Law and regulation in this area are developing at pace and it’s no longer just those businesses looking for ESG linked products which need to be analysing their Environmental, Social & Governance (‘ESG’) behaviours.
This article considers what businesses may wish to be doing voluntarily, either as good practice or in preparation for a financing, in terms of developing their ESG practices. For more information on types of ESG Lending, see our article The basics: what is ESG lending?.
For a high level audit of your organisation’s current ESG performance, you can use our ESG 360 tool – available here - without charge.
The ‘have to’ vs the ‘should do’
Most companies are not currently required by law to be reducing their emissions or increasing their social value (or even setting targets to do so). Good governance – beyond simply complying with the law - is also largely down to individual businesses to ensure.
Legal requirements in the UK are currently focussed on reporting and most reporting requirements (set out in the Companies Act 2006) apply to a relatively small percentage of UK companies (although still estimated to be over 1,300). Alongside that there are a raft of guidelines, standards and recommendations at governmental, international and sector levels on how to measure and report on ESG.
Whilst well-meaning and innovative, the sheer quantity of information and lack of standardisation can leave businesses which are looking to report (at best) wasting resources as they remain unsure where to start and (at worst) with an opportunity to greenwash. This is soon to change. The IFRS are introducing a set of sustainability standards which – like their financial equivalent - should be comprehensive and globally recognised. Standards 1 and 2 will become effective in January 2024 (alongside a programme of support to aid compliance).
If you’re not currently required to report, there are a raft of reasons you may wish to do so voluntarily and if you’re not ready to report, starting the information gathering process now will be a useful exercise.
Get ahead or get left behind
What companies could be doing, particularly if a (re)financing is on the cards in the short or medium term, is very different. Just some of the benefits of voluntary information gathering, target setting and reporting are set out below:
Availability and cost of finance
Mid-market lenders (bank and non-bank) are coming under pressure from regulators, stakeholders and other organisations to improve their own ESG credentials and to evolve products and portfolios accordingly. Understanding the changes your business can make, the risks you may face and having meaningful targets will help you with conversations at term sheet and credit stage, may mean additional (potentially cheaper) products are available to you and can have a positive impact on your perceived credit risk.
It’s anticipated that some sort of ESG reporting will be mandatory for most if not all companies by 2025 in order for the UK government to meet its own ESG ambitions. Taking steps now to pre-empt will be time well spent, as is ensuring engagement from across the business to ensure you’re ready to measure and, in turn, to report.
Business value The government is starting by ensuring information is available. The next step will be to ensure that consideration of this information is embedded in decision making across the financial markets. The final shift will be to ensure that markets make decisions which are consistent with net zero. ESG status will soon go to the heart of the value of your business. Employees, stakeholders, investors and customers will expect you to be able to show you’re making ground. In addition, the next generation entering the workforce will expect employers to focus on ESG and the best candidates will be drawn to companies who are able to include this in their pitch. . Talking the talk will no longer cut it.
The disclosure requirements are not just about targets and KPIs they’re also designed to ensure that there is traction at a senior and stakeholder level, development of internal processes to ensure information gathering is possible and that appropriate risk assessing is taking place. It’s important to remember that this engagement often presents opportunities as well as risks: more tangibly in items such as cost savings but also in attracting talent in a competitive market.
The businesses you transact with will be doing the same and in order to measure their own scope 3 emissions (their indirect emissions from eg their suppliers) they will want this information and will make decisions based on it. Get it right and you could win customers, get it wrong and you could lose them, and potentially suppliers too.
Doing the right thing
The benefits of becoming ESG aware go beyond compliance with the law and cost savings. Businesses should do and be seen to do the right thing – every step towards net zero is an important one. The more conscious you are of your impact, the easier this will become.
If you’re genuinely working hard and proud of your credentials, don’t be afraid to shout about it.
Whatever your financing needs, it’s never too soon to be considering what you could be doing in terms of ESG as well as what you should be doing – don’t wait for your (re)financing to bring it in to sharper focus – now is the time to get ahead.
Don’t forget our ESG 360 tool is available to you without charge, to assist in analysing your current level of compliance.