From niche to necessity: the development of ESG in the UK

Sustainability issues and related legislation, for example, environmental, energy, human rights and consumer regulations are long standing, but the development of a focus on ESG (and indeed the coining of the phrase/acronym itself) is more recent. Over the past decade, ESG has evolved from being a financial sector niche to a mainstream imperative, driven by regulatory changes, investor demands and societal expectations. All boards will have ESG as a key issue on their radar. 

Sustainable finance and ESG disclosures

ESG, as a collective set of considerations, arguably developed in the finance sector, partly as a function of sophisticated risk management, and an evolution of ethical, responsible and impact investing approaches. In 2004, the UN Global Compact published Who Cares Wins, which discussed the concept of ‘environmental, social and governance’ factors to describe these non-financial issues. The UN Global Compact launched the Principles for Responsible Investment in 2006, creating a framework for investors to incorporate ESG into their investment processes. 

Investors began to call for ESG-related information to compare sustainability claims and make informed decisions on sustainable investments. A number of voluntary ESG reporting frameworks emerged, including the recommendations from the Taskforce on Climate-Related Financial Disclosures (TCFD) published in June 2017, the Global Reporting Initiative (GRI) standards and the Sustainability Accounting Standards Board (SASB) standards.  

Mandatory reporting standards

The TCFD recommendations emerged as one of the leading frameworks for reporting on climate change and have heavily influenced the UK reporting framework. Voluntary reporting has evolved to become mandatory for large parts of the economy. TCFD-aligned disclosures were introduced (via the Listing Rules) on a ‘comply or explain’ basis for UK listed companies for financial years from 1 January 2021. The UK government subsequently introduced the requirement for in-scope larger companies (both traded and private) to make certain mandatory disclosures based on the TCFD framework for financial years from 6 April 2022.

Greenwashing

The increasing focus on demonstrating sustainability credentials has led to concerns about greenwashing and, more recently, greenhushing. The government and the Financial Conduct Authority (FCA) have taken robust steps to address greenwashing. The Competition and Markets Authority has been empowered to impose fines of up to 10% of global turnover on companies making misleading environmental claims and the Advertising Standards Authority has been actively cracking down on misleading green claims.

Beyond finance

The breadth of the subject matter implied by ESG is now so vast that it is not practical to note all the UK legislation connected with the topic. However, some examples that give a sense of the breadth of the legal landscape include: