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The ESG: Hindrance or help in furthering compliance with UK environmental legislation?

Written by April O'Hara for Environmental Law.




This article considers the intention behind the ESG and the potential impacts it can have on businesses and their environmental obligations within the UK.


Introduction


The role of Environmental, Social, and Corporate Governance (ESG) matters in the UK has evolved considerably in recent years, propelled in part by market pressures, but also with the growing influence of legislation. It is reasonable to expect that ESG matters will play an even more influential role in the coming years as it begins garnering legislative effect. In this article, the potential positive influence of ESG on aiding businesses’ compliance with the UK’s environmental legislation will be evaluated.



Examining ESG

 

The development of ESG's considerable influence over investment patterns and the success of businesses has grown at an unprecedented rate, since its beginnings at the end of the twentieth century. The conclusion of the UN-commissioned report by Freshfields Bruckhaus Deringer in 2005 reported that 'ESG considerations can (and, where they affect estimates of value, risk and return, should) form part of the investment decision-making process’. At least within the scope of US law, this is quickly proving to be an international business reality, with UK legislation hurrying to keep up.[1] Despite this, there is still considerable concerns about the practical utility of ESG in investment analysis and business practices, with many companies at times distancing themselves from the term, including Vanguard and BlackRock.[2] The chief difficulty with ESG principles lies both in defining which ones are demonstrably useful for investment analysis, and whether the term has genuine use for businesses in a way that can be centralised into clearly actionable and governable guidelines. 



The UK’s focus on improving environmental conditions have evolved exponentially over the last two decades, driven by legislation that has set out pathways to achieving a number of climate goals by set deadlines; including the Climate Change Act 2008, which set the goal of achieving net zero by 2050, and the Environment Act 2021, which set targets from improving air and water quality, biodiversity, and waste reduction amongst others. Businesses have been both compelled and supported in their adoption of renewable energy and more sustainable business practices, through a mixture of measures, including tax incentives, subsidised energy costs, and clear guidelines on environmental practices. This has affected businesses’ ESG practices by giving them straightforward goals to work demonstrably towards, and to measure their performance against, in coordination with similar developments in social and corporate governance laid out in the Modern Slavery Act 2015 and the Corporate Governance Code 2018, amongst others.


 

The UK’s direct approach to ESG itself has however been piecemeal and largely driven by horizontal practices amongst businesses, rather than vertically by legislation.[3] The UK market’s adoption of ESG and the Government’s direction of environmental legislation have combined in recent years such that various pieces of legislation are now looked to as rough guides of ESG practice; nothing has however provided a clear or centralised guide to ESG practices or how to effectively disentangle them from the issues presented by so-called greenwashing, which is largely managed by Consumer Protection Regulations rather than by ESG principles, although the two are often interlinked.[4]


 

Recently, however, the introduction of compulsory ESG reports mark a move towards a more purpose-driven utilisation of ESG principles and consolidation of comparative ESG networks that might give greater clarity to investors and investment analysts.[5] The development of ESG reporting has the potential to create a resource for legislators to draw upon in creating realistic goals and for spotting troublesome areas in environmental legislation and business practices. This may in turn lead to the creation of targeted legislation that supports the call for ‘recognizing that measurement is both necessary and inevitable’ that Harvard Business Review made in 2021, arguing that ESG benchmarks provide a way forward for businesses to make the future safer when utilised effectively.[6]



Conclusion

 

Overall, in order to make ESG a useful legislative entity in aiding environmental responsibility, there are clear frameworks needed that align with international perspectives in order to allow UK businesses to effectively compete in international markets; that have clear purpose and scope beyond what existing legislation regarding ESG compliance already offers; and that do effectively guide responsible investment in a way that makes a genuine difference to improving ESG matters in accordance with centralised national and international goals. The move towards compulsory reporting marks a move in this direction but much more clarity and concise purpose is required to make ESG an effective and useful tool for managing the consequences of businesses on the environment.

 





References


[1] UNEP Finance Initiative; Freshfields Bruckhaus Deringer, ‘A legal framework for the integration of environmental, social and governance issues into institutional management’, October 2005, p.114 (accessible at <https://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf> last accessed 22.11.23).

[2] New York Times, ‘The Pushback on E.S.G. Investing’ May 11, 2022 (accessible at <https://www.nytimes.com/2022/05/11/business/dealbook/esg-investing-pushback.html> last accessed 22.11.23).

[3] PWC, ‘What’s in store for UK sustainable finance policy? Takeaways from a PwC roundtable with HM Treasury’ (accessible at <https://www.pwc.co.uk/industries/financial-services/understanding-regulatory-developments/whats-in-store-for-uk-sustainable-finance-policy-takeaways-from-a-pwc-roundtable-with-hm-treasury.html> last accessed 22.11.23);

A Otis, J Schaffer and A Friedman, ‘The Increasing Legal Complexity Surrounding ESG’, Kramer Levin 07.10.22 (accessible at <https://www.kramerlevin.com/en/perspectives-search/the-increasing-legal-complexity-surrounding-esg.html> last accessed 22.11.23).

[4] J Ormesher and S Tuson ‘Greenwashing: what do you need to know?’ The Law Society, 03.08.23 (accessible at <www.lawsociety.org.uk/topics/climate-change/greenwashing-what-do-you-need-to-know> last accessed 22.11.23).

[5] L Smith, ‘ESG reporting requirements in the UK’, Taylor Wessing 06.03.23 (accessible at <https://www.taylorwessing.com/en/interface/2023/esg-reporting-tech-and-data/esg-reporting-requirements-in-the-uk> last accessed 22.11.23).

[6] J Howard-Grenville, ‘ESG Impact Is Hard to Measure — But It’s Not Impossible’, Harvard Business Review 01.22.21 (accessible at <https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible> last accessed 22.11.23).

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