations?
ESG reporting is beneficial for both large corporations and small and medium-sized businesses in the UK. Transparent ESG reporting can differentiate smaller organisations from their competitors, attract ethically minded customers, and build a loyal customer base.
By openly disclosing their environmental, social, and governance practices and performance, companies demonstrate accountability and commitment to sustainable and ethical operations.
Here is a detailed explanation of why transparent ESG reporting is critical for UK businesses:
Investor demand
Investors see companies with strong ESG performance as better long-term investments. These companies are perceived as more capable of navigating environmental and social challenges, making them more resilient and sustainable.
By assessing ESG factors, investors can identify potential risks that might not be evident in traditional financial analysis. For instance, if a company fails to comply with environmental regulations or engages in poor labour practices this can impact financial performance.
With growing public awareness and concern about issues like climate change, social inequality, and corporate governance, there is increasing pressure on investors to consider these factors. Funds and portfolios that prioritise ESG are becoming more popular, driving demand for companies that excel in these areas.
It is worth noting that in 2023 the government held a consultation on the future regulatory regime for ESG ratings providers, with a view to regulating ESG data providers. The aim is to improve clarity and trust in ratings so that investors can make more informed decisions.
Regulatory compliance
ESG reporting supports regulatory compliance (see ‘What is the legal framework for ESG reporting in the UK?’ below). Plus, companies that proactively address ESG issues are better prepared for new regulations and can avoid the costs and disruptions associated with sudden compliance efforts.
The government may offer incentives for companies that meet or exceed ESG reporting standards, such as tax breaks or green grants. Complying with and exceeding ESG regulations can unlock these benefits.
Reputation management
Transparent ESG reporting builds trust with a wide range of stakeholders, including investors, customers, suppliers, and the community. This trust can translate into better business relationships and a stronger social licence to operate.
Consumers are increasingly choosing to support businesses that align with their values. Companies known for their commitment to environmental sustainability, social responsibility, and ethical governance often enjoy greater customer loyalty.
Employees, especially younger generations, prefer to work for companies with strong ESG credentials. A good ESG reputation can help attract and retain top talent.
Operational efficiency
A commitment to sharing regular ESG reports helps companies to focus on ESG criteria. ESG concentrates efforts on reducing energy consumption, minimising waste, and optimising resource use.
Companies that follow best ESG practices are more likely to build sustainable and resilient supply chains which can lead to significant cost savings and operational efficiencies.
What is the legal framework for ESG reporting in the UK?
The purpose of regulations is to ensure stakeholders have access to relevant non-financial information that could impact a company’s performance and long-term value.
The key regulations governing ESG reporting standards in the UK are:
The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
All large companies (public companies (PLCs) and private companies with 250 or more employees, and a turnover of £36 million or balance sheet total of £18 million) must report environmental, social and employee matters in their annual reports.
The Non-Financial Reporting Directive (NFRD)
The NFRD is an EU directive, implemented in the UK through the Companies, Partnerships, and Groups (Accounts and Non-Financial Reporting) Regulations 2016.
The NFRD applies to large public-interest entities (PIEs) with over 500 employees. These organisations must disclose non-financial information about:
- Environmental, social, and employee-related matters
- Compliance with human rights
- Prevention of corruption and bribery
- Diversity on the board of directors.
The UK Stewardship Code
The UK Stewardship Code sets out principles for institutional investors on how they should engage with investee companies. It encourages investors to consider ESG factors in their investment processes and promote long-term value creation.
The aim of the Code is to improve the quality of engagement between institutional investors and investee companies, fostering sustainable and responsible investment practices.
Businesses that wish to seek investment from signatories to the Code need to provide transparent, comprehensive ESG reports.
The Task Force on Climate-related Financial Disclosures (TCFD) Recommendations
The TCFD is a voluntary framework for companies of all sizes across all sectors to disclose climate-related financial risks and opportunities.
Companies report on their governance, strategy, risk management and metrics related to climate change, aligning their disclosures with the TCFD recommendations.
The purpose of the recommendations is to provide consistent, transparent information so investors can understand the potential impact of climate change on a company’s performance.
ESG reporting – best practices
To effectively report on ESG factors, businesses should consider implementing the following best practices:
Prioritise ESG factors
Reporting on ESG factors that have the greatest impact on a business is critical. This involves:
- Materiality assessment. Conducting a materiality assessment to identify the ESG issues most relevant to the company’s operations and stakeholders.
- Focus on impact. Prioritising factors that significantly impact the company’s financial performance, reputation, and regulatory compliance.
- Consistency over time. Maintaining consistency in ESG data collection and reporting over time to track progress and identify trends.
Set clear goals and targets
Establishing clear, measurable ESG goals and targets demonstrates a company’s commitment to continuous improvement. Reporting on progress towards these targets holds the company accountable and shows stakeholders that the business is serious about its ESG commitments.
Clear goals and targets also provide a roadmap for future actions and performance improvement.
Engage stakeholders
Engaging with stakeholders, including investors, employees, customers, and the community, is crucial for understanding their ESG concerns and expectations. This engagement can provide valuable insights that improve the relevance and quality of sustainability reports.
Regular dialogue with stakeholders helps identify material ESG issues and align reporting with stakeholder interests.
Adopt a comprehensive framework
Using established frameworks like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations can significantly raise ESG reporting standards.
These frameworks provide structured guidance on what information to disclose and how to present it.
- GRI: Offers detailed standards for reporting on a wide range of ESG factors, helping companies communicate their impact on the economy, environment, and society.
- SASB: Focuses on industry-specific standards that help companies disclose sustainability risks and opportunities to investors.
- TCFD: Provides recommendations for disclosing clear, comparable, and consistent information about the risks and opportunities presented by climate change (see above).
Adopting one or a combination of these ESG reporting frameworks helps to ensure that companies provide comprehensive and consistent ESG disclosures.
Ensure data accuracy and transparency
Accurate and transparent ESG data is essential for credibility. Companies should establish robust data collection processes, ensuring that the information reported is reliable and verifiable.
Accurate data not only builds trust but also supports better decision-making and performance assessment.
Communicate effectively
Effective communication of ESG efforts and achievements is key to engaging stakeholders and building support. Communication may be through an ESG policy, annual reports, sustainability reports, corporate websites, and social media.
Transparent and accessible communication enhances stakeholder trust and demonstrates the company’s commitment to ESG principles.
Present a balanced view
Presenting a balanced view of ESG performance involves reporting both positive achievements and areas for improvement. This transparency builds trust with stakeholders and shows a genuine commitment to sustainability.
Stay updated with regulatory changes
The regulatory landscape for ESG reporting is continually evolving. Businesses must stay abreast of changes in ESG regulations and standards to ensure compliance.
Regularly reviewing and updating reporting practices helps companies meet evolving stakeholder expectations and regulatory requirements, minimising the risk of non-compliance.
ESG Awareness Training
ESG reporting is more than a regulatory requirement – it is a strategic imperative for businesses. By adopting best practices and adhering to the legal framework, companies can enhance transparency, manage ESG risks, and build stronger stakeholder relationships.
Our ESG Awareness Training provides a comprehensive insight into ESG reporting and how ESG factors impact business performance and influence investment decisions. As the demand for responsible business practices continues to grow, effective ESG management is playing an ever more crucial role in shaping the future of corporate sustainability.
Find out more about ESG Awareness Training on our website, or contact us today on 0203 011 4242/info@praxis42.com
