1. THE IMPORTANCE OF DATA, DISCLOSURE AND REPORTING

1.1 Global financial regulators and voluntary standard frameworks are converging around concrete measures to improve data quality and coverage. These requirements go beyond climate-related reporting and also incorporate wider environmental and social factors. Investor-grade, high-quality ESG disclosure will continue to drive investment decisions, consumer spending habits and regulatory compliance.  

1.2 This data is not only important in order to access finance and comply with regulations; reliable data will also show a company its risks and opportunities and allow it to facilitate a robust business strategy featuring ESG risk-management. The increase of data gathering and disclosure has a correlative effect. Companies and governments are using data driven technologies like artificial intelligence and machine learning to monitor and improve environmental compliance and worker safety, while also increasing operational efficiency.

1.3 There is a growing body of laws and regulations governing disclosure of environmental and climate-related data which increasingly aims to scrutinise green claims and requires the true integration of sustainability into investment decision-making. These include reporting in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) and the UK Stewardship Code in the UK, and the EU Sustainable Finance Disclosure Regulation. The US has also made changes to their climate-related disclosure regime, with the U.S. Securities and Exchange Commission (SEC) proposing rule amendments to “enhance registrant disclosures regarding issuers’ climate-related risks and opportunities”. 

1.4 These hard-law requirements are overlaid with investor expectations, market best-practices and “soft law” voluntary reporting standards, such as the UN Global Compact, the Extractive Industry Transparency Initiative and UNPRI. Whether required by law to disclose, or encouraged to do so by investors and stakeholders, Boards must ensure they are in a position to manage ESG disclosures.  

1.5 As disclosure requirements become more onerous, current ESG policies should be reviewed, responsibility for ESG performance should be clearly delegated, and Boards should consider whether their current ESG reporting and information-gathering practices adequately support legal obligations, branding and wider ESG commitments.

2. THE RISE OF SOCIAL AND GOVERNANCE ISSUE, WITH A FOCUS ON DIVERSITY (D&I) AND HUMAN RIGHTS

2.1 Events such as the COVID-19 pandemic and the Black Lives Matter movement have generated unprecedented momentum for company stakeholders to demand that Boards take action on a broad range of social and governance issues. Two areas, human rights and diversity and inclusion (D&I), warrant particular focus for businesses.  

2.2 Human rights and the responsibility of businesses for the impacts they have through their sales, supply-chain and operations are likely to be the subject of new laws which may change the boundaries of corporate responsibility in the social arena. Previously viewed by some as a task for NGO campaigns and CSR initiatives, the prevention of adverse human rights impacts in the context of global business is increasingly being tackled by legislation, including proposed new EU-level mandatory human rights due diligence legislation, the first EU human rights sanctions regime, and the Uyghur Forced Labor Prevention Act in the U.S., which addresses goods made using forced labour in the supply chain.

2.3 This focus on social issues will increasingly become a bankability issue: major investment firms and asset managers have signalled that they will require companies to disclose diversity data and there is a corresponding rise in shareholder activism relating to diversity and work culture in large organisations.  In additional to gender pay gap reporting for UK companies since 2017 (albeit with a pause during the COVID-19 pandemic), some businesses are disclosing ethnicity pay data on a voluntary basis, with calls for this to be made mandatory. Broader reporting requirements are also being rolled out; companies listed on the Nasdaq stock exchange may soon be subject to a “comply or explain” requirement to have two Board members who are from under-represented groups.  

2.4 In response to new regulations, “crowd-reg”, and increasing shareholder activism, governance structures should promote transparency, trust, diversity and integrity. Companies must meet these expectations whilst not over-reaching and failing to deliver on their promises.

3. COP26 AND CLIMATE COMMITMENTS

3.1 As the planet looks to tackle the climate crisis, we expect increasingly complex conversations about climate resilience, the importance of biodiversity, and financing of the energy transition. All businesses need to act now to ensure they meet the demands of regulators, their employees, shareholders and other stakeholders. Companies must evidence credible transition plans which include suitably ambitious targets and be innovative in their approach to tackling climate change and biodiversity loss. Accusations of green-washing or lack of authenticity can derail a company, so robust systems which produce reliable, science-based data should be an essential part of any Board’s target-setting and reporting processes.  

3.2 Finally, COP26 has shaped the global response to climate change and altered the landscape in which businesses operate. Key topics discussed at COP26 affect all businesses and their stakeholders and the key learnings from the conference should be considered in any target-setting and business strategies going forward. These considerations include: 

(a) the increased pressure on governments to legislate for climate change is expected to place increasing regulatory and economic burden on businesses to adapt, particularly for businesses operating in countries that signed up to the Glasgow Climate Pact;

(b) companies needing to take substantive action to mitigate the risk of climate change activism;

(c) further reforms to green finance will have a knock-on effect on both borrowers and issuers through their balance sheet;

(d) rules for a framework for a global market in carbon offsets and emissions trading have been agreed, creating a new framework for a centralised system whereby countries can trade credits to help meet their decarbonisation targets; and  

(e) $19.2 billion of public and private funds were pledged to end and reverse deforestation, with a goal for the reversal to start by 2030. Notably, The Glasgow Financial Alliance for Net Zero (formed of over 450 firms representing ~$130 trillion, or 40% of the world’s financial assets under management) signed up to achieve and deliver net zero by 2050, and marked a significant shift towards private funds forming part of the climate crisis solution. 

Failing to meet ESG expectations can result in serious reputational harm, divert management time and limit investment, so companies should be proactive in engaging with stakeholders and managing their ESG journey. This in turn will deliver strong performance and sustainable long-term growth. Contact us for more information and to help you navigate the challenges and opportunities of the new business environment that places such importance on ESG issues.