Is ESG Still Top of the Agenda for UK Corporates?

The recent US Presidential election has impacted the ESG (Environmental, Social and Governance) agenda for corporate America.  Since taking office earlier this year, Donald Trump has dismantled diversity, equity and Inclusion policies, withdrew the US from the Paris Climate Agreement, moved to fast-track permits for new fossil fuel infrastructure, blocked new offshore wind development, and rolled back the requirement for half of vehicles sold by 2030 to be electric.

By contrast, here in the UK, since the Labour government came to power in July this year, it has, amongst other things, lifted the ban on onshore wind in England, consented approximately 2GW of solar (more than the last 14 year combined), and launched Great British Energy – backed by over £8 billion of funding to speed up the deployment of clean technologies.

In recent years, ESG considerations have become increasingly important to the strategic agendas of UK corporates.  But, will the US pushback on ESG lead to increased anti-ESG sentiment by corporates on this side of the pond, and indeed, globally?

What is ESG?

ESG stands for ‘environmental, social and governance’.  It looks at how a company is managed, directed, and controlled and how it manages the following environmental, governance and social aims and responsibilities:

• Environmental – climate change and greenhouse gas emissions; emissions to air, water and land, pollution and waste; biodiversity, deforestation and land use; energy efficiency and resource depletion (including water);
• Social – human rights (including modern slavery and child labour, health and safety, diversity equity and inclusion (DEI); conflict zones and conflict minerals; and stakeholder and community engagement;
• Governance – bribery and corruption and anti-money laundering; executive pay; board independence, diversity and structure; conflicts of interest and responsible tax strategy.

Why is ESG important for companies?

ESG is important for companies because their stakeholders (e.g. their investors, suppliers, employees and consumers) are concerned about our planet and its people and are ramping up pressure on companies to manage their impact on environmental and social issues.  Addressing ESG issues is increasingly a pre-requisite for acquiring business and attracting investors and access to capital as investors use ESG performance as part of their investment selection criteria.

It can also contribute to costs savings (e.g. if waste and/or energy consumption is reduced). Companies who prioritise ESG issues are also more likely to be prepared to deal with physical risks e.g. flooding and fire – and this, in turn can lead to decreased costs e.g. reduced insurance premium payments.

They are also more likely to avoid the risks of climate litigation and enforcement actions, discriminatory claims for equal pay and supply chain disruption.  Many companies have also found that commitment to ESG issues enhances their reputation, attracts investment and talent and consequently, productivity and increased growth.

ESG and UK law

Whilst there is no specific ‘ESG law’ in the UK, the UK legislative framework for ESG consists of multiple regulators and laws and regulations including:

• The Climate Change Act 2008 sets legally binding carbon reduction targets for the UK and requires companies to report on their greenhouse gas emissions and climate-related risks. Since 2019, large UK companies were required to report publicly on their direct or scope 1  emissions (i.e. emissions from activities which the company owns/controls e.g. emissions from combustion in its own boilers, vehicles, emission from its manufacture of products from its own equipment) and also on indirect or scope 2 emissions (i.e. emissions associated with the generation of electricity purchased for their own consumption).  Large quoted companies were also required to report on scope 3 or other indirect emissions (i.e. emissions that are a consequence of an organisation’s activities and which occur at sources that the organisation does not own or control and which are not scope 2 emissions e.g. extraction and production of purchased materials, transport of purchased fuels etc.).  However, companies that were not subject to mandatory reporting requirements could still chose to report their environmental impacts on a voluntary basis;
• The Companies Act 2006 requires companies to report on their ESG performance in their annual reports and places obligations on company directors to consider the impact of the company’s operations on the environment;
• The UK Corporate Governance Code sets out principles and provisions for good corporate governance, including the consideration of ESG issues;
• The Modern Slavery Act 2015 requires companies over a specified turnover to publish an annual statement setting out the steps they have taken to ensure that their supply chains and operations are free of modern slavery and human trafficking;
• Trading Standards, Competition and Markets Authority (CMA) and Adverting Standards Authority – these enforce consumer protection laws, e.g. where a company makes green claims it must adhere to the Green Claims Code (which is enforced by the CMA) and holds businesses accountable for misleading environmental claims etc.;
• Environmental regulators – Environment Agency, Natural England, Natural Resources Wales – these impose sanctions against company directors and officers for environmental offences;
• Health and Safety Executive and local authorities – these oversee health and safety offences, undertake criminal prosecutions, issue warnings, statutory prohibitions, improvement notices;
• Serious Fraud Office – enforces the Bribery Act in England and Wales; and
• UK Emissions Trading Scheme – where operators of industrial facilities which fall within the UK Emissions Trading Scheme (UK ETS) must report their greenhouse gas emissions to the relevant regulator.

How are UK corporates meeting their ESG objectives?

A number of UK companies are proactively implementing ESG compliance measures, including, for example:

• Undertaking energy audits to identify energy waste;
• Installing energy efficient HVAC systems – i.e. upgrading their heating, ventilation and air conditioning systems to more energy efficient models with programmable thermostats,
• Installing energy efficient heating – i.e. to include energy efficient boilers, heat pumps etc;
• Installing energy efficient lighting – e. replacing traditional incandescent and fluorescent lighting with energy efficient LED lighting which lasts longer and consumes less electricity and consequently reducing energy costs;
• Improving/installing insulation to reduce heat loss and energy waste leading to lower heating and cooling costs (e.g. insulation cladding for buildings, sealing air leaks, upgrading windows and doors to improve energy efficiency etc.);
• Installing smart energy management technologies e.g. smart meters, occupancy sensors, smart thermostats to track usage, optimise energy use, monitor and control energy consumption in real time and adjust usage based on demand;
• Improved waste management and recycling;
• Improved water management to reduce water consumption;
• Installing low carbon and renewable energy solutions (both on-site and off-site)– e.g. heat pumps, wind turbines, rooftop solar and battery; if possible connecting to ground mounted solar by private wire; corporate power purchase agreements with renewable energy developers (using a utility to sleeve the power); connection to heat networks (if available) etc.;
• Energy efficient computers and other office equipment and appliances;
• Establishing staff engagement programmes to build a strong culture of ESG awareness – e.g. training programmes, energy saving tips to staff, incentive schemes to adopt sustainability practice in workplace – e.g. sustainability apps and reward schemes etc.; and
• Introducing electric car salary sacrifice schemes for employees.

Conclusion

Just this month, the UK government cut in half the level of subsidies paid to Drax, Britain’s largest renewable power generator, for the operation of its biomass power plant in North Yorkshire. Drax was found to have misreported its use of primary and old-growth forests in Canada in contradiction of its own sustainability claims and UK reporting requirements.

Furthermore, the UK is currently consulting on the creation of the first two UK Sustainability Reporting Standards (SRS) for (i) the disclosure of sustainability-related financial information and (ii) climate related disclosures, following on from the establishment of the International Sustainability Standards Board at COP 26 in Glasgow, which was tasked with creating a global baseline for sustainability reporting.

So, despite US pushback, ESG is undoubtedly still top of the agenda for UK corporates.  In fact, UK corporates advocate that meeting ESG objectives make them attractive for global funds (including US funds) who recognise that sustainable practices and reputation credibility are integral to long term business success.  In fact, the growth in global ESG-related litigation with claims being issued against companies for, amongst other things, alleged greenwashing, anti-bribery, and modern slavery infringements means that companies that align with ESG standards will be better positioned to avoid the potentially huge economic impact of such claims and maintain their competitive edge.  Global investors will seek out the value to be had by both avoiding such liabilities and employing efficient sustainable solutions and green technology.

Perhaps we have entered a new phase of the ‘special relationship’ where, possibly for once in a very long time, the UK can lead the US on climate policy and the importance of continuing to focus on ESG, both for the planet and its people and for driving long term business value. This in turn leads to more robust and resilient economies.

How we can help

If you’re a UK company seeking to address your ESG objectives then we can help. Our experienced energy team continues to advise wind, solar and battery developers, as well as corporates on low carbon and renewable energy supply contracts, energy savings performance agreements and all types of power purchase agreements (PPAs), including private wire PPAs, sleeved PPAs and other route to market agreements.