By Kari Mccormick
For the first time, investors and company boards are taking to start taking climate risk more seriously as we head towards Cop28, hosted by the United Arab Emirates this year, writes Kari McCormmick.
As we head towards yet another summit on climate change, this time in the UAE, we should look at how far British businesses have come on the “E” in ESG. Many are not just embracing opportunities to transition to net-zero, but genuinely leading the field in embedding ESG values in a just transition.
But there are developing risks on this journey. Over the last year, litigation rose globally against governments and companies alike. They are held to account for climate commitments it is alleged they should have made – or ones they have made but are not delivering on. Regulatory enforcement is also on the rise.
Greenwashing, and the quality of climate change corporate reporting, continues to be the focus of regulators. While of obvious relevance to the financial services industry, the ESG focus areas are significant to businesses more generally: initiatives in the UK in the next 24 months include a review of the corporate governance code, net-zero transition plans, sustainability disclosure requirements for asset managers, a new anti-greenwashing rule that will apply to all regulated firms, and proposals to bring ESG data and ratings providers into the FCA’s regulatory perimeter.
Many companies already report on their net-zero commitments. Focus has turned to transition plans – the roadmaps setting out how the company will deliver on those commitments with interim targets being a key component. These plans will be carefully scrutinised by stakeholders, and challenged if not supportable. The government is committed to the UK becoming the world’s first net zero-aligned financial centre and sees transition plans as a key component of that ambition. The Transition Plan Taskforce is expected to report later in 2023 with a “gold standard” framework. FCA guidance already encourages UK-listed companies to publish their transition plans for financial years from January of last year.
British companies also report according to the parameters of another taskforce, specifically on financial disclosures related to climate. These disclosures will be made by larger private companies for the first time in 2023. Once the International Sustainability Standards Board finalises disclosure standards later this year, the FCA will be looking to implement them in the UK for listed companies with a new framework.
Another area of focus for many companies is going to be non-financial reporting on sustainability issues like environmental rights, social rights, human rights and governance factors. This reporting is required by the Corporate Sustainability Reporting Directive. A number of UK businesses, and other non-EU head-quartered companies that nevertheless have a footprint in the EU, are currently seeking advice on the application of the directive to their business.
These developments are just the tip of the iceberg. While climate remains a core focus, there are many other aspects of ESG that companies are expected to act and report upon.
Attention is also turning to diversity and inclusion, including at board level, both through regulatory requirements for listed companies and voluntary initiatives.
It should be great news for everyone to see corporates demonstrating genuine leadership on this, and seeing legislators taking it seriously. But it also means a huge array of regulatory and legal developments companies need to stay abreast of. The challenge for some will be whether they have the resources, expertise and data they need. However, failing to invest in compliance is not an option. The enforcement and litigation cost of failing to comply is a risk businesses cannot afford to take.
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