Environmental, Social, and Governance: Responsibilities of UK Businesses
UK businesses are coming under increasing legal, cultural and societal pressure to address their responsibilities regarding sustainability. Companies and business owners across the country must take accountability for their collective impact on the environment.
The UK’s Financial Conduct Authority (FCA) argues that the business and ‘financial sector has an important role to play in helping the economy adapt to a more sustainable long-term future.’ NGO’s, voluntary initiatives and changes in public behaviour can only go so far in tackling the climate crisis. This is where Environmental, Social, and Governance (ESG) comes in. In recent years, the British government has introduced new legislation that increases the responsibilities of businesses regarding ESG criteria and ESG disclosure.
These responsibilities go beyond improving safety and sustainability in the workplace, finding ways to reduce plastic use, and setting business goals to meet sustainability KPIs.
In this article, we’ll unpack what ‘Environmental, Social and Governance’ means, how it applies to business operations and reporting, and what laws and regulations are in place to enforce ESG standards. We’ll guide you through the benefits of upholding your responsibilities and the best practices for business ESG disclosure.
ESG Explained
ESG (short for Environmental, Social, and Governance) is a set of criteria that have become a key focus for businesses, consumers and legislators. ESG refers to standards that measure a business’ impact on the environment and society, including how it’s governed via company leadership, pay, internal controls, and shareholder rights, looking at how robust a business’ transparency and accountability are. ESG criteria aim to capture, record, and report on all the non-financial risks and opportunities related to a business’ day-to-day operations.
When it comes to ESG responsibilities, many UK companies are now required to assess and address how they integrate environmental concerns, social standards, and the business’ overall governance (management). ESG disclosure refers to how the three ESG pillars are reported to a company’s board and, when required, to government bodies and relevant interested parties such as investors, employees, or other stakeholders.
ESG Criteria Breakdown: What it Means for Business
Environmental
As the terms suggest, the environmental aspect of ESG focuses on how a business promotes environmental sustainability through its policies or strategies. Good environmental governance works to minimise a business’ impact on the planet to protect the environment and mitigate its contribution to the effects of climate change.
Examples of sustainable measures that businesses put in place as part of environmental ESG criteria include:
- Reducing energy consumption throughout operations.
- Eliminating unnecessary plastic use and all single-use plastics.
- Minimising water usage and reporting data on water consumption.
- Restricting or eliminating harmful chemicals and pollutants in business operations.
- Innovating and developing ‘greener’, more environmentally-friendly products and services.
- Use of renewable energy sources (e.g. solar, wind, nuclear, hydropower, etc.) working towards a net-zero target.
- Regularly releasing data and metrics regarding CO2 and other greenhouse gas emissions and working to reduce emissions as far as possible.
- Switching to sustainable or zero-waste solutions (e.g. using biodegradable materials, reusable packaging, eradicating unnecessary plastic use, etc.).
- Promoting reducing, reusing, repurposing and recycling throughout the business and supply chain to minimise the amount of waste destined for landfill or incineration.
For more guidance on this topic, check out our article on how businesses can introduce environmental goals and meet sustainability KPIs at work.
More and more business owners are looking to improve their operations’ environmental criteria. There is a lot to take into consideration. It’s not surprising that some areas get overlooked, like improving the sustainability of health and safety at work, including environmentally-friendly first aid solutions.
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Learn more about sustainable first aid solutions and innovation in the medical sector on our blog:
- How Sustainable Is Your First Aid Kit?
- How to Dispose of Used or Out-of-Date First Aid Supplies
- How to Clean and Reuse First Aid Items
- How to Make an All-Natural First Aid Kit
- Is it Possible to Have a Zero Waste First Aid Kit?
- Ways to Reduce Plastic Waste in Hospitals
- How Are Plastics Recycled in Healthcare?
- Sustainable Solutions to Plastic Use in Healthcare
- Material Replacements for Plastic in the Healthcare Sector
Social
The social aspect of ESG refers to how a company’s business’ stakeholders are treated, focusing on how business operations and decisions impact workplace culture and wider society. Stakeholders can include employees, other businesses, customers, and the community it operates in.
Businesses should never underestimate how they can positively or negatively influence and contribute to fairness in society. Social standards in workplaces, such as ensuring fair conditions and equal opportunities for the entire workforce (including employees, freelancers and contractors, members of the supply chain, and local community members), are essential to social governance in business.
Examples of business standards that often factor in social criteria include:
- Far-reaching inclusion and equality policies.
- Employee diversity (throughout the entire workforce).
- Fair pay, including wage increases in line with inflation and cost of living.
- Staff and relevant stakeholders are provided with training and development.
- Working with an ethical supply chain (suppliers with good ESG standards).
- Strong consumer protection (including safe products and safeguarding of user data and privacy).
- Engagement and investments in the community (to advocate for company ethics and values in wider society).
- Fair employee benefits and support (e.g. flexible working, holiday pay, incentives, and other staff retention strategies).
- Measures in place to protect all workforce members (e.g. from harassment and abuse or maintaining physical safety, health, mental health, and wellbeing).
Governance
Governance refers to the corporate governance (leadership and management) of a business, enterprise, or company, including the factors like decision-making, reporting, and the logistical management of a business. ‘Good’ or ‘high-quality’ governance is generally associated with ethical behaviour, integrity, transparency, and accountability.
Regarding ESG, governance is linked to the environmental and social criteria discussed above, addressing the decision-making and transparency related to them. Good governance can keep a business’ values aligned with broader societal values.
Examples of good governance standards in a business include:
- No conflicts of interest.
- Limitations around political lobbying.
- Introduction and enforcement of ethical policies.
- Honest accounting and compliance with regulations.
- A clean record (no illegal conduct, including corruption or bribery).
- Fairer, less hierarchical pay ratios between executives and employees.
- Evident diversity among all leadership teams, including executive boards.
- Transparency about corporate practices, leadership, and executive pay.
- Accountability among business leaders regarding risk and performance management.
- Accurate reporting on strategy, financial performance, and operations (as well as the environmental and social ESG criteria).
What ESG legislation is there in place in the UK?
ESG legislation for UK businesses is fragmented and can therefore be confusing. Since the Summer of 2022, the UK has had no single ESG regulation or law. Instead, the requirements are spread across several domestic laws and regulations derived from EU legislation. This means there is now a wide range of legal requirements for all businesses (large and small) to be aware of and comply with.
The primary sources of ESG legislation are found in the following:
- The Bribery Act 2010
- The Listing Rules
- The Companies Act 2006
- The Climate Change Act (CCA) 2008
- The UK Stewardship Code (UKSC) 2020
- The UK Corporate Governance Code (UKCGC) 2018
- The Disclosure Guidance and Transparency Rules (DTRs)
- The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
- The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022
- The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022
Much of the ESG-related legislation is combined with other laws that aren’t directly related to ESG concerns. Since 2022, the newest regulations mean that over 1300 of the largest companies and financial institutions registered in the UK must disclose climate-related financial information, in line with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
The FCA, an independent public body, published its ESG strategy in 2021. This established the FCA’s statutory role in supporting the transition towards a more sustainable economy by working with the government, industry leaders, listed companies, and international partners.
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What does the new ESG legislation require of some UK businesses?
All business owners should know about ESG legislation and how it could affect business operations and ESG disclosure. ESG criteria and disclosure are now legally-mandated requirements for many UK companies, with larger businesses often meeting the criteria to comply with ESG laws.
All UK businesses making more than £500 million in annual revenue or with 500+ employees must abide by the new ESG laws introduced in 2022. This legislation requires companies of this size or income to produce annual sustainability reports and climate-related disclosures. It’s important to note that these ESG laws only mandate disclosures on the environmental risks faced by businesses and do not legally require them to disclose reports on the social and governance aspects of ESG.
The Companies Act 2006 was amended in 2022 to stipulate a new Sustainability Information Statement that requires UK businesses to declare climate-related financial disclosures. The statement sets out what to include and how companies should disclose climate-related information:
(a) a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
(b) a description of how the company identifies, assesses, and manages climate-related risks and opportunities;
(c) a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process;
(d) a description of—
(i) the principal climate-related risks and opportunities arising in connection with the company’s operations, and
(ii) the time periods by reference to which those risks and opportunities are assessed;
(e) a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
(f) an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios;
(g) a description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
(h) a description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.”
Why is ESG important for all businesses, even if it’s not legally required?
While many smaller businesses are not required to set ESG standards and report on their progress, there are many reasons why ESG disclosure is important and can benefit businesses long term.
Open the toggles for more information:
Supports individual and collective progress towards sustainability
Builds consumer trust and increases brand loyalty
Transparency and clarity for stakeholders and investors improve competitive advantage
Attracts employees
Reduces business costs
How to Provide Quality, Compliant ESG Disclosure
As previously mentioned, the TCFD provides businesses with a framework to help company leaders navigate how to disclose the legally required environmental information.
As part of their ESG guidance, the TCFD recommends that businesses follow seven principles for ‘effective disclosure’:
- Disclosure should represent relevant information
- Disclosure should be specific and complete
- Disclosure should be clear, balanced, and understandable
- Disclosure should be consistent over time
- Disclosure should be comparable among companies within a sector industry or portfolio
- Disclosure should be reliable, verifiable, and objective
- Disclosure should be provided on a timely basis
What to Include in ESG Reporting
To help break it down further, business owners should include the following elements in their reporting:
Risks
Clearly identify the risk of potential events that could threaten the business’ reputation, environmental compliance, competitive advantage, general operations or financial stability.
Opportunities
Potential areas where the business could innovate, either in environmental improvements such as reducing emissions, developing social and governance practices, creating new products, or entering new commercial markets.
Strategies
Lay out the methods and tactics for budget, timeline, and materials, including the potential range of strategic outcomes.
Performance
Present efforts, progress, and failures regarding the business’ sustainability goals. Focus heavily on data and KPI metrics for this section. Included metrics should evidence improvements over a period of time and relative to business peers and competitors in the market.
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