11 May 2022
On the back of the heightened focus on sustainability and energy consumption, we think this tendency for non-mandatory disclosure will not only remain but will actually increase. Financiers, customers, employees, and the government are some of the stakeholders who will undoubtedly take great interest in an entity’s ESG strategies, or its lack thereof.Getting a head start on ESG disclosures now is not only good for business – it is simply the right thing to do.
Current landscape and legal requirements
We previously described ESG reporting as the wild west of standards. Little has changed in the standards currently available, but the outlook is positive, with the formation of the International Sustainability Standards Board (ISSB) in late 2021. We are hoping that the ISSB can unify the plethora of existing material into a comprehensive set of standards for ESG reporting. This will enable the existing standard setters to focus on providing further guidance or good practice for specific ESG issues or industries.
Despite the myriad of standards available, none of the suites of ESG standards currently in issue apply on a mandatory basis in the UK, yet some of the UK’s most significant entities are already required by legislation to provide some ESG-related disclosures. Most recently, Statutory Instrument 2022, No. 31 introduced climate-related financial disclosures to many more entities with effect from 6 April 2022. These entities include AIM listed companies with more than 500 employees and all UK companies or LLPs that have more than both 500 employees and £500m turnover.
If your business is not caught by these new requirements, you can nonetheless choose to include ESG disclosures, either in a formal statement, or within other areas of the annual report such as the S172 statement, the directors’ report, the strategic report, the streamlined energy and carbon report, and the corporate governance disclosures.
Why provide ESG disclosures if there are no requirements for you to do so?
Even if there are no legal requirements for your entity to provide ESG information, it will still benefit your business to make some disclosure in your annual report, because:
- Providers of capital often require ESG information before they will invest, whether they are financial institutions or private equity firms.
- Supply chains and consumers are becoming ever more ESG conscious:
- Corporate customers also require relevant ESG information more regularly, before accepting new suppliers or when deciding to continue a relationship with existing suppliers.
- General consumers are focusing more on an entity’s green credentials and sustainability outlook before supporting them.
- Evaluating ESG often requires a different approach to analysing the business which may identify opportunities that were not previously considered, and may also help to justify your approach to impairment reviews and asset valuations in the long term.
- It gives an opportunity to consider your business’s sustainability, paving the way for long-term value creation and thereby ensuring longevity.
- Doing the right thing and being seen to do the right thing helps to attract and retain top talent.
It is also likely that most, if not all, entities will be required to provide some ESG disclosure in the future – including yours. Why not be on the front foot and show your commitment to the environment, your community, and your other stakeholders?
What do ESG disclosures look like?
The disclosures should inform the reader of your annual report on matters such as:
- how you identify potential ESG related risks and opportunities;
- what the risks are for your business;
- how the identified risks and opportunities are incorporated into your broader strategy and business management;
- specifically, how you manage and control the identified risks;
- who in your business is responsible for overseeing these management processes and controls; and
- how progress is measured and accountability ensured.
The ESG areas to focus on in your disclosures will depend on the business and the industry. For example, a food company might focus on the sustainability of its ingredients, whereas a construction company may concentrate more on the environmental impact of its construction activities and the physical safety of its employees.
It is important to note that ESG disclosures aren’t an ‘all-or-nothing’ affair. It is about communicating to users what your business is doing about ESG matters and this does not require a comprehensive approach, especially in the early days. Some disclosures are better than none, as long as they are useful and relevant. You can reap substantial rewards even by giving quite limited disclosures.
What about climate?
Climate is a component of ESG, although it is at the forefront of many stakeholders’ thoughts on ESG matters, irrespective of your business or industry.
As such, climate-related disclosures can be a good place to start your ESG journey, allowing you to focus on a key part of your ESG strategy whilst developing your ability to craft disclosures that are both useful to the reader and beneficial to your company.
Where to start
It is always daunting to start something new. As mentioned, climate-related disclosures are a great place to start and hone your skills in this area. There is also guidance available from many sources, including the Financial Reporting Council (FRC), the Department for Business, Energy and Industrial Strategy (BEIS), and the Taskforce on Climate-related Financial Disclosures (TCFD).
As you would expect, RSM can also be a great source of guidance. We have dedicated ESG resources and expertise, covering both the implementation and reporting of ESG, and we are passionate about the benefits this can bring to your business (and, of course, to society at large).
Please get in touch with Danielle Stewart OBE, or your usual RSM contact, to discuss how to set out on your ESG journey.