On 7 July 2021, the Financial Reporting Council (FRC) published a Statement of Intent on Environmental, Social and Governance (ESG) challenges.
ESG concerns are becoming ever more relevant to corporate bodies of all sizes across the UK. For many years now, climate change, sustainability, green energy, reducing one's carbon footprint, deforestation and charitable giving, to name a few, have been high on the corporate agenda. We have seen these wider public interest issues commonly factor into business reporting, management decision-making and stakeholder management.
The FRC recognises that corporate bodies have attempted to implement ESG practices into their corporate governance in an era of increasing regulatory change. The FRC's Statement of Intent identifies six underlying issues below caused by the implementation of varying ESG practices across the UK and seeks to set out a plan in order to allow corporate bodies to properly meet ambitious stakeholder expectations and to develop an effective system of ESG reporting based on a common conceptual framework.
We need to do better by ensuring that:
Source: FRC Statement of Intent of Environmental, Social and Governance challenges, July 2021
The FRC plans to undertake the following activities in order to address the issues above and build a common conceptual framework for ESG reporting:
- Production – guide the collection of more robust and reliable data, encourage the use of quality non-financial information at management level and consider the role of the UK Corporate Governance Code and reporting.
- Audit and assurance - work with the assurance market to develop a suitable framework for ESG information and consider revising audit and assurance standards.
- Distribution – increase the availability and digitisation of data (including tagging) so it is made available publicly on a more consistent basis.
- Consumption – a focus on 'quality reporting' and obtaining investor insight including on approaches to ESG within UK Stewardship Code reporting.
- Supervision – supervise the audit industry and set high expectations for regulated entitles with emphasis on monitoring.
- Regulation – increase regulatory coherence, support global sustainability reporting standards and work with international regulators and governments to ensure global efficiency.
These are clearly long-term goals which the FRC acknowledges require both national and international input. It is promising to see regulators start to consider broader issues such as ESG and the difficulties in measuring non-financial performance.
From a corporate governance perspective, we may see over time: changes to the UK Corporate Governance Code and UK Stewardship Code; a drive for 'responsible investors' to focus on targeted ESG considerations at board level; and, utilising more technologically advanced solutions for data capture and reporting.
If you would like to discuss the impact of ESG concerns on your business or would like further information on these ESG challenges or FRC proposals, please contact Leon Miller, Matt Lewy or Krish Dholakia.
If you are interested in more ESG material, please see our wider WBD publications such as our article on the Shell decision relating to climate change litigation and our popular WBD US podcast ESG and Doing Well by Doing Good.