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ESG and environmental reporting: What you need to know

The Topline

“Operating a successful sustainability strategy is essential for businesses today – in terms of corporate social responsibility, commerciality, risk management, ESG and environmental reporting. In this article, we share some straightforward, practical steps for building an effective ESG framework.”

Ben Sheppard, Partner, Infrastructure and Energy

Ben Sheppard

An image of a set of solar panels at a diagonal angle, with a building in the background. A visual metaphor for this post on ESG and environmental reporting.

Tackling the imperative to get their business’ sustainability/ESG (environmental, social, governance) approach right – ensuring legal and regulatory compliance and embedding sustainability and responsibility in the ethos, operations, reporting and reputation of the business – is one of the biggest challenges facing board members and in-house counsel today.  However, there are practical steps businesses can take.  Walker Morris’ Commercial/Infrastructure & Energy and Regulatory specialists Ben Sheppard and Rachel Turnbull, both of whom work closely with the firm’s expert Environment Team, explain.

A step-by-step approach to sustainability, ESG and environmental reporting

Regulation, investors, employees, other stakeholders and society as a whole are driving the need for all businesses to address their sustainability agenda. Recent years have seen an unmistakeable cultural shift towards a global community with an increasing social and environmental conscience.  National and international laws, regulations, policies, politics and wide-ranging commercial pressures all impose both tangible and intangible requirements on businesses to get their approach right.

Our framework of practical steps should help businesses to deliver strong sustainability performance.

Step 1 – Understand and articulate the challenge

A business needs to know what sustainability/ESG covers and specifically which aspects are most relevant to its operations. For example:

  • Environmental
    • Climate change, emissions
    • Waste, pollution
    • Resource depletion
  • Social
    • Diversity and inclusion
    • Working conditions (slavery, child labour, employee relations, health and safety)
    • Communities (local, indigenous, humanitarian issues)
  • Governance
    • Bribery, corruption
    • Executive pay
    • Fair taxing

The business can then define and articulate its strategy, commitments and sustainability reporting against these criteria.

Step 2: Outline an approach

A successful, practical approach to addressing sustainability across the business requires leadership from the top down.  It involves the right cultural messaging, and provision of dedicated resource and guidance, combined with business-wide data, operational and contract reviews, training and ongoing monitoring.  For example:

  • From the top
    • Senior people from across the organisation need to engender a sustainability ethos that may involve:
      • Introducing sustainability related financial incentives for senior leaders.
      • Appointing a head of sustainability and/or a sustainability committee.
      • Ensuring consistent messaging, both internally and externally.
  • Across the business
    • Break sustainability/ESG into component areas and designate senior responsibility for each.
    • Collect, review and report on sustainability metrics, using data.
    • Undertake contract reviews and consider using new sustainability/ESG-friendly standard contractual clauses.
    • Consider the sustainability credentials of investors, supply chain components and other stakeholders.
    • Train staff – at all levels, and regularly – on general and specific sustainability issues.
    • Monitor national and international legal, regulatory and assessment developments.
    • Keep accurate and up-to-date records of all sustainability activities, initiatives and disclosures/statements/environmental reporting.

Step 3: Implement

Specific assignments can then be undertaken in relation to each aspect of the sustainability agenda, such as:

  • Environmental
    • Audit all aspects of the business which have an environmental/climate change impact.
    • Consider own/subsidiaries’/investors’/supply chain third parties’ products, processes and policies.
    • Ask:
      • Can energy/emissions/waste be reduced? How?
      • What green claims are being made and can they be substantiated (beware ‘greenwashing’)?
      • Can climate-friendly contract clauses be used in existing or new relationships?
    • Keep up-to-date/comply with legal, regulatory and environmental reporting requirements.
  • Social
    • Audit all aspects of the business which have a social impact – on the workforce and on any outside communities.
    • Consider own/subsidiaries’/investors’/supply chain third parties’ products, processes and procedures.
    • Review and maintain robust, inclusive diversity policies and procedures.
    • Review and maintain policies and procedures to ensure fair working conditions.
    • Consider the mental, as well as the physical, health and wellbeing of the workforce.
    • Be clear, consistent, fair, transparent and proactive when communicating with employees and other parties.
    • Beware, in particular, modern slavery and human trafficking. Ignorance/turning a blind eye will not suffice.
    • Keep up-to-date/comply with legal, regulatory and reporting requirements.
  • Governance
    • Be transparent about executive pay and pension contributions.
    • Consider how executive remuneration compares to the rest of the workforce and make adjustments where necessary.
    • Consider how workforce remuneration compares to the market and make adjustments if necessary.
    • Conduct the diligence into own/subsidiaries’/investors’/supply chain and third parties’ products, processes policies in respect to corruption and bribery.
    • Note directors’ reporting duties and duties under corporate law to act in the best interest of the company.
    • Take specialist advice on tax strategies.
    • Keep up-to-date with legal, regulatory and reporting requirements.

Sustainability, ESG and environmental reporting

One really key area in which a business can demonstrate its sustainability compliance and credentials is its sustainability/environmental reporting.

So, what must be reported?

The first step to achieving a comprehensive climate reporting approach is to comply with mandatory reporting requirements:

Essential ESG and environmental reporting

  • The Companies Act 2006 (CA 2006), the Listing Rules and Disclosure Guidance and Transparency Rules require certain companies to report in their directors’ reports, strategic reports and annual company reports on environmental and climate-related matters.
  • LLPs’ annual reports should include disclosures on greenhouse gas emissions, intensity merit energy efficiency steps and total energy use.
  • Large companies [1] are required in their strategic report to provide an analysis using non-financial KPIs.
  • Large unquoted companies are required on their directors’ report to provide a report on greenhouse gas emissions, an intensity metric, energy efficiency steps and total UK energy use.
  • Quoted companies [2] are required to report on greenhouse gas emissions, an intensity metric and total global energy use and energy efficiency steps.
  • Traded/banking/authorised insurance companies should include a non-financial information statement in a strategic report.
  • UK incorporated companies with a premium listing should include their annual financial report, a statement setting out whether they have made climate-related financial disclosures consistent with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations (see below) on a comply or explain basis.

And what do businesses need to know about voluntary reporting?

Quite apart from regulatory requirements, a survey carried out in the US [3] found that 78% of consumers were more likely to buy a product if it had ‘green’ credentials [4], that 75% of millennials would pay more for a green product, and that 76% of people would even switch from a preferred brand for sustainability.  Getting ahead of the game by additional voluntary climate-related reporting can therefore be an effective commercial strategy.

The preferred scope and nature of voluntary reporting will differ from business to business, and will depend on the type of voluntary commitments made at board level.  Schemes for reporting which businesses may choose to adopt currently include (non-exhaustively):

Voluntary ESG and environmental reporting

  • Governmental guidance schemes, such as Defra Environmental Reporting Guidelines, government guidance on Greenhouse Gas (GHG) conversion factors and GHG reporting from transport, and Financial Council guidance.
  • Non-governmental scheme, such as CDP (previously know as the Carbon Disclosure Project), the GHG protocol, Global Reporting Initiative reporting framework, European Reporting Lab Taskforce on Climate-related Reporting and so on…
  • Schemes may involve direct reporting, where the company reports either to the body running the scheme  or publicly on the extent it has complied with the scheme; or indirect where the company engages with the environmental performance of other organisations with which it is involved.

What’s on the horizon?

As of 26 June 2023, the International Sustainability Standards Board (ISSB) has published its first set of sustainability disclosure standards.  (The standards fully incorporate the recommendations of the TCFD.)  The ISSB has launched its standards with the aim of providing useful and comparable data to aid investor decision-making.  On 19 July 2023, the Financial Reporting Council (FRC), in its role as the Secretariat to the UK Sustainability Disclosure Technical Advisory Committee, issued a call for evidence to collect views to inform the proposed endorsement of the ISSB’s sustainability disclosure standards in the UK.  The expectation is that the standards will establish a global baseline for sustainability reporting.

On 11 July 2023, the European Securities and Markets Authority (ESMA) published a public statement on sustainability disclosures in prospectuses drawn up under the EU Prospectus Regulation. Although not directly relevant to UK prospectuses, UK firms and market participants are expected to adhere to ESMA guidelines to the extent that they are relevant.

Sustainability and environmental expertise: How we can support you

Walker Morris’ Environment Team is a multi-disciplinary group of specialist lawyers experienced in all aspects of the sustainability agenda. We can work with businesses at every step of their journey to create, implement and deliver an effective sustainability strategy.

Ways we can help you with sustainability

  • Audits, contract reviews and drafting policies and procedures.
  • Keeping you updated and informed on sustainability-related developments.
  • Providing tailored training to staff at all levels.
  • Carrying out sustainability/ESG due diligence.
  • Assisting you in securing ‘green finance’ or investments based on sustainability criteria.
  • Delivering low carbon, sustainability and other green projects.
  • Assisting with measuring and reporting of energy, carbon and climate risks.
  • Providing comprehensive, cross-disciplinary advice and transactional assistance.
  • Risk management and dispute resolution strategies if/when sustainability queries, concerns or investigations arise.

As well as assisting with sustainability advice and reporting, our Environment Team can help businesses with the submission of applications to the relevant authorities for authorisations, licences and consents needed in respect of emissions, discharges and waste management.  We can support negotiations with the relevant enforcement authority where a breach of consent is alleged and regulatory investigations ensue.  In relation to planning and project work, we can guide clients from the purchase of land to the submission of planning applications, review and report on environmental reports, prepare and and co-ordinate environmental impact assessments, and help to manage teams of experts with different technical competences.

Please contact Ben, Rachel or any member of the Environment Team for tailored advice, assistance or training on sustainability/ESG or environmental issues generally.

 

[1] that is, not small under  section 382, or medium-sized under section 465 of CA 2006 (SMEs)

[2] under section 385 CA 2006

[3] GreenPrint survey, February 2021

[4] See our briefing here on how can businesses ensure that their ‘green’ claims comply with consumer protection legislation for further information and advice in this area

Ben
Sheppard

Partner

Infrastructure & Energy

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Rachel
Turnbull

Director

Regulatory & Compliance

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