5 reasons why UK firms should take the lead on ESG
Whether it is due to the demands of customers, investors or other stakeholder groups, ESG reporting is fast becoming an imperative for many organisations globally.
In the UK, we also face fresh impetus from regulators, through the impending requirements of the EU’s Corporate Sustainability Reporting Directive (CSRD) and the roll out of the UK’s own Sustainability Disclosure Requirements (SDR).
These regulations will require businesses to make their performance on environmental, social and governance (ESG) factors publicly known – with many organisations compelled to disclose this information in a way that conforms to global standards.
While, initially, this is more likely to affect larger businesses, the impact will also have repercussions on smaller companies too – due to the requirement to include Scope 3 emissions data. Any business looking to win a bid or tender from company committed to carbon reporting will now need to share their emissions data, as this will fall within their buyer’s scope 3 emissions.
The roll out of the EU’s CSRD regulation in January 2025, for instance, is predicted to directly impact 50,000 companies– and this will have a knock-on effect as it permeates through to supply chain partners based in the UK.
It will not be long before this type of reporting, influenced by commercial or regulatory pressure, affects all businesses. While it may not be a requirement for everyone just yet, there is still a strong case for UK businesses to get ahead of the game.
Here are five compelling reasons why it makes sense to take a leading stance on ESG and for UK business to align themselves with global reporting standards.
1. Gain the competitive advantage
Even without regulations, it is already the case that more than 70% of supplier contracts contain CSR clauses. So, the ability to supply emissions data in a way that conforms with global standards will be an advantage when looking to win business.
But, when it comes to conducting business within the EU (the UK’s largest trading partner), the commercial incentives are clear and imminent. The CSRD regulation states that any large UK companies with significant activities within the EU will be obliged to start reporting from 2025. UK SMEs listed on EU regulated markets will also need to follow suit in 2026, while non-EU companies with a net turnover of more than €150m, and just one subsidiary or branch in the EU, will need to comply by 2028.
2. Uncover opportunities for innovation
To align with global standards, businesses will need to put the appropriate infrastructure – people, processes and technology – in place, to deliver the relevant data. This will also require organisations to carefully review, analyse and evaluate that data in order to create actionable insights. This shouldn’t just be a tick box exercise, however, as those insights have the potential to unlock opportunities for innovation.They will very likely highlight where new strategies and systems could deliver operational efficiencies, energy reductions and cost savings. This could deliver huge business benefits – alongside having a significant environmental impact.
3. Improve investor confidence
There is no doubt that ESG has become a major consideration for investors. A recent Workiva study found that nine out of ten institutional investors now believe ESG disclosures are critical when assessing long-term financial outlook and organisational risks – 88% also said that ESG should be treated with the same rigour as financial reporting.
Similarly, eight in ten retail investors (82%) say they are interested in investing in companies that are socially and environmentally responsible, and nearly three-quarters would actively avoid any industry that contributes to climate change. The ability to comply with international standards will, therefore, help to build their confidence and ease access to corporate finance – helping to secure long-term business success.
4. Attract and retain a talented workforce
It’s not only investors that are shifting their focus towards transparency on ESG issues – the sustainability credentials of an employer can have a direct impact on the recruitment and retention of talent. A Swytch study found that 30% of respondents had already taken the decision to leave a company due to its lack of a corporate sustainability agenda.
This is an issue that particularly resonates with the next generation of workers. More than one third of Gen Z (34%) and Millennials (39%) say they would take a pay cut if a company’s ESG strategies aligned with their values. More than half would also relocate for a job if the employer demonstrated these values. So strong ESG credentials could help to lower the overall investment needed to attract the best talent.
5. Strengthen the commercial proposition
Strong ESG reporting also enables businesses to speak confidently on sustainability and assume an industry leadership position. This can help to differentiate a brand, win over customers and build brand loyalty.
It also opens up the potential to create ‘green’ products aimed at more environmentally conscious customers. According to a survey by Nielsen, 73% of consumers would change their consumption habits if it meant this reduced their environmental impact. There is clearly huge potential if business can incorporate ESG messaging into their marketing communications in a credible and substantiated way.
However, while aligning with sustainability reporting requirements makes sense, it is not without its challenges. Businesses need to consider how they will go about gathering and processing all the necessary information. This will typically involve well over one thousand data points.
Organisations will also need to consider which stakeholders within the organisation would need to be involved in that process – and what solutions are available to help companies create an integrated and efficient carbon accounting infrastructure.
If you want to find out how other businesses are building out their internal infrastructure to support sustainability reporting, visit our ESG Hub.
