Environmental, social and governance (ESG) reporting

As sustainability becomes a central focus for businesses worldwide, UK companies are also under growing pressure to embrace environmental, social and governance (ESG) practices. While large corporations have had to disclose their sustainability efforts for some time, now smaller companies are also being encouraged—and in some cases, required—to do the same.

ESG reporting can seem complex, especially with all the rules that govern sustainability disclosures. However, it has many benefits, from better risk management to increased trust from stakeholders and attracting investment.

Here we look at the key points of ESG reporting for UK companies, including mandatory and voluntary disclosures, as well as key frameworks and reporting standards.

Mandatory disclosures

The need for UK companies to report on sustainability largely depends on their size, sector, and activities. Here are the main rules and frameworks you should know about.

The Companies Act 2006

The Companies Act 2006 forms the backbone of corporate reporting in the UK. It mostly deals with financial reporting but also includes some non-financial requirements. For larger companies, the Section 172 statement requires directors to report on how they consider things like employee welfare, environmental impact and the long-term business sustainability in decision-making. While reporting is typically mandatory for larger businesses, smaller listed companies or those that heads of large groups or subsidiaries of public interest entities might also need to report.

Streamlined energy and carbon reporting (SECR)

The SECR framework, introduced in 2019, requires large companies to report on their energy use and greenhouse gas emissions. Companies must comply if they meet two of the following criteria: more than 250 employees, an annual turnover above £36 million or total assets exceeding £18 million.

Under SECR, qualifying companies must include details about their energy use, carbon emissions and energy-saving actions in their annual directors’ report. While this may seem daunting, for companies approaching the reporting threshold, looking at the data can help reduce energy costs and improve operational efficiency.

Task force on climate-related financial disclosures (TCFD)

The TCFD has been a key driver of climate-related reporting globally. In the UK, TCFD-aligned disclosures became mandatory for listed companies from 2022. For financial years ending after April 5 2023, all UK listed UK companies and large companies with over 500 employees and £500 million turnover must comply with TCFD recommendations.

TCFD sets a strong example for managing climate risks. Smaller companies can benefit from following TCFD principles voluntarily, like assessing climate-related risks and opportunities, which can improve long-term resilience and investor confidence.

Climate-related financial disclosure regulations

Building on TCFD, these regulations extend mandatory climate-related disclosures to more companies, including larger private businesses and limited liability partnerships. Companies that fall under these rules must report on their governance and strategy for managing climate risks and opportunities and how they integrate climate considerations into their financial decisions.

Companies close to the reporting thresholds should prepare for future compliance. Voluntarily aligning with these regulations can show a proactive approach to managing climate risks and opportunities, making them more appealing to investors and clients.

Corporate sustainability reporting directive (CSRD)

The CSRD is expected to come into effect soon and will replace the EU’s non-financial reporting directive (NFRD). This will significantly expand the scope of mandatory ESG reporting. While the CSRD mainly applies to large EU companies, it also affects UK businesses with operations in the EU.

CSRD is likely to impact companies in the supply chain of larger companies that need to comply. As large companies aim to improve their sustainability, they will increasingly ask their suppliers for ESG-related disclosures. Companies can benefit by preparing for these requests through voluntary reporting frameworks.

Other mandatory disclosures

Companies in certain sectors or with significant market influence might have extra mandatory disclosure requirements based on their activities or ownership. These could include environmental rules about waste management, water usage or labour practices under the Modern Slavery Act. Therefore, it is important to understand the specific obligations for your industry.

Voluntary disclosures

Besides mandatory requirements, many companies chose to do voluntary ESG reporting to demonstrate leadership, improve stakeholder relationships and future-proof their operations. Here are some common voluntary frameworks and standards.

International Sustainability Standards Board (ISSB) disclosures

The ISSB is creating a global baseline for sustainability disclosures. This aims to unify different ESG reporting frameworks, making reporting easier and more comparable. Although this is still developing, ISSB standards could become important for companies wanting to standardise their sustainability reporting, especially those looking for international customers or investors. The first two standards, IFRS S1 and IFRS S2 are expected to be approved in the UK in early 2025.

Global Reporting Initiative (GRI)

The GRI is one of the most well-known voluntary reporting frameworks, offering detailed standards for ESG disclosures. Companies can use GRI standards to report on various sustainability topics, including environmental impacts, social issues and governance factors. Although it is voluntary, GRI provides a structured and credible way for companies to showcase their sustainability efforts in line with international best practices.

Taskforce on nature-related financial disclosures (TNFD)

The TNFD is a newer framework that focuses on financial risks and opportunities related to nature and biodiversity. It helps companies operating in sectors with significant natural resource use like agriculture, forestry, or manufacturing to report on nature-related risks. Although it’s not mandatory yet, adopting TNFD early can help companies stay ahead of future regulations and improve their resilience to nature-related financial risks.

Conclusion

ESG reporting is becoming crucial for corporate governance for UK businesses of all sizes. Even though many companies don’t yet face the same strict reporting requirements as large corporations, the situation is changing. Regulatory pressure, supply chain demands, and investor interest are encouraging many companies to adopt ESG practices, even if they’re not legally required.

By understanding the key reporting frameworks like SECR, TCFD and the upcoming CSRD and using voluntary standards like GRI and ISSB, companies can show they are responsible and forward-thinking. Preparing for ESG disclosures can bring long-term benefits, such as cost savings, increased stakeholder trust and improved competitiveness.

For UK companies, now is the time to consider ESG reporting. Whether through mandatory rules or voluntary initiatives, including ESG in your business strategy will help meet new expectations and build a sustainable, resilient and successful future.