Maintained • European Union, International, United Kingdom
This note summarises the key policy and legal measures on environmental, social and governance (ESG) and corporate responsibility (CR) (also known as corporate social responsibility (CSR). It highlights new and emerging initiatives driving change in this area, covering international, EU and UK developments.
Scope of this note
This note summarises the key policy and legal developments in environmental, social and governance (ESG) issues and corporate responsibility (CR) (also known as corporate social responsibility (CSR)) at a UK and EU level. It focuses on key recent, new and emerging legal initiatives that are driving change in this area and highlights expected key developments on the horizon.
For practitioner insights on the ESG issues that are currently top of mind for their clients and the key ESG developments on their radar for the coming few months, see Article, ESG Outlook Spring-Summer 2023.
The terms ESG, CR and CSR are used to refer to the decisions and behaviour of a company or financial organisation in the context of environmental and social responsibility, including areas such as ethics, the environment, diversity, human rights, integrity, labour chain, climate change, philanthropy, accountability, sustainability, values, community, transparency, fair trade and the long term.
Brexit and the EU-UK future relationship
The EU-UK trade and co-operation agreement includes commitments from the EU and UK on ESG and sustainability to:
Not regress on levels of environment and climate protection below the levels in place at the end of the transition period, and to strive to increase those levels.
Encourage responsible supply chain management and CSR, including by providing policy frameworks to encourage the uptake of relevant practices by businesses and support the implementation of international instruments such as the UN Global Compact and the UN Guiding Principles on Business and Human Rights.
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 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:
More than 2,000 employees.
A turnover of more than £200 million and a balance sheet total of more than £2 billion.
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:
Purpose and leadership.
Opportunity and risk.
UK Stewardship Code
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).
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:
Amendments to the definition of stewardship, to clarify that the purpose is to create value for clients and beneficiaries (rather than to create value for beneficiaries, the economy and society). Stewardship is now defined as "the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society".
Signatories are expected to take ESG matters, including climate change, into account and to ensure their investment decisions are aligned with their clients' needs.
The principles for asset managers and asset owners include that:
Signatories systematically integrate stewardship and investment, including material ESG issues, and climate change, to fulfil their responsibilities.
Signatories' purpose, investment beliefs, strategy and culture enable stewardship that creates long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment and society.
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.
Directors' duties and enlightened shareholder value (Companies Act 2006)
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:
Likely consequences of any decision in the long term.
Interests of the company’s employees.
Need to foster the company’s business relationships with suppliers, customers and others.
Impact of the company’s operations on the community and the environment.
Desirability of the company maintaining a reputation for high standards of business conduct.
Need to act fairly as between members of the company.
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).
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.
The Financial Conduct Authority (FCA) consulted in 2022 on sustainability disclosure requirements (SDRs) that will require companies, some financial institutions and occupational pension schemes to disclose sustainability-related information. The final rules will be published in 2023. The policy statement is expected in Q4 2023 (see Legal update, FCA update on SDR and investment labels consultation) For more information, see Practice notes, Hot topics: UK regulation of sustainable finance and Hot topics: proposed FCA sustainability disclosure requirements (SDR) and labelling regime.
For accounting periods beginning on or after 1 April 2022, under the Listing Rules, UK and overseas companies with listed equity shares or certificates representing equity shares (other than OEICs and shell companies) must include in their annual report:
A comply or explain statement on whether they have achieved certain targets for women and ethnic minority representation on their board.
A standardised numerical disclosure on the ethnic background and gender identity or sex of their board, key board positions, and executive management team.
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.
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).
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:
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.
UK: legal drivers on ESG for financial services industry
Sustainable finance is the process of taking ESG considerations into account in investment decision-making, with the aim of increasing investment in longer-term and sustainable activities. Practice note, A guide to key resources: sustainable finance will help you navigate Practical Law's sustainable finance materials.
Tracking sustainability developments for regulated firms
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:
Disclosure Regulation ((EU) 2019/2088) (also known as the SFDR), which imposes harmonised transparency and disclosure requirements on financial market participants and financial advisers, including requiring firms within scope to consider how sustainability risks are incorporated into the investment decision-making process and how the remuneration of individuals is consistent with sustainability issues. For more information, see Practice note, Sustainable finance: SFDR: overview.
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.
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).
Sustainable Development Goals (SDGs)
The 17 SDGs relate to:
Social issues (ending poverty and hunger, ensuring clean water and sanitation, good health and well-being, quality education and gender equality and reducing inequalities).
Economics (decent work and economic growth, industry innovation and infrastructure).
The environment (affordable and clean energy, sustainable cities and communities, responsible consumption and production, climate action, marine life and life on land).
Governance (peace, justice and strong institutions and partnership for the goals).
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.
UN proposal for treaty on business and human rights
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.
International Sustainability Standards Board (ISSB) sets new global sustainability accounting standards
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.
UN resolution seeking clarity on countries' climate change and human rights obligations
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:
The obligations of states under international law to ensure the protection of the climate system and other parts of the environment from anthropogenic (human-caused) emissions of greenhouse gases (GHGs) for states and for present and future generations.
The legal consequences of these obligations for states that have caused significant harm to the climate system and other parts of the environment. The resolution asks the ICJ to consider states (in particular small island developing states) and people of present and future generations adversely affected by climate changes.
Task Force on Nature-related Financial Disclosures (TNFD)
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.
Task Force on Inequality-related Financial Disclosures (TIFD)
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.