ESG information includes all aspects of a company’s governance including environmental, energy and resource, safety, human rights, supply chain, bribery and corruption management systems.
This information is now routinely used by investors to draw conclusions about the quality of a company’s management, identify exposure to business risks and assess the company’s ability to leverage business opportunities.
There are various ways in which listed companies in the UK must report on ESG matters, some of which are mandatory and others that are good practice.
Under the Companies Act 2006, the annual Strategic/Directors’ Report must contain an explanation of how the company is managing issues such as environmental performance, human rights, social and community involvement and diversity including gender diversity at Board, senior management and whole-company levels.
Under the Streamlined Energy and Carbon Reporting framework, companies must also include in the annual Directors’ Report information on the company’s global total energy use and energy efficiency actions from the previous year, and large LLPs must report the same in an equivalent energy and carbon report at the end of each financial year.
Every four years, under the Energy Savings Opportunity Scheme, large UK companies must carry out energy saving assessments of their total energy consumption, conduct energy audits and identify where energy savings can be made, and notify the Environment Agency of these results.
Signatories to the United Nations’ Principles for Responsible Investment must report on their responsible investment activities annually otherwise they will be delisted. From 2020 it will also become compulsory for signatories to report on climate change indicators.
Within the project finance and private equity sector, signatories to the Equator Principles (the fourth version of which (EP4) will apply from October 1, 2020) must report annually on the progress in implementing its policies and processes and give statistics on the number of qualifying transactions, project categorisations and project locations. Many financial institutions are now signatories to the Equator Principles and EP4 will require more expansive reporting on human rights and climate change than the third version. EP4 can be used voluntarily before October 1, 2020.
The Financial Reporting Council’s UK Corporate Governance Code provides standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with stakeholders on a comply or explain basis.
Disclosure under the Financial Stability Board’s task force on climate-related financial disclosures (TCFD) is currently voluntary but there are moves to make it mandatory. In March 2020, the Financial Conduct Authority consulted on proposals to enhance climate-related disclosures by listed issuers to include a statement in their annual financial report regarding whether they have made disclosures consistent with the TCFD’s recommendations. This may be required in a new Listing Rule which would apply in relation to accounting periods beginning on or after January 1, 2021.