Insight Article: What Do You Need To Be ESG Compliant?

There is currently a lot of discussion in the media about ESG yet, from a legal perspective, your business needs to do nothing, unless…

It is a large company with 2 of these 3 criteria:

• turnover (or gross income) of £36 million or more,
• balance sheet assets of £18 million or more,
• 250 employees or more

OR

It is a large, unquoted company that has consumed (in the UK) more than 40,000 kilowatt-hours (kWh) of energy in the reporting period.

OR

It is an Academy Trust, then you need to comply with SECR: Streamlined Energy and Carbon Reporting.

AND

You may also have to complete an ESOS, Energy Saving Opportunity Scheme, for the environment agency every 4 years if you have:

• More than 250 employees, or
• An annual turnover in excess of €50 million and an annual balance sheet total in excess of €43 million.

So why is everyone talking about ESG if I legally don’t need to do anything?

ESG can be approached from 2 different viewpoints:

1. From the change maker’s perspective where the SME wants to make a positive impact to the environment, employees, and other stakeholders ahead of their competitors.
2. From the survival perspective where the SME wants to be able to remain steady and profitable in turbulent times.

Whatever your viewpoint is, the process of ESG reporting will be the same and the data gathered will come from the same sources.

As an SME you may or may not have considered how national and global events affect your business, such as COVID 19, COP 26, Ukraine war, energy crisis, natural disasters etc. These are horrific events that have changed our world and will continue to add further challenges in the future. This is not scaremongering tactics to convince you, allow us to explain how using ESG is a great tool to better future-proof your business.

The three parts to ESG are —the environmental, social, and governance aspects.

This diagram is a very simple way of identifying each aspect within the three groups.

Environmental

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help evaluate any environmental risks a company might face and how the company is managing those risks.

For example, the Ukraine war has caused major issues for the energy market which in turn has a knock-on effect to the cost of operations for SMEs in the UK. Those SMEs that were already aware of their energy consumption and had introduced energy saving measures will not be feeling the effect as much as those who had not done a carbon footprint assessment.

Social

Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values? Does the company donate to the local community or encourage employees to perform volunteer work? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests considered?

For example, the pandemic highlighted the robustness of a company’s CSR policy. Staff may have been forced to work from home whilst also home-schooling children or potentially looking after a sick family member. The company would have to trust the employee that they were working when they could.

Governance

Investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are allowed to vote on important issues. Investors and other stakeholders may also want assurances that companies avoid conflicts of interest in their choice of board members; that they don’t use political contributions to obtain unduly favourable treatment; and of course, don’t engage in illegal practices.

For example, WeWork, the office space for start-ups, fell from glory when it tried to launch its IPO due to unethical and unaccountable leadership. Due to bad governance the company was reduced in value from $47 Billion to $10 Billion.

How to start your ESG journey

As ESG is currently voluntary to report on, the market is saturated with ESG frameworks and reporting tools. Each standard appeals to different sectors and investors look at their preferred framework for investments. The UK is likely to make ESG reporting mandatory but most likely only for large corporations to start with.

SMEs of 1-50 employees, £5 million turnover

• Has the flexibility to use any framework, or parts thereof, with any methodology. Time and money will be the biggest constraints. The supply chain and stakeholder analysis should be much simpler and therefore easier to control and communicate with.
• There should be minimum of a Carbon footprint assessment and commitment to net zero.
• And publicly accessible policy documents declaring governance and social values.

SMEs of 51-200 employees, £200 million turnover

• The choice of framework is more important as some will be more suitable to a certain industry. Potential investors will be looking into the ESG reports and asking more questions around methodology.
• The main globally recognised frameworks are:
  • GRI, Global Reporting Initiative
  • CDP, (Formally Carbon Disclosure Project)
  • SASB, Sustainability Accounting Standards Board
  • IR, Integrated Reporting

Sustainability certification is another leg to your ESG journey where the business can demonstrate the commitment to environmental best practices. ISO 14001 and Planet Mark are examples of these.

Summary

Today, ESG reporting for SMEs is voluntary. However, with climate change, sustainability, and other ESG concerns gaining traction with governments, regulators, investors, and other stakeholders, regulated ESG reporting is all but inevitable.

Don’t wait for regulatory requirements, benchmark where you are on ESG matters and prioritise your response. By reporting on ESG voluntarily, a strong signal is sent to stakeholders that you are aware of these issues, have a plan to mitigate the risks, and are committed to making improvements.

ESG cannot be siloed and must be embedded into an organization’s entire operation and strategy. As we have seen recently, world events cause damaging ripples and affect SMEs in the most surprising ways. ESG strategy at best will give you the competitive edge, at worst will keep your business operational in turbulent times.

Original diagram found here – https://www.kroll.com/en/insights/publications/compliance-risk/is-your-compliance-team-ready-for-mandatory-esg-due-diligence