With businesses turning their attention toward environmental, social, and governance (ESG) initiatives, the need for consistent, transparent reporting has increased. The United Kingdom is leading the way by publishing an ESG regulatory requirement for public companies – the first major regulation in this area. This article will answer five of the biggest questions related to the main components of the legislation.
Who Does the UK ESG Regulatory Requirement Impact?
The UK has passed not one, but two new laws that together cover all UK registered companies and Limited Liability Partnerships (LLPs) with over 500 employees having annual revenue of more than £500 million. The UK’s new laws are the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022. The legislation also adds environmental reporting to all UK Public Interest Entities required to produce “non-financial information statements” under existing reporting regulations.
What Is Mandated by the UK ESG Legislation?
The organisations impacted by the legislation must now produce a sustainability statement on climate-related disclosures in their annual strategic or energy and carbon reports. While the new regulations are commonly being referred to as ESG laws, the language of the regulations only applies to environmental risk factors.
The sustainability information statement requires companies to report the following:
- A listing and description of environmental risks identified as impacting the company’s operations.
- The company’s governance strategy for assessing and managing environmental risk that takes into account different environmental outcomes.
- The scope for the assessment (e.g., fiscal year 20xx).
- List and description of environmental goals and key performance indicators (KPIs) used to measure environmental risk performance.
- The process used to identify, assess, and manage environmental risks.
- The company’s process for integrating environmental risk into the broader enterprise risk management (ERM) strategy.
In the law’s current form, the information required for environmental disclosure reporting includes fairly common risk management information related to how the risks are identified, controlled, and measured.
When Does the UK ESG Legislation Take Effect?
Parliament passed the new regulations in January of 2022 with an effective date of 6 April, 2022. This window gives all impacted businesses roughly three months to arrange their compliance efforts. Parliament has indeed been signaling the urgency to implement an ESG law for months before the official legislation, so many companies have already been taking steps to document their environmental initiatives.
What Role Do Assurance Teams Play in ESG Reporting?
As with other reporting requirements, assurance teams help companies validate that reported environmental risk information is accurate, supported, and reported on time. The unique nature of environmental risk across various organisations is the primary factor inducing complication within the ESG realm. While the regulations provide a framework for building the reporting structure, the contents will fluctuate depending on each company’s commitments, KPIs, and level of investment. Further, as the investment community continues to roll out proprietary ESG scoring frameworks — S&P Global Corporate Sustainability Assessment, Bloomberg ESG Scoring, etc. — assurance teams’ ability to quickly provide accurate data to the evaluators becomes increasingly important.
How Can Technology Help With ESG Reporting?
As the burden of evidence to substantiate all reported ESG metrics increases, leading organisations have found that their biggest challenges with managing an effective ESG programme relate to:
- having one system of record to track all ESG initiatives & claims.
- evidence collection to substantiate the organisation’s progress towards those public claims.
- selecting the appropriate framework(s) to map against.
- consolidating results for ESG reporting purposes, whether into stand-alone ESG reports or as part of their broader Annual reporting.
Whether you’re looking to start or accelerate your ESG journey, a connected risk platform can help your organisation implement ESG risk reporting programmes by collecting, consolidating, and measuring the data from the programme. As money is spent, hours worked, and environmental impact is realised, data can be sent into the system and measured against KPIs, just like many assurance professionals currently do with other risk and compliance metrics.
Planning for Compliance
As you develop the compliance programme and plan your KPIs, now is the perfect time to consider risk and compliance management software to enable the process and streamline reporting. Find out how AuditBoard can help you manage, automate, and streamline your environmental risk reporting programme, and help you turn your environmental reporting programme into a competitive advantage.
Aaron Wright is a Director of Product Solutions, UK&I at AuditBoard. Before joining AuditBoard, Aaron was an Internal IT Audit Advisor at Cardinal Health, where he managed a risk-based audit plan and led internal audit projects focused on infrastructure, cybersecurity, and applications. Connect with Aaron on LinkedIn.
