ESG – a continually evolving area

Posted: 13/10/2021

In November last year we considered the opportunities and challenges posed by environmental, social and governance (ESG) matters for registered providers of social housing (RPs). However, ESG is a continually evolving area and we consider some recent updates below.

FRC statement of intent on ESG challenges

In July, the Financial Reporting Council (FRC) published a Statement of Intent on ESG challenges identifying a number of barriers for companies aiming to achieve an effective and efficient system of ESG reporting in a way that meets stakeholder demands. The statement also identifies various actions that the FRC plans to undertake to support the market.

The FRC acknowledges, as we know, that there is an ever-increasing amount of regulatory change in this area and there remain a range of underlying issues with:

• production – to ensure that better internal information leads to better decisions and better insight for stakeholders. Organisations face challenges in how they measure, manage, control and assure ESG data, and it can be challenging to use this data in decision making. This is exacerbated by the different thresholds, frameworks and guidance, as well as the inefficiencies of complying with various obligations or different requirements from different stakeholders;
• audit and assurance – so that the reported information is robust and reliable. A perceived lack of credibility of ESG data can mean organisations are keen to seek independent assurance. However, there are differing levels of assurance provided, which creates further inconsistencies;
• distribution – so that information is made accessible to interested parties. ESG information is often located in separate places, reports and media at different dates and often not in an accessible or reusable format;
• consumption – to ensure this information leads to better decision making by stakeholders. There can be difficulties obtaining the data and there are questions over its quality or efficacy. This can limit the ability to use the data for effective decision making. ESG information is also currently subject to an assortment of regulatory requirements and oversight, which hinders consistency;
• supervision – so that information and activity is appropriately monitored and requirements are enforced. With the increased demand and expectations on ESG reporting, there needs to be effective supervision and monitoring of organisations to ensure requirements are met; and
• regulation – coordinated and coherent regulation leads to efficiency. As mentioned above, there are different domestic and international standards relating to ESG. There is a need to ensure international ESG standards work effectively alongside a UK framework.

The FRC has committed to taking several actions including:

• providing guidance on frameworks and methodologies in measuring and controlling ESG data;
• developing guidance for reporting under UK GAAP and how organisations include information on climate-related issues in their report;
• considering the role of the UK Corporate Governance Code to ensure boards are taking appropriate account of ESG when considering the long-term success of the company;
• working with organisations to ensure the audit and assurance framework on ESG information is fit for purpose;
• building an appropriate ESG framework that is publicly available and readily accessible including electronic distribution of ESG data;
• increasing regulatory coherence by supporting global sustainability reporting standards and working with international regulators and governments; and
• continuing to monitor investors' approaches to ESG within their UK Stewardship Code reporting.

ESG continues to be an area of increased focus, both within the social housing sector and more widely. Many RPs are seeking to take advantage of the opportunities in the market and their unique position in relation to being able to demonstrate their ESG credentials. In order to do so, they must be able to demonstrate that they are capable of fulfilling the financial and impact objectives of potential investors in a consistent and meaningful way. However, to date, the onus has remained on individual organisations to interpret ESG requirements themselves, with a limited overarching regime to provide certainty or consistency.

The statement is clearly aimed at improving consistency, efficiencies and accountability on reporting of ESG information and so will be welcome news as many organisations, including RPs, focus their attention on getting ESG reporting right. These developments should assist RPs in promoting their organisations and highlighting the unique position that social housing providers have in furthering ESG objectives as part of their core business, as well as meeting investor expectations and requirements.

As part of its follow up to the statement, the FRC has also recently launched a new project that interested organisations can take part in focused on the production, distribution and consumption of ESG data. The project is intended to provide participants with an opportunity to develop systems around these issues in relation to ESG data. Potential participants should contact the FRC’s financial reporting lab at FinancialReportingLab@frc.org.uk by 15 November 2021.

FRC Lab report on reporting on stakeholders, decisions and section 172

The FRC also published a report in July titled ‘Reporting on stakeholders, decisions and Section 172’. The report sets out what investors and other stakeholders are looking for in reporting on these areas and how companies can improve their reporting to better meet investors' needs. The report also provides some tips on producing section 172 statements and best practice examples.

Whilst the requirement to produce a section 172 statement derives from the Companies Act 2006 and applies only to companies, it is arguable that all organisations, including community benefit societies, should be considering the benefits of producing something similar to demonstrate how the board is acting in the best interests and promoting the success of the organisation. 

Look out for our upcoming article discussing ESG and section 172 reporting soon. We are also holding a webinar on 13 October for members of the CHIC legal framework focussed on ESG reporting requirements – contact Caroline Barry if you are a member of CHIC and would like to sign up.

On the horizon- upcoming developments:

Finally, there are several developments on the horizon in relation to ESG, including:

• the Environment Bill 2021-22 is soon expected to become law and is currently at its third reading stage in the House of Lords – track progress of the Bill here;
• from 1 October 2021 new requirements under the Pension Schemes Act 2021 will come into effect, requiring trustees of larger occupational pension schemes to assess, manage and monitor the impact of climate-related risks on an ongoing basis and produce an annual report;
• 22 October 2021 is the deadline for comments for the Financial Conduct Authority CP 21/24 on listing rules relating to diversity and inclusion on company boards and executive committees reporting;
• during 2021 MHCLG is expected to consult on the Task Force on Climate-related Financial Disclosures for Local Government Pension Schemes;
• changes are expected to the Modern Slavery Act 2015(mandatory content and the reporting deadline for modern slavery statements and publication on the government-run register – read our previous update on the upcoming Modern Slavery regime changes);
• audit and corporate governance: expected reforms following the Department for Business, Energy & Industrial Strategy March 2021 consultation; and
• the 2021-2023 Taskforce on Nature-related Financial Disclosure to build framework.

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