An ESG framework can be used to assess the company’s position and areas of weakness and draw out non-financial risks and opportunities available to the company.
The subjects that Environmental, Social and Corporate Governance (ESG) covers depend on each company’s internal and external activities, but broadly will usually include:
- Shareholder structure
- Board and workplace diversity
- Employee engagement
- Community engagement
- Business ethics
- Greenhouse gas emissions created by the company both directly and indirectly
- Other metrics related to environmental measures undertaken by the company
- Executive compensation
- Company policies
- Tax transparency
- Risk management
- Anti-competitive practices
ESG has been a continuously developing subject. Many larger companies and groups have chosen to look at it in the light of the UN Sustainability Goals, focusing each of the 17 points in a way that allows them to improve their results and develop action plans for the future. ESG attracts investment from socially conscious shareholders; and following recent ‘greenwashing’ scandals those shareholders are now demanding the accurate reporting of results. Shareholders are very focused on ESG subjects.
Until recently ESG was only voluntarily reported on by companies, however it is beginning to be legislated for, and measured by external agencies. The lack of complete and standardised measurements is causing investors difficulties in their assessment of prospective investments and can disadvantage some companies. Companies’ focus on shareholder welfare should remain a priority to ensure future investment and these metrics form a part of that welfare. Companies who prioritise ESG have better staff retention.
What are the ESG regulations & legislation?
Existing and new regulations and legislation include:
- Voluntary Disclosures – Proxy firms are requiring companies to detail information relating to ESG topics.
- SEC regulations have recently changed to include information covering climate-related disclosure and cybersecurity matters along with human capital management and board diversity disclosures. The regulatory agenda for SEC, ESG reporting regulations in 2023 is:
- April 2023 – Climate Change Disclosure;
- October 2023 – Investment Company Names; and
- October 2023 – Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.
- EU regulation – Companies operating in the EU will need to be aware of the Corporate Sustainability Reporting Directive (CSRD), effective January 1, 2024. The Directive also applies to non-EU companies with net turnover in the EU in excess of €150 million. Detailed rules are being drafted by European Financial Reporting Advisory Group (EFRAG); and
- Climate related disclosures in the UK – The London Stock Exchange have had to include climate-related disclosures on a “comply or explain” basis in their reporting since January 1, 2022. The Sustainability Disclosure Rules that were being developed by the UK government have been paused due to a change in approach, but these may be revived at a later date.
We hope you find this blog informative and insightful. ESG is a wide subject affecting many companies. Should you need assistance with how the legislative and regulatory changes will need to be considered and reported upon within your company, or think you may require company secretarial services or assistance with any of the matters covered in our Insights blog, please do not hesitate to contact us for an initial consultation at companysecretary@kincosec.com
