ESG Regulations: What UK Organisations Must Know to Comply

Refining and strengthening ESG regulations will be a crucial component of the UK Government’s approach to what it terms a ‘green industrial revolution’ designed to drive the nation’s long-term response to COVID-19. As the UK’s Presidency of COP2026 unfolds, ministers have signalled intent to establish leadership in sustainability by the first major economy to legislate for net-zero.

Added to the mix is the introduction of post-Brexit legislation designed to align with or exceed the sustainability and human rights standards enshrined in both EU law and among broader global trading partners. Effectively, the UK Government is aiming to develop an ESG policy and regulatory landscape that works for the UK market, tailoring many areas of law to UK priorities and, by doing so, putting the economy in a strong position to generate post-COVID growth.

As investor and consumer scrutiny also focuses on environmental, social and governance performance indicators, UK firms need to be alert to the impacts of more intensive ESG regulations.

What Are the ESG Regulations in the UK?

The three elements of environment, social and governance (ESG) are highly interdependent. In many instances, good performance in one area is fundamental to meeting the requirements of another, but they cover an incredibly diverse range of topics. These have grown and changed in importance and focus over time, and, as is typically the case with fast-moving areas, ESG regulation has struggled to keep pace.

Consequently, there is not currently one overarching piece of UK legislation covering all ESG factors. However, there are various regulations covering aspects of ESG that companies must comply with in different ways, depending on their size, sector and scope. These derive from a range of legislative sources and official guidance, including the:

• UK Corporate Governance Code 2018 (UKCGC)
• Companies Act 2006
• Climate Change Act 2008 (CCA)
• UK Stewardship Code 2020 (UKSC)
• Disclosure Guidance and Transparency Rules (DTRs)
• Bribery Act 2010
• Modern Slavery Act 2015

The main ESG disclosure requirements come from the UKCGC, the Companies Act and the DTRs. However, these are often principles-based rather than prescriptive, allowing for their application to various business types and sectors. While this has benefits in terms of broad coverage, it can leave organisations short of guidance about exactly what elements of their operations to monitor and report on and which audiences need to be addressed.

Is ESG Reporting Mandatory in the UK?

The majority of ESG reporting is not currently mandatory in the UK. However, some specific metrics that come under the ESG regulation reporting umbrella are mandatory, including:

• Greenhouse gas reporting: Mandatory for quoted companies since 2013 under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
• Energy use: Quoted companies must report on their global energy use, and large businesses must disclose their UK annual energy use and greenhouse gas emissions. This is required by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
• Gender pay gap: Any employer with a headcount of 250 or more must comply with gender pay gap reporting regulations.
• Modern Slavery: UK organisations with an annual turnover of £36 million or more must publish an annual statement setting out the steps to prevent modern slavery.

The examples above are not exhaustive, and ESG regulations with mandatory reporting is likely to grow in scope in the coming years. Consequently, many companies are voluntarily adopting frameworks and implementing processes that will enable them to report from a mature position across a broader range of metrics in preparation for mandatory ESG reporting.
Among them is Lloyds Banking Group (LBG), which published its first ESG Report in February 2021, saying: “We have noted a shift in stakeholders increasing their focus on ESG performance when assessing the overall success of a company. We have listened to our investors’ and stakeholders’ feedback, to make this document a more useful tool for understanding and engaging with our ESG performance for all of our stakeholders, including shareholders.” This underlines recognition of the general shift to stakeholder capitalism that has been unfolding for some time, now accelerated by the pandemic.

LBG’s report stretches to 100 pages, indicating the scale of ESG and its impacts across the organisation. It refers to the Task Force on Climate-Related Financial Disclosure (TCFD) and various other reporting and disclosure guidelines with which it seeks to align operations.

The TCFD has significant traction in the UK, and Chancellor Rishi Sunak has already signalled that mandatory reporting of climate-related financial information in accordance with the TCFD guidelines will be implemented across the economy by 2025. Additionally, it’s been reported that G7 are backing mandatory climate disclosures.

What Are the Non-Mandatory Guidelines and Frameworks?

There are numerous guidelines and frameworks in existence that organisations can adopt to facilitate reporting and compliance with ESG regulations, including:

• Task Force on Climate-Related Financial Disclosure (TCFD)
• Sustainability Accounting Standards Board (SASB)
• Carbon Disclosure Project (CDP)
• International Integrated Reporting Framework (IIRC)
• Global Reporting Initiative (GRI)
• UN Principles for Responsible Investment (PRI)

An organisation may adopt more than one of these non-mandatory frameworks. They have different focus areas, from financial impact in the accounting standards to direct climate and social impact in the other frameworks. The choice may depend on the company’s sector. For example, Lloyd’s Banking Group’s ESG report aligns with the UN Environment Programme Finance Initiative’s Principles for Responsible Banking, but also with the Global Reporting Initiative Standards, the SASB disclosure framework, and the TCFD.

In a bid to resolve the complexity of this “alphabet soup” of frameworks, the World Economic Forum’s International Business Committee proposed a set of ESG metrics in September 2020. These build on, rather than replace, components of existing frameworks to create an overarching reporting framework that covers all the relevant areas.

What Should You Do Today to Align with Current and Future ESG Regulations?

The direction of travel towards increasing ESG regulation is clear, so UK businesses must work to establish the potential impact on their business. But compliance is not the only benefit of aligning with ESG regulations, but it can also help to:

• Satisfy investor requirements: proxy advisors such as Glass Lewis are already advising that institutional investors demand disclosure on issues such as board diversity, environmental and social risk oversight.
• Reduce direct costs and gain efficiencies: measuring and monitoring metrics such as energy and raw materials consumption can lead to efficiencies and cost reductions.
• Build corporate reputation: consumers and employees want businesses to show their commitment to ESG issues and advertise their long-term plans to improve performance.
• Build competitive advantage: early implementation of ESG monitoring and reporting allows time for the organisation’s approach to mature and develop into a strategic activity that can lead to competitive advantage.

To align with current and future ESG regulations, UK businesses should:

1. Ensure ESG is a standing item on the board agenda and that the board has access to expertise and comprehensive information around ESG issues so it can adequately support the business.
2. Conduct a materiality assessment to identify and prioritise the ESG areas that are applicable to your business. Identify existing regulatory reporting requirements related to ESG.
3. Identify the core audiences (regulatory, shareholders, stakeholders, etc.) to address in your ESG reporting.
4. Identify the infrastructure, technology, and resource investment needed to support identification of material issues, regulatory compliance and monitoring of ESG performance.
5. Understand the frameworks used for current ESG reporting and their suitability to your business. Regularly monitor the framework landscape in case of new developments, such as adopting the WEF ESG metrics.

ESG issues have wide-ranging impacts across the business. Evolving a business to make ESG a strategic driver is a complex activity. Organisations will need to invest in technology that helps operationalise ESG commitments and facilitate robust, centralised tracking and reporting to satisfy ESG regulations and meet broader corporate goals beyond compliance. Tools such as Diligent’s ESG Solutions can assist organisations in establishing a robust framework for managing, improving and reporting on ESG performance.

Key Takeaways

• ESG regulations will become more numerous and rigorous in the coming years.
• Reporting on broad ESG performance will become mandatory in the next decade, with proxy advisors already pressing hard for disclosure on key ESG issues.
• An ‘alphabet soup’ of ESG frameworks is starting to gravitate towards a common approach based around the WEF ESG metrics.
• Acting early to incorporate ESG monitoring and reporting into a corporate strategy can build competitive advantage, corporate reputation and insulate against future compliance risk.
• Implementing technical solutions can help manage the burden of compliance given the scale and scope of ESG impacts.

Find out more about ESG regulations and how your organisation can devise a roadmap to operationalise ESG.