In May 2022, the government published its response to the BEIS March 2021 consultation paper, Restoring trust in audit and corporate governance, on major reforms to the UK audit industry and corporate governance regime. The response outlines reforms in relation to the scope of the definition of public interest entities (PIEs), directors' accountability and new corporate reporting requirements (in relation to internal control, resilience, assurance of reported information, anti-fraud measures, and dividends), supervision of corporate reporting, enforcement against company directors and clawback and malus in executive directors' remuneration, audit purpose and scope, audit committee oversight and engagement with shareholders, the audit market and the establishment of the new regulator, the Audit, Reporting and Governance Authority (ARGA). The timescale for many of the reforms, including the establishment of ARGA, is expected to stretch over several years to give market participants time to prepare for the changes. For more information, see Legal update, Audit: government response to consultation on audit and corporate governance reform (full update), Corporate governance reform toolkit and Practice note, Audit reforms: proposals, impact and implementation of the Kingman, CMA and Brydon reviews.

The UK Corporate Governance Code issued by the Financial Reporting Council (FRC) consists of principles of good governance in the areas of leadership, division of responsibilities, composition, succession and evaluation, audit, risk and internal control and remuneration, to ensure that a company operates effectively, complies with legal requirements and reports reliably.

The UK Corporate Governance Code applies to all companies with a premium listing, whether incorporated in the UK or elsewhere. The UK Corporate Governance Code is a "comply or explain" code. The Listing Rules require UK listed companies to include in their annual corporate reports and accounts a disclosure statement setting out how they have applied the principles, whether they have complied with the Code's provisions, and explaining and justifying any non-compliance.

The July 2018 version of the Code applies to accounting periods beginning on or after 1 January 2019.

As well as setting principles of good governance, the July 2018 version of the Code extends somewhat into other aspects of ESG. For example, it refers to companies "contributing to wider society" (Principle A) and has an emphasis on stakeholder engagement (Principle D and Provision 5).

For more information, see Practice notes:

In recent years, there has been an increase in the corporate governance disclosures required of large private companies in their annual reports and on their websites (see Practice notes, Private companies: corporate governance considerations for large private companies (including the Wates principles) and Private companies: corporate governance reporting requirements).

For financial years beginning on or after 1 January 2019, a UK incorporated company must include a statement of corporate governance arrangements in its directors' report if the company has either or both:

Unquoted companies must make available the statement of corporate governance arrangements on a website (maintained by or on behalf of the company and which identifies the company). The Wates Corporate Governance Principles for Large Private Companies (Wates principles) are aimed at large private companies which may (but are not required to) adopt them as an appropriate framework when making a disclosure about their corporate governance arrangements. The Wates principles consist of six high level principles with accompanying guidance covering:

Institutional investors are subject to the UK Stewardship Code, which is published by the FRC and sets out good practice for institutional investors on engagement with investee companies (see Practice note, UK Stewardship Code 2020).

In October 2019, the FRC published the UK Stewardship Code 2020. The 2020 code applies from 1 January 2020.

The 2020 Code has a greater focus on ESG (including climate change) matters than the previous version. The key changes on the ESG aspects include:

The principles for asset managers and asset owners include that:

The principles for service providers include that signatories support clients' integration of stewardship and investment, taking into account material ESG issues and communicating what activities they have undertaken.

These are "apply or explain" principles, with reporting expectations. In applying the principles, signatories should consider (among other things) environmental and social issues, including climate change.

Under section 172 of the Companies Act 2006 (CA 2006), the directors have a duty to promote the success of the company. This means that a company director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, they are to have regard (among other matters) to the:

The wording of section 172 of the CA 2006 makes clear that a director is only under a duty to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members. However, in fulfilling that duty they should also "have regard to" the non-exhaustive list of factors. This reflects the concept that has become known as "enlightened shareholder value"; namely, that it will be to the advantage of companies that directors, in coming to their decisions, also consider other factors, including certain other "stakeholder" groups (for example, employees, suppliers, customers and others) and also the likely consequences and impact of their decisions (for example, in the long term and on the community and the environment). The Chartered Governance Institute UK and Ireland (CGI) (previously the ICSA) and Investment Association (IA) stakeholder voice guidance sets out matters for boards to consider in relation to stakeholders (see Practice note, Shareholder and stakeholder engagement).

Section 172 tries to engender an idea of CR that reflects wider expectations of responsible business behaviour and that, while still only involving one duty to promote the success of the company for the benefit of members, requires directors to have regard to additional CR-type factors.

For financial years beginning on or after 1 January 2019, all public and private companies required to prepare a strategic report, except those companies that qualify as medium-sized under sections 465 to 467 of the CA 2006 in relation to the financial year, must include a separate "section 172(1) statement" in their strategic report describing how the directors have had regard to the matters set out in section 172(1)(a) to (f) of the CA 2006 when performing their duty under section 172; and unquoted companies must publish their section 172(1) statement on a website (maintained by or on behalf of the company).

For more information on:

The CA 2006 and related regulations, the Listing Rules and the Disclosure Guidance and Transparency Rules (DTR) require certain companies to report annually on environmental, climate-related and other non-financial matters (such as social and employee-related matters) in their directors' reports, strategic reports and elsewhere in their annual reports.

Reporting requirements are complex and vary depending on the type of company. Practice note, Narrative reporting: climate-related and environmental disclosures in annual company reports: overview summarises the requirements for environment and climate-related reporting in UK companies' annual reports prepared in accordance with the CA 2006 and links to more detailed notes. Practice notes, Directors report and Strategic report explain the disclosures required in relation to engagement with employees, suppliers, and customers, corporate governance arrangements, social matters, respect for human rights, and anti-corruption and anti-bribery matters.

Requirements have increased considerably over recent years, particularly in relation to climate-related financial disclosures.

There has been increased recent focus on using shareholder pressure to encourage companies to engage with climate risks. A key example of this trend is the Say on Climate initiative requiring companies to submit a climate transition action plan at their AGM for a shareholder vote. For more information, see Practice notes, Resolutions on climate change at annual general meetings of FTSE 350 companies, Shareholder resolutions on climate change: legal and practical issues and engaging with investors, Shareholder activism and Article, Shareholder activism: here to stay.

The government has said that it plans to introduce mandatory requirements for certain companies to publish net zero transition plans setting out how they will decarbonise in the period to 2050. The government has created a Transition Plan Taskforce (TPT), which is tasked with developing a "gold standard" for transition plans and related metrics. The TPT defines a transition plan as an entity's plan to contribute to and prepare for a rapid global transition towards a low greenhouse gas emissions economy. The TPT consulted on a draft framework in November 2022 and is expected to finalise the framework in 2023 (see Legal update, Climate transition plans: TPT consultation on disclosure framework and implementation guidance (full update)). The government indicated in its March 2023 update to the Green Finance Strategy that it expects to consult in autumn or winter 2023 on mandatory disclosure of transition plans (see Legal update, Government publishes updated Green Finance Strategy). For more information, see Practice note, Net zero transition plans for UK companies.

Concern over the effects of climate change is one of the main drivers for increased focus on ESG. In 2019, the UK set itself a statutory net zero carbon target for 2050 under the Climate Change Act 2008 (see Practice note, Climate Change Act 2008).

Key areas of regulation to drive progress towards the net zero target include the UK Emissions Trading Scheme (UK ETS), the climate change levy (CCL), climate-related disclosures, the Energy Savings Opportunity Scheme (ESOS) and energy efficiency in buildings and products.

For more information and links to detailed materials, see Practice note, Climate change issues for companies and Climate change toolkit.

Key requirements and developments mandating ESG-related supply chain due diligence include:

For more information, see Practice note, ESG-related supply chain due diligence: UK and EU developments.

Under the Modern Slavery Act 2015, larger organisations carrying on business in the UK with a total turnover of £36 million or more must report annually on actions they have taken to eliminate modern slavery in their supply chains. The report takes the form of a modern slavery statement, which would usually cover information on supply chain due diligence efforts. Legislative changes in the pipeline would mandate the content of any modern slavery statement, and would make it mandatory to include information about due diligence processes on suppliers. For more information on this requirement, including proposed legislative changes, see Practice note, Modern Slavery Act 2015: slavery and human trafficking statement.

A Modern Slavery Bill was proposed in the Queen's Speech 2022. The Bill would cover many issues that have been proposed previously, including extending the reporting requirement in section 54 of the Modern Slavery Act 2015 to include public bodies, mandating the content of the slavery and human trafficking statements, and introducing fines for non-compliance (see Modern Slavery Act 2015 toolkit).

For financial years beginning on or after 6 April 2017, large employers (with at least 250 relevant employees) are subject to mandatory gender pay gap reporting under the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 (SI 2017/172). For further details, see Practice note, Gender pay gap reporting obligations.

Some organisations may already report voluntarily on their ethnicity pay gap but, at present, there is no mandatory requirement to do so. The government's October 2018 consultation, which closed in January 2019, had considered proposals to introduce mandatory ethnicity pay gap reporting. In its Policy paper: Inclusive Britain: government response to the Commission on Race and Ethnic Disparities (published on 17 March 2022), the government confirmed that mandatory ethnicity pay gap reporting will not be introduced at this stage and that the government will support employers with voluntary reporting. For further details, see Practice note, Diversity and inclusion: UK reporting requirements for companies: Ethnicity pay gap.

The Bribery Act 2010 has prompted commercial organisations to assess whether they have adequate procedures to ensure that they are not involved in bribery and corruption. It is widely accepted that corruption causes poverty and suffering, inhibits economic growth, is damaging to business, both financially and in relation to reputation, and may result in criminal and civil liability and penalties for organisations and individuals. Most major companies already have in place an anti-corruption policy that should be reviewed regularly to ensure that it is fit for purpose. For more information, see:

Companies are increasingly incorporating the management of material ESG risks and opportunities into their long-term strategy and therefore into their incentive plans (see Legal update, PwC research finds almost 60% of FTSE 100 companies use ESG performance targets). The Investment Association's November 2021 guidance on executive remuneration recommends that companies should use ESG metrics that are quantifiable and are appropriately stretching, and demonstrably linked to company strategy (see Legal update, Executive remuneration: Investment Association principles of remuneration for 2022). Companies that have not yet incorporated ESG metrics into their remuneration policy should explain to shareholders what their intentions are in this regard. For further details, see Practice note, Directors' remuneration: corporate governance issues: ESG: linking executive pay to the company's ESG strategy.

For information on developments relating to understanding and quantifying nature and biodiversity risk, nature markets and finance, and nature and biodiversity disclosures, see Habitats, wildlife and biodiversity toolkit.

For information on how environmental claims in advertising and other sales and marketing communications are regulated in the UK, see Practice note, Greenwashing in advertising and consumer protection law.

For information on developments in environmental legislation in England and Wales and the EU, see Environment draft legislation tracker (England and Wales) and Environment draft legislation tracker (EU) respectively.

Practice note, Horizon scanning for financial services practitioners: Sustainable finance tracks forthcoming significant legal and regulatory developments on sustainable finance.

Climate change and sustainability work by international financial services authorities: tracker tracks key developments at an international level that impact UK financial services firms relating to climate change and sustainability.

For key ESG resources fro finance lawyers, including on green, sustainability-linked and social loans and bonds, see Environmental, social and governance (ESG) for finance lawyers toolkit (UK).

For information on ESG guidance for investors, see Practice note, Environmental, social and governance (ESG) guidance: tools for companies and investors: Tools for investors on ESG.

The UK is committed in law to net zero and the government is pushing for the UK to be a net zero financial centre. Key initiatives relating to this ambition include:

For an overview of the key measures and initiatives the UK government and financial services regulators are taking to develop a greener financial system, notably on climate change and sustainability, see Practice note, Hot topics: UK regulation of sustainable finance.

Practice note, Hot topics: EU sustainable finance regulation provides an overview of the EU sustainable finance framework that puts ESG considerations at the heart of the financial system to help transform Europe's economy into a greener, more resilient and circular system.

The package of EU sustainable finance Regulations seeks to integrate ESG considerations into the investment and advisory process in a consistent manner across sectors. It consists of the:

Practice note, EU sustainable finance: indirect impact on UK listed companies gives an overview of the indirect impact of EU sustainable finance regulation on UK listed companies that are not financial services firms and matters to consider in relation to increased investor engagement and demand for sustainability information.

The EU Non-Financial Reporting Directive 2014 (2014/95/EU) requires large EU public interest entities to publish an annual statement relating to environmental, social and employee-related matters, respect for human rights, anti-corruption and bribery matters.

The Corporate Sustainability Reporting Directive (EU) 2022/2464 significantly expands the non-financial reporting requirements to apply to a wider range of companies (including some non-EU companies). Affected companies will have to report on a broader list of sustainability matters relevant to their businesses in accordance with mandatory EU sustainability reporting standards.

For more information, see:

The European Commission has mandated the European Financial Reporting Advisory Group (EFRAG) to develop of EU sustainability reporting standards (ESRS).

The Corporate Sustainability Reporting Directive (EU) 2022/2464 (CSRD) includes requirements for companies to report according to mandatory ESRS developed by EFRAG (see Corporate Sustainability Reporting Directive (CSRD) extends Non-Financial Reporting Directive 2014 above).

To track this development, see Climate-related and environmental disclosures in company annual reports: key developments tracker: EFRAG: development of EU sustainability reporting standards (ESRS).

For information on mandatory ESG-related supply chain due diligence requirements in the EU (both existing and emerging), see Practice note, ESG-related supply chain due diligence: UK and EU developments. These include:

The Commission has proposed the following measures in relation to product sustainability, greenwashing and consumer protection as part of its Green Deal package:

The Council has also adopted the Sustainable Batteries Regulation which modernises and replaces the Batteries Directive 2006 and ensures the sustainability of batteries placed on the EU market throughout their entire life cycle. For further guidance, see Sustainable Batteries Regulation: legislation tracker and Practice note, EU Batteries Directive 2006: Proposed Batteries Regulation to replace Batteries Directive 2006).

In December 2020, the EU adopted the Human Rights Violations Regulation ((EU) 2020/1998) and the Human Rights Violations Decision (2020/1999), which together establish a global human rights sanctions regime for the EU. The regime allows the EU to impose sanctions on individuals, entities and bodies that are responsible for, involved in or associated with serious human rights violations and abuses in any part of the world (see European Council: EU adopts a global human rights sanctions regime (7 December 2020)).

In September 2015, the countries at the UN Sustainable Development Summit 2015 formally adopted the 2030 Agenda for Sustainable Development. The Agenda includes 17 Sustainable Development Goals (see Sustainable Development Goals (SDGs) below) and 169 targets designed to stimulate action over the next 15 years (see Legal update, UN adopts the 2030 Agenda for Sustainable Development).

Sustainable development has been defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

The Agenda follows from the 1992 UN Conference on Environment and Development (UNCED, frequently referred to as the Earth Summit), and the 2012 Rio Declaration, both of which set broad environmental goals on a wide range of areas, including biodiversity, energy, forests and sustainable agriculture (see Legal update, Outcome of the Rio+20 conference).

The 17 SDGs relate to:

The SDGs are not legally binding, but governments are expected to take ownership and establish national frameworks to achieve them. The SDGs applied from January 2016 and will guide the decisions that the UN takes in the period to 2030.

In July 2020, the Local Government Association (LGA) and the UK Stakeholders for Sustainable Development (UKSSD) launched guidance to local authorities on the SDGs.

The UN is working on proposals for a legally binding treaty on business and human rights (see UN Human Rights Council: Open-ended intergovernmental working group on transnational corporations and other business enterprises with respect to human rights).

The treaty would go beyond the voluntary UN Guiding Principles for Business and Human Rights (UNGPs), which provide a global standard for preventing and addressing the risk of adverse human rights impacts linked to business activity.

In July 2022, the UN General Assembly passed resolution 76/300, which recognises that a clean, healthy and sustainable environment is a human right (see Legal update, UN recognises clean, healthy and sustainable environment as human right). The landmark resolution was passed with 161 votes in favour and 8 abstentions and follows the UN Human Rights Council (UNHRC) passing a similar resolution in October 2021 (see Legal update, UN Human Rights Council recognises safe, clean, healthy and sustainable environment as human right).

The UN resolution recognises that climate change and environmental damage (including from unsustainable use of natural resources, air, land and water pollution, poor management of chemicals and waste, and biodiversity loss) has a negative impact on enjoyment of all human rights.

The resolution is likely to support the growing trend in climate change litigation of connecting protection of human rights with the responsibilities of governments and greenhouse gas emitters to act on climate change.

In June 2023, the ISSB (established by the IFRS Foundation) issued the first two IFRS Sustainability Disclosure Standards. They will be effective for annual reporting periods starting 1 January 2024, with early adoption permitted in some circumstances. From 2024, the IFRS Foundation will also take over the monitoring of progress on companies’ climate-related disclosures from the TCFD.

For more information, see Practice note, IFRS Sustainability Disclosure Standards.

In March 2023, the United Nations General Assembly (UNGA) adopted a resolution inviting the UN's International Court of Justice (ICJ) to issue an advisory opinion on countries' climate change and human rights obligations under international law (see Vanuatu press release). The resolution was introduced by 18 countries led by Vanuatu and was co-sponsored by 132 states.

The resolution asks the ICJ to issue an opinion on:

For more information, see Legal update, UN adopts resolution inviting International Court of Justice to issue opinion on countries' climate change and human rights obligations.

The Task Force on Nature-related Financial Disclosures (TNFD) reporting framework is intended to establish a voluntary method for organisations (particularly companies) to identify, assess and report on material nature-related risks and opportunities (sometimes referred to as "biodiversity-related risks and opportunities"). It has been tested throughout 2022 and the final version is due to be issued in September 2023. For more information, see Practice note, Taskforce on Nature-related Financial Disclosures (TNFD): disclosure framework.

The Task Force on Inequality-related Financial Disclosures (TIFD) aims to reduce inequality created by the private sector. It will provide guidance, thresholds, targets, and metrics for companies and investors to measure and manage their impacts on inequality, as well as inequality’s impacts on company and investor performance. For more information, see the TIFD website.